Way to grow: Unitrin chief executive tells why the company chose its latest acquisition and predicts more renewal rights transactions in the industry in 2005.

Key Points

* Unitrin Inc. acquired Kemper Auto & Home as a renewal rights transaction, meaning Unitrin took on Kemper's management, employees, offices and systems with none of the existing liabilities.

* In 2004, Unitrin decided to combine its Multi Lines insurance personal lines business with its Kemper unit.

* Richard Vie, chairman and chief executive officer of Unitrin, expects to see more highly targeted renewal rights transactions in 2005.

**********

Under the stewardship of Richard Vie, chairman and chief executive officer, Unitrin Inc. has taken Kemper Auto & Home into its fold. Unitrin subsidiary Trinity Universal Insurance Co. acquired Kemper's individual and family group business unit in Jacksonville, Fla., for about $45 million in cash plus 1% of premiums written over a three-year period beginning Jan. 1, 2003. The purchase was settled in the third quarter of 2004.

But the $9.7 million charge related to the Kemper settlement, coupled with the roughly $14 million in Florida hurricane losses, didn't put a damper on Unitrin's third-quarter operating results. Net income for the Chicago-based holding company rose more than 31% to $56.5 million, or 82 cents a share, from $43.1 million, or 64 cents a share, in the third quarter of 2003.

"We've been working on all three of our businesses ever since we spun off from Teledyne in 1990," Vie said. "These are all cyclical businesses to some degree and right now, all of the businesses are hitting on all cylinders." Unitrin's three business groups are property/casualty, life and health, and consumer finance.

In a wide-ranging interview, Vie spoke about his company's recent acquisition and touched on a variety of other topics, including the impact of emerging technology, the future of the property/casualty industry and underwriting discipline.

What was the strategy behind Unitrin's acquisition of Kemper Auto & Home?

The purchase of Kemper's personal lines is a good example of how Unitrin likes to be opportunistic and strategic in acquisitions. Remember, this was the beginning of 2002, one of the worst of times in the personal-lines business. The Kemper deal met our strategic requirement, which means achieving value over time.

Several things were attractive about Kemper Auto & Home. First, it's a great national brand name with a very strong, old and established following among their independent agents. They'd been reasonably profitable, and they were concentrated in the part of the country where Unitrin wasn't. They were primarily in the East, and Unitrin's property/casualty group was primarily west of the Mississippi. It had a good geographic fit with Unitrin's Multi Lines group and its flagship brand, Trinity Universal.

When Kemper decided to divest its personal-lines business to concentrate on commercial lines, we negotiated a renewal rights transaction where we got the opportunity to renew and write new business of about $700 million. We acquired the management, the employees, the offices, the systems--we got it all--but only what would support the personal-lines operation. So we got a stand-alone operation that was decades and decades old, and we took none of the existing liabilities.

What's been your biggest challenge in making all of this work?

Every acquisition has challenges, both ones you think you know and some that you don't know but discover later. Soon after the deal was signed, we learned of the seller's financial problems. For that reason, we expedited the rewriting of the policies onto Unitrin paper. Thanks to the hard work of our dedicated employees, the process is complete.

It's gone so well that in 2004, we decided to combine our Multi Lines insurance personal-lines business with our Kemper unit, which will result in additional synergies for Unitrin. Let me point out that our Multi Lines business was performing well, with combined ratios in the 90s. The consolidation enables us to reduce costs and use the best practices of both organizations.

The reorganization also gives us a chance to restructure our commercial business, which was operating within our Multi Line segment. That's been renamed Unitrin Business Insurance, and I think it's poised to grow profitably.

These things take an enormous amount of effort, because we'll be moving Unitrin personal lines, which has been in Dallas for 70 or 80 years, to Jacksonville, Fla. There's several hundred people involved, and that has been laid out clearly. People have been told what the time frames are. They know who's going and who's not. So the official part is done. Now it's a matter of Kemper and Unitrin Multi Line working together to get this accomplished, and we think that will happen toward the middle or latter part of '05.

How did the relatively unknown Unitrin go about building trust and relationships with the agent network from well-known Kemper?

This was vital to the success of the transaction. Trust is a vital part of our business. Our intention in virtually every acquisition is to leave what we acquired intact as long as we can. And that was our plan in the Kemper transaction. The key here is the independent agents. The advantage that we had was that the Kemper agents continued to do business with the same people after the transaction as they had been doing business with before. So it was seamless.

Also, when Lumbermens (Mutual Casualty Co.) began to encounter serious financial problems, it became important to Kemper Auto & Home agents to know that they were now under the umbrella of a stable company that was committed to their business. They soon learned that Unitrin has rigorous financial controls, very good financial stability. Unitrin is very well capitalized.

We also have rights to continue to use the Kemper brand name, and this has been valuable for the transition.

Unitrin management has enjoyed and benefited from spending time with the Kemper agents. They told us that they believe there is plenty of room for a big brand with a well capitalized company and that's what Unitrin offers to them.

For the industry as a whole, do you think that 2005 will be an active year for mergers and acquisitions?

I don't see many deals being done other than renewal rights transactions where companies wish to divest blocks of unwanted business. So we're going to see some highly targeted renewal rights transactions. They may well be lines that the current company doesn't care to stay in, or it's possible that if they're big enough, they might be spun off to shareholders. Acquisitions can be very risky and a large percentage never achieve their objectives. That, plus the current mindset of doing renewal-rights transactions, will encourage management to focus on organic growth in the near term.

How has emerging technology affected Unitrin? What do you think is the impact on the industry as a whole?

In the property/casualty business, the biggest challenge is how to make it easy for agents to do business with us. It takes a big organization to afford the level of sophistication that's required. I don't know that smaller companies are going to be able to keep up. That's not a prediction; it just strikes me as very difficult to do.

Kemper Auto & Home has significantly invested in technology and has a major enhancement scheduled for 2005 that will offer agents new functionality that will eliminate duplicate work. This new system will actually prefill a number of customer entry fields for the agency force. Customer-service reps look for the easiest possible way to do something, and the technology we're bringing out this year will make it vastly easier for them to do business with us.

By reducing this duplicate work, we free our agent to do what he or she can do best--serving as a trusted adviser to customers and selling insurance. Also, an independent agent will tend to give more business to the company that brings him an ease of doing business. By making it easier to do business with us, we believe we improve the likelihood that the independent agent will do more business with us.

Can you give some details on how this enhancement will work?

If you can create a data file that the customer-service reps can use online, they can be talking to potential customers and half of that data file is already filled out. Technology gives us the capability to extract information more quickly so that you can underwrite that case, quote a rate and bind it while the person is still connected to you, whether it's in your office, over the telephone or over the computer.

Do you share the industry concern that underwriting discipline will erode as the property/casualty market begins to soften?

People who got burned recently are a little more cautious. True, we're going into a softer market. Larger companies that have a very sharp focus on their business--and I'd put Unitrin in there--have over the last 10 years developed fairly sophisticated tools to segment their business so that they get the proper risk classification and they price it accordingly. You can maintain underwriting discipline by being better focused on the understanding of the risk that you are putting on the books and you can get it into the right pricing category. This is where smaller companies are at quite a disadvantage because they don't perhaps have the technology or the adequate database to give them the information they need to segment their underwriting.

Unitrin Inc.

A.M. Best Company # 02523 (Trinity Universal Insurance Co.)

Headquarters: Bloomington, Ill.

Products: Property/casualty insurance products; life and health insurance products; and other financial services 

Distribution: Independent agents and direct

Employees: 8,796

Net income 2003: $123.6 million

Assets 2003: $8.5 billion

Source: Unitrin Inc.