(a) In 2007, the Company’s Shareholders’ Equity was decreased by $3.2 million for the Company’s pro rata share of the impact of Intermec’s (the Company’s former Investee) changes in measuring and reporting postretirement benefits plans and accounting for uncertain income taxes.
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 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.
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.
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.
General and Administrative Expenses decreased by $18.2 million for year ended December 31, 2010, compared to 2009, due primarily to the cessation of all lending activities in 2009 and a decline in costs associated with a smaller loan portfolio. Fireside Bank incurred $6.8 million of pre-tax restructuring charges for the year ended December 31, 2010 related to its plan to exit the automobile finance business. Fireside Bank incurred $11.0 million of pre-tax restructuring charges for the year ended December 31, 2009 related to its exit plan.
The Fireside Bank segment reported an Operating Profit of $1.6 million for the year ended December 31, 2009, compared to an Operating Loss of $25.3 million for 2008. Operating results improved due primarily to a lower Provision for Loan Losses, lower Interest Expense on Certificates of Deposits, and lower General and Administrative Expenses, partially offset by lower Interest, Loan Fees and Earned Discounts.
The Reserve for Loan Losses as a percentage of Net Automobile Loan Receivables was 11.2% at December 31, 2009, compared to 10.0% at December 31, 2008. The Reserve for Loan Losses was $83.3 million at December 31, 2009, while Delinquent Loan Balances 30 Days or greater totaled $76.1 million. The Reserve for Loan Losses was $120.1 million at December 31, 2008, while Delinquent Loan Balances 30 Days or greater totaled $147.8 million.
On November 24, 2010, Unitrin issued $250 million of its 6.00% senior notes due November 30, 2015. 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 a portion of the proceeds from the sale of the 2015 Senior Notes to repay borrowings of $140 million under the 2012 Credit Agreement and to make a capital contribution of $60 million to its subsidiary, United Insurance. Interest expense under the 2015 Senior Notes was $1.6 million for the year ended December 31, 2010.
Net Cash Used by Financing Activities decreased by $87.3 million for the year ended December 31, 2010, compared to 2009. In 2010, Unitrin borrowed $140 million under the 2012 Credit Agreement and issued $250 million aggregate principal amount of senior notes for proceeds of $247.8 million, compared to borrowing $220 million under its prior revolving credit agreement during 2009. In 2010, Unitrin repaid borrowings of $140 million under the 2012 Credit Agreement and retired the 2010 Senior Notes for $200 million, compared to repaying $220 million under its prior revolving credit agreement during 2009. The Company has funded its Automobile Loan Receivables through the issuance of Certificates of Deposits. Net cash used by Repayments of Certificates of Deposits, net of Proceeds from the Issuance of Certificates of Deposits, was $366.9 million for the year ended December 31, 2010, compared to net cash used of $428.5 million for 2009. Unitrin did not repurchase shares of its common stock during 2009, compared to using $34.4 million of cash during 2010 to repurchase shares of its common stock. Unitrin used $54.6 million of cash to pay dividends for the year ended December 31, 2010, compared to $66.6 million of cash used to pay dividends in 2009. The amount of cash used to pay dividends decreased in 2010, compared to 2009, due primarily to differences in dividend rates. The quarterly dividend rate was $0.47 per common share in the first quarter of 2009. Beginning with the second quarter of 2009, the quarterly dividend rate was lowered to $0.20 per common share. In the first quarter of 2010, the quarterly dividend rate was increased to $0.22 per common share and maintained at that level throughout 2010.
The fair value of the Company’s investments measured and reported at fair value was $5,030.8 million at December 31, 2010, of which $4,789.8 million, or 95%, was based on quoted market prices or significant value drivers that are observable and $241.0 million, or 5%, was based on significant value drivers that are unobservable. Fair value measurements based on readily available, active, quoted market prices or for which fair value can be measured from actively quoted prices generally are deemed to have a higher degree of market price observability and a lesser degree of judgment, compared to fair value measurements based on significant unobservable inputs used in measuring fair value. The prices that the Company might realize from actual sales of investments are likely to vary from their respective estimated fair values at December 31, 2010 due to limitations inherent in the estimation process and changing market conditions.
Changes in these factors from one evaluation date to the next evaluation date could result in the Company determining that a temporary decline in the fair value of an investment at December 31, 2010 is no longer
Gains and losses on sales of investments are computed on the specific identification method and are reported in the Consolidated Statements of Operations in the period in which the sales occur. The Company regularly reviews its investment portfolio for factors that may indicate that a decline in fair value of an investment is other than temporary. Losses are computed on the specific identification method and reported in the Consolidated Statements of Operations in the period that the decline is determined to be other than temporary. In second quarter of 2009, the Company adopted a required change in accounting which impacts the determination of the amount of OTTI losses on Investments in Fixed Maturities that are recognized in earnings and subsequent to April 1, 2009. Effective April 1, 2009, the portion of an impairment of an investment in a fixed maturity attributed to a credit losses is reported in Net Impairment Losses Recognized in Earnings in the Consolidated Statement of Operations, with the balance of such impairment reported in Accumulated Other Comprehensive Income.
An aging of unrealized losses on the Company’s Investments in Fixed Maturities and Equity Securities at December 31, 2010 is presented below:
Reinsurance and indemnification recoverables on property and casualty insurance reserves were $78.1 million and $77.4 million at December 31, 2010 and 2009, respectively. These reinsurance recoverables are concentrated with several reinsurers, the vast majority of which are highly rated by one or more of the principal investor and/or insurance company rating agencies. While most of the reinsurance recoverables were unsecured at December 31, 2010 and 2009, the agreements with the reinsurers generally provide for some form of collateralization upon the occurrence of certain events. The largest reinsurance recoverable on property and casualty insurance is from General Security National Insurance Company (“GSNIC”), a subsidiary of SCOR and is unsecured. In 2002, the Company acquired two insurance companies from SCOR. Under the agreement governing the acquisition of these insurance companies, SCOR and/or GSNIC are responsible for all liabilities of these insurance companies incurred prior to the acquisition. Reinsurance recoverables at December 31, 2010 and 2009 included $27.1 million and $30.3 million, respectively, from GSNIC.
Option and SAR activity for the year ended December 31, 2010 is presented below:
As discussed in Note 3, “Acquisitions of Businesses,” to the Consolidated Financial Statements, Unitrin’s subsidiary, Trinity, completed its acquisition of Direct Response on February 13, 2009. The results of Direct Response’s operations are included in the Unitrin Direct segment. The Unitrin Direct segment recognized restructuring expenses in 2010 and 2009, in part, due to integrating Direct Response’s Operations into its operations.
The statute of limitations related to Unitrin and its eligible subsidiaries’ consolidated Federal income tax returns, Primesco’s consolidated Federal income tax returns and Direct Response’s consolidated Federal income tax returns is closed for all tax years up to and including 2006. The expiration of the statute of limitations related to the various state income tax returns that Unitrin and its subsidiaries file varies by state. None of the consolidated Federal income tax returns are currently under examination. The Florida Department of Revenue is conducting an audit of United Insurance’s 2007 - 2009 income tax returns. The Company does not expect any material modifications to the returns as filed to result from the audit.
The actuarial assumptions used to develop the components of the OPEB Accumulated Benefit Obligation at December 31, 2010 and 2009 were:
The catastrophe reinsurance programs for the Life and Health Insurance and Unitrin Direct segments in 2008 also included reinsurance coverage from the FHCF for hurricane losses in Florida at retentions lower than those described above.
Earned Premiums ceded on long-duration and short-duration policies were not material for the years ended December 31, 2010, 2009 and 2008. Certain insurance subsidiaries assume business from other insurance companies and involuntary pools. Earned Premiums assumed on long-duration and short-duration policies for the years ended December 31, 2010, 2009 and 2008 were:
The Company’s policy is to recognize transfers between levels as of the end of the reporting period. Transfers between levels 1 and 2 were not significant for the year ended December 31, 2010. Included in Other Equity Interests at December 31, 2010 in the preceding table is $59.1 million of private equity funds and mezzanine debt funds which the Company has unfunded commitments of $68.6 million. These funds cannot be redeemed, instead distributions are received through the liquidation of the underlying investments of the fund. It is estimated that the assets of these funds will be liquidated and distributed to the Company between 2011 and 2021.
Information by security type pertaining to the changes in the fair value of the Company’s investments classified as Level 3 for the year ended December 31, 2009 is presented below:
The Company believes that the transactions described above have been entered into on terms no less favorable to the Company than could have been negotiated with non-affiliated third parties.
with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth herein. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.