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KEMPER Corp 10-K 2011 Documents found in this filing:Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K
For the fiscal year ended December 31, 2010 OR
Commission file number: 001-18298
UNITRIN, INC. (Exact name of registrant as specified in its charter)
(312) 661-4600 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller Reporting Company ¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x As of June 30, 2010, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $1.5 billion based on the closing sale price as reported on the New York Stock Exchange. Solely for purposes of this calculation, all executive officers and directors of the registrant are considered affiliates. Registrant had 61,066,587 shares of common stock outstanding as of January 31, 2011. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 4, 2011 are incorporated by reference into Part III.
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Table of ContentsCaution Regarding Forward-Looking Statements This 2010 Annual Report on Form 10-K (the “2010 Annual Report”), including the accompanying consolidated financial statements of Unitrin, Inc. (“Unitrin”) and its subsidiaries (individually and collectively referred to herein as the “Company”) and the notes thereto appearing in Item 8 herein (the “Consolidated Financial Statements”), the Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in Item 7 herein (the “MD&A”) and the other Exhibits and Financial Statement Schedules filed as a part hereof or incorporated by reference herein may contain or incorporate by reference information that includes or is based on forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements give expectations or forecasts of future events. The reader can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as “believe(s),” “goal(s),” “target(s),” “estimate(s),” “anticipate(s),” “forecast(s),” “project(s),” “plan(s),” “intend(s),” “expect(s),” “might,” “may” and other words and terms of similar meaning in connection with a discussion of future operating, financial performance or financial condition. Forward-looking statements, in particular, include statements relating to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, trends in operations and financial results. Any or all forward-looking statements may turn out to be wrong, and, accordingly, readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this 2010 Annual Report. These statements are based on current expectations and the current economic environment. They involve a number of risks and uncertainties that are difficult to predict. These statements are not guarantees of future performance; actual results could differ materially from those expressed or implied in the forward-looking statements. Forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining the Company’s actual future results and financial condition. The reader should consider the following list of general factors that could affect the Company’s future results and financial condition, as well as those discussed below under Item 1A., “Risk Factors”, in this 2010 Annual Report. Among the general factors that could cause actual results and financial condition to differ materially from estimated results and financial condition are:
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No assurances can be given that the results contemplated in any forward-looking statements will be achieved or will be achieved in any particular timetable. The Company assumes no obligation to publicly correct or update any forward-looking statements as a result of events or developments subsequent to the date of this 2010 Annual Report. The reader is advised, however, to consult any further disclosures Unitrin makes on related subjects in its filings with the SEC. PART I
Unitrin, incorporated in Delaware in 1990, is a diversified insurance holding company, with subsidiaries that principally provide life, automobile, homeowners and other insurance products for individuals and small businesses.
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Table of ContentsUnitrin’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments thereto are accessible free of charge through Unitrin’s website, unitrin.com, as soon as reasonably practicable after such materials are filed with or furnished to the SEC. (a) GENERAL DEVELOPMENT OF BUSINESS Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 During the first quarter of 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (the “Health Care Acts”) were signed into law. The business model of Reserve National Insurance Company (“Reserve National”), which focuses on providing limited health insurance coverages to persons who lack access to traditional private options, is likely to be adversely affected by the implementation of the Health Care Acts. Reserve National might suffer significant loss of revenue and might not be able to compete effectively in the markets that it has historically served. Certain provisions that establish minimum loss ratios for health insurance policies significantly above the levels historically experienced by Reserve National could adversely impact Reserve National’s ability to achieve an adequate return and may result in a significant loss of business for Reserve National. A significant loss of business could have a material adverse effect on the financial condition and results of operations of Reserve National. In the third quarter of 2010, the Company determined that the goodwill associated with Reserve National was impaired and not recoverable and wrote off $14.8 million of goodwill. See MD&A, “Life and Health Insurance,” Note 7, “Goodwill,” to the Consolidated Financial Statements, “Regulation” under this Item 1 beginning on page 20 and Item 1A., “Risk Factors,” under the caption “Reserve National’s business model is vulnerable to American health care reform.” Purchase of Kemper Name On June 29, 2010, Unitrin purchased all rights to the “Kemper” name owned by Lumbermens Mutual Casualty Company and its affiliates (“Lumbermens”). These rights include registered trademarks, logos and internet domain names incorporating the Kemper name. As a result of the transaction, Unitrin has acquired unrestricted use of the Kemper name in connection with all of its operations and Kemper® became a registered service mark of Unitrin. Prior to purchasing the rights, the Company was licensed to use the Kemper name only in connection with the personal lines business. Lumbermens, had for many years owned the intellectual property rights to the Kemper name in the insurance marketplace and had conducted its various insurance businesses under the name “Kemper Insurance Companies.” Lumbermens has ceased all use of the Kemper name. Retirement of 2010 Senior Notes and Issuance of 2015 Senior Notes On November 1, 2010, Unitrin repaid and retired $200 million aggregate principal amount of its 4.875% Senior Notes due November 1, 2010 (the “2010 Senior Notes”). On November 24, 2010, Unitrin issued $250 million aggregate principal amount of its 6.00% Senior Notes due November 30, 2015 (the “2015 Senior Notes”) in a public offering. The 2015 Senior Notes are unsecured and may be redeemed in whole at any time or in part from time to time at Unitrin’s option at specified redemption prices. Unitrin issued the 2015 Senior Notes for proceeds of $247.8 million, net of transaction costs, for an effective yield of 6.21%. Unitrin used the net proceeds from the offering to repay borrowings of $140 million under its credit facility, to make a capital contribution of $60 million to its subsidiary, United Insurance Company of America (“United Insurance”), and for working capital and other general corporate purposes. Unitrin Common Stock Repurchases During 2010, Unitrin repurchased approximately 1.4 million shares of its common stock at an aggregate cost of $34.4 million in open market transactions. Unitrin’s stock repurchase program was first announced on August 8, 1990. The repurchase program was subsequently expanded several times, most recently in November 2006, when
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Table of Contentsthe Board of Directors expanded Unitrin’s authority to repurchase Unitrin’s common stock by an aggregate of 6.0 million shares (in addition to approximately 0.8 million shares remaining under its prior authorization). No shares remained available for repurchase under this repurchase program at December 31, 2010. On February 2, 2011, the Board of Directors approved a new common stock repurchase program. Under the new program, Unitrin is authorized to repurchase up to $300 million worth of its common stock. Repurchases may be made from time to time at prevailing prices in the open market or in privately-negotiated transactions, subject to market conditions and other factors. Repurchases will be financed through Unitrin’s general corporate funds. Depending upon the amount of repurchases and other factors, Unitrin may also borrow funds under its existing revolving credit facility. (b) BUSINESS SEGMENT FINANCIAL DATA Financial information about Unitrin’s business segments for the years ended December 31, 2010, 2009 and 2008 is contained in the following sections of this 2010 Annual Report of Unitrin, Inc. and is incorporated herein by reference: (i) Note 21, “Business Segments,” to the Consolidated Financial Statements; and (ii) MD&A. (c) DESCRIPTION OF BUSINESS Unitrin is a diversified insurance holding company, with subsidiaries that provide automobile, homeowners, life, health, and other insurance products for individuals and small businesses. The Company is engaged, through its subsidiaries, in the property and casualty insurance, life and health insurance and automobile finance businesses. The Company conducts its operations through five operating segments: Kemper, Unitrin Specialty, Unitrin Direct, Life and Health Insurance and Fireside Bank. Fireside Bank’s automobile finance business is in runoff. Unitrin’s subsidiaries employ approximately 7,130 full-time associates supporting its operations, of which approximately 870 are employed in the Kemper segment, 710 in the Unitrin Specialty segment, 560 in the Unitrin Direct segment, 430 shared by the Kemper, Unitrin Specialty and Unitrin Direct segments, 3,980 in the Life and Health Insurance segment, 380 at Fireside Bank and the remainder in various corporate and other staff functions. Property and Casualty Insurance Business Unitrin’s property and casualty insurance business operations are primarily conducted through the Kemper, Unitrin Specialty, and Unitrin Direct segments. In addition, the Life and Health Insurance segment’s career agents also sell property insurance to its customers. Unitrin’s insurance subsidiaries operating in the Kemper, Unitrin Specialty, Unitrin Direct and Life and Health Insurance segments provide automobile, homeowners, fire, and other types of property and casualty insurance to individuals and commercial automobile insurance to businesses. Automobile insurance in these segments accounted for 56%, 59% and 57% of Unitrin’s consolidated insurance premiums earned from continuing operations for the years ended December 31, 2010, 2009 and 2008, respectively. Automobile insurance in these segments accounted for 47%, 49% and 50% of Unitrin’s consolidated revenues from continuing operations for the years ended December 31, 2010, 2009 and 2008, respectively. Homeowners insurance in these segments accounted for 13%, 12% and 12% of Unitrin’s consolidated insurance premiums earned from continuing operations for the years ended December 31, 2010, 2009 and 2008, respectively. Homeowners insurance in these segments accounted for 11%, 10% and 11% of Unitrin’s consolidated revenues from continuing operations for the years ended December 31, 2010, 2009 and 2008, respectively. Property insurance indemnifies an insured with an interest in physical property for loss of, or damage to, such property or the loss of its income-producing abilities. Casualty insurance primarily covers liability for damage to property of, or injury to, a person or entity other than the insured. In most cases casualty insurance also obligates the insurance company to provide a defense for the insured in litigation arising out of events covered by the policy. The Kemper and Unitrin Specialty segments distribute their products through independent agents who are paid commissions for their services. The Unitrin Direct segment distributes its products directly to consumers and through employer-sponsored voluntary benefit programs and other affinity relationships.
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Table of ContentsKemper Kemper, based in Jacksonville, Florida, conducts business in 38 states and the District of Columbia. In 2010, the following states provided over half of the premium revenues included in this segment: New York (19%), California (13%), North Carolina (12%) and Texas (11%). Kemper primarily sells preferred and standard risk automobile and homeowners insurance. Kemper’s insurance products accounted for 51% of the aggregate insurance premium revenues of Unitrin’s property and casualty insurance business in 2010. Kemper’s products are marketed by approximately 2,600 independent insurance agents. These personal lines products are designed and priced for those individuals who have demonstrated favorable risk characteristics and loss history. Typical customers include middle to upper income individuals and families. Unitrin Specialty Unitrin Specialty, based in Dallas, Texas, conducts business in 21 states, principally in the midwest, southeast, southwest and western United States. In 2010, the following states provided more than three-fifths of the premium revenues in this segment: California (44%), Texas (18%), Washington (7%) and Louisiana (4%). Unitrin Specialty provides nonstandard personal and commercial automobile insurance. Unitrin Specialty’s insurance products accounted for 27% of the aggregate insurance premium revenues of Unitrin’s property and casualty insurance business in 2010. Nonstandard automobile insurance is provided for individuals and businesses that have had difficulty obtaining standard or preferred risk insurance, usually because of their driving records, claims experience or premium payment history. Unitrin Specialty’s products are marketed through approximately 8,000 independent agents and brokers. Unitrin Direct Unitrin Direct, based in Chicago, Illinois, markets automobile and homeowners insurance primarily via direct mail, web insurance portals, “click-thrus,” its own websites, employer-sponsored voluntary benefit programs and other affinity relationships. The Unitrin Direct segment’s automobile and homeowners insurance products are available in 48 states and the District of Columbia. In 2010, the following states provided approximately two-thirds of the premium revenues in this segment: Florida (16%), New York (14%), California (10%), Texas (6%), Connecticut (5%), Michigan (5%), Pennsylvania (5%) and Georgia (5%). Unitrin Direct’s insurance products accounted for 16% of the aggregate insurance premium revenues of Unitrin’s property and casualty insurance business in 2010. Unitrin Direct writes a broad spectrum of personal automobile insurance risks ranging from preferred to non-standard private passenger automobile insurance risks, and competes with companies that sell insurance directly to the consumer and employer-sponsored voluntary benefit programs, as well as companies that sell through agents. Unitrin Direct also offers homeowners and renters insurance across 48 states and the District of Columbia, complementing its direct automobile insurance business.
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Table of ContentsProperty and Casualty Loss and Loss Adjustment Expense Reserves The Company’s reserves for losses and loss adjusting expenses (“LAE”) for property and casualty insurance (“Property and Casualty Insurance Reserves”) are reported using the Company’s estimate of its ultimate liability for losses and LAE for claims that occurred prior to the end of any given accounting period but have not yet been paid. The Company had $1,118.7 million and $1,211.3 million of gross loss and LAE reserves at December 31, 2010 and 2009, respectively. Property and Casualty Insurance Reserves by business segment at December 31, 2010 and 2009 were:
Certain reserves acquired in connection with a business acquisition from SCOR Reinsurance Company (“SCOR”) in 2002 (the “Unallocated Reserves”) are reinsured by an insurance subsidiary of SCOR (see Note 8, “Property and Casualty Insurance Reserves,” to the Consolidated Financial Statements). The Company does not allocate these reserves to its business segments. In estimating the Company’s Property and Casualty Insurance Reserves, the Company’s actuaries exercise professional judgment and must consider, and are influenced by, many variables that are difficult to quantify. Accordingly, the process of estimating and establishing the Company’s Property and Casualty Insurance Reserves is inherently uncertain and the actual ultimate net cost of claims may vary materially from the estimated amounts reserved. The reserving process is particularly imprecise for claims involving asbestos, environmental matters, construction defect and other emerging and/or long-tailed exposures that may not be discovered or reported until years after the insurance policy period has ended. Property and Casualty Insurance Reserves related to the Company’s Discontinued Operations are predominantly long-tailed exposures, of which $59.8 million was related to asbestos, environmental matters and construction defect exposures at December 31, 2010. See MD&A, “Critical Accounting Estimates,” under the caption “Property and Casualty Insurance Reserves for Losses and Loss Adjustment Expenses” beginning on page 71 for a discussion of the Company’s reserving process and the factors considered by the Company’s actuaries in estimating the Company’s Property and Casualty Insurance Reserves.
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Table of ContentsThe Company’s goal is to ensure that its total reserves for property and casualty insurance losses and LAE are adequate to cover all costs, while sustaining minimal variation from the time reserves for losses and LAE are initially estimated until losses and LAE are fully developed. Changes in the Company’s estimates of these losses and LAE, also referred to as “development,” will occur over time and may be material. Favorable development is recognized and reported in the Consolidated Financial Statements when the Company decreases its previous estimate of ultimate losses and LAE and results in an increase in net income in the period recognized, whereas adverse development is recognized and reported in the Consolidated Financial Statements when the Company increases its previous estimate of ultimate losses and LAE and results in a decrease in net income. The Company recognized total favorable development of $24.9 million, $80.9 million and $79.3 million before tax for the years ended December 31, 2010, 2009 and 2008, respectively. Development for each of the Company’s continuing business segments and Unitrin Business Insurance for the years ended December 31, 2010, 2009 and 2008 was:
Development in the Company’s Kemper segment comprised a substantial portion of the Company’s development reported in continuing operations in 2010, 2009 and 2008. See MD&A, “Critical Accounting Estimates,” under the caption “Property and Casualty Insurance Reserves for Losses and Loss Adjustment Expenses—Kemper Development” for additional information regarding this development. Adverse development in the Life and Health Insurance segment in 2010 and 2008 is due primarily to adverse development on certain hurricanes. See MD&A, “Catastrophes” and “Life and Health Insurance,” and Note 25, “Contingencies,” to the Consolidated Financial Statements for additional information on the impact of catastrophes on the development reported for the Company’s Life and Health Insurance segment. See MD&A, “Catastrophes,” “Kemper,” “Unitrin Specialty,” “Unitrin Direct,” and “Life and Health Insurance” for the impact of development on the results reported by the Company’s business segments. Development in Unitrin Business Insurance comprised all of the Company’s development reported in discontinued operations. On June 3, 2008, the Company sold its Unitrin Business Insurance operations to AmTrust Financial Services, Inc. (“AmTrust”). The Company retained Property and Casualty Insurance Reserves for unpaid insured losses that occurred prior to June 1, 2008, the effective date of the sale. Development for Unitrin Business Insurance in 2010 and 2009 did not have as great of an impact, as compared to 2008, as the losses and LAE became more fully developed. The impact of development, either favorable or adverse, should decline over time as the losses and LAE continue to be more fully developed. See Note 8, “Property and Casualty Insurance Reserves” to the Consolidated Financial Statements for a tabular reconciliation for the three most recent annual periods setting forth the Company’s Property and Casualty Insurance Reserves as of the beginning of each year, incurred losses and LAE for insured events of the current year, changes in incurred losses and LAE for insured events of prior years, payments of losses and LAE for insured events of the current year, payments of losses and LAE for insured events of prior years and the Company’s Property and Casualty Insurance Reserves at the end of the year and additional information regarding the nature of adjustments to incurred losses and LAE for insured events of prior years.
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Table of ContentsTen Year Loss Development History The following table illustrates the changes over time in the Company’s estimate of reserves for losses and LAE. The first section shows the amount of reserves reported in the Company’s consolidated financial statements as originally reported at the end of each calendar year. The second section, reading down, shows the cumulative amount of payments made through the end of each successive year with respect to that reserve liability. The third section, reading down, shows a re-estimation of the original reserve shown in the first section. In the third section, the original reserve is re-estimated using information that has become known in subsequent years and as trends become more apparent. The last section compares the latest re-estimate with the original estimate. Conditions and trends that affected development in the past may not necessarily repeat in the future. Accordingly, it may not be appropriate to extrapolate reserve deficiencies or redundancies based on this table.
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Table of ContentsLoss and Loss Adjustment Expense Reserve Development
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Table of ContentsLoss and Loss Adjustment Expense Reserve Development
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Table of ContentsThe Company acquired Valley Group Inc. and its subsidiaries (“VGI”) in 1999. Under the agreement governing the acquisition of VGI, the Company was entitled to recover from the seller 90% of the unfavorable development of VGI’s pre-acquisition loss and LAE reserves, subject to a maximum recovery of $50 million. Reserve development shown in the preceding table for the years 2000 to 2004 is net of changes in the Company’s estimated recovery, which was received in 2004. Reserves increased in 2002 and 2003 partly due to the Company’s acquisition of the personal lines business of Lumbermens. At the end of 2002, the Company also acquired two insurance companies from SCOR. Reinsurance recoverable in 2003 and forward includes a recoverable from a subsidiary of SCOR under an indemnity reinsurance agreement whereby the subsidiary assumed the pre-acquisition liabilities of the two insurance companies acquired by the Company. In 2005, three major hurricanes that significantly impacted the Company (Katrina, Rita and Wilma) made landfall in the United States. Accordingly, reserves at December 31, 2005 increased as claims from these hurricanes were established for adjudication and declined in subsequent years as claims were paid. The Company acquired Merastar Insurance Company (“Merastar”) in 2007. Accordingly, reserves for this business are included in the table for 2007 and forward. In 2008, three major hurricanes that significantly impacted the Company (Dolly, Gustav and Ike) made landfall in the United States. Accordingly, reserves at December 31, 2008 increased as claims from these hurricanes were established for adjudication and declined in subsequent years as claims were paid. The Company acquired Direct Response Corporation and its subsidiaries (“Direct Response”) in 2009. Accordingly, reserves for this business are included in the table for 2009 and forward. Reserve estimates increase or decrease as more information becomes known about individual claims and as changes in conditions and claims trends become more apparent. In 2010, the Company reduced Property and Casualty Insurance Reserves by $24.9 million to recognize favorable development of losses and LAE from prior accident years. Personal lines insurance losses and LAE reserves developed favorably by $21.6 million and commercial lines, including discontinued operations, developed favorably by $3.3 million. Personal insurance losses and LAE developed favorably in 2010 due primarily to the emergence of more favorable loss trends for the 2009, 2007 and 2006 accident years, partially offset by adverse development on certain hurricanes. In 2009, the Company reduced Property and Casualty Insurance Reserves by $80.9 million to recognize favorable development of losses and LAE from prior accident years. Personal lines insurance losses and LAE reserves developed favorably by $72.3 million and commercial lines, including discontinued operations, developed favorably by $8.6 million. Personal insurance losses and LAE developed favorably in 2009 due primarily to the emergence of more favorable loss trends for the 2007, 2006 and 2005 accident years due to improvements in the Company’s claims handling procedures and favorable development on catastrophes. In 2008, the Company reduced Property and Casualty Insurance Reserves by $79.3 million to recognize favorable development of losses and LAE from prior accident years. Personal lines insurance losses and LAE reserves developed favorably by $45.8 million and commercial lines insurance losses and LAE reserves developed favorably by $33.5 million in 2008. Personal lines insurance losses and LAE reserves developed favorably in 2008 due primarily to the emergence of more favorable loss trends than expected for the 2006 and 2005 accident years due to the improvements in the Company’s claims handling procedures, partially offset by adverse development of $8.9 million related to certain re-opened claims from Hurricane Rita, which occurred in the 2005 accident year. Commercial lines insurance losses and LAE reserves developed favorably in 2008 primarily in the Company’s discontinued operations. During the fourth quarter of 2008, the Company’s actuaries conducted their regular reserve review of the Unitrin Business Insurance run-off business for all traditional reserving groups. In addition, the Company’s actuaries updated certain analyses using the Company’s experience as well as more recent industry studies to re-estimate asbestos, environmental liabilities and construction defect liabilities. These updated analyses, along with the actuaries’ regular reserve reviews during 2008, resulted in favorable reserve development of $29.7 million in 2008. In 2007, the Company reduced Property and Casualty Insurance Reserves by $101.1 million to record favorable development of losses and LAE from prior accident years. Personal lines insurance losses and LAE and commercial lines insurance losses and LAE developed favorably by $44.4 million and $56.7 million, respectively, in 2007. The reserve reductions were primarily due to the emergence of more favorable loss trends than expected for the 2006, 2005 and 2004 accident years, partially due to the improvements in the Company’s claims handling procedures.
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Table of ContentsIn 2006, the Company reduced Property and Casualty Insurance Reserves by $91.6 million to record favorable development of losses and LAE from prior accident years. Personal lines insurance losses and LAE and commercial lines insurance losses and LAE developed favorably by $63.6 million and $28.0 million, respectively, in 2006. The reserve reductions were primarily due to the emergence of more favorable loss trends than expected for the 2005 and 2004 accident years, partially due to the improvements in the Company’s claims handling procedures. In 2005, the Company reduced Property and Casualty Insurance Reserves by $92.1 million to record favorable development of losses and LAE from prior accident years. Personal lines insurance losses and LAE and commercial lines insurance losses and LAE developed favorably by $73.1 million and $19.0 million, respectively, in 2005. The reserve reductions were primarily due to the emergence of more favorable loss trends than expected for the 2004 and 2003 accident years, partially due to improvements in the Company’s claims handling procedures. In 2004, the Company reduced Property and Casualty Insurance Reserves by $39.0 million to record favorable development of losses and LAE from prior accident years. Personal lines insurance losses and LAE and commercial lines insurance losses and LAE developed favorably by $29.7 million and $9.3 million, respectively, in 2004. The reserve reductions were primarily due to favorable development of the 2003 accident year. During 2001 and 2002, the Company increased Property and Casualty Insurance Reserves to reflect adverse development due to developing loss trends primarily related to construction defect, mold, automobile liability and product liability loss exposures in its commercial lines of business as well as personal automobile liability. The Company does not discount reserves. There are no significant differences between the Company’s property and casualty reserves carried on a statutory basis and those computed in accordance with accounting principles generally accepted in the United States of America, except that such reserves for statutory reporting purposes are reported net of reinsurance in the statutory financial statements. Catastrophe Losses Catastrophes and storms are inherent risks of the property and casualty insurance business. These catastrophic events and natural disasters include, without limitation, hurricanes, tornadoes, earthquakes, hailstorms, wildfires, high winds and winter storms. Such events result in insured losses that are, and will continue to be, a material factor in the results of operations and financial position of Unitrin’s property and casualty insurance companies. Further, because the level of insured losses that could occur in any one year cannot be accurately predicted, these losses contribute to material year-to-year fluctuations in the results of the operations and financial position of these companies. Specific types of catastrophic events are more likely to occur at certain times within the year than others. This factor adds an element of seasonality to property and casualty insurance claims. The occurrence and severity of catastrophic events are difficult to accurately predict in any year. However, some geographic locations are more susceptible to these events than others. The Company has endeavored to manage its direct insurance exposures in certain regions that are prone to naturally occurring catastrophic events through a combination of geographic diversification, restrictions on the amount and location of new business production in such regions, and reinsurance. The Company has adopted the industry-wide catastrophe classifications of storms and other events promulgated by Insurance Services Office, Inc. (“ISO”) to track and report losses related to catastrophes. ISO classifies a disaster as a catastrophe when the event causes $25 million or more in direct losses to property and affects a significant number of policyholders and insurers. ISO-classified catastrophes are assigned a unique serial number recognized throughout the insurance industry. The discussions throughout this 2010 Annual Report utilize ISO’s definition of catastrophes. The process of estimating and establishing reserves for catastrophe losses is inherently uncertain and the actual ultimate cost of a claim, net of reinsurance recoveries, may vary materially from the estimated amount reserved. See Note 22, “Catastrophe Reinsurance,” to the Consolidated Financial Statements for a discussion of the factors that influence the process of estimating and establishing reserves for catastrophes.
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Table of ContentsReinsurance The Company manages its exposure to catastrophes and other natural disasters through a combination of geographical diversification, restrictions on the amount and location of new business production in certain regions, and reinsurance. To limit its exposures to catastrophic events, the Company maintains various primary catastrophe reinsurance programs for its property and casualty insurance businesses. Coverage for each primary catastrophe reinsurance program is provided in various layers. In addition to these programs, the Kemper segment purchases reinsurance for catastrophes losses in North Carolina at retentions lower than the Kemper’s primary catastrophe reinsurance programs. The Company also purchases reinsurance from the Florida Hurricane Catastrophe Fund (the “FHCF”) for hurricane losses in Florida at retentions lower than those described below for the Company’s primary catastrophe reinsurance programs. See Note 22, “Catastrophe Reinsurance,” to the Consolidated Financial Statements for information pertaining to the Company’s primary catastrophe reinsurance programs for 2010, 2009 and 2008. The Company’s catastrophe reinsurance programs for 2011 are described below. Coverage for each catastrophe reinsurance program effective January 1, 2011 is provided in various layers as presented below:
The estimated aggregate annual premiums in 2011 for the programs presented in the preceding table are $19.8 million for the Kemper segment program, $1.0 million for the Unitrin Direct and Unitrin Specialty segments program and $2.6 million for the Life and Health Insurance segment program. In the event that the Company’s incurred catastrophe losses and LAE covered by any of its catastrophe reinsurance programs exceed the retention for a particular layer, each of the programs above requires one reinstatement of such coverage. In such an instance, the Company is required to pay a reinstatement premium to the reinsurers to reinstate the full amount of reinsurance available under such layer. The reinstatement premium is a percentage of the original premium based on the ratio of the losses exceeding the Company’s retention to the reinsurers’ coverage limit. In addition to the catastrophe loss exposures caused by natural events described above, Unitrin’s property and casualty insurance companies are exposed to losses from catastrophic events that are not the result of acts of nature, such as acts of terrorism, the nature and level of which in any period are very difficult to predict. While there were no reported losses experienced by Unitrin’s property and casualty insurance companies in relation to the terrorist attacks on September 11, 2001, the companies have reinsurance coverage to address certain exposures to potential future terrorist attacks. The reinsurance coverage for certified events, as designated by the federal government, is from the Terrorist Risk Insurance Act and the coverage for non-certified events is available in the catastrophe reinsurance program for Unitrin’s property and casualty insurance companies. However, certain perils, such as biological, chemical, nuclear pollution or contamination, are excluded from the Company’s reinsurance coverage for non-certified events.
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Table of ContentsIn addition to the catastrophe reinsurance programs described above, Unitrin’s property and casualty insurance companies utilize other reinsurance arrangements to limit their maximum loss, provide greater diversification of risk and minimize exposures on larger risks. Under the various reinsurance arrangements, Unitrin’s property and casualty insurance companies are indemnified by reinsurers for certain losses incurred under insurance policies issued by the companies. As indemnity reinsurance does not discharge an insurer from its direct obligations to policyholders on risks insured, Unitrin’s property and casualty insurance companies remain directly liable. However, so long as the reinsurers meet their obligations, the net liability for Unitrin’s property and casualty insurance companies is limited to the amount of risk that they retain. Unitrin’s property and casualty insurance companies purchase their reinsurance only from reinsurers rated “A-” or better by A. M. Best at the time of purchase. For further discussion of the reinsurance programs, see Note 8, “Property and Casualty Insurance Reserves,” Note 22, “Catastrophe Reinsurance,” and Note 23, “Other Reinsurance,” to the Consolidated Financial Statements. Pricing Pricing levels for property and casualty insurance are influenced by many factors, including the frequency and severity of claims, state regulation and legislation, competition, general business and economic conditions, including market rates of interest, inflation, expense levels, and judicial decisions. In addition, many state regulators require consideration of investment income when approving or setting rates, which reduces underwriting margins. See MD&A under the captions “Kemper,” “Unitrin Specialty” and “Unitrin Direct.” Competition Based on the most recent annual data published by A.M. Best as of the end of 2009, there were 981 property and casualty insurance groups in the United States. Unitrin’s property and casualty insurance companies ranked among the 80 largest property and casualty insurance groups in the United States, measured by net premiums written (39th), policyholders’ surplus (79th) and admitted assets (75th). Unitrin’s property and casualty insurance companies ranked as the 17th largest personal automobile insurance writers, measured by written premium. In 2009, the property and casualty insurance industry’s estimated net premiums written were $420 billion, of which nearly 80% were accounted for by the top 50 groups of property and casualty insurance companies. Unitrin’s property and casualty insurance companies wrote less than 1% of the industry’s estimated 2009 premium volume. Property and casualty insurance is a highly competitive business, particularly with respect to personal automobile insurance. Unitrin’s property and casualty insurance companies compete on the basis of, among other measures, (i) using appropriate pricing, (ii) maintaining underwriting discipline, (iii) selling to selected markets, (iv) utilizing technological innovations for the marketing and sale of insurance, (v) controlling expenses, (vi) maintaining adequate ratings from A.M. Best and other ratings agencies, (vii) providing quality services to agents and policyholders, and (viii) making strategic acquisitions of suitable property and casualty insurers. Life and Health Insurance Business The Company’s Life and Health Insurance segment consists of Unitrin’s wholly-owned subsidiaries, United Insurance, The Reliable Life Insurance Company (“Reliable”), Union National Life Insurance Company (“Union National Life”), Mutual Savings Life Insurance Company (“Mutual Savings Life”), United Casualty Insurance Company of America (“United Casualty”), Union National Fire Insurance Company (“Union National Fire”), Mutual Savings Fire Insurance Company (“Mutual Savings Fire”) and Reserve National. As discussed below,
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Table of ContentsUnited Insurance, Reliable, Union National Life, Mutual Savings Life, United Casualty, Union National Fire and Mutual Savings Fire (the “Career Agency Companies”) distribute their products through a network of employee, or “career,” agents. Reserve National distributes its products through a network of exclusive independent agents. Both these career agents and independent agents are paid commissions for their services. In 2010, the following states provided approximately two-thirds of the Life and Health Insurance segment’s premium revenues: Texas (22%), Louisiana (11%), Alabama (7%), Mississippi (6%), Illinois (5%), Florida (4%), Georgia (4%), Missouri (4%), and North Carolina (4%). Life insurance accounted for 17%, 16%, and 17% of the Company’s consolidated insurance premiums earned from continuing operations for the years ended December 31, 2010, 2009 and 2008, respectively. Life insurance accounted for 14%, 14% and 15% of Unitrin’s consolidated revenues from continuing operations for the years ended December 31, 2010, 2009 and 2008, respectively. Career Agency Companies The Career Agency Companies, based in St. Louis, Missouri, focus on providing individual life and health insurance products to customers of modest incomes who desire basic protection for themselves and their families. Their leading product is ordinary life insurance, including permanent and term insurance. Face amounts of these policies are lower than those of policies typically sold to higher income customers by other companies in the life insurance industry. Premiums average about $16 per policy per month. Permanent policies are offered primarily on a non-participating, guaranteed-cost basis. Approximately 80% of the Life and Health Insurance segment’s premium revenues are generated by the Career Agency Companies. The Career Agency Companies employ nearly 2,600 career agents to distribute their products in 25 states and the District of Columbia. These career agents are full-time employees who call on customers in their homes to sell insurance products, provide services related to policies in force and collect premiums, typically monthly. The Life and Health Insurance segment’s career agents also distribute certain property insurance products. Customers of the Career Agency Companies generally are families with annual incomes of less than $25,000. According to the U.S. Bureau of the Census, in 2009, there were approximately 26.8 million households in the United States with less than $25,000 of annual income, representing approximately 23.8% of all U.S. households. Reserve National Reserve National, based in Oklahoma City, Oklahoma, is licensed in 35 states throughout the south, southwest and midwest, and specializes in the sale of Medicare Supplement insurance and limited health insurance coverages such as fixed indemnity, dental and vision, and accident-only plans, primarily to individuals in rural areas where access to a multitude of health plan options is less prevalent. See MD&A, “Life and Health Insurance,” Note 7, “Goodwill,” to the Consolidated Financial Statements, “Regulation” under this Item 1 beginning on page 20 and Item 1A., “Risk Factors,” under the caption “Reserve National’s business model is vulnerable to American health care reform,” for a discussion of the impact of American health care reform on Reserve National. Reserve National has approximately 275 independent agents appointed to market and distribute its products. These agents typically represent only Reserve National. Reinsurance Consistent with insurance industry practice, Unitrin’s life and health insurance companies utilize reinsurance arrangements to limit their maximum loss, provide greater diversification of risk and minimize exposures on larger risks. Included among the segment’s reinsurance arrangements is excess of loss reinsurance coverage specifically designed to protect against losses arising from catastrophic events under the property insurance policies distributed by the Career Agency Companies’ agents and written by Unitrin’s subsidiaries, United Casualty, Union National Fire and Mutual Savings Fire, and reinsured by Unitrin’s subsidiary, Trinity Universal Insurance Company (“Trinity”), or written by Capitol County Mutual Fire Insurance Company (“Capitol”), a
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Table of Contentsmutual insurance company owned by its policyholders, and its subsidiary, Old Reliable Casualty Company (“ORCC”), and reinsured by Trinity. The annual catastrophe reinsurance program for the Career Agency Companies, Capitol and ORCC is described above in the discussion of “Reinsurance” under “Property and Casualty Insurance Business” of this Item 1 beginning on page 13. Also see MD&A “Catastrophes” and Note 22, “Catastrophe Reinsurance” to the Consolidated Financial Statements for additional information pertaining to the Career Agency’s segment’s catastrophe reinsurance program. Lapse Ratio The lapse ratio is a measure of a life insurer’s loss of existing business. For a given year, this ratio is commonly computed as the total face amount of individual life insurance policies lapsed, surrendered, expired and decreased during such year, less policies increased and revived during such year, divided by the total face amount of policies at the beginning of the year plus the face amount of policies issued and reinsurance assumed in the prior year. The Life and Health Insurance segment’s lapse ratio for individual life insurance was 8%, 9% and 9% in 2010, 2009 and 2008, respectively. The customer base served by the Career Agency Companies and competing life insurance companies tends to have a higher incidence of lapse than other demographic segments of the population. Thus, to maintain or increase the level of its business, the Career Agency Companies must write a high volume of new policies. Pricing Premiums for life and health insurance products are based on assumptions with respect to mortality, morbidity, investment yields, expenses, and lapses and are also affected by state laws and regulations, as well as competition. Pricing assumptions are based on the experience of Unitrin’s life and health insurance subsidiaries, as well as the industry in general, depending on the factor being considered. The actual profit or loss produced by a product will vary from the anticipated profit if the actual experience differs from the assumptions used in pricing the product. Premiums for policies sold by the Career Agency Companies are set at levels designed to cover the relatively high cost of “in home” servicing of such policies. As a result of such higher expenses, incurred claims as a percentage of earned premiums tend to be lower for companies utilizing this method of distribution than the life insurance industry average. Premiums for Medicare supplement and other accident and health policies must take into account the rising costs of medical care. The annual rate of medical cost inflation has historically been higher than the general rate of inflation, necessitating frequent rate increases, most of which are subject to approval by state regulatory agencies. Competition Based on the most recent data published by A.M. Best as of the end of 2009, there were 370 life and health insurance company groups in the United States. The Unitrin Life and Health Insurance segment ranked in the top 30% of life and health insurance company groups, as measured by admitted assets (84th), net premiums written (91st) and capital and surplus (103rd). Unitrin’s life and health insurance subsidiaries generally compete by using appropriate pricing, selling to selected markets, controlling expenses, maintaining adequate ratings from A.M. Best and providing competitive services to agents and policyholders.
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Table of ContentsAutomobile Finance Business Near the end of the first quarter of 2009, Fireside Bank began a plan to exit the automobile finance business and wind down its operations in an orderly fashion over the next several years. Fireside Bank is based in Pleasanton, California and organized under California law as an industrial bank, and its deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”). Fireside Bank’s principal business was the financing of used automobiles through the purchase of retail installment contracts from automobile dealers and is now limited to the collection and servicing of those accounts. The borrowers under these contracts typically have marginal credit histories and are considered to be sub-prime. Fireside Bank has over 59,000 contracts and loans outstanding, totaling in excess of $380 million, nearly two-thirds of which are with residents of California. Strong collection and loan servicing practices are key elements to the successful execution of the plan to exit the automobile finance business. Over 80% of Fireside Bank’s employees are now directly involved in loan collection and servicing activities. Collections and servicing activities are conducted from a call center housed in Fireside Bank’s Pleasanton, California, home office and from a collection call center in Phoenix, Arizona. See the discussion of loan loss reserves under the headings “Fireside Bank” and “Critical Accounting Estimates” in the MD&A and Note 1, “Basis of Presentation and Significant Estimates,” Note 2, “Summary of Accounting Policies and Accounting Changes,” and Note 6, “Automobile Loan Receivables,” to the Consolidated Financial Statements. Fireside Bank’s automobile financing activities were funded primarily by FDIC-insured certificates of deposits. Fireside Bank’s deposits were originated through its then-existing California branch network, brokers and over the Internet. Fireside Bank no longer accepts new deposits or allows existing deposits to roll over at maturity and has been redeeming certain deposits in advance of their scheduled maturity dates. Investments The quality, nature, and amount of the various types of investments which can be made by insurance companies are regulated by state laws. Depending on the state, these laws permit investments in qualified assets, including, but not limited to, municipal, state and federal government obligations, corporate bonds, real estate, preferred and common stocks, investment partnerships, limited liability investment companies and limited partnerships and mortgages where the value of the underlying real estate exceeds the amount of the loan. The Company employs a total return investment strategy, with an emphasis on yield, while maintaining liquidity to meet both its short and long-term insurance obligations primarily through the combination of investment-grade fixed maturity investments and, to a lesser extent, equity securities with the potential for long-term price appreciation. See the discussions of the Company’s investments under the headings “Investment Results,” “Investment Quality and Concentrations,” “Investments in Limited Liability Investment Companies and Limited Partnerships,” “Liquidity and Capital Resources” and “Critical Accounting Estimates,” in the MD&A, “Quantitative and Qualitative Disclosures about Market Risk,” in Item 7A and Note 5, “Investments,” Note 17, “Income from Investments,” and Note 24, “Fair Value Measurements,” to the Consolidated Financial Statements. Regulation Insurance Regulation Unitrin is subject to the insurance holding company laws of a number of states. Certain dividends and distributions by an insurance subsidiary are subject to approval by the insurance regulators of the state of incorporation of such subsidiary. Other significant transactions between an insurance subsidiary and its holding company or other subsidiaries of the holding company may require approval by insurance regulators in the state of incorporation of each of the insurance subsidiaries participating in such transactions.
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Table of ContentsUnitrin’s insurance subsidiaries are subject to extensive regulation in the states in which they do business. Such regulation pertains to a variety of matters, including, but not limited to, policy forms, premium rate plans, licensing of agents, licenses to transact business, trade practices, investments and solvency. The majority of Unitrin’s insurance operations are in states requiring prior approval by regulators before proposed rates for property, casualty, or health insurance policies may be implemented. However, rates proposed for life insurance generally become effective immediately upon filing with a state, even though the same state may require prior rate approval for other types of insurance. Insurance regulatory authorities perform periodic examinations of an insurer’s market conduct and other affairs. Unitrin’s health insurance subsidiaries are also subject to certain regulation by the federal government. For example, the Health Care Acts, and the regulations promulgated thereunder, establish minimum loss ratios, coverages and minimum policy limits for health insurance policies. Insurance companies are required to report their financial condition and results of operation in accordance with statutory accounting principles prescribed or permitted by state insurance regulators in conjunction with the National Association of Insurance Commissioners (the “NAIC”). State insurance regulators also prescribe the form and content of statutory financial statements, perform periodic financial examinations of insurers, set minimum reserve and loss ratio requirements, establish standards for the types and amounts of investments and require minimum capital and surplus levels. Such statutory capital and surplus requirements include risk-based capital (“RBC”) rules promulgated by the NAIC. These RBC standards are intended to assess the level of risk inherent in an insurance company’s business and consider items such as asset risk, credit risk, underwriting risk and other business risks relevant to its operations. In accordance with RBC formulas, a company’s RBC requirements are calculated and compared to its total adjusted capital to determine whether regulatory intervention is warranted. At December 31, 2010, the total adjusted capital of each of Unitrin’s insurance subsidiaries exceeded the minimum levels required under RBC rules. Unitrin’s insurance subsidiaries are required under the guaranty fund laws of most states in which they transact business to pay assessments up to prescribed limits to fund policyholder losses or liabilities of insolvent insurance companies. Unitrin’s insurance subsidiaries also are required to participate in various involuntary pools or assigned risk pools, principally involving windstorms and high risk drivers. In most states, the involuntary pool participation of Unitrin’s insurance subsidiaries is in proportion to their voluntary writings of related lines of business in such states. In addition to the regulatory requirements described above, a number of legislative and regulatory measures pending or recently approved may significantly affect the insurance business in a variety of ways. In particular, the NAIC adopted extensive modifications to its Model Insurance Holding Company System Regulatory Act and related regulation in December 2010. Assuming enactment into law by the various state legislatures and regulators, these modifications will, among other things, substantially expand the oversight and examination powers of state insurance regulators not only with respect to licensed insurance companies, but also with respect to their presently unregulated non-insurance affiliates, and impose new reporting requirements on the ultimate controlling persons of such insurance companies. Other significant measures enacted in recent years include, among other things, tort reform, consumer privacy requirements, credit score regulation, producer compensation regulations, corporate governance requirements and financial services deregulation initiatives. State insurance laws intended primarily for the protection of policyholders contain certain requirements that must be met prior to any change of control of an insurance company or insurance holding company that is domiciled or, in some cases, an insurance company having such substantial business that it is deemed commercially domiciled, in that state. These requirements may include the advance filing of specific information with the state insurance regulators, a public hearing on the matter, and the review and approval of the change of control by such regulators. The Company has insurance subsidiaries domiciled in Alabama, California, Illinois, Louisiana, Missouri, New York, Oklahoma, Oregon, Texas and Wisconsin. In these states, except Alabama, “control” generally is presumed to exist through the direct or indirect ownership of 10% or more of the voting securities of an insurance company. Control is presumed to exist in Alabama with a 5% or more ownership interest in such securities. Any purchase of Unitrin’s shares that would result in the purchaser owning Unitrin’s voting securities in the foregoing percentages for the states indicated would be presumed to result in the acquisition of control of
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Table of ContentsUnitrin’s insurance subsidiaries in those states. Therefore, acquisitions subject to the 10% threshold generally would require the prior approval of the insurance regulatory authorities in each state in which Unitrin’s insurance subsidiaries are domiciled or deemed to be commercially domiciled, including those in Alabama, while acquisitions subject to the 5% threshold generally would require the prior approval of only Alabama regulatory authorities. In addition, many states require pre-acquisition notification to the state insurance regulators of a change of control of an insurance company licensed in that state if specific market concentration thresholds would be triggered by the acquisition. While those pre-acquisition notification statutes generally do not authorize the state insurance regulators to disapprove the change of control, they do authorize the issuance of a cease and desist order with respect to the insurance company if certain conditions, such as undue market concentration, would result from the acquisition. These insurance regulatory requirements may deter, delay or prevent transactions effecting control of the Company or the ownership of Unitrin’s voting securities, including transactions that could be advantageous to Unitrin’s shareholders. Fireside Bank Regulation Fireside Bank is an industrial bank regulated by the California Department of Financial Institutions (the “CDFI”). Under California banking law, Fireside Bank is permitted to engage in the activities of a commercial bank, except the activity of accepting demand deposits, and is generally subject to the same laws and regulations to which commercial banks are subject under the California banking law. Fireside Bank’s activities are now limited to the servicing of its existing loan and deposit customers. In addition, since Fireside Bank’s deposits are insured by the FDIC, it is subject to a broad system of regulation under the Federal Deposit Insurance Act, FDIC regulations and other federal regulations. The regulations of these state and federal agencies govern most aspects of Fireside Bank’s business, and are generally intended to protect a bank’s depositors, creditors, borrowers and the deposit insurance fund. They impose reporting obligations, minimum capitalization requirements, limitations on dividends, investments, loans, borrowings, branching, mergers and acquisitions, reserves against deposits, and other requirements, including those relating to privacy, fairness in consumer credit, and prevention and detection of fraud and financial crime. Federal law also imposes certain restrictions on Fireside Bank’s transactions with the Company and other affiliates, and certain fair lending and reporting requirements involving consumer lending operations and Community Reinvestment Act activities. Near the end of the first quarter of 2009, Fireside Bank began a plan to exit the automobile finance business and wind down its operations in an orderly fashion over the next several years, during which time Fireside Bank will continue to collect outstanding loan balances and make interest payments and redemptions on outstanding certificates of deposits in the ordinary course of business. In connection with the exit plan, Fireside Bank ceased accepting new loan applications and purchasing retail installment contracts from automobile dealers. Fireside Bank also has ceased opening new certificate of deposit accounts and no longer permits depositors to renew existing certificates of deposits when they mature. During 2009, Fireside Bank also closed all of its branch offices and reduced its staffing. Effective December 21, 2009, Fireside Bank agreed to and became the subject of a consent order issued by the FDIC and CDFI. The consent order requires Fireside Bank to develop and submit to the FDIC and CDFI a written liquidation plan and to update that plan by November 30 of each year. Other requirements of the consent order include: (i) certain restrictions and procedures relative to Fireside Bank’s management and directors; (ii) the adoption of certain policies and procedures and the submission of quarterly reports to the FDIC and CDFI; (iii) the maintenance of a minimum ratio of Tier 1 capital to average total assets of 15%; (iv) the maintenance of adequate reserves for loan losses; and (v) restrictions on the payment of dividends by Fireside Bank to Unitrin. Given the current status of Fireside Bank’s ongoing run-off plan, Fireside Bank’s management does not consider the terms of the consent order to be onerous nor does it believe that compliance with the order will have a material adverse affect on Fireside Bank, the run-off plan or Unitrin’s ability to recover its investment in Fireside Bank over the next several years. Dodd-Frank Act In July 2010, the Dodd-Frank Act (the “DFA”) was enacted into law. The DFA effects a profound increase in the regulation of the financial services industry. Among other things, the DFA forms within the Treasury Department
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Table of Contentsa Federal Insurance Office that is charged with monitoring all aspects of the insurance industry, gathering data, and conducting a study on methods to modernize and improve the insurance regulatory system in the United States. A report on this study is required to be delivered to Congress within 18 months after enactment of the DFA and could be influential in reshaping the current state-based insurance regulatory system and/or introducing a direct federal role in such regulation. The DFA also requires the Government Accountability Office to study whether companies like Unitrin, that own industrial banks such as Fireside Bank, should continue to be exempt from registration as bank holding companies under Federal law. The report on this study, which likewise must be delivered to Congress within 18 months of enactment of the DFA, could result in legislation that would end the exemption. If this were to happen, Unitrin could be required to register as a bank holding company if Fireside Bank has not terminated its industrial bank license and related FDIC insurance coverage in accordance with its exit plan by the effective date of such legislation.
Most issuers, including Unitrin, are exposed to numerous risk factors that could cause actual results to differ materially from recent results or anticipated future results. The following discussion details the significant risk factors that are more specific to Unitrin. In addition to those described below, the Company’s business, financial condition and results of operation could be materially affected by other factors not presently known by, or considered material to, the Company. Readers are advised to consider these factors along with the other information included in this 2010 Annual Report, and to consult any further disclosures Unitrin makes on related subjects in its filings with the SEC. Catastrophe losses, whether resulting from natural disasters, terrorism or other man-made events, and reinsurance risks could adversely affect the Company’s results of operations, liquidity or financial condition. Unitrin’s property and casualty insurance subsidiaries are subject to claims arising out of catastrophes that may have a significant effect on their results of operations, liquidity and financial condition. Catastrophes can be caused by various events, including, but not limited to, hurricanes, tornadoes, windstorms, earthquakes, hail storms, explosions, severe winter weather and wildfires and may include man-made events, such as terrorist attacks and hazardous material spills. The incidence, frequency and severity of catastrophes are inherently unpredictable, and may be impacted by the uncertain effects of climate change. The extent of the Company’s losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Unitrin’s Life and Health Insurance subsidiaries are particularly exposed to risks of catastrophic mortality, such as pandemic or other events that result in large numbers of deaths. In addition, the occurrence of such an event in a concentrated geographic area could have a severe disruptive effect on the Company’s workforce and business operations. The likelihood and severity of such events can not be predicted and are difficult to estimate. Unitrin’s insurance subsidiaries seek to reduce their exposure to catastrophe losses through underwriting strategies and the purchase of catastrophe reinsurance. Reinsurance does not relieve Unitrin’s insurance subsidiaries of their direct liability to their policyholders. As long as the reinsurers meet their obligations, the net liability for Unitrin’s insurance subsidiaries is limited to the amount of risk that they retain. While the Company’s principal reinsurers are each rated “A-” or better by A.M. Best at the time reinsurance is purchased, the Company cannot be certain that reinsurers will pay the amounts due from them either now, in the future, or on a timely basis. A reinsurer’s insolvency or inability to make payments under the terms of its reinsurance agreement with Unitrin’s insurance subsidiaries could have a material adverse effect on the Company’s financial position, results of operations and liquidity. In addition, market conditions beyond the Company’s control determine the availability and cost of the reinsurance protection that Unitrin’s insurance subsidiaries may purchase. A decrease in the amount of reinsurance protection that Unitrin’s insurance subsidiaries purchase generally should decrease their cost of reinsurance, but increase their risk of loss. An increase in the amount of reinsurance protection that Unitrin’s
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Table of Contentsinsurance subsidiaries purchase generally should increase their cost of reinsurance, but decrease their risk of loss. However, if the amount of available reinsurance is reduced, Unitrin’s insurance subsidiaries could pay more for the same level, or a lower level, of reinsurance coverage. Accordingly, the Company may be forced to incur additional expenses for reinsurance or may not be able to obtain sufficient reinsurance on acceptable terms, which could adversely affect the ability of Unitrin’s insurance subsidiaries to write future insurance policies or result in their retaining more risk with respect to such insurance policies. Estimating losses and LAE for determining property and casualty insurance reserves, or determining premium rates, is inherently uncertain, and the Company’s results of operations may be materially impacted if the Company’s insurance reserves or premium rates are insufficient. The Company establishes loss and LAE reserves to cover estimated liabilities, which remain unpaid as of the end of each accounting period, and to investigate and settle all claims incurred under the property and casualty insurance policies that it has issued. Loss and LAE reserves are established for claims that have been reported to the Company as of the end of the accounting period, as well as for claims that have occurred but have not yet been reported to the Company. The estimates of loss and LAE reserves are based on the Company’s assessment of the facts and circumstances known to it at the time, as well as estimates of the impact of future trends in the severity of claims, the frequency of claims and other factors. See MD&A, “Critical Accounting Estimates,” under the caption “Property and Casualty Insurance Reserves for Losses and Loss Adjustment Expenses” beginning on page 68 for a discussion of the Company’s reserving process and the factors considered by the Company’s actuaries in estimating the Company’s Property and Casualty Insurance Reserves. As the process of estimating property and casualty insurance reserves is inherently uncertain, the reserves established by the Company are not precise estimates of liability and could prove to be inadequate to cover its ultimate losses and expenses. The process of estimating loss reserves is complex and imprecise. The estimate of the ultimate cost of claims must take into consideration many factors that are dependent on the outcome of future events. The impacts on the Company’s estimates of property and casualty insurance reserves from these factors are difficult to assess accurately. A change in any one or more of the factors is likely to result in a projected ultimate loss that is different than the previous projected ultimate loss, and may have a material impact on the Company’s estimate of the projected ultimate loss. Increases in the estimates of ultimate losses and LAE will decrease earnings, while decreases in such estimates will increase earnings, as reported by the Company in the results of its operations for the periods in which the changes to the estimates are made by the Company. The Company’s actuaries also consider trends in the severity and frequency of claims and other factors, when determining the premium rates to charge for its property and casualty insurance products. An unanticipated change in any one or more of these factors or trends, as well as a change in competitive conditions, may also result in inadequate premium rates charged for insurance policies issued by Unitrin’s property and casualty insurance subsidiaries in the future. Such pricing inadequacies could have a material impact on the Company’s operating results. The success of Fireside Bank’s plan to exit the automobile finance business is subject to risk. The results of operations and financial condition of Fireside Bank and the success of the Company’s plan to exit the automobile finance business, including, but not limited to, the amount of Fireside Bank’s capital returned to Unitrin depend, to a large extent, on the performance of its automobile loan receivable portfolio. Automobile loan borrowers may default during the terms of their loans. Fireside Bank bears the full risk of losses resulting from defaults. In the event of a default, the collateral value of the financed vehicle usually does not cover the outstanding loan balance and costs of recovery. A substantial portion of Fireside Bank’s automobile loan receivable portfolio is considered sub-prime. The risk of default for sub-prime loans is higher than for prime loans and has been accentuated by economic conditions over the past few years. Approximately two-thirds of Fireside Bank’s automobile loan portfolio is concentrated in loans to borrowers residing in California, where the unemployment rate has been higher than the national average. Continued economic stress in the California
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Table of Contentseconomy could result in increases over time in loan delinquencies and loan charge-offs in Fireside Bank’s loan portfolio and consequent adverse effects on the execution of Fireside Bank’s plan to exit the automobile finance business, including a reduction in the amount of capital expected to be returned to Unitrin. Reserve National’s business model is vulnerable to American health care reform. Reserve National’s business model, which focuses on providing limited health insurance coverages to persons who lack access to traditional private options, is likely to be adversely affected by the Health Care Acts. Depending largely on the final regulations for the Health Care Acts, Reserve National might suffer significant loss of revenue and be unable to compete effectively in the markets that it has historically served. In particular, certain provisions that establish minimum loss ratios for health insurance policies significantly above the levels historically experienced by Reserve National could adversely impact Reserve National’s ability to achieve an adequate return and may result in a significant loss of business for Reserve National. A significant loss of business could have a material adverse effect on the financial condition, the results of operations and the valuation of Reserve National. The Unitrin Direct segment may not reach consistent profitability or an adequate rate of return. The Unitrin Direct segment reported significant operating losses in 2009 and 2008 and operated slightly below break-even in 2010. The Company has taken a number of actions intended to improve Unitrin Direct’s operating results including, but not limited to, implementing premium rate increases in most states, improving insurance risk selection and retention, reducing marketing spending, modifying its direct marketing program to target a better response rate, introducing a new product and brand and improving operating scale with the acquisitions and integrations of Merastar and Direct Response. However, there is no assurance that Unitrin Direct will be profitable or reach an adequate rate of return in future years. Unitrin is dependent on receiving dividends from its subsidiaries to service its debt and to pay dividends to its shareholders. As a holding company with no business operations of its own, Unitrin depends on the dividend income that it receives from its subsidiaries as the primary source of funds to pay interest and principal on its outstanding debt obligations and to pay dividends to its shareholders. Unitrin’s subsidiaries are subject to significant regulatory restrictions under state insurance and banking laws and regulations which limit their ability to declare and pay dividends. These regulations impose minimum solvency and liquidity requirements on dividends between affiliated companies and require prior notice to, and may require approval from, state insurance or bank regulators before dividends can be paid. The inability of one or more of Unitrin’s subsidiaries to pay sufficient dividends to Unitrin may materially affect Unitrin’s ability to timely pay its debt obligations or to pay dividends to its shareholders. A significant downgrade in the ratings of Unitrin or its insurance subsidiaries could adversely affect the Company. Third-party rating agencies, such as A.M. Best, assess the financial strength and rate the claims-paying ability of insurance companies based on criteria established by the rating agencies. Third-party ratings are important competitive factors in the insurance industry. Financial strength ratings are used to assess the financial strength and quality of insurers. A significant downgrade by a recognized rating agency in the ratings of Unitrin’s insurance subsidiaries, particularly those that market their products through independent agents, could result in a substantial loss of business if agents or policyholders of such subsidiaries move to other companies with higher claims paying and financial strength ratings. Any substantial loss of business could have a material adverse effect on the financial condition and results of operations of such subsidiaries. A downgrade in Unitrin’s credit rating by Standard & Poor’s (“S&P”), Moody’s Investors Services (“Moody’s”) or Fitch Ratings (“Fitch”) may reduce Unitrin’s ability to access the capital markets for general corporate purposes or refinance existing debt.
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Table of ContentsUnitrin’s subsidiaries are subject to significant regulation by state insurance departments and by the FDIC and state bank regulators. Insurance. Unitrin’s insurance subsidiaries are subject to extensive regulation in the states in which they do business. Current regulations encompass a wide variety of matters, including policy forms, premium rates, licensing, trade practices, investment standards, statutory capital and surplus requirements, reserve and loss ratio requirements, restrictions on transactions among affiliates and consumer privacy. Banking. Fireside Bank is regulated by the FDIC and the CDFI and is subject to a consent order to which it has agreed with these two agencies. The consent order imposes a number of additional requirements on Fireside Bank. Any failure to comply with the consent order could subject Fireside Bank to the exercise of enforcement remedies by the FDIC and CDFI. These agencies regulate most aspects of Fireside Bank’s business and impose reporting obligations and a broad array of restrictions and requirements on such matters as capitalization, dividends, investments, loans and borrowings, and many requirements which relate to privacy and fairness in consumer credit or the detection and prevention of fraud and financial crime. Effect on Operations. Insurance and banking regulatory agencies conduct periodic examinations of Unitrin’s subsidiaries and require the filing of annual and other reports relating to financial condition, holding company issues and other matters. If an insurance company fails to obtain required licenses or approvals, or if any of Unitrin’s subsidiaries fail to comply with other regulatory requirements, including banking regulations and the consent order applicable to Fireside Bank, the regulatory agencies can suspend or delay their operations or licenses, require corrective action, and impose penalties or other remedies available under the applicable regulations. These federal and state laws and regulations, and their interpretation by the various regulatory agencies and courts, are undergoing continual revision and expansion. The regulatory structures in the financial services industry have come under intense scrutiny as a result of the turmoil experienced by the financial markets. While it is not possible to predict how new legislation or regulations or new interpretations of existing laws and regulations may impact the operations of Unitrin’s subsidiaries, two recent developments have the potential to significantly impact such operations. In July 2010, the DFA was enacted into law. For more information about the potential impact of the DFA on the Company’s operations, see “Dodd-Frank Act” under “Regulation” in Item 1, beginning on page 19. In addition, the NAIC adopted extensive modifications to its Model Insurance Holding Company System Regulatory Act and related regulation in December 2010. Assuming enactment into law by the various state legislatures and regulators, these modifications will, among other things, substantially expand the oversight and examination powers of state insurance regulators not only with respect to licensed insurance companies, but also with respect to their presently unregulated non-insurance affiliates, and impose new reporting requirements on the ultimate controlling persons of such insurance companies. These new developments (including regulations that are required to be promulgated under the DFA), as well as significant changes in, or new interpretations of, existing laws and regulations could make it more expensive for Unitrin’s subsidiaries to conduct their businesses and could materially affect the profitability of their operations and the Company’s financial results. See the discussion in the risk factor above entitled “Reserve National’s business model is vulnerable to American health care reform” regarding the potential effect of the Health Care Acts on Reserve National’s business model. For a more detailed discussion of the regulations applicable to Unitrin’s subsidiaries, and the consent order applicable to Fireside Bank, see “Insurance Regulation” and “Fireside Bank Regulation” under “Regulation” in Item 1, beginning on page 17. The Company is subject to interest rate risk and credit risk in its fixed maturity investment portfolio. One of the Company’s primary market risk exposures is to changes in interest rates. A decline in market interest rates could have an adverse effect on the Company’s investment income as it invests cash in new investments that may yield less than the portfolio’s average rate. In a declining interest rate environment, borrowers may seek to
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Table of Contentsrefinance their borrowings at lower rates and, accordingly, prepay or redeem securities the Company holds as investments more quickly than the Company initially expected. Such prepayment or redemption action may cause the Company to reinvest the redeemed proceeds in lower yielding investments. An increase in market interest rates could also have an adverse effect on the value of the Company’s investment portfolio, for example, by decreasing the fair values of the fixed income securities that comprise a substantial majority of its investment portfolio. The Company’s fixed maturity investment portfolio is subject to credit risk from the issuers of the securities in the portfolio. Deterioration in the financial conditions of the issuers could result in a decline in the fair value of the Company’s fixed maturity investment portfolio. Deterioration in the financial conditions of the issuers could also result in issuer defaults and impact the Company’s ability to recover the reported value of its fixed maturity investment portfolio. Accordingly, deterioration in the credit quality of the Company’s investment portfolio could adversely affect the Company’s operating results and financial position. The Company has a large equity concentration in Intermec, Inc. The Company’s investment in the common stock of Intermec, Inc. (“Intermec”) is reported at fair value in the Consolidated Balance Sheet and was $137.5 million at December 31, 2010. The Company’s investment in Intermec common stock is subject to a variety of risk factors under the umbrella of market risk. General economic swings influence Intermec’s performance. A downturn in the global economy, or in the global supply chain solutions industry, in which Intermec competes, could have a negative impact on Intermec. Such results could have an adverse effect on the fair value of the Company’s investment in Intermec common stock. The Company’s investments in limited liability investment companies and limited partnerships are concentrated in companies and partnerships that invest in distressed and mezzanine debt and secondary transactions. At December 31, 2010, Unitrin’s insurance subsidiaries had $328.0 million invested in limited liability investment companies and limited partnerships accounted for under the equity method of accounting (“Equity Method Limited Liability Investments”), that invest in distressed and mezzanine debt of other companies and secondary transactions. In addition, Unitrin’s insurance subsidiaries had unfunded commitments to invest an additional $146.4 million at December 31, 2010, including $69.4 million of unfunded commitments related to investments reported as Other Equity Interests and included in Equity Securities in the Consolidated Balance Sheet, in such limited liability investment companies and limited partnerships. Such unfunded commitments generally may be used to fund additional investments made, or losses incurred, by such limited liability investment companies and limited partnerships. The underlying investments of such limited liability investment companies and limited partnerships generally provide opportunities for higher returns, but at a higher risk than investment-grade investments. General economic swings influence the performance of the underlying investments in distressed and mezzanine debt and secondary transactions. Unitrin’s insurance subsidiaries have also made direct investments in the same or similar distressed and mezzanine debt securities of certain issuers in which such limited liability investment companies and limited partnerships have made investments, which could exacerbate any losses attributable to poor performance of any such investments. A severe and continued downturn in the economy may result in deterioration in the business prospects of the issuers of the underlying investments that could adversely affect the Company’s operating results and financial position. The insurance industry is highly competitive. The Company’s insurance businesses face significant competition, and its ability to compete is affected by a variety of issues relative to others in the industry, such as product pricing, service quality, financial strength and name recognition. Competitive success is based on many factors, including, but not limited to, the following:
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The inability to compete effectively in any of the Company’s insurance businesses could materially reduce the Company’s customer base and revenues, and could adversely affect the future results and financial condition of the Company. See “Competition” in Item 1 of Part I beginning on pages 14 and 16, for more information on the competitive rankings in the property and casualty insurance markets and the life and health insurance markets, respectively, in the United States. The effects of emerging claim and coverage issues on Unitrin’s insurance subsidiaries are uncertain. As industry practices and regulatory, judicial, political, social and other environmental conditions change, unexpected and unintended issues related to insurance claims and coverages may emerge. These emerging practices, conditions and issues could adversely affect Unitrin’s insurance subsidiaries by either extending coverages beyond Unitrin’s insurance subsidiaries’ underwriting intent or by increasing the number or size of claims. The effects of such emerging claim and coverage issues are extremely hard to predict, but could materially affect the financial results of the Company. Legal and regulatory proceedings are unpredictable. Unitrin and its subsidiaries are involved in lawsuits, regulatory inquiries, and other legal proceedings arising out of the ordinary course of their businesses. Many of these matters raise difficult and complicated factual and legal issues and are subject to uncertainties and complexities, and the outcomes of these matters are difficult to predict. Given the unpredictability of the legal and regulatory environments in which the Company operates, there can be no assurance that one or more of these matters will not produce a result which could have a material adverse effect on the Company’s financial results for any given period. For further information about the Company’s pending litigation, see Item 3, “Legal Proceedings,” beginning on page 26. Managing technology initiatives to address business developments and increasing data security regulations and risks present significant challenges to the Company. While technological developments can streamline many business processes and ultimately reduce the cost of operations, technology initiatives can present short-term cost and implementation risks. In addition, projections of expenses, implementation schedules and utility of results may be inaccurate and can escalate over time. The financial services industry is highly regulated, and the Company faces rising costs and competing time constraints in meeting compliance requirements of new and proposed regulations. Companies operating in the financial services industry obtain and store vast amounts of personal data. The expanding volume and sophistication of computer viruses, hackers and other external hazards may increase the vulnerability of the Company’s data systems, including, but not limited to, the personal data used in and stored on such systems, to security breaches. These increased risks and expanding regulatory requirements, including requirements related to personal data security, expose the Company to potential data loss and damages and significant increases in compliance and litigation costs.
Not applicable.
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Owned Properties The Company owns the 41-story office building at One East Wacker Drive, Chicago, Illinois, that houses the executive offices of Unitrin and the home office of its Unitrin Direct operations, which together occupy approximately 48,000 square feet of the 527,000 rentable square feet in the building. In addition, Unitrin’s subsidiaries together own and occupy 14 buildings located in 7 states consisting of approximately 46,000 square feet in the aggregate. Unitrin’s subsidiaries hold additional properties solely for investment purposes that are not utilized by Unitrin or its subsidiaries. Leased Facilities Kemper leases facilities with an aggregate square footage of approximately 222,000 at 8 locations in 8 states. The latest expiration date of the existing leases is in September of 2018. Fireside Bank leases facilities with an aggregate square footage of approximately 63,000 at 2 locations in 2 states. The latest expiration date of the existing leases is in August of 2014. Unitrin Specialty leases facilities with an aggregate square footage of approximately 148,000 at 3 locations in 3 states. The latest expiration date of the existing leases is in June of 2018. Unitrin Direct leases facilities with an aggregate square footage of approximately 215,000 at 7 locations in 6 states. The latest expiration date of the existing leases is in February of 2018. Unitrin’s Life and Health Insurance segment leases facilities with aggregate square footage of approximately 500,000 at 125 locations in 26 states. The latest expiration date of the existing leases is in October of 2019. Unitrin’s corporate data processing operation leases facilities with aggregate square footage of approximately 36,000 square feet at 2 locations in 2 states. The latest expiration date of the existing leases is in March of 2018. Kemper, Unitrin Specialty and Unitrin Direct share leased facilities with an aggregate square footage of approximately 88,000 at 3 locations in 3 states. The latest expiration date of the existing leases is in September of 2018. The properties described above are in good condition. The properties utilized in the Company’s operations consist of facilities suitable for general office space, call centers and data processing operations.
Proceedings In the ordinary course of their businesses, Unitrin and its subsidiaries are involved in legal proceedings, including lawsuits, regulatory examinations and inquiries. Some of these proceedings involve matters particular to the Company or one or more of its subsidiaries, while others pertain to business practices in the industries in which Unitrin or its subsidiaries operate. Some lawsuits seek class action status that, if granted, could expose Unitrin or its subsidiaries to potentially significant liability by virtue of the size of the putative classes. These matters can raise complicated issues and may be subject to many uncertainties, including, but not limited to: (i) the underlying facts of the matter; (ii) unsettled questions of law; (iii) issues unique to the jurisdiction where the matter is pending; (iv) damage claims, including claims for punitive damages, that are disproportionate to the actual economic loss incurred; and (v) the legal, regulatory and political environments faced by large corporations generally and the insurance and banking sectors specifically. Accordingly, the outcomes of these matters are difficult to predict, and the amounts or ranges of potential loss at particular points in time are in most cases difficult or impossible to ascertain.
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Table of ContentsCertain subsidiaries of Unitrin, like many property and casualty insurers, are defending a significant volume of lawsuits in Florida, Louisiana and Texas arising out of property damage caused by catastrophes and storms, including major hurricanes. In these matters, the plaintiffs seek compensatory and punitive damages, and equitable relief. The Company believes its relevant subsidiaries have meritorious defenses to assert in these proceedings, and will vigorously contest these matters. However, it is anticipated that additional lawsuits will continue to be filed, at least until the applicable statutes of limitation expire, though some courts continue to demonstrate reluctance to enforce these statutes. Financial Impact The Company believes that resolution of its pending legal proceedings will not have a material adverse effect on the Company’s financial position. However, given the unpredictability of the legal environment, there can be no assurance that one or more of these matters will not produce a result which could have a material adverse effect on the Company’s financial results for any given period. Legal Environment The legal and regulatory environments within which Unitrin and its subsidiaries conduct their businesses is often unpredictable. Industry practices that were considered legally-compliant and reasonable for years may suddenly be deemed unacceptable by virtue of an unexpected court or regulatory ruling. Anticipating such shifts in the law and the impact they may have on the Company and its operations is a difficult task and there can be no assurances that the Company will not encounter such shifts in the future.
PART II
Market Information Unitrin’s common stock is traded on the New York Stock Exchange (the “NYSE”) under the symbol of “UTR.”
Holders As of January 21, 2011, the number of record holders of Unitrin’s common stock was approximately 5,200.
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Table of ContentsDividends
Unitrin’s insurance subsidiaries are subject to various state insurance laws that restrict the ability of these insurance subsidiaries to pay dividends without prior regulatory approval. In addition, Unitrin’s automobile finance subsidiary, Fireside Bank, is subject to certain risk-based capital regulations having the effect of limiting the amount of dividends that may be paid by Fireside Bank. Fireside Bank also has agreed not to pay dividends without the prior approval of the FDIC and the CDFI. See MD&A, “Letter to Shareholders” and “Liquidity and Capital Resources” and Note 12, “Shareholders’ Equity,” to the Consolidated Financial Statements for information on Unitrin’s ability and intent to pay dividends. Issuer Purchases of Equity Securities
The preceding table does not include shares withheld or surrendered, either actually or constructively, to satisfy the exercise price and/or tax withholding obligations relating to the exercise of stock options or stock appreciation rights under Unitrin’s stock option plans or shares withheld to satisfy tax withholding obligations on the vesting of awards under Unitrin’s restricted stock plan. During the quarter ended December 31, 2010, 23,027 shares were withheld or surrendered, either actually or constructively, to satisfy the exercise price and/or tax withholding obligations relating to the exercise of stock options or stock appreciation rights under Unitrin’s three stock option plans. During the quarter ended December 31, 2010, 383 shares were withheld to satisfy tax withholding obligations on the vesting of awards under Unitrin’s restricted stock plan.
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Table of ContentsUnitrin Common Stock Performance Graph The following graph assumes $100 invested on December 31, 2005 in (i) Unitrin common stock, (ii) the S&P MidCap 400 Index, and (iii) the S&P Composite 1500 Insurance Index, in each case with dividends reinvested. Unitrin is a constituent of each of these two indices. The comparisons in the graph below are based on historical data and are not intended to forecast the possible future performance of Unitrin common stock.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Table of ContentsUnitrin, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations SUMMARY OF RESULTS Net Income was $184.6 million ($2.98 per unrestricted common share) for the year ended December 31, 2010, compared to $164.7 million ($2.64 per unrestricted common share) for the year ended December 31, 2009. Income from Continuing Operations was $183.8 million ($2.97 per unrestricted common share) in 2010, compared to $162.2 million ($2.60 per unrestricted common share) in 2009. As discussed throughout this MD&A, results from continuing operations increased for the year ended December 31, 2010 due primarily to improved operating results in the Unitrin Direct and Fireside Bank segments, lower Net Impairment Losses Recognized in Earnings and higher Net Realized Gains on the Sales of Investments, partially offset by lower segment operating profit in the Kemper, Unitrin Specialty and Life and Health Insurance segments. Catastrophe losses from continuing operations were $78.1 million before tax for the year ended December 31, 2010, compared to $43.5 million for 2009. The Company reported Income from Discontinued Operations of $0.8 million and $2.5 million for the years ended December 31, 2010 and 2009, respectively. Earned Premiums were $2,289.4 million in 2010, compared to $2,455.5 million in 2009, a decrease of $166.1 million. Earned Premiums decreased in all four insurance segments. Automobile Finance Revenues decreased by $79.5 million in 2010, compared to 2009, due to Fireside Bank’s execution of its ongoing plan to exit the automobile finance business. Net Investment Income increased by $4.9 million in 2010 due primarily to higher Dividends on Equity Securities and higher interest from Investments in Fixed Maturities. Net Realized Gains on Sales of Investments, reported in the Consolidated Statement of Operations, were $42.6 million in 2010, compared to $24.6 million in 2009. Net Impairment Losses Recognized in Earnings for the years ended December 31, 2010 and 2009 were $16.5 million and $50.4 million, respectively. The Company cannot predict when or if similar investment gains or losses may occur in the future. Other Comprehensive Investment Gains, which are not reported in the Consolidated Statement of Operations, but rather are reported in the Consolidated Statement of Comprehensive Income (Loss), were $179.5 million in 2010, compared to $233.7 million in 2009. The net comprehensive investment gain for the year ended December 31, 2010 was largely due to lower overall interest rates resulting from lower risk-free interest rates and an appreciation in the fair value of equity securities. The net comprehensive investment gain for the year ended December 31, 2009 was largely due to lower overall interest rates resulting from narrower credit spreads, partially offset by higher risk-free interest rates. CATASTROPHES The Company manages its exposure to catastrophes and other natural disasters through a combination of geographical diversification, restrictions on the amount and location of new business production in certain regions, and reinsurance. To limit its exposures to catastrophic events, the Company maintains various primary catastrophe reinsurance programs for its property and casualty insurance businesses. Coverage for each primary catastrophe reinsurance program is provided in various layers (see Note 22, “Catastrophe Reinsurance,” to the Consolidated Financial Statements for further discussion of these programs). In addition to these programs, the Kemper segment purchases reinsurance for catastrophe losses in North Carolina at retentions lower than the Company’s primary catastrophe reinsurance programs (“the Kemper NC Program”). The Company purchases reinsurance from the FHCF for hurricane losses in Florida at retentions lower than the Company’s primary catastrophe reinsurance programs.
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Table of ContentsUnitrin, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
Catastrophe reinsurance premiums for the Company’s primary reinsurance programs, the Kemper NC Program and the FHCF reduced earned premiums for the years ended December 31, 2010, 2009 and 2008 by the following:
The Life and Health Insurance segment presented above includes reinsurance reinstatement premiums of $0.6 million, $0.7 million and $4.4 million for the years ended December 31, 2010, 2009 and 2008, respectively, to reinstate coverage following certain hurricanes. Total catastrophe losses and LAE (including development), net of reinsurance recoveries, reported in continuing operations were $78.1 million, $43.5 million and $144.9 million for the years ended December 31, 2010, 2009 and 2008, respectively. Catastrophe losses and LAE (including development), net of reinsurance recoveries, for the years ended December 31, 2010, 2009 and 2008 by business segment are presented below.
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Table of ContentsUnitrin, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) CATASTROPHES (Continued)
Total Catastrophe loss and LAE reserves, net of reinsurance recoverables, developed adversely by $1.4 million for the year ended December 31, 2010. Total Catastrophe loss and LAE reserves, net of reinsurance recoverables, developed favorably by $18.4 million for the year ended December 31, 2009. Total Catastrophe loss and LAE reserves, net of reinsurance recoverables, developed adversely by $4.8 million for the year ended December 31, 2008. The Kemper segment reported favorable catastrophe reserve development of $4.9 million, $18.3 million and $5.8 million for the years ended December 31, 2010, 2009 and 2008, respectively. The Life and Health Insurance segment reported adverse catastrophe reserve development of $3.3 million and $11.0 million for the years ended December 31, 2010 and 2008, respectively, and favorable catastrophe reserve development of $0.1 million for the year ended December 31, 2009. Excluding such development, the Kemper segment experienced a higher severity of catastrophe losses, due in part to a catastrophe loss of $12.9 million resulting from damage caused by hail in the state of Arizona in the fourth quarter of 2010, for the year ended December 31, 2010, compared to 2009. No major hurricanes that significantly impacted the Company made landfall in the United States during 2010 or 2009. In the third quarter of 2008, three major hurricanes (Dolly, Gustav and Ike) that significantly impacted the Company made landfall in the United States. The Kemper, Unitrin Specialty, Unitrin Direct and Life and Health Insurance segments reported $40.6 million, $1.5 million, $0.5 million and $22.8 million, respectively, of catastrophe loss and LAE, net of reinsurance recoveries, related to these hurricanes for the year ended December 31, 2008. In addition to these losses, Insurance Expenses for the year ended December 31, 2008 includes an expense of $3.9 million related to the Kemper segment’s estimate of its share of assessments from the Texas Windstorm Insurance Association (“TWIA”). Insurance Expenses for the year ended December 31, 2009 includes a reduction of expense of $2.8 million due to a decrease in the Company’s estimate of its share of assessments from TWIA.
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Table of ContentsUnitrin, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
KEMPER Selected financial information for the Kemper segment follows:
INSURANCE RESERVES
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Table of ContentsUnitrin, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) KEMPER (Continued)
2010 Compared with 2009 Earned Premiums in the Kemper segment decreased by $43.8 million for the year ended December 31, 2010, compared to 2009, due primarily to lower volume, partially offset by higher average premium rates. Volume decreased due, in part, to Kemper’s decision to maintain its underwriting discipline and increase premium rates while facing increased competition in a soft personal lines insurance market, as well as planned decreases related to certain initiatives implemented in 2009 to improve profitability and the return on required capital. Kemper expects earned premiums to decrease in the short term as lower volume is partially offset by higher average premium rates. Earned premiums on automobile insurance decreased by $39.9 million for the year ended December 31, 2010, compared to 2009, due to lower volume, partially offset by higher average premium rates. The weighted-average number of automobile insurance policies in force decreased by approximately 9% for the year ended December 31, 2010, compared to 2009. Earned premiums on homeowners insurance decreased by $4.0 million for the year ended December 31, 2010, compared to 2009, due primarily to lower volume, partially offset by higher average premium rates. The weighted-average number of homeowners insurance policies in force decreased by approximately 6% for the year ended December 31, 2010, compared to 2009. Earned premiums on other personal insurance increased by $0.1 million for the year ended December 31, 2010, compared to 2009, due primarily to higher average premium rates, partially offset by lower volume. Net Investment Income in the Kemper segment increased by $10.7 million for the year ended December 31, 2010, compared to 2009, due primarily to higher net investment income from Equity Method Limited Liability Investments. The Kemper segment reported net investment income of $15.5 million from Equity Method Limited Liability Investments for the year ended December 31, 2010, compared to $7.0 million for 2009. Operating Profit in the Kemper segment decreased by $22.3 million for the year ended December 31, 2010, compared to 2009, due primarily to the impact of lower favorable loss and LAE reserve development and higher incurred catastrophe losses and LAE (excluding development), partially offset by lower non-catastrophe losses and LAE as a percentage of earned premiums, higher Net Investment Income and lower Insurance Expenses as a percentage of earned premiums. Favorable loss and LAE reserve development was $23.8 million for the year ended December 31, 2010, compared to $60.5 million for 2009. Catastrophe losses and LAE were $70.2 million (excluding favorable development of $4.9 million), compared to $47.6 million (excluding favorable development of $18.3 million) for 2009. Non-catastrophe losses and LAE (excluding development) as a percentage of earned premiums were 66.1% for the year ended December 31, 2010, compared to 68.8% for 2009. Automobile insurance incurred losses and LAE were $399.1 million for the year ended December 31, 2010, compared to $409.6 million for 2009. Automobile insurance incurred losses and LAE decreased by $10.5 million due primarily to lower claim volume resulting principally from fewer automobile insurance policies in force, partially offset by the impact of lower favorable loss and LAE reserve development. Favorable loss and LAE reserve development was $11.8 million for the year ended December 31, 2010, compared to $32.5 million for 2009. Non-catastrophe losses and LAE (excluding development) as a percentage of earned premiums on automobile insurance were 74.1% for the year ended December 31, 2010, compared to 74.5% for 2009. Homeowners insurance incurred losses and LAE were $210.0 million for the year ended December 31, 2010, compared to $188.8 million for 2009. Homeowners insurance incurred losses and LAE increased by $21.2 million for the year ended December 31, 2010, compared to 2009, due primarily to higher catastrophe losses and LAE (excluding development) and the impact of lower favorable loss and LAE reserve development, partially offset by lower non-catastrophe losses and LAE (excluding development). Catastrophe losses and LAE (excluding development) on homeowners insurance were $61.4 million for the year ended December 31, 2010, compared to $38.8 million for 2009. Favorable loss and LAE reserve development was $8.3 million for the year
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Table of ContentsUnitrin, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) KEMPER (Continued)
ended December 31, 2010, compared to favorable development of $25.9 million for 2009. Non-catastrophe losses and LAE (excluding development) decreased by $19.0 million due primarily to lower average, estimated frequency and severity of losses. Non-catastrophe losses and LAE (excluding development) as a percentage of earned premiums on homeowners insurance were 54.1% for the year ended December 31, 2010, compared to 59.8% for 2009. Other personal insurance incurred losses and LAE were $24.5 million for the year ended December 31, 2010, compared to $29.4 million for 2009. Other personal insurance incurred losses and LAE decreased by $4.9 million due primarily to lower levels of non-catastrophe losses and LAE and the impact of higher favorable loss and LAE reserve development. Non-catastrophe losses and LAE (excluding development) decreased by $2.7 million due to lower average, estimated severity of umbrella liability insurance losses. Favorable loss and LAE reserve development was $3.7 million for the year ended December 31, 2010, compared to favorable development of $2.1 million for 2009. See MD&A, “Critical Accounting Estimates,” for additional information pertaining to the Company’s process of estimating property and casualty insurance reserves for losses and LAE, development of property and casualty insurance losses and LAE, estimated variability of property and casualty insurance reserves for losses and LAE, and a discussion of some of the variables that may impact development of property and casualty insurance losses and LAE and the estimated variability of property and casualty insurance reserves for losses and LAE. Insurance Expenses decreased by $16.6 million for the year ended December 31, 2010, compared to 2009. Insurance Expenses for the year ended December 31, 2009 included a reduction in expense of $2.8 million due to a change in the Kemper segment’s estimated TWIA assessment for Hurricane Ike. Insurance Expenses for the year ended December 31, 2009 included a charge of $3.3 million to write off the Kemper segment’s equity in the North Carolina Beach Plan (the “NC Beach Plan”) underwriting pool due to a change in the law enacted in the third quarter of 2009. Excluding the impact of the TWIA assessment and NC Beach Plan write-off, Insurance Expenses decreased $16.1 million due primarily to lower acquisition expenses, largely due to lower earned premiums, and the favorable impact of expense savings initiatives begun in 2009. Net Income in the Kemper segment decreased by $13.1 million for the year ended December 31, 2010, compared to 2009, due primarily to the lower Operating Profit. The Kemper segment’s effective income tax rate differs from the federal statutory income tax rate due primarily to tax-exempt investment income and dividends received deductions. Tax-exempt investment income and dividends received deductions were $24.7 million for the year ended December 31, 2010, compared to $23.4 million for 2009. 2009 Compared with 2008 Earned Premiums in the Kemper segment increased by $1.1 million for the year ended December 31, 2009, compared to 2008, due primarily to higher average premium rates, partially offset by an increase in the cost of reinsurance. Earned premiums on homeowners insurance increased by $5.2 million for the year ended December 31, 2009, compared to 2008, due primarily to higher average premium rates, partially offset by an increase in the cost of reinsurance. Earned premiums on automobile insurance decreased by $5.4 million for the year ended December 31, 2009, compared to 2008, due primarily to lower average premium rates and, to a lesser extent, lower volume. Net Investment Income in the Kemper Segment increased by $23.0 million for the year ended December 31, 2009, compared to 2008, due primarily to higher net investment income from Equity Method Limited Liability Investments, partially offset by a lower level of investments. The Kemper segment reported net investment
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Table of ContentsUnitrin, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) KEMPER (Continued)
income of $7.0 million from Equity Method Limited Liability Investments for the year ended December 31, 2009, compared to net investment losses of $17.4 million in 2008. Operating Profit in the Kemper segment increased by $78.6 million for the year ended December 31, 2009, compared to 2008, due primarily to lower incurred catastrophe losses and LAE (including the impact of loss and LAE reserve development), higher Net Investment Income and to a lesser extent lower insurance expenses, partially offset by the impact of lower favorable loss and LAE reserve development on automobile insurance and higher incurred losses and LAE on automobile insurance. There were no major hurricane catastrophe losses in 2009. The Kemper segment recognized catastrophe losses, totaling $40.6 million, from Hurricanes Dolly, Gustav and Ike in 2008. See MD&A, “Catastrophes,” and Note 22, “Catastrophe Reinsurance,” to the Consolidated Financial Statements for additional information on Hurricanes Dolly, Gustav and Ike and the Company’s catastrophe reinsurance programs. Catastrophe losses for the year ended December 31, 2009 also decreased due to lower frequency and severity of wind and hail storms in the first half of 2009, compared to 2008. Homeowners insurance incurred losses and LAE were $188.8 million for the year ended December 31, 2009, compared to $248.1 million for 2008. Homeowners insurance incurred losses and LAE decreased due primarily to lower catastrophe losses and LAE (including loss and LAE reserve development). Homeowners insurance catastrophe losses and LAE (excluding loss and LAE reserve development) were $38.8 million for the year ended December 31, 2009, compared to $90.4 million for 2008. Catastrophe losses and LAE decreased for the year ended December 31, 2009 due primarily to no major hurricanes occurring in 2009, compared to the aforementioned major hurricanes in 2008, and, to a lesser extent, a decrease in the frequency and severity of wind and hail storms in the first half of 2009, compared to 2008. Favorable catastrophe loss and LAE reserve development was $17.5 million for the year ended December 31, 2009, compared to a favorable development of $5.2 million for 2008. Catastrophe loss and LAE reserve development for the year ended December 31, 2009 included favorable development of $8.7 million on Hurricanes Ike and Gustav, both of which occurred in 2008, and $3.1 million of higher subrogation recoveries from certain California wildfires, which occurred in 2007. Automobile insurance incurred losses and LAE were $409.6 million for the year ended December 31, 2009, compared to $393.5 million for 2008. Automobile insurance incurred losses and LAE increased due primarily to lower favorable loss and LAE reserve development and higher incurred non-catastrophe losses and LAE, partially offset by lower catastrophe losses and LAE (excluding loss and LAE reserve development). Loss and LAE reserve development on automobile insurance had a favorable effect of $32.5 million for the year ended December 31, 2009, compared to a favorable effect of $48.2 million for 2008. Non-catastrophe losses and LAE increased due primarily to higher severity on automobile liability claims. Automobile insurance catastrophe losses and LAE (excluding loss and LAE reserve development) were $6.6 million for the year ended December 31, 2009, compared to $8.8 million for 2008. Other personal insurance incurred losses and LAE were $29.4 million for the year ended December 31, 2009, compared to $32.2 million for 2008. Other personal insurance Catastrophe losses and LAE (excluding loss and LAE reserve development) were $2.2 million for the year ended December 31, 2009, compared to $3.9 million in 2008. Favorable loss and LAE reserve development on other personal insurance was $2.1 for the year ended December 31, 2009, compared to unfavorable loss and LAE development of $1.3 million for 2008. Insurance Expenses in the Kemper segment decreased by $8.6 million for the year ended December 31, 2009, compared to 2008. Insurance Expenses for the year ended December 31, 2009 included a reduction in expense of $2.8 million due to a change in the Kemper segment’s estimated TWIA assessment for Hurricane Ike. Insurance Expenses for the year ended December 31, 2008 included expense of $3.9 million related to the estimated TWIA assessment. Insurance Expenses for the year ended December 31, 2009 included a charge of $3.3 million to write
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Table of ContentsUnitrin, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) KEMPER (Continued)
off the Kemper segment’s equity in the NC Beach Plan due to a change in the law enacted in 2009. Excluding the impact of the TWIA assessments and NC Beach Plan write-off, Insurance Expenses for the year ended December 31, 2009 decreased by $5.4 million, compared to 2008, due primarily to expense savings initiatives, partially offset by restructuring costs. Restructuring costs were $1.6 million for the year ended December 31, 2009. Net Income in the Kemper segment increased by $50.3 million for the year ended December 31, 2009, compared to 2008, due primarily to the changes in Operating Profit. The Kemper segment’s effective income tax rate differs from the federal statutory income tax rate due primarily to tax-exempt investment income and dividends received deductions. Tax-exempt investment income and dividends received deductions were $23.4 million for the year ended December 31, 2009, compared to $24.8 million for 2008. UNITRIN SPECIALTY Selected financial information for the Unitrin Specialty segment follows:
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Table of ContentsUnitrin, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) UNITRIN SPECIALTY (Continued)
INSURANCE RESERVES
2010 Compared with 2009 Earned Premiums in the Unitrin Specialty segment decreased by $52.6 million for the year ended December 31, 2010, compared to 2009, due to lower earned premiums for both personal and commercial automobile insurance. Personal automobile insurance earned premiums decreased by $40.2 million for the year ended December 31, 2010, compared to 2009, due to lower volume, slightly offset by higher average premium rates. Economic conditions, increased competition and higher premium rates, particularly in California, have all contributed to a decline in the number of personal automobile insurance policies in force in the Unitrin Specialty segment over the past several quarters. There were approximately 360,000 personal automobile insurance policies in force at the beginning of 2009, rising to a peak of approximately 380,000 policies at the end of the first quarter of 2009. Policies in force declined to approximately 351,000 policies at December 31, 2009 and then further declined to approximately 329,000 policies at the end of 2010. Unitrin Specialty expects that personal automobile insurance policies in force will continue to decline for the next several quarters, but at a slower pace and will flatten in the second half of 2011. Commercial automobile insurance earned premiums decreased by $12.4 million for the year ended December 31, 2010, compared to 2009, due to lower volume and, to a lesser extent, lower average earned premium per policy. Commercial automobile insurance volume has declined due, in part, to increased competition and a contraction of the commercial automobile insurance market resulting from the continued effects of the economy. Average earned premium per policy on commercial automobile insurance has declined due, in part, to the continued shift in the mix of Unitrin Specialty’s commercial automobile insurance business towards light commercial vehicle insurance products, which carry a lower premium rate per policy than other classes of commercial vehicles.
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Table of ContentsUnitrin, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) UNITRIN SPECIALTY (Continued)
Net Investment Income in the Unitrin Specialty segment increased by $4.0 million for the year ended December 31, 2010, compared to 2009, due primarily to higher net investment income from Equity Method Limited Liability Investments. The Unitrin Specialty segment reported net investment income of $7.3 million from Equity Method Limited Liability Investments for the year ended December 31, 2010, compared to $3.5 million for 2009. Operating Profit in the Unitrin Specialty segment decreased by $5.9 million for the year ended December 31, 2010, compared to 2009, due to lower operating profit in commercial automobile insurance and other insurance, partially offset by higher operating profit in personal automobile insurance. Commercial automobile insurance operating profit decreased by $7.6 million for the year ended December 31, 2010, compared to 2009, due primarily to lower favorable reserve development and higher incurred losses and LAE (excluding development) as a percentage of commercial automobile insurance earned premiums and higher insurance expenses as a percentage of commercial automobile insurance earned premiums. Favorable loss and LAE reserve development on commercial automobile insurance was $1.1 million for the year ended December 31, 2010, compared to $5.4 million for 2009. See MD&A, “Critical Accounting Estimates,” for additional information pertaining to the Company’s process of estimating property and casualty insurance reserves for losses and LAE, development of property and casualty insurance losses and LAE and estimated variability of property and casualty insurance reserves for losses and LAE. Incurred losses and LAE (excluding development) as a percentage of commercial automobile insurance earned premiums increased for the year ended December 31, 2010, compared to 2009, due primarily to higher frequency, partially offset by lower severity of losses. Net investment income allocated to commercial automobile insurance was flat for the year ended December 31, 2010, compared to 2009, as lower levels of investments allocated to commercial automobile insurance were offset by higher investment returns on Equity Method Limited Liability Investments. Insurance expenses as a percentage of commercial automobile insurance earned premiums increased due primarily to increased investment in technology and reduced economies of scale. Personal automobile insurance operating profit increased by $3.4 million for the year ended December 31, 2010, compared to 2009, due primarily to higher net investment income and lower incurred losses and LAE (excluding catastrophes and development) as a percentage of personal automobile insurance earned premiums, partially offset by the impact of adverse loss and LAE reserve development and higher insurance expenses as a percentage of personal automobile insurance earned premiums. Net investment income allocated to personal automobile insurance increased by $4.0 million for the year ended December 31, 2010, compared to 2009, due primarily to higher investment returns on Equity Method Limited Liability Investments. Incurred losses and LAE (excluding catastrophes and development) as a percentage of personal automobile earned premiums improved due primarily to lower frequency, partially offset by higher severity. Loss and LAE reserve development on personal automobile insurance had an adverse effect of $3.6 million for the year ended December 31, 2010, compared to a favorable effect of $2.3 million for 2009. Personal automobile insurance catastrophe losses and LAE were $3.0 million for the year ended December 31, 2010, compared to $4.2 million for 2009. Insurance expenses as a percentage of personal automobile insurance earned premiums increased due primarily to increased investment in technology and reduced economies of scale. Operating results in other insurance decreased by $1.7 million for the year ended December 31, 2010, compared to 2009, due primarily to the impact of adverse loss and LAE reserve development. Loss and LAE reserve development on certain reinsurance pools in run-off, which are included in other insurance, had an adverse effect of $0.7 million for the year ended December 31, 2010, compared to a favorable development of $0.2 million for 2009. Loss and LAE reserve development on other personal insurance had an adverse effect of $0.9 million for
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Table of ContentsUnitrin, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) UNITRIN SPECIALTY (Continued)
the year ended December 31, 2010, and was almost entirely related to two liability claims that had been previously reported, one from 2003 and the other from 2005. Loss and LAE reserve development on other personal insurance was not significant for the year ended December 31, 2009. Net Income in the Unitrin Specialty segment decreased by $3.3 million for the year ended December 31, 2010, compared to 2009, due primarily to the lower operating profit. Unitrin Specialty’s effective tax rate differs from the statutory tax rate due primarily to tax-exempt investment income and dividends received deductions. Tax-exempt investment income and dividends received deductions were $11.5 million for both the year ended December 31, 2010, and the year ended December 31, 2009. 2009 Compared with 2008 Earned Premiums in the Unitrin Specialty segment increased by $33.5 million for the year ended December 31, 2009, compared to 2008, due to higher earned premiums on personal automobile insurance, partially offset by lower earned premiums on commercial automobile insurance. Personal automobile insurance earned premiums increased by $57.5 million for the year ended December 31, 2009, compared to 2008, due to higher volume, partially offset by lower average earned premium rates. Personal automobile insurance volume increased due primarily to a higher level of renewal policies resulting from the Unitrin Specialty segment’s significant growth in 2008 in California. Commercial automobile insurance earned premiums decreased by $24.0 million for the year ended December 31, 2009, compared to 2008, due to lower volume, partially the result of increased competition and, to a lesser extent, lower average earned premium rates. In the fourth quarter of 2008 and throughout 2009, Unitrin Specialty implemented several initiatives targeted to stabilize commercial automobile premium volume, including the introduction of a new commercial insurance product for light commercial vehicles, a reduction in down payment requirements for certain commercial automobile insurance risks and the introduction of improved internet-enabled commercial lines rating technology. While these initiatives appear to have stabilized new business production, commercial automobile insurance premium volume decreased for the year ended December 31, 2009, compared to 2008, due primarily to a lower level of renewal policies. Net Investment Income in the Unitrin Specialty segment increased by $12.2 million for the year ended December 31, 2009, compared to 2008, due primarily to higher net investment income from Equity Method Limited Liability Investments. The Unitrin Specialty segment reported net investment income of $3.5 million from Equity Method Limited Liability Investments for the year ended December 31, 2009, compared to net investment losses of $7.9 million for 2008. Operating Profit in the Unitrin Specialty segment increased by $20.3 million for the year ended December 31, 2009, compared to 2008, due primarily to higher operating profit in both personal and commercial automobile insurance, partially offset by lower operating profit in other insurance, which is comprised of certain reinsurance pools in run-off. Personal automobile insurance operating profit increased by $13.8 million for the year ended December 31, 2009, compared to 2008, due primarily to higher net investment income, and to a lesser degree lower insurance expenses as a percentage of personal automobile insurance earned premiums and lower incurred losses and LAE (excluding catastrophes and development) as a percentage of personal automobile insurance earned premiums. Net investment income allocated to personal automobile insurance increased by $9.3 million for the year ended December 31, 2009, compared to 2008, due to higher investment returns on Equity Method Limited Liability Investments and a higher level of investments. Insurance expenses as a percentage of personal automobile insurance earned premiums decreased for the year ended December 31, 2009, compared to 2008, due primarily to lower commission rates, principally due to a greater proportion of renewal policies, and greater economies of
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Table of ContentsUnitrin, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) UNITRIN SPECIALTY (Continued)
scale. Incurred losses and LAE (excluding catastrophes and development) as a percentage of personal automobile earned premiums decreased due primarily to lower frequency and severity on physical damage coverages, partially offset by higher severity on liability coverages. Personal automobile insurance catastrophe losses and LAE were $4.2 million for the year ended December 31, 2009, compared to $2.9 million for 2008. Loss and LAE reserve development on personal automobile insurance had a favorable effect of $2.3 million for the year ended December 31, 2009, compared to a favorable effect of $1.7 million for 2008. Commercial automobile insurance operating profit increased by $8.4 million for the year ended December 31, 2009, compared to 2008, due primarily to higher favorable loss and LAE reserve development, higher net investment income allocated to commercial automobile insurance and lower incurred losses and LAE (excluding development) as a percentage of commercial automobile insurance earned premiums. Loss and LAE reserve development on commercial automobile insurance had a favorable effect of $5.4 million for the year ended December 31, 2009, compared to a favorable effect of $1.3 million for 2008. Net investment income allocated to commercial automobile insurance increased by $2.9 million for the year ended December 31, 2009, compared to the same period in 2008, due primarily to higher investment returns on Equity Method Limited Liability Investments partially offset by lower levels of investments. Incurred losses and LAE (excluding development) as a percentage of commercial automobile insurance earned premiums decreased for the year ended December 31, 2009, compared to 2008, due primarily to lower severity and, to a lesser extent, lower frequency of losses. Operating profit in other insurance decreased by $1.9 million for the year ended December 31, 2009, compared to 2008, due to the impact of lower favorable loss and LAE reserve development, partially offset by the impact of the change in the Unitrin Specialty segment’s estimate of losses and LAE recoverable from certain reinsurers that had assumed business from these run-off pools. Favorable loss and LAE reserve development on other insurance was $0.2 million for the year ended December 31, 2009, compared to $2.5 million for 2008. Net Income in the Unitrin Specialty segment increased by $13.4 million for the year ended December 31, 2009, compared to 2008, due primarily to the higher operating profit. The Unitrin Specialty segment’s effective tax rate differs from the statutory tax rate due primarily to tax-exempt investment income and dividends received deductions. Tax-exempt investment income and dividends received deductions were $11.5 million for the year ended December 31, 2009, compared to $11.2 million for 2008.
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Table of ContentsUnitrin, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
UNITRIN DIRECT Selected financial information for the Unitrin Direct segment follows:
INSURANCE RESERVES
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Table of ContentsUnitrin, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) UNITRIN DIRECT (Continued)
2010 Compared with 2009 On February 13, 2009, the Company completed its acquisition of Direct Response in a cash transaction. Direct Response specializes in the sale of personal automobile insurance through direct mail and the internet through web insurance portals and its own websites, Response.com and Teachers.com. The results for Direct Response are included in the Unitrin Direct segment from the date of acquisition. Direct Response products had earned premiums of $106.8 million for year ended December 31, 2010, compared to $115.2 million from the date of acquisition through December 31, 2009. See Note 3, “Acquisitions of Businesses,” to the Consolidated Financial Statements for additional information pertaining to the acquisition of Direct Response. Earned Premiums in the Unitrin Direct segment decreased by $63.2 million for the year ended December 31, 2010, compared to 2009, due primarily to lower volume. Unitrin Direct continues to modify its marketing program to target better response and conversion rates from customers with more favorable risk characteristics and place greater emphasis on improving premium rate adequacy and insurance risk selection. Unitrin Direct has substantially ceased using Direct Response’s products to write new business and has designed a new Unitrin Direct product to replace these products, as well as other products. Unitrin Direct is in the early stages of introducing this newly-designed product on a segment-wide basis. Unitrin Direct currently estimates that this product will comprise approximately 13% of its earned premiums in 2011 and over time will improve policyholder retention, loss ratios and per policy acquisition costs. In the fourth quarter of 2010, Unitrin Direct launched a new initiative featuring its iMingle™ and Insuring The i Generation™ marketing approach. Designed for the “i Generation,” iMingle is specially designed for customers that expect technology and service to work together to make life easy – whether it is applying for insurance, signing policy documents, enrolling in automatic bill pay, or on-line coverage changes- all through an innovative interface. The new approach targets insureds with more favorable risk characteristics primarily through social networking interfaces. The terms iMingle™ and Insuring The i Generation™, and the logos containing such terms, are service marks or trademarks of Unitrin Direct Insurance Company. The Unitrin Direct segment has implemented and continues to implement rate increases across its book of business. These actions have led to a decrease in the overall premium volume, with the number of policies in force at December 31, 2010 decreasing by 19% from the level at December 31, 2009. While premium rate increases have been and continue to be implemented over much of the Unitrin Direct segment’s book of business, average earned premiums per policy have remained relatively flat due primarily to an improvement in the risk characteristics of the book of business. In the third quarter of 2010, one of Unitrin Direct’s web insurance portal partners was purchased and the acquiring company ceased marketing for the portal. The number of new policies written through this portal has declined substantially. Unitrin Direct expects that new policy sales from this portal will be minimal in 2011. The web insurance portal partner represented 8% and 9% of Unitrin Direct’s policies in force at December 31, 2010 and December 31, 2009, respectively. The Unitrin Direct segment expects earned premiums will continue to decline in 2011, compared to 2010 on a sequential quarter basis, Unitrin Direct expects earned premiums to decline in the first quarter of 2011 and then remain relatively flat through the end of 2011. Net Investment Income in the Unitrin Direct segment increased by $2.9 million for the year ended December 31, 2010, compared to 2009, due primarily to higher net investment income from Equity Method Limited Liability Investments. The Unitrin Direct segment reported net investment income of $6.3 million from Equity Method Limited Liability Investments for the year ended December 31, 2010, compared to $3.7 million for 2009. The Unitrin Direct segment reported an Operating Loss of $7.1 million for the year ended December 31, 2010, compared to an Operating Loss of $12.6 million for 2009. Operating results improved in the Unitrin Direct segment for the year ended December 31, 2010, compared to 2009, due primarily to higher Net Investment
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Table of ContentsUnitrin, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) UNITRIN DIRECT (Continued)
Income and lower Insurance Expenses as a percentage of earned premiums, partially offset by higher Incurred Losses and LAE as a percentage of earned premiums. Incurred Losses and LAE as a percentage of earned premiums were 79.3% for the year ended December 31, 2010, compared to 77.9% for 2009. Incurred Losses and LAE as a percentage of earned premiums increased due primarily to higher non-catastrophe losses and LAE (excluding development) and the impact of lower favorable loss and LAE reserve development, partially offset by lower catastrophe losses and LAE (excluding development). Incurred Losses and LAE as a percentage of earned premiums for the year ended December 31, 2010 were significantly higher than the level required to produce an underwriting profit. Underwriting profit is a non-GAAP measure of profitability before tax used by insurance companies to measure the profits directly related to earned premiums. Accordingly, underwriting profit excludes net investment income, whereas Operating Profit, a GAAP measure, includes net investment income. See MD&A, “Critical Accounting Estimates,” for additional information pertaining to the Company’s process of estimating property and casualty insurance reserves for losses and LAE, development of property and casualty insurance losses and LAE and estimated variability of property and casualty insurance reserves for losses and LAE. Insurance Expenses in the Unitrin Direct segment were $87.1 million, or 30.8% of earned premiums, for the year ended December 31, 2010, compared to $107.0 million, or 31.0% of earned premiums, for 2009. Insurance Expenses decreased for the year ended December 31, 2010, compared to 2009, due primarily to lower restructuring costs, lower salary and benefits expenses due, in part, to certain restructuring actions taken in 2009 and lower bad debt expense, partially offset by higher amortization expense related to the acquisition of Direct Response. Restructuring costs were $0.9 million for the year ended December 31, 2010, compared to $7.2 million for 2009. Unitrin Direct reported a Net Loss of $1.1 million for the year ended December 31, 2010, compared to a Net Loss of $5.3 million for 2009. Unitrin Direct’s effective income tax rate differs from the federal statutory income tax rate due primarily to tax-exempt investment income and dividends received deductions. Tax-exempt investment income and dividends received deductions were $10.0 million for the year ended December 31, 2010, compared to $9.9 million for 2009. 2009 Compared with 2008 Earned Premiums in the Unitrin Direct segment increased by $55.1 million for the year ended December 31, 2009, compared to 2008 due primarily to the impact of including earned premiums of $115.2 million from the Direct Response acquisition, partially offset by lower volume. Excluding the impact of the Direct Response acquisition, Earned Premiums in the Unitrin Direct segment decreased by $60.1 million for the year ended December 31, 2009, compared to 2008. During the second half of 2008, the Unitrin Direct segment began to moderate its marketing spending while modifying its direct mail marketing program to target a better response rate from customers with more favorable risk characteristics and place greater emphasis on improving Incurred Losses and LAE as a percentage of Earned Premiums through improved premium rate adequacy and improved insurance risk selection. At the end of 2009, the Unitrin Direct segment had implemented rate increases in most states, with more significant rate increases to be implemented for the Direct Response book of business. In 2009, the Unitrin Direct segment suspended writing new business using Direct Response’s distribution channels and insurance products until certain rate increases and product changes were implemented. Net Investment Income in the Unitrin Direct Segment increased by $13.9 million for the year ended December 31, 2009 compared to 2008, due primarily to higher net investment income from Equity Method Limited Liability Investments and higher levels of investments allocated to the Unitrin Direct segment, due
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Table of ContentsUnitrin, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) UNITRIN DIRECT (Continued)
primarily to the acquisition of Direct Response. The Unitrin Direct segment reported net investment income of $3.7 million from Equity Method Limited Liability Investments for the year ended December 31, 2009, compared to a net investment loss of $4.4 million for 2008. The Unitrin Direct segment reported an Operating Loss of $12.6 million for the year ended December 31, 2009, compared to an Operating Loss of $52.5 million for 2008. The operating loss for Direct Response was $7.0 million from the date of acquisition through December 31, 2009, which includes restructuring costs of $6.5 million and a charge of $1.5 million to write off goodwill. Excluding the impact of the Direct Response acquisition, the Unitrin Direct segment’s Operating Loss was $5.6 million for the year ended December 31, 2009, compared to an Operating Loss of $52.5 million for 2008. Excluding the impact of the acquisition of Direct Response, operating results in the Unitrin Direct segment improved for the year ended December 31, 2009, compared to 2008, due primarily to lower volume of unprofitable business, lower Incurred Losses and LAE and higher Net Investment Income. Incurred Losses and LAE as a percentage of earned premiums for the Unitrin Direct segment’s book of business was significantly higher than that required to produce an underwriting profit for the years ended December 31, 2009 and 2008. Incurred Losses and LAE (excluding loss reserve development and the impact of the Direct Response acquisition) as a percentage of earned premiums was 78.8% for the year ended December 31, 2009, compared to 83.8% for 2008. Incurred Losses and LAE (excluding loss reserve development and the impact of the Direct Response acquisition) as a percentage of earned premiums improved in 2009 due primarily to the impact of the premium rate increases implemented in 2008 and 2009. Incurred Losses and LAE, excluding the impact of the Direct Response acquisition, decreased by $77.2 million for the year ended December 31, 2009, compared to 2008, due primarily to the lower volume of earned premiums and, to a lesser extent, the favorable impact of loss and LAE reserve development in 2009, compared to 2008, and the lower percentage of incurred losses and LAE to earned premiums. Favorable loss and LAE reserve development for the Unitrin Direct segment was $12.1 million for the year ended December 31, 2009, compared to adverse development of $3.2 million for 2008. Catastrophe losses and LAE, excluding the impact of the Direct Response acquisition, for the Unitrin Direct segment were $2.5 million for the year ended December 31, 2009, compared to $3.1 million for 2008. Catastrophe loss and LAE for Direct Response were $0.9 million from the date of acquisition through December 31, 2009. Insurance Expenses in the Unitrin Direct segment were $107.0 million for the year ended December 31, 2009, compared to $101.3 million for 2008. Insurance Expenses for Direct Response, including restructuring costs, were $29.3 million from the date of acquisition through December 31, 2009. Insurance Expenses, excluding the impact of the Direct Response acquisition, decreased by $23.6 million for the year ended December 31, 2009, compared to 2008, due primarily to lower marketing expense and lower other variable expenses due to the lower volume of business. Marketing spending, excluding the impact of the Direct Response acquisition, decreased by $13.2 million for the year ended December 31, 2009, compared to 2008. Unitrin Direct closed certain office locations and also reduced staff, including staff at Direct Response, by approximately 30% in 2009. Total restructuring costs incurred related to these expense savings initiatives were $7.2 million for the year ended December 31, 2009. Unitrin Direct reported a Net Loss of $5.3 million for the year ended December 31, 2009, compared to a Net Loss of $32.0 million for 2008. Excluding a net loss of $4.4 million from Direct Response from the date of the acquisition through December 31, 2009, the Unitrin Direct segment recorded a net loss of $0.9 million for the year ended December 31, 2009, compared to a net loss of $32.0 million for the year ended December 31, 2008. Net results in the Unitrin Direct segment improved due primarily to the improvements in operating results. Unitrin Direct’s effective income tax rate differs from the federal statutory income tax rate due primarily to tax-exempt investment income and dividends received deductions. Tax-exempt investment income and dividends received deductions were $9.9 million for the year ended December 31, 2009, compared to $6.1 million for 2008.
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Table of ContentsUnitrin, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
LIFE AND HEALTH INSURANCE Selected financial information for the Life and Health Insurance segment follows:
INSURANCE RESERVES
2010 Compared with 2009 Earned Premiums in the Life and Health Insurance segment decreased by $6.5 million for the year ended December 31, 2010, compared to 2009. Earned premiums on property insurance decreased by $6.2 million for the year ended December 31, 2010, compared to 2009, due primarily to lower volume resulting from a strategy to reduce the segment’s catastrophe exposure through the non-renewal of dwelling policies in certain coastal areas and the continued run-off of dwelling policies in all other markets, slightly offset by lower catastrophe reinsurance premiums and higher average premium rates on dwelling coverage in Texas. Earned premiums on life insurance decreased by $3.0 million for the year ended December 31, 2010, compared to 2009, due to lower volume, partially offset by higher average premium rates. Earned premiums on accident and health insurance increased by $2.7 million for the year ended December 31, 2010, compared to 2009, due to higher average premium rates, partially offset by lower volume. Over the past several years the Life and Health Insurance segment has taken several actions to reduce its exposure to catastrophe risks. These actions have included non-renewing dwelling policies in coastal areas and areas further inland and the halting of new sales of dwelling coverage in all markets. The non-renewals were substantially completed in the second quarter of 2009. As the remaining insurance policies providing dwelling
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Table of ContentsUnitrin, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) LIFE AND HEALTH INSURANCE (Continued)
coverage run off over the next several years, the Life and Health Insurance segment expects that its exposure to catastrophe risks will continue to decline along with the related earned premiums. Earned premiums from dwelling coverage comprised 32% of the Life and Health Insurance segment’s earned premiums on property insurance for the year ended December 31, 2010, compared to 36% for 2009. The Company believes that some, of the health insurance products sold by its subsidiary, Reserve National, could be adversely impacted by some provisions of the Health Care Acts that were signed into law in the first quarter of 2010. In particular, a provision which sets minimum loss ratios for health insurance policies could adversely impact Reserve National’s business prospects. Such affected health insurance products accounted for approximately 49% of the Life and Health Insurance segment’s accident and health insurance earned premiums for the year ended December 31, 2010. Based on the continuing uncertainty about the impact of the Health Care Acts on Reserve National’s operations and the increased likelihood that the minimum loss ratio provisions of the Health Care Acts would apply to some of Reserve National’s non-comprehensive health insurance coverages, the Company determined that goodwill associated with Reserve National was impaired and not recoverable at September 30, 2010 and wrote off $14.8 million of goodwill in the third quarter of 2010. See Note 7, “Goodwill,” to the Consolidated Financial Statements. Net Investment Income in the Life and Health Insurance segment decreased by $11.0 million for the year ended December 31, 2010, compared to 2009, due primarily to lower net investment income from Equity Method Limited Liability Investments, partially offset by higher net investment income from investments in fixed maturities. The Life and Health Insurance segment reported net investment income of $15.8 million from Equity Method Limited Liability Investments for the year ended December 31, 2010, compared to net investment income of $31.6 million for 2009. Operating Profit in the Life and Health Insurance segment was $154.0 million for the year ended December 31, 2010, compared to $168.5 million for 2009. The Life and Health Insurance segment wrote-off $14.8 million of goodwill at the Company’s health insurance subsidiary, Reserve National in the third quarter of 2010. Excluding the write-off of goodwill, Operating Profit in the Life and Health Insurance segment increased $0.3 million for the year ended December 31, 2010, compared to 2009. Policyholders’ Benefits and Incurred Losses and LAE decreased by $17.0 million for the year ended December 31, 2010, compared to 2009, due primarily to lower policyholders’ benefits on life insurance and lower losses and LAE on property insurance. Policyholders’ benefits on life insurance were $263.0 million for the year ended December 31, 2010, compared to $272.1 million for 2009, and decreased due primarily to better mortality experience on life insurance. Policyholders’ benefits and incurred losses and LAE on accident and health insurance were $95.7 million for the year ended December 31, 2010, compared to $98.0 million for 2009. Incurred accident and health losses as a percentage of earned premiums decreased due primarily to lower Medicare supplement claims as a percentage of earned premiums, partially offset by higher first time cancer related incurred accident and health insurance claims as a percentage of accident and health insurance earned premiums. Incurred Losses and LAE, net of reinsurance, on property insurance were $48.1 million for the year ended December 31, 2010, compared to $53.7 million for 2009, and decreased due primarily to lower catastrophe losses and LAE (excluding development) and lower non-catastrophe losses and LAE, partially offset by higher adverse loss and LAE reserve development. Catastrophe losses and LAE, net of reinsurance (excluding development), were $4.5 million for the year ended December 31, 2010, compared to $6.7 million for 2009. Adverse loss reserve development on property insurance was $4.5 million (including adverse development of $3.3 million on catastrophes) for the year ended December 31, 2010, compared to adverse development of $2.6 million (including favorable development of $0.1 million on catastrophes) for 2009.
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Table of ContentsUnitrin, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) LIFE AND HEALTH INSURANCE (Continued)
The Life and Health Insurance segment has a number of pending legal matters related to catastrophes and storms and could continue to report either favorable or unfavorable catastrophe reserve development in future periods depending on the resolution of these matters. See Note 25, “Contingencies,” to the Consolidated Financial Statements. Net Income in the Life and Health Insurance segment was $94.9 million for the year ended December 31, 2010, compared to $112.1 million for 2009. 2009 Compared with 2008 On April 1, 2008, Unitrin completed its acquisition of Primesco Inc. and its subsidiaries (“Primesco”) in a cash merger transaction. Primesco’s wholly-owned subsidiaries, Mutual Savings Life and Mutual Savings Fire, specialize in the sale of life, health and fire insurance products to persons of modest financial means primarily in the states of Alabama, Georgia and Mississippi. Results for Primesco are included in the Company’s results of operations from the date of acquisition. See Note 3, “Acquisitions of Businesses,” to the Consolidated Financial Statements for additional information pertaining to the acquisition of Primesco. Earned Premiums in the Life and Health Insurance segment decreased by $10.8 million for the year ended December 31, 2009, compared to 2008. Earned Premiums in the Life and Health Insurance segment for the year ended December 31, 2009 included earned premiums of $12.6 million in the first quarter of 2009 (consisting of $9.8 million from life insurance, $1.9 million from accident and health insurance and $0.9 million from property insurance) related to the Primesco acquisition with no corresponding amount in the first quarter of 2008. Excluding the impact of the Primesco acquisition, Earned Premiums in the Life and Health Insurance segment decreased by $23.4 million for the year ended December 31, 2009, compared to 2008. Earned premiums on life insurance decreased by $8.6 million for the year ended December 31, 2009, due primarily to lower volume, partially offset by higher average premium rates. Earned premiums on accident and health insurance decreased by $2.8 million for the year ended December 31, 2009, as the volume of limited benefit medical and Medicare supplement products declined by $9.0 million, while higher average premium rates for those same products increased earned premiums by $6.2 million. Earned premiums on property insurance sold by the Life and Health Insurance segment’s career agents decreased by $12.0 million for the year ended December 31, 2009 due primarily to lower volume, due in part to the Life and Health Insurance segment’s strategy to reduce its catastrophe exposure through the non-renewal of dwelling coverage in certain coastal areas and the continued run-off of dwelling coverage in all other markets, partially offset by lower catastrophe reinsurance premiums. Catastrophe reinsurance premiums, which reduce the Life and Health Insurance segment’s earned premiums on property insurance, decreased by $6.2 million for the year ended December 31, 2009, compared to 2008. Catastrophe reinsurance premiums, which reduce the Life and Health Insurance segment’s earned premiums on property insurance, included a reinsurance premium of $4.4 million for the year ended December 31, 2008 to reinstate catastrophe reinsurance coverage following Hurricanes Dolly, Gustav and Ike. See MD&A, “Catastrophes,” and Note 22, “Catastrophe Reinsurance,” to the Consolidated Financial Statements for additional information on Hurricanes Dolly, Gustav and Ike and the Company’s catastrophe reinsurance programs. Excluding the impact of the reinsurance premium to reinstate catastrophe reinsurance coverage in 2008, catastrophe reinsurance premiums decreased by $1.8 million for the year ended December 31, 2009 due primarily to lower premium volume resulting in part from reduced coastal exposures and a decrease in the Life and Health Insurance segment’s upper retention limits. The Life and Health Insurance segment purchased catastrophe reinsurance coverage of $32.0 million in excess of a retention of $8.0 million under its 2009 catastrophe reinsurance program, compared to reinsurance coverage of $74.0 million in excess of a retention of $6.0 million under its 2008 catastrophe reinsurance program. The Life and Health Insurance segment’s property
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Table of ContentsUnitrin, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) LIFE AND HEALTH INSURANCE (Continued)
insurance products provide fire and allied lines coverage for modest value dwellings and personal property. Dwelling coverage represented approximately 36% of the Life and Health Insurance segment’s property insurance premiums in 2009, compared to 43% in 2008. Net Investment Income in the Life and Health Insurance segment increased by $63.2 million for the year ended December 31, 2009, compared to 2008, due primarily to higher net investment income from Equity Method Limited Liability Investments and $5.4 million of net investment income from Primesco in the first quarter of 2009 with no corresponding amount in 2008, partially offset by lower net investment income from investments in fixed maturities and short-term investments due in part to lower volume resulting from extraordinary dividends paid by Unitrin’s subsidiaries, Union National Life and Reliable, to Unitrin and certain other intercompany transactions in 2009. The Life and Health Insurance segment reported net investment income of $31.6 from Equity Method Limited Liability Investments for the year ended December 31, 2009, compared to net investment losses of $38.3 million for 2008. Operating Profit in the Life and Health Insurance segment increased by $89.2 million for the year ended December 31, 2009, compared to 2008, due primarily to the higher net investment income and lower catastrophe losses and LAE, net of reinsurance, on property insurance sold by the Life and Health Insurance segment’s career agents, and lower insurance expenses, partially offset by higher policyholders’ benefits and incurred losses as a percentage of earned premiums on life insurance and, to a lesser extent, Medicare supplement products. Policyholders’ Benefits and Incurred Losses and LAE decreased by $23.9 million for the year ended December 31, 2009, compared to 2008, due primarily to lower catastrophe losses and LAE, net of reinsurance, on property insurance, partially offset by higher policyholders’ benefits and incurred losses as a percentage of earned premiums on life insurance and, to a lesser extent, accident and health insurance. Catastrophe losses and LAE, net of reinsurance, (including development) were $6.6 million for the year ended December 31, 2009, compared to $41.5 million for 2008. No hurricanes occurred during 2009 that impacted the Life and Health Insurance segment. Catastrophe losses and LAE, net of reinsurance, for the year ended December 31, 2008 included losses of $22.8 million from three hurricanes (Dolly, Gustav and Ike) that occurred in the third quarter of 2008. Adverse loss reserve development on property insurance was $2.6 million (including favorable development of $0.1 million on catastrophes) for the year ended December 31, 2009, compared to adverse development of $13.7 million (including adverse development of $11.0 million on catastrophes) in 2008. Policyholders’ benefits and incurred losses as a percentage of earned premiums on life insurance increased due to a lower level of policy lapses for the year ended December 31, 2009, compared to 2008. When a life insurance policy lapses, the reserve for future policyholder benefits reported on the balance sheet is reduced and a corresponding reduction in policyholders’ benefits expense is reported on the income statement. Insurance Expenses in the Life and Health Insurance segment decreased by $13.3 million for the year ended December 31, 2009, compared to 2008, due primarily to lower amortization of policy acquisition costs, due in part to the lower level of policy lapses, and lower expense related to home and field office operations, partially offset by the inclusion of insurance expense from Primesco in the first quarter of 2009 with no corresponding amount in the first quarter of 2008. After the 2008 acquisition of Primesco, the Life and Health Insurance segment incurred certain redundant expenses associated with maintaining Primesco’s home office and has focused on eliminating these redundant expenses by consolidating the Primesco home office operations into the Career Agency Companies home office. The consolidation of the two home offices was substantially completed during the first quarter of 2009 and has resulted in lower home office expenses as a percentage of earned premiums from the additional scale provided by the acquisition. Net Income in the Life and Health Insurance segment was $112.1 million for the year ended December 31, 2009, compared to $51.8 million for 2008.
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Table of ContentsUnitrin, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued)
FIRESIDE BANK Selected financial information for Fireside Bank follows:
AUTOMOBILE LOAN RECEIVABLES
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Table of ContentsUnitrin, Inc. and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations—(Continued) FIRESIDE BANK (Continued)
AUTOMOBILE LOAN RECEIVABLES AT DECEMBER 31, 2010 BY YEAR OF ORIGINATION
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