S&P Announces Research Update: Unitrin Inc

Business Wire, Oct 22, 2004

NEW YORK -- On Oct 22, 2004, Standard & Poor's Ratings Services affirmed its 'BBB ' counterparty credit rating on Unitrin Inc. (NYSE:UTR). At the same time, Standard & Poor's affirmed its 'A ' counterparty credit and financial strength ratings on Unitrin's life and health subsidiaries and its 'A' counterparty credit and financial strength ratings on Unitrin's property/casualty subsidiaries. In addition, Standard & Poor's revised its outlook on the property/casualty subsidiaries to stable from negative. The outlook on the holding company and the life and health subsidiaries remains stable.

The rating reflects the group's strong, improved, and balanced earnings; strong diversified business position; very strong holding-company liquidity; and conservative balance sheet. Offsetting these strengths is the company's continued, though diminished, concentrations in equity holdings.

Outlook

The outlook on the group's property/casualty insurance businesses was revised because of increased capitalization levels, improved operating performance, and the virtual resolution of uncertainty relating to the transference of Kemper business to Unitrin policies.

Unitrin's 2004 earnings are benefiting from a number of factors, including a return to profitability of the core property/casualty insurance business; an improving loss position in the start-up direct marketing operations; solid, profitable growth of the consumer finance business; and continued strong, stable performance of the life/health insurance units. Standard & Poor's expects the company to post a property/casualty combined ratio of 100% or less as of year-end 2004. Sales growth for life/health is expected to continue at 1%-3%, with aggregate growth of about 5%-10% in the property/casualty segments. Consolidated capital adequacy is expected to remain strong at at least 150%, and GAAP interest coverage is expected to be maintained in excess of 8x for full-year 2004. Financial leverage is expected to remain at less than 30%.

Major Rating Factors

--Improved operating performance in property/casualty operations. The property/casualty operations posted underwriting losses in each of the past five years and pretax operating losses in three of the past five years. Nevertheless, they have shown continued improvement in the past two years, as demonstrated by a statutory combined ratio of 114.8% in 2002 and 104% in 2003, down from a 10-year high of 120.4% in 2001. The high combined ratio in 2001 was because of reserve strengthening and poor operating performance. As of June 30, 2004, the company has shown further improvement, and Standard & Poor's estimates that the company's GAAP combined ratio for consolidated property/casualty operations was 99%. The company's improvement in operating results has been broad-based and spans all major property/casualty reporting segments. As of June 30, 2004, the company's three main operating segments--multi-lines, specialty lines, and Kemper Auto and Home (KAH)--had estimated GAAP combined ratios of 98%, 95%, and 99%, respectively. These three segments account for more than 90% of revenues. The balance of the business is written out of the Unitrin Direct segment and exhibited a 109% combined ratio as of June 30, 2004, compared with 121% for the same period in 2003. Offsetting the positive trends and improvement in the combined ratio are the continuing high statutory expense of 31.2% as of Dec. 31, 2003, and the fact though greatly improved, the company's operating performance through Dec. 31, 2003, trailed that of the industry. Standard & Poor's expects the company to maintain pricing and reserving discipline, as measured by a combined ratio of 100% or less in its property/casualty operations for full-year 2004.

--Resolution of execution risk associated with KAH renewal rights. On June 28, 2002, Unitrin acquired the renewal rights to the Kemper Insurance Cos.'s (Kemper) personal lines book of business. Subsequent to the transaction, Kemper's financial condition rapidly deteriorated and Standard & Poor's expressed concern that potential regulatory action against Kemper could significantly disrupt the business being ceded to Trinity. Such action could have led to cancellation of Kemper policies prior to being rewritten by Unitrin, potentially leading to a significant loss of business, adverse selection, and increased expenses for Trinity. As of June 30, 2004, Trinity has obtained all the necessary licenses and achieved the necessary IT modifications that have resulted in the transition of substantially all KAH business to the Trinity companies. Through June 30, 2004, pretax operating income for the KAH segment was $16.2 million, which showed a marked improvement over a pretax loss of $25 million for the same period in 2003. Standard & Poor's considers the transference of policies from the troubled Kemper group of companies to Trinity licenses to be a significant stabilizing development for Trinity.

--Strong competitive positions in niche markets. Unitrin has strong and diversified business positions in several regional niche markets, including personal lines property/casualty insurance, nonstandard automobile insurance, life and health insurance targeted at lower-income markets, and consumer finance, focused on the sub-prime automobile market. Unitrin is a super-regional company that maintains a regional focus via a highly localized independent agency structure. Offsetting the company's strong business position is the expense burden associated with maintaining a local presence along with the fact that the company operates in many mature markets. However, many of the company's target markets are generally underserved, with relatively strong margins and high barriers to entry.