High Yield Corporate Bond Review: Unitrin, Inc. Senior Notes 6.134% Yield

Unitrin (UTR) is an insurance/financial services company providing a diverse array of insurance and consumer finance products; plus, they have services for individuals, families and small businesses with very low debt. Unitrin, Inc. was founded in April 1990, when it was spun off from the conglomerate Teledyne, Inc.

Unitrin is comprised of many subsidiaries, including the following companies:

Property and Casualty Insurance

Alpha Property & Casualty Insurance Company
Charter Indemnity Company
Financial Indemnity Company
Kemper Independence Insurance
Merastar Insurance Company
Mutual Savings Fire Insurance Company
National Merit Insurance Company
Response Indemnity Company of California
Response Indemnity Company of New York
Response Insurance Company
Response Worldwide Direct Auto
Response Worldwide Insurance Company
Trinity Universal Insurance Company
Union National Fire Insurance Company
United Casualty Insurance Company of America
Unitrin Advantage Insurance Company
Unitrin Auto and Home Insurance Company
Unitrin Casualty Insurance Co.

Unitrin Direct Auto Insurance

Unitrin Property & Casualty Company
Unitrin Preferred Insurance Company
Unitrin Specialty Insurance Company
Valley Insurance Company
Valley Property & Casualty Insurance Company
Warner Insurance Company

Life and Health Insurance

Mutual Savings Life Insurance Company
Reserve National Insurance Company
The Reliable Life Insurance Company
Union National Life Insurance Company
United Insurance Company of America

Consumer Finance

Fireside Bank

A.M. Best Co. has affirmed the financial strength rating (FSR) of A- (Excellent) and issuer credit ratings (ICR) of “a-” of Unitrin Property and Casualty Insurance Group (Unitrin P&C) and it’s many members.

At Durig Capital, we have developed a process for our clients to review, select, purchase and monitor Corporate Bonds. Enclosed is our review along with supporting documents showing why we believe it makes sense with our Corporate Bond clients’ portfolios. We reviewed 10,000 separate Corporate Bond listings to find what, we believe, is currently the best Corporate Bond for investors. The following includes our selection criteria.

Step 1 – Yield Curve at 4-7 Years Out.

We went out on the yield curve just enough to receive higher returns in yield but not far enough that if inflation starts to increase, which is a small but real probability due to our country’s largest deficit spending, it could lead to a loss of principle. To protect our client in this worst case scenario we would just plan to hold to maturity.

Surprisingly, we are seeing a well-funded company giving 7-year bonds yielding higher than borrowing on 30-year mortgages at 4.63% (quoted at Bankrate.com). Not that we are a proponent of this, but the math is telling us that it’s better to invest in these UTR bonds than to pay down your mortgage at current rates.

Step 2 – We like companies that are profitable.

For the last quarter, net income attributable to shareholders was $48.2 million, or 77 cents a share, compared with a net loss of $7.5 million, or 9 cents a share, last year.

Unitrin also paid a 77 cent dividend last quarter.

Step 3 – We like companies with low debt to cash ratio.

Unitrin’s current debt is $561 million, and their cash and short term investments was $510.4 million last quarter. If Unitrin applied it’s current cash and investments to it’s current debt, it would have very minimal debt to no debt. Their current balance sheet can be viewed here. For an insurance company approaching 3 billion in total revenues (plus, profit before income and taxes at $335, both in 2009), it’s hard for me to see why the $561 debt has such low ratings.

Step 4 – We like high yields.

Unitrin bonds currently have a 6.134% yield. With the corresponding Treasury yielding 2.39%, this gives Unitrin an attractive 3.74% spread over Treasuries, or 156%.

Step 5 – We currently like shorter maturities.

UTR bonds mature in 05/15/2017, or in just under 7 years.

Summary

This is a good 6.134% yield bond for under 7 years. Even though it had a lower rating, coverage above but large cash and investment coverage and still was profitable similar to our previous Fidelity Bond report. Delivering a good profit soon after a tremendous shock to our economy helps prove to me the value of their business model. I believe, with the low debt level and good profitability, they are well situated for an upgraded bond rating. You can find other Corporate Bonds listed on our web site here.

Coupon 6.13 %
Ratings Baa3/ BBB-
Maturity 05/15/2017
Price 99.250
Yield to Maturity 6.134 %
Yield to Call 6.134 %

The Unitrin website is available here.

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