Fitch Assigns 'BBB' Rating to Unitrin's Debt

Business Wire, Dec 4, 2002

Business Editors

CHICAGO--(BUSINESS WIRE)--Dec. 4, 2002

Fitch Ratings has assigned a 'BBB' long-term rating to Unitrin, Inc. (Unitrin) and a 'BBB' rating to Unitrin's $300 million of senior 5.75% notes due 2007. The Rating Outlook is Stable.

Positive factors supporting Unitrin's ratings include the company's diversified business profile, the stable earnings of its life insurance operation, and the company's moderate financial leverage and reasonable financial flexibility.

Partially offsetting these positives is the poor recent earnings of the company's property/casualty operations, the potential impact of the company's concentrated investment focus in select equity investments, and the mature nature and limited growth opportunities of its life insurance operations.

Unitrin is a holding company with subsidiaries that conduct operations in property/casualty insurance, life insurance, and consumer finance. In June 2002, the company acquired Kemper's personal lines business in exchange for $42 million.

In recent years Unitrin's mix of operating revenues has been approximately 50% property/casualty, 40% life, and 10% consumer finance. Fitch anticipates that this mix will shift further toward property/casualty revenues as a result of the Kemper acquisition.

Unitrin's life insurance operation generates the majority of its operating earnings by marketing relatively small face amount life insurance policies in the home service market. Fitch believes that the profitability and stability of products sold in the home-service market are favorable from a credit perspective. However, Fitch also believes that the home service market's growth potential is limited.

Unitrin's property/casualty operation has generated $101 million of pretax operating losses through the first nine months of 2002 and Fitch believes that it is unlikely to contribute material operating earnings in the near term.

Fitch views Unitrin's consumer-finance operation's consistent operating earnings and its ability to self-fund loan originations favorably. However, approximately 50% of the consumer finance operation's loan originations are made in the sub-prime market and Fitch generally views the consumer finance industry as having lower credit-quality than the insurance industry. As a result, Fitch believes that support for Unitrin's ratings from its consumer-finance operation is limited.

Unitrin utilizes a moderate amount of financial leverage and Fitch believes the company has reasonable financial flexibility. The company issued $300 million of senior notes in June 2002 and its debt-to-capital ratio at September 30, 2002 was approximately 13%.

Fitch estimates Unitrin's operating earnings-based interest coverage at 1.0 times (x) through the first nine months of 2002 as the company's earnings suffered from poor property/casualty results. On a run-rate basis, Fitch believes that Unitrin's operating earnings based interest coverage will likely be in a range of 3.0x-5.0x.

Unitrin's lead property/casualty and life insurance subsidiaries hold large investments in Northrop Grumman Corp. and Baker Hughes, Inc. common stock. While these investments have generated significant capital gains for the companies over the years, Fitch believes that they expose the insurance subsidiaries to much higher than industry average surplus exposure to equity-market risk. Fitch estimates that at June 30, 2002, Unitrin's lead property/casualty and life insurance subsidiaries' investments in Northrop and Baker Hughes stock approximated 90% and 60% of their respective statutory surplus.

The personal lines business acquired by Unitrin from Kemper in June 2002 generated approximately $700 million of net premiums written in 2001. Unitrin's lead property/casualty subsidiary's premiums-to-surplus ratio at year-end 2001 was 1.6x and it had $579 million of statutory surplus at June 30, 2002.

Fitch believes that Unitrin will have to make substantial capital contributions to its lead property/casualty subsidiary to support the Kemper business and to fund 2002's operating loss. As a result, although Unitrin received $455 million of dividends from subsidiaries in the first nine months of 2002, Fitch does not consider the cash a source of future financial flexibility.

Note: These ratings were initiated by Fitch as a service to users of Fitch ratings. The ratings are based primarily on publicly available information.

Entity/Issue/Type           Action     Rating/Outlook
Unitrin, Inc.
--Long-term                 Assigned   'BBB'/Stable;
--Senior debt               Assigned   'BBB'/Stable.