Kemper Corporation (formerly Unitrin, Inc.) — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; filed November 2, 2011. The company changed its name to Kemper Corporation on August 25, 2011. Unless otherwise noted, amounts are in millions of dollars.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenues | $592.8 | $650.6 | $1,881.7 | $1,971.7 |
| Income from continuing operations | $3.8 | $32.3 | $44.8 | $113.4 |
| Net income, including discontinued operations | $4.7 | $35.7 | $58.3 | $121.7 |
| Diluted net income per unrestricted share | $0.08 | $0.58 | $0.96 | $1.95 |
| Net cash from (used in) operating activities | Not separately stated for Q3 | $(10.1) | $60.2 |
- Earned premiums were $543.0 in Q3 and $1,637.1 year to date, down 4% and 5%, respectively, year over year. Net investment income fell to $58.6 in Q3 and $222.7 year to date, from $79.4 and $241.0.
- Consolidated total expenses were $593.6 in Q3, exceeding revenue and producing a $0.8 pretax loss from continuing operations; a $4.6 income tax benefit contributed to continuing-operations income of $3.8.
- At September 30, assets were $8,200.6, liabilities $5,980.5 and shareholders’ equity $2,220.1. Cash was $471.0; total investments were $6,064.3. Notes payable were $675.4, including $65.0 drawn under the revolving credit agreement. The company reported $180.0 of remaining availability at quarter-end. Fireside Bank’s certificates of deposit had been fully redeemed.
- Investing activities provided $684.6 for the first nine months, including $220.7 net proceeds from the auto-loan portfolio sale and $282.1 from reducing short-term investments. Financing activities used $320.7, including deposit repayments, dividends and share repurchases. Cash increased $353.8 to $471.0.
- Quarter-end balance-sheet cash includes subsidiary cash and is not equivalent to cash held directly by the parent. Kemper directly held $37.6 of cash and investments at September 30.
Changes and operating drivers
- Net income declined $31.0 in Q3 and $63.4 year to date. Continuing-operations income declined $28.5 and $68.6, respectively. Lower premiums and investment income, substantially higher catastrophe claims, and weaker operating results in key personal-auto businesses were significant factors.
- Catastrophe losses and loss-adjustment expenses from continuing operations were $42.7 in Q3 and $156.7 year to date, versus $13.9 and $57.7 in 2010. 2011 losses included $23.7 from Hurricane Irene and substantial spring-storm and tornado claims. Prior-year reserve development was favorable by $18.2 in Q3 and $30.1 year to date.
- Kemper Preferred reported a $15.7 Q3 operating loss and a $55.7 year-to-date loss, versus profits of $17.1 and $54.0 in the comparable 2010 periods. Its combined ratios were 111.2% for Q3 and 114.6% year to date; underlying combined ratios, excluding catastrophe losses and prior-year reserve development, were 96.6% and 95.6%.
- Unitrin Direct reported operating losses of $3.7 in Q3 and $19.3 year to date; its year-to-date combined ratio was 119.4% and underlying ratio 119.3%. Earned premiums were down as the company repriced and redesigned the product; policies in force were approximately 19% below September 2010.
- Unitrin Specialty earned premiums fell, and net operating income declined to $5.3 in Q3 and $14.4 year to date. Its year-to-date combined ratio was 99.7%; its underlying ratio was 100.7%.
- Life and Health Insurance net operating income increased to $22.4 in Q3 and $76.0 year to date. Lower policy benefits and the absence of the $14.8 goodwill write-off recorded in 2010 helped, partly offset by lower investment income and higher expenses.
- Net investment income from equity-method limited-liability investments fell sharply: $7.2 year to date versus $33.3 in 2010, including a $13.7 loss in Q3 versus $10.5 income in Q3 2010. Net realized investment results were a $4.2 loss in Q3 but a $27.8 gain year to date. The Q3 result included $13.4 of realized equity-security sale losses.
Outlook, risks and unusual items
- No consolidated earnings or revenue guidance is provided. Management expected earned premiums to decline over the next few quarters in Kemper Preferred and in the near term at Unitrin Direct; Unitrin Specialty expected auto policies in force to remain down through the rest of 2011.
- In Q3, Fireside Bank sold its active auto-loan portfolio for a $4.5 pretax gain and was classified as a discontinued operation. After quarter-end, regulators approved a $250.0 capital distribution through its parent to Kemper; Kemper used part of the proceeds to repay the $65.0 revolver balance in October. Fireside also expected to return at least $15.0 of additional capital.
- Kemper made an $83.7 voluntary pension contribution in September, partly funded by borrowing under the revolver. The contribution included $51.5 of Intermec shares; the company recognized a $7.0 realized loss on their contribution. The Department of Labor was considering retroactive relief from prohibited-transaction rules; management expected relief in Q4, but it had not yet been granted as of the filing.
- The company retained $134.3 of property-and-casualty reserves for former Unitrin Business Insurance claims at September 30. It cautioned that reserve estimates may change and that adverse legal outcomes could materially affect results in a period, even though management did not expect pending proceedings to materially affect consolidated equity.
- Key risks include catastrophe frequency and severity, reserve-estimate changes, competition and pricing, investment-market and interest-rate movements, reinsurance availability, regulation and litigation. About 45% of Life and Health accident-and-health earned premiums came from products that may be adversely affected by the Affordable Care Act; Reserve National was transitioning sales to other products.
- Management expected adoption of the insurance acquisition-cost accounting standard in 2012 to reduce consolidated shareholders’ equity by approximately $100.0. The filing also reports $67.9 of unfunded commitments to private-equity and mezzanine-debt funds.
- Market-risk sensitivity estimates at September 30 indicated adverse fair-value impacts of $359.2 on fixed maturities from a 100-basis-point rate increase and $62.0 on equity securities from the modeled rate and equity-price shocks. These are scenario estimates, not forecasts.
Important facts for investors to verify
- Whether personal-lines rate increases and underwriting actions can stabilize policy counts and improve underlying loss and expense ratios without further material premium erosion.
- Whether catastrophe claims, particularly from 2011 storms, develop within recorded reserves, and whether favorable prior-year reserve development persists.
- The sustainability and drivers of returns from equity-method investments, which contributed to the sharp decline in investment income.
- Completion and amount of Fireside Bank’s remaining capital return, and the parent company’s liquidity after the October revolver repayment.
- The outcome of the Department of Labor review of the in-kind pension contribution and the eventual impact of the new insurance acquisition-cost accounting standard.