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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A No. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996 Commission File No. 0-18298
UNITRIN, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 95-4255452
(State or Other (I.R.S. Employer
Jurisdiction of Incorporation or Organization) Identification Number)
One East Wacker Drive
Chicago, Illinois 60601
(Address of Principal Executive Offices) (Zip Code)
(312) 661-4600
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value
Preferred Share Purchase Rights Pursuant to Rights Agreement
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Based on the closing market price of Registrant's common stock on December
31, 1996, the aggregate market value of such stock held by non-affiliates of
Registrant is approximately $1.46 billion. Solely for purposes of this
calculation, all executive officers and directors of Registrant are considered
affiliates.
Registrant had 37,340,894 shares of common stock outstanding as of December
31, 1996.
Documents Incorporated by Reference
Part of the Form 10-K/A
Documents into which incorporated
Portions of 1996 Annual Report to Shareholders Parts I, II and IV
Portions of Proxy Statement for 1997 Annual Meeting Part III
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This Form 10-K/A amends and restates the Form 10-K filed February 27, 1997 in
its entirety to read as follows:
PART I
ITEM 1. Business
Unitrin, Inc. ("Unitrin" or the "Company") was incorporated in Delaware in
1990. Unitrin serves the basic financial needs of individuals, families and
small businesses. Through its subsidiaries, Unitrin provides property and
casualty insurance, life and health insurance, and consumer finance services.
(a) General development of business
During 1996, Unitrin repurchased and retired 1,277,175 shares of its common
stock in open market transactions at a total cost of $61.1 million, bringing the
total number of shares that have been repurchased since August 1994 to
approximately 14.8 million at a total cost of $722 million. Unitrin's board of
directors has authorized a total of 18 million shares to be repurchased.
Effective May 31, 1996, United Insurance Company of America ("United"), one
of the Company's subsidiaries, entered into an agreement to cede its entire
obligation under certain life insurance policies to a third party. Life
insurance reserves related to this block were approximately $112 million at
December 31, 1996. At such date, United had not been relieved of its primary
obligation to these policyholders and, therefore, under applicable accounting
requirements, the Company continues to include the life insurance reserves
related to this block of business on its balance sheet, along with a
corresponding amount classified as "Other Receivables." The Company expects
that the reinsurer will fully perform its assumed obligations to policyholders.
As a result of this transaction, premiums in the Company's Life and Health
Insurance segment decreased by $7.3 million in 1996 and will decrease by an
additional $6 million in 1997. The effect of this transaction on the segment's
operating profit is not material.
Effective as of January 1, 1997, Unitrin acquired Union Automobile
Indemnity Company ("Union") of Bloomington, Illinois, a property and casualty
insurance company with annual direct written premiums of approximately $35
million. As consideration for the acquisition, Unitrin issued 342,000 shares of
its common stock, then valued at approximately $18.6 million, to Union's former
parent company.
(b) Business segment financial data
Financial information about the Company's business segments for the years
ended December 31, 1996, 1995 and 1994 is contained in the following portions of
Unitrin's 1996 Annual Report and incorporated herein by reference: (i) Note 16
to the Company's Consolidated Financial Statements, which Financial Statements
are further described in Item 14(a)1 hereto and filed as Exhibit 13.1 hereto and
incorporated by reference into Item 8 hereof (the "Financial Statements"), and
(ii) "Management's Discussion and Analysis of Results of Operations and
Financial Condition," which is filed as Exhibit 13.2 hereto and incorporated by
reference into Item 7 hereof (the "MD&A").
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(c) Description of business
Unitrin conducts its operations in three segments: Property and Casualty
Insurance, Life and Health Insurance and Consumer Finance. Unitrin and its
subsidiaries have approximately 7,400 full-time employees of which approximately
5,000 are employed in the Life and Health Insurance segment, 1,700 in the
Property and Casualty Insurance segment and 600 in the Consumer Finance segment.
Property and Casualty Insurance
Trinity Universal Insurance Company ("Trinity"), together with its
subsidiaries, affiliates and Union (collectively, the "Property and Casualty
Group") comprise a network of regional insurers operating in the southern,
midwestern and western United States. The Property and Casualty Group provides
insurance coverage to over 775,000 policyholders in thirty-two states. Taking
the acquisition of Union into account, the five states providing the largest
amount of premium revenues are: Texas (27%), California (13%), Wisconsin (9%),
Illinois (8%), and Louisiana (6%).
Property insurance indemnifies an insured with an interest in physical
property for loss of such property or the loss of its income-producing
abilities. Casualty insurance primarily covers liability for damage to property
of, or injury to, a person or entity other than the insured.
Products and Distribution
The Property and Casualty Group provides automobile, homeowners, commercial
multi-peril, motorcycle, boat and watercraft, fire, casualty, workers
compensation and other types of property and casualty insurance to individuals
and businesses. Automobile insurance accounted for 37%, 33% and 32% of
Unitrin's consolidated insurance premiums for the years ended December 31, 1996,
1995 and 1994 respectively.
Preferred and Standard Risk Insurance Products. Preferred and standard risk
insurance products are marketed exclusively by over 2,600 independent
agents. These personal and commercial products are designed and priced for
those individuals and businesses that have demonstrated favorable risk
characteristics and loss history. Typical customers include "main street"
businesses and middle income families. Products are marketed primarily in
suburban and rural communities. Trinity and its subsidiaries (Milwaukee
Guardian Insurance, Inc., Milwaukee Safeguard Insurance Company, Security
National Insurance Company, and Trinity Universal Insurance Company of
Kansas, Inc.) and its affiliates (Milwaukee Mutual Insurance Company and
Trinity Lloyd's Insurance Company) principally provide the Property and
Casualty Group's preferred and standard products in Texas, Wisconsin,
Illinois, Louisiana, Minnesota and other southern, midwestern and
northwestern states. In addition, Unitrin's most recent acquisition, Union,
will market the Group's products in Illinois and adjacent states beginning
in 1997.
Specialty Products. Specialty products are principally provided by
Financial Indemnity Company and Alpha Property & Casualty Insurance Company
and include nonstandard automobile, motorcycle, and specialty watercraft
insurance. Nonstandard automobile insurance is provided for individuals and
companies that have had difficulty obtaining standard or preferred risk
insurance, usually because of their driving record. Nonstandard automobile
insurance products are marketed through over 4,600 agents in California and
twenty other states.
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Storm Losses/Seasonality
Geographic location can have an impact on a property insurer's exposure to
losses from hazards such as hurricanes, tornadoes, windstorms and hail.
Moreover, these storms add an element of seasonality to property insurance
claims, since windstorms and tornadoes tend to occur in the spring of the year,
while hurricanes generally occur in the summer and fall. Historically, the
Property and Casualty Group wrote a sizable portion of its business in Texas,
the plains states and certain coastal areas that are storm-prone. In recent
years, the Property and Casualty Group has endeavored to reduce its
vulnerability to storm losses through a combination of geographic expansion
outside of these areas and reduced concentration of business in storm-prone
areas.
Pricing
Pricing levels for property and casualty insurance are influenced by many
factors, including the frequency and severity of claims, state regulation and
legislation, competition, general business conditions, inflation, expense levels
and judicial decisions. In addition, many state regulators are requiring
consideration of investment income when approving or setting rates, which has
led to reduced underwriting margins.
Reinsurance
In accordance with the practice of the insurance industry, the Company
cedes insurance to other insurers. These reinsurance arrangements limit the
Company's exposure arising from large risks or from hazards of a catastrophic
nature. Although such reinsurance does not discharge the Company from its
obligations on risks insured, so long as reinsurers meet their obligations, the
Company's net liability is limited to the amount of risk it retains. See Note
17 to the Financial Statements.
Competition
Based on the most recent data published by A.M. Best Company ("A.M. Best"),
at the end of 1995 there were approximately 1,200 property and casualty
insurance organizations in the United States, made up of more than 2,400
companies. Unitrin's Property and Casualty Group ranked among the 100 largest
property and casualty insurance company organizations in the United States,
measured by admitted assets (73rd), net premiums written (62d) and
policyholders' surplus (52d).
In 1995, the industry's estimated net premiums written were $260 billion,
72% of which were accounted for by 50 groups of companies. Unitrin's property
and casualty insurance companies together wrote less than 1% of the industry's
estimated 1995 premium volume.
Profitability of the property and casualty insurance industry is cyclical,
particularly with respect to commercial lines. Periods of severe price
competition and excess capacity to write new business tend to be followed by
periods of premium increases and diminished capacity to provide coverage.
Unitrin's insurance subsidiaries generally compete using appropriate
pricing, selling to selected markets, controlling expenses, maintaining ratings
from A.M. Best and providing competitive services to agents and policyholders.
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Life and Health Insurance
Unitrin conducts its life and health insurance business through United and
United's subsidiaries, Union National Life Insurance Company and The Pyramid
Life Insurance Company (collectively, the "Life and Health Group"). The leading
product of the Life and Health Group is traditional life insurance, including
permanent and term insurance. This product accounted for 28%, 32% and 32% of
Unitrin's consolidated insurance premiums for the years ended December 31, 1996,
1995 and 1994, respectively. Permanent policies are offered primarily on a non-
participating, guaranteed-cost basis.
Home Service Insurance Products
United, together with its subsidiary, Union National Life Insurance
Company, is one of the largest home service insurance operations in the United
States (see: "Competition," below). In the "home service" market, agents who
are full-time employees of the insurer call on customers in their homes to sell
insurance products, provide services related to policies in force and collect
premiums, typically monthly. The Life and Health Group's home service operations
generated 81% of the Group's premiums in 1996.
The major market for home service business generally consists of middle and
lower income families. Approximately 3,700 of the Life and Health Group's 5,000
employees are full-time sales representatives and sales management personnel
engaged in the home service business.
The Life and Health Group also distributes property and casualty insurance
products to its home service customers through United Casualty Insurance Company
of America and Union National Fire Insurance Company
Group Life and Health Insurance Products
United's Group Division specializes in fully insured and stop loss group
life and health insurance, as well as administrative services for medium-sized
businesses and organizations. Its nearly 250 brokers and independent agents are
concentrated in the western states.
Worksite Insurance Products
United's Worksite Products Division specializes in employer-paid and
voluntary group and individual life insurance products and Section 125
administration programs. It provides such products on behalf of employers,
financial institutions, credit unions, and banks to their employees, members,
and customers.
Medicare Supplement and Other Health Insurance Products
United's subsidiary, The Pyramid Life Insurance Company, focuses primarily
on selling insurance to the senior market. Its products include Medicare
supplement, long-term care, home health care, major medical, and supplemental
health insurance. Products are marketed in 22 states through over 3,000
independent agents and agencies. Medicare supplement insurance is also marketed
through hospital networks.
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Pricing
Premiums for life and health insurance products are based on assumptions
with respect to mortality, morbidity, investment yields, expenses and lapses and
are also affected by state laws and regulations, as well as competition.
Pricing assumptions are based on the experience of the Life and Health Group, as
well as the industry in general, depending upon the factor being considered.
The actual profit or loss produced by a product will vary from the anticipated
profit if the actual experience differs from the assumptions used in pricing the
product.
Premiums for policies sold through the Life and Health Group's home service
operations are set at levels designed to cover the relatively high cost of
distribution in the home service market. As a result of such higher expenses,
incurred claims as a percentage of premium income tend to be lower for home
service companies than the insurance industry average.
Premiums for Medicare supplement and other accident and health policies
must take into account the rising costs of medical care. The annual rate of
medical cost inflation has historically been higher than the general rate of
inflation, necessitating frequent rate increases, most of which are subject to
approval by state regulatory agencies. The rate of medical care inflation has
moderated in the recent past, though there can be no assurances that such
moderation will continue.
Reinsurance
As is customary among life and health insurance companies, the Life and
Health Group cedes insurance above certain Company-determined retention limits
to other insurance companies to limit losses on risks. The Life and Health
Group's maximum retention for individual life insurance policies is $250,000,
plus an additional $100,000 for policies with accidental death or dismemberment
benefits. Retention limits for group policies vary depending on the type of
policy. Under any reinsurance arrangement, should the reinsurer be unable to
meet the obligations it assumes, the ceding insurance company remains
contingently liable with respect to the ceded insurance. For descriptions of
certain reinsurance arrangements of the Company's life and health insurance
segment, see Items 1(a) and 7 of this Form 10-K/A and Note 17 to the Financial
Statements.
Lapse Ratio
The lapse ratio is a measure reflecting a life insurer's loss of existing
business. For a given year, this ratio is commonly computed as the total face
amount of individual life insurance policies lapsed, surrendered, expired and
decreased during such year, less policies increased and revived during such
year, divided by the total face amount of policies at the beginning of the year
plus the face amount of policies issued and reinsurance assumed in the prior
year. The Life and Health Group's lapse ratios for individual life insurance
were 19%, 18% and 20% for the years 1996, 1995 and 1994, respectively.
The lapse ratios of companies in the home service market tend to be higher
than the lapse ratios of other life insurance companies. Thus, to maintain or
increase the level of its home service business, the Life and Health Group's
home service operations must continue to write a high volume of new policies.
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Competition
Based on the most recent data published by A.M. Best, in 1995, there were
approximately 660 life and health insurance company groups in the United States,
made up of about 1,200 companies. Unitrin's Life and Health Group ranked among
the 100 largest life and health insurance company groups, as measured by
admitted assets (89th), net premiums written (94th) and capital and surplus
(40th).
Approximately 70 life insurance companies participate in the home service
life insurance market in the United States. In 1995, the Life and Health
Group's home service operations ranked among the top three home service groups
of companies, based on net premiums written in home service life insurance.
Unitrin's insurance subsidiaries generally compete using appropriate
pricing, selling to selected markets, controlling expenses, maintaining ratings
from A.M. Best and providing competitive services to agents and policyholders.
Consumer Finance
Unitrin is engaged in the consumer finance business through its subsidiary,
Fireside Thrift Co. ("Fireside Thrift"), which has 37 branches in California and
one in Arizona.
Fireside Thrift is organized under California law as an industrial loan
company and is a member of the Federal Deposit Insurance Corporation ("FDIC").
Industrial loan companies are sometimes also referred to as thrift and loan
companies, and are distinct from both savings and loan associations and banks.
(See also, "Regulation," below.)
Fireside Thrift's principal business is the financing of used automobiles
through the purchase of conditional sales contracts from automobile dealers.
Fireside Thrift also makes personal loans, mostly secured by automobiles. The
borrowers under these contracts and loans typically have marginal credit
histories. However, Fireside Thrift individually underwrites each loan
application and historically has declined to extend credit to more than three
quarters of its loan applicants. See "Management's Discussion and Analysis of
Results of Operations--Consumer Finance" in Item 7 below for a discussion about
Fireside Thrift's loan loss reserves. Fireside Thrift competes for loans
primarily on the basis of timely service to its customers and by offering
flexible loan terms. Principal competitors include banks, finance companies,
"captive" credit subsidiaries of automobile manufacturers and other industrial
loan companies.
Fireside Thrift's financing activities are funded primarily by thrift
investment certificates (i.e., interest-bearing instruments that may be redeemed
by the owner or repurchased by Fireside Thrift under certain circumstances)
ranging from thirty-one days to five years in maturity, money market accounts
and Individual Retirement Accounts ("IRAs"). It competes for funds primarily
with banks, savings and loan associations and other industrial loan companies.
Investments
The quality, nature and amount of various types of investments which can be
made by insurance companies are regulated by state laws. These laws permit
investments in qualified assets, including municipal, state and federal
government obligations, corporate bonds, real estate, preferred and common
stocks, and mortgages where the value of the underlying real estate exceeds the
amount of the loan.
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Unitrin's investment strategy is based on current market conditions and
other factors that it reviews from time to time. Unitrin's consolidated
investment portfolio consists primarily of United States Government obligations
and investment-grade fixed maturities. The Company's investment in non-
investment grade, fixed maturity investments is insignificant. See the
discussions of the Company's investments under the headings "Investees,"
"Investment Results" and "Liquidity and Capital Resources" in Item 7 of this
Form 10-K/A and in Notes 4 and 5 to the Financial Statements.
Regulation
Unitrin is subject to the insurance holding company laws of several
states. Certain dividends and distributions by an insurance subsidiary to its
holding company are subject to approval by the insurance regulators of the state
of incorporation of such subsidiary. Other significant transactions between an
insurance subsidiary and its holding company or other subsidiaries of the
holding company may require approval by insurance regulators in the state(s) of
incorporation of one or more of the insurance subsidiaries participating in such
transactions.
Unitrin's insurance subsidiaries are subject to regulation in the states in
which they do business. Such regulation pertains to matters such as approving
policy forms and various premium rates, licensing agents, granting and revoking
licenses to transact business and regulating trade practices. The majority of
Unitrin's insurance operations are in states requiring prior approval by
regulators before proposed rates for property, casualty or health insurance
policies may be implemented. However, rates proposed for life insurance
generally become effective immediately upon filing with a state, even though the
same state may require prior rate approval for other forms of insurance.
Insurance regulatory authorities perform periodic examinations of an insurer's
market conduct and other affairs.
State insurance regulators also prescribe the form and content of financial
statements, perform periodic financial examinations of insurers, set minimum
reserve and loss ratio requirements, establish standards for the types and
amounts of investments and require minimum capital and surplus levels. Such
statutory capital and surplus requirements include risk-based capital ("RBC")
rules promulgated by the National Association of Insurance Commissioners (the
"NAIC"). Compliance with the RBC rules is determined by the ratio of regulatory
total adjusted capital, as defined by the NAIC, to the authorized control level
RBC, as defined by the NAIC. At December 31, 1996, the total adjusted capital of
every one of Unitrin's insurance subsidiaries significantly exceeded the minimum
RBC requirements.
The NAIC annually calculates certain statutory financial ratios for most
insurance companies in the United States. These calculations are known as the
Insurance Regulatory Information System ("IRIS") ratios. There presently are
twelve IRIS ratios. The primary purpose of the ratios is to provide an "early
warning" of any negative developments. The NAIC reports the ratios to state
regulators who may then contact the companies if three or more ratios fall
outside the NAIC's "usual ranges." At December 31, 1996, Unitrin had no
subsidiaries with three or more ratios outside the usual range.
In addition, the Company's insurance subsidiaries are required under the
guaranty fund laws of most states in which they transact business to pay
assessments up to prescribed limits to fund policyholder losses or liabilities
of insolvent insurance companies. The Company also is required to participate in
various involuntary pools, principally involving workers compensation and
windstorms. The Company's involuntary pool participation in most states is
generally in
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proportion to its voluntary writings of related lines of business
in such states.
Fireside Thrift is chartered by the California Department of Corporations
and is subject to the provisions of the California Industrial Loan Law, which
imposes minimum capitalization requirements, limits dividends, regulates loan
terms, collection practices and remedies and mandates disclosure of certain
contract terms. In addition, since Fireside Thrift is a member of the FDIC, it
is subject to regulations imposed by the FDIC on member institutions, including
federal consumer credit regulations. Fireside Thrift is also governed by Federal
Reserve Board regulations applicable to non-member state banks.
ITEM 2. Properties
Owned Properties.
Unitrin's subsidiary, United, owns the 41-story office building at One East
Wacker Drive, Chicago, Illinois, that houses the executive offices of Unitrin
and United. Unitrin and United occupy approximately 172,000 square feet of the
527,000 rentable square feet in the building. Unitrin's subsidiary, Milwaukee
Insurance Group, Inc., owns a two-story office building in downtown Milwaukee,
Wisconsin, consisting of approximately 132,000 square feet, which houses the
Property and Casualty Group's northern regional office. In addition, the Life
and Health Group occupies approximately 227,000 square feet in 33 Company-owned
buildings located in 15 states.
Leased Facilities.
The Life and Health Group leases facilities at 204 locations in 28 states
and the District of Columbia with aggregate square footage of approximately
526,000. The terms of these leases range from monthly tenancies to 5 years.
The Property and Casualty Group leases facilities at 28 locations in 12
states with an aggregate of approximately 328,000 square feet. The expiration
date of the longest current lease is September 2006.
Fireside Thrift occupies 40 leased facilities with an aggregate of
approximately 130,000 square feet. The longest term of the current leases
expires in August 2001.
The properties described are in good condition and suitable for all
presently anticipated requirements of the Company.
ITEM 3. Legal Proceedings
Unitrin and its subsidiaries are parties to various legal actions
incidental to their businesses. Some of these actions seek substantial punitive
damages that bear no apparent relationship to the actual damages alleged.
Although no assurances can be given and no determination can be made as of the
date hereof as to the outcome of any particular action, the Company and its
subsidiaries believe there are meritorious defenses to these legal actions and
are defending them vigorously. Unitrin believes that resolution of these actions
will not have a material adverse effect on Unitrin's financial position.
In connection with one action, Ronnie Dale Bleeker v. Trinity Universal
Insurance Company et al., the District Court of Hildalgo County, Texas, on
February 9, 1995 entered a
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judgment in the amount of $77.0 million, including attorney's fees of $38.5
million, against Trinity. The case involves an accident in which Ronnie Bleeker,
a former insured of Trinity under a $40 thousand automobile insurance policy,
while driving his truck struck another truck parked alongside a road, killing
one person and injuring several others. Suit was filed against Bleeker by the
injured parties (the "Claim Case"). In 1993, the plaintiffs in the Claim Case
were awarded damages in excess of $9 million. In 1994, these plaintiffs, acting
as assignees of a purported claim by Bleeker against Trinity, filed suit against
Trinity (the "Bad Faith Case") alleging that negligent claim handling by Trinity
led to the large verdict against Bleeker in the Claim Case. The Bad Faith Case
was tried in 1995 and resulted in the judgment against Trinity described above.
Trinity has strongly denied any wrongdoing and intends to pursue vigorously
all avenues for relief from the judgment. The matter is presently on appeal to
the Thirteenth Court of Appeals in Corpus Christi, Texas. The ultimate outcome
of this litigation cannot presently be predicted. However, the Company believes
that Trinity has a number of meritorious grounds for appeal, and, accordingly,
the judgment has not been accrued in the Company's financial statements.
ITEM 4. Submission of Matters to a Vote of Security Holders
During the quarter ended December 31, 1996, no matters were submitted to a
vote of shareholders.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
Unitrin's common stock is traded on the National Market Tier of the Nasdaq
Stock Market. The high and low prices for Unitrin's common stock during each
quarterly period in 1995 and 1996 are incorporated herein by reference to Note
19 to the Financial Statements, captioned "Quarterly Financial Information
(Unaudited)."
Information as to the amount and frequency of cash dividends declared by
Unitrin on its common stock during 1995 and 1996 is incorporated herein by
reference to the following portions of the Financial Statements:
(a) Consolidated Statements of Shareholders' Equity, and
(b) Dividends Paid to Common Shareholders (Per Share) included in Note 19
under the caption "Quarterly Financial Information (Unaudited)."
Information as to restrictions on the ability of Unitrin's subsidiaries to
transfer funds to Unitrin in the form of cash dividends, loans or advances is
incorporated herein by reference to the following items:
(a) Note 9 to the Financial Statements, captioned "Shareholders' Equity,"
and
(b) The "Liquidity and Capital Resources" section of the MD&A.
As of December 31, 1996, the approximate number of record holders of
Unitrin's common stock was 10,000.
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ITEM 6. Selected Financial Data
Selected consolidated financial data for the five years ended December 31,
1996 is incorporated herein by reference to the data captioned "Financial
Highlights" on page 1 of Unitrin's 1996 Annual Report, which data are filed as
Exhibit 13.3 hereto.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The MD&A is incorporated herein by reference to Exhibit 13.2.
ITEM 8. Financial Statements and Supplementary Data
The Financial Statements (including their related notes and the reports of
KPMG Peat Marwick LLP and Deloitte & Touche LLP)are incorporated herein by
reference to Exhibit 13.1 hereto.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There was no change in, or disagreement with, the Company's accountants
during or relating to the year ended December 31, 1996.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information regarding directors and executive officers, including, to the
extent applicable, information required by Item 405 of Regulation S-K, is
incorporated herein by reference to the sections captioned "Election of
Directors" and "Executive Officers" in the Proxy Statement for the 1997 Annual
Meeting of Shareholders of Unitrin.
ITEM 11. Executive Compensation
Information regarding compensation of executive officers is incorporated
herein by reference to the section captioned "Compensation of Executive
Officers" in the Proxy Statement for the 1997 Annual Meeting of Shareholders of
Unitrin. Neither the joint report by the Compensation and Stock Option
Committees of Unitrin's Board of Directors nor the Unitrin stock performance
graph to be included in such proxy statement shall be deemed to be incorporated
herein by this reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
This information is incorporated herein by reference to the section
captioned "Ownership of Common Stock" in the Proxy Statement for the 1997 Annual
Meeting of Shareholders of Unitrin.
ITEM 13. Certain Relationships and Related Transactions
This information is incorporated herein by reference to the section
captioned
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"Compensation Committee Interlocks and Insider Participation" in the Proxy
Statement for the 1997 Annual Meeting of Shareholders of Unitrin.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of this Report:
1. Financial Statements. The following financial statements, in response
to Item 8 of this Form 10-K/A, have been filed as Exhibit 13.1 and
incorporated by reference into Item 8 hereof:
The consolidated balance sheets of Unitrin, Inc. and subsidiaries as
of December 31, 1996 and 1995, and the consolidated statements of
income, cash flows and shareholders' equity for the years ended
December 31, 1996, 1995 and 1994, together with the notes thereto, the
report of KPMG Peat Marwick LLP thereon, dated January 7, 1997, except
as to Note 5, which is as of September 22, 1997, and the reports of
Deloitte & Touche LLP on the financial statements of Litton
Industries, Inc. and subsidiaries and of Western Atlas Inc. and
subsidiaries dated September 19, 1996 and February 13, 1996,
respectively.
2. Financial Statement Schedules.
Schedule I: Investments - Other Than Investments in Related Parties
Schedule II: Parent Company Financial Statements
Schedule III: Supplementary Insurance Information
Schedule IV: Reinsurance Schedule
Financial statements of fifty percent or less owned person: To be
filed by amendment within 90 days of the July 31, 1997 fiscal year-end
of Litton Industries, Inc.
Schedules not listed here have been omitted because they are not
applicable, not material or the required information is included in
the Financial Statements, including the notes thereto.
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SCHEDULE I
UNITRIN, INC. AND SUBSIDIARES
INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31,1996
(Dollars in Millions)
<TABLE>
<CAPTION>
Amount
Amortized Fair Carried in
Cost Value Balance Sheet
--------- -------- -------------
<S> <C> <C> <C>
Fixed Maturities:
Bonds and Notes:
United States Government and
Government Agencies and Authorities $1,930.3 $1,957.0 $1,957.0
States, Municipalities
and Political Subdivisions 133.4 136.7 136.7
Corporate Securities:
Other Bonds and Notes 58.5 58.9 58.9
Redemptive Preferred Stocks 54.2 54.8 54.8
-------- -------- --------
Total Investments in Fixed Maturities 2,176.4 2,207.4 2,207.4
-------- -------- --------
Equity Securities:
Common Stocks 20.0 57.9 57.9
Non-redemptive Preferred Stocks 152.0 201.8 201.8
-------- -------- --------
Total Investments in Equity Securities 172.0 259.7 259.7
-------- -------- --------
Investees (A)
Litton Industries, Inc. 245.9 602.8 245.9
Western Atlas Inc. 349.3 897.1 349.3
Curtiss-Wright Corporation 74.9 110.4 74.9
-------- -------- --------
Total Investees 670.1 1,610.3 670.1
-------- -------- --------
Loans, Real Estate and Short-term Investments 154.2 XXX.X 154.2
-------- --------
Total Investments $3,172.7 $3,291.4
======== ========
</TABLE>
(A) - Amortized Cost = Cost Plus Cumulative Undistributed Earnings.
12
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
UNITRIN, INC.
PARENT COMPANY BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(Dollars in Millions)
December 31,
------------------------
ASSETS 1996 1995
------ -------- --------
<S> <C> <C>
Investment in Subsidiaries and Investees $1,663.9 $1,623.1
Equity Securities at Fair Value (Cost: 1996 and 1995 - $50.0) 53.6 51.5
Other Assets 7.1 2.6
-------- --------
Total Assets $1,724.6 $1,677.2
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Notes Payable $ 53.0 $ 93.0
Accrued Expenses and Other Liabilities 191.3 59.7
-------- --------
Total Liabilities 244.3 152.7
-------- --------
Shareholders' Equity:
Common Stock 3.7 3.8
Additional Paid-in Capital 133.0 126.2
Retained Earnings 1,265.8 1,281.1
Net Unrealized Appreciation on Equity Securities 2.4 1.0
Net Unrealized Appreciation in Subsidiaries' Securities 75.4 112.4
-------- --------
Total Shareholders' Equity 1,480.3 1,524.5
-------- --------
Total Liabilities and Shareholders' Equity $1,724.6 $1,677.2
======== ========
</TABLE>
13
<PAGE>
SCHEDULE II
UNITRIN, INC.
PARENT COMPANY STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in Millions)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Revenues:
Net Investment Income $ 7.1 $ 1.9 $ 10.1
Net Gains (Losses) on Sales of Investments -- -- (4.5)
------ ------ ------
Total Revenues 7.1 1.9 5.6
------ ------ ------
Interest Expense 9.8 10.5 --
Other Operating Expenses 1.6 6.0 10.4
------ ------ ------
Total Operating Expenses 11.4 16.5 10.4
------ ------ ------
Income (Loss) Before Income Taxes and Equity
in Net Income of Subsidiaries and Investees (4.3) (14.6) (4.8)
Income Tax (Benefit) Expense (3.2) (5.4) (1.6)
------ ------ ------
Income (Loss) Before Equity in
Net Income of Subsidiaries and Investees (1.1) (9.2) (3.2)
Equity in Net Income of Subsidiaries and
Investees 133.6 159.8 151.6
------ ------ ------
Net Income $132.5 $150.6 $148.4
====== ====== ======
</TABLE>
14
<PAGE>
SCHEDULE II
UNITRIN, INC.
PARENT COMPANY STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in Millions)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities:
Net Income $132.5 $150.6 $148.4
Adjustment Required to Reconcile Net Income
to Net Cash Provided by Operations:
Equity in Net Income of Subsidiaries and Investees (133.6) (159.8) (151.6)
Cash Dividends from Subsidiaries 149.8 441.1 150.3
Cash Dividends from Investee 1.4 - -
Other, Net 128.4 52.4 14.4
------ ------ ------
Net Cash Provided by Operating Activities 278.5 484.3 161.5
------ ------ ------
Investing Activities:
Sales and Maturities of Fixed Maturities - - 245.6
Purchases of Fixed Maturities - - (47.3)
Purchase of Securities from Subsidiaries:
Curtiss-Wright Common Stock (95.4) - -
Navistar Series G Preferred Stock - (50.0) -
Litton Industries, Inc. Common Stock - (77.0) -
Change in Short-term Investments - 41.0 (41.0)
Purchases of Property (3.7) - -
------ ------ ------
Net Cash Provided (Used) by Investing Activities (99.1) (86.0) 157.3
------ ------ ------
Financing Activities:
Notes Payable Proceeds 170.0 401.0 -
Notes Payable Payments (210.0) (308.0) -
Cash Dividends Paid (83.0) (80.7) (75.8)
Common Stock Repurchases (61.1) (416.0) (245.3)
Issuance of Unitrin Common Stock 4.7 4.6 0.9
------ ------ ------
Net Cash Used by Financing Activities (179.4) (399.1) (320.2)
------ ------ ------
Increase (Decrease) in Cash - (0.8) (1.4)
Cash, Beginning of Year - 0.8 2.2
------ ------ ------
Cash, End of Year $ - $ - $ 0.8
====== ====== ======
</TABLE>
15
<PAGE>
SCHEDULE III
UNITRIN, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(Dollars in Millions)
<TABLE>
<CAPTION>
Insurance Amortization
Claims Of Deferred
Net and Policy
Premiums Investment Policyholders' Acquisition
Premiums Written Income Benefits Costs
-------- -------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996:
Life and Health $ 489.1 $ N/A $123.0 $289.7 $ 59.8
Property and Casualty 731.2 741.3 50.0 510.0 110.3
Other - N/A 6.0 - -
-------- ------ ------ ------ ------
Total $1,220.3 $ N/A $179.0 $799.7 $170.1
======== ====== ====== ====== ======
Year Ended December 31, 1995:
Life and Health $ 511.8 $ N/A $137.9 $302.3 $ 64.5
Property and Casualty 587.3 575.0 44.2 415.2 93.0
Other - N/A 4.5 - -
-------- ------ ------ ------ ------
Total $1,099.1 $ N/A $186.6 $717.5 $157.5
======== ====== ====== ====== ======
Year Ended December 31, 1994:
Life and Health $ 518.7 $ N/A $148.9 $296.1 $ 66.0
Property and Casualty 530.1 532.1 45.5 358.3 82.4
Other - N/A 12.8 - -
-------- ------ ------ ------ ------
Total $1,048.8 $ N/A $207.2 $654.4 $148.4
======== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Deferred
Other Policy
Insurance Acquisition Insurance Unearned
Expenses Costs Reserves Premiums
--------- ---------- --------- --------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996:
Life and Health $222.3 $225.9 $1,599.0 $ 6.7
Property and Casualty 97.7 39.4 454.8 253.8
Other (3.9) - - -
------ ------ -------- ------
Total $316.1 $265.3 $2,053.8 $260.5
====== ====== ======== ======
Year Ended December 31, 1995:
Life and Health $230.1 $252.0 $1,569.5 $ 6.8
Property and Casualty 73.1 36.5 437.8 246.1
Other (2.3) - - -
------ ------ -------- ------
Total $300.9 $288.5 $2,007.3 $252.9
====== ====== ======== ======
Year Ended December 31, 1994:
Life and Health $236.8
Property and Casualty 69.5
Other (2.2)
------
Total $304.1
======
</TABLE>
16
<PAGE>
SCHEDULE IV
UNITRIN, INC.
REINSURANCE SCHEDULE
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
(Dollars in Millions)
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed
Amount Companies Companies Amount to Net
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
1996:
- -----------------------
Life Insurance in Force $18,747.2 $2,120.2 $ - $16,627.0 -
Premiums
Life Insurance $ 368.8 $ 9.4 - $ 359.4 -
Accident and Health
Insurance 130.6 0.9 - 129.7 -
Property and Liability
Insurance 643.4 21.8 109.6 731.2 15.0%
--------- --------- --------- --------- ----------
Total Premiums $ 1,142.8 $ 32.1 $109.6 $ 1,220.3 9.0%
========== ========= ========= ========= ==========
Year Ended December 31,
1995:
- -----------------------
Life Insurance in Force $20,082.9 $ 565.7 $ - $19,517.2 -
Premiums
Life Insurance $ 370.5 $ 1.9 - $ 368.6 -
Accident and Health
Insurance 144.4 1.2 - 143.2 -
Property and Liability
Insurance 566.1 15.7 36.9 587.3 6.3%
--------- --------- --------- --------- ----------
Total Premiums $ 1,081.0 $ 18.8 $ 36.9 $ 1,099.1 3.4%
========== ========= ========= ========= ==========
Year Ended December 31,
1994:
- -----------------------
Life Insurance in Force $20,242.0 $ 535.1 $ - $19,706.9 -
Premiums
Life Insurance $ 362.1 $ 2.7 - $ 359.4 -
Accident and Health
Insurance 161.0 1.7 - 159.3 -
Property and Liability
Insurance 538.0 16.8 8.9 530.1 1.7%
--------- --------- --------- --------- ----------
Total Premiums $ 1,061.1 $ 21.2 $ 8.9 $ 1,048.8 0.8%
========== ========= ========= ========= ==========
</TABLE>
17
<PAGE>
3. Exhibits. The following exhibits are either filed as a part hereto or
are incorporated by reference. Exhibit numbers correspond to the
numbering system in Item 601 of Regulation S-K. Exhibits 10.1 through
10.5 relate to compensatory plans filed or incorporated by reference
as exhibits hereto pursuant to Item 14(c) of Form 10-K.
3.1 Certificate of Incorporation (incorporated herein by reference to
Exhibit 3.1 to Unitrin's Registration Statement on Form 10 dated
February 15, 1990)
3.2 Amended and Restated By-Laws (incorporated herein by reference to
Exhibit 3.2 to the Company's 1994 Annual Report on Form 10-K)
4 Rights Agreement between Unitrin, Inc. and First Chicago Trust Company
of New York, as rights agent, dated as of August 3, 1994 (incorporated
herein by reference to Exhibit 1 to the Company's Registration
Statement on Form 8-A dated August 3, 1994)
10.1 Unitrin, Inc. 1990 Stock Option Plan, as amended and restated
(incorporated herein by reference to Exhibit 10.1 to the Company's
1995 Annual Report on Form 10-K)
10.2 Unitrin, Inc. 1995 Non-Employee Director Stock Option Plan
(incorporated herein by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1995)
10.3 Unitrin, Inc. Pension Equalization Plan (incorporated herein by
reference to Exhibit 10.4 to the Company's 1994 Annual Report on Form
10-K)
10.4 Unitrin is a party to individual severance agreements (the form of
which is incorporated herein by reference to Exhibit 10.5 to the
Company's 1994 Annual Report on Form 10-K), with the following
executive officers:
Jerrold V. Jerome (Chairman)
Richard C. Vie (President and Chief Executive Officer)
David F. Bengston (Vice President)
James W. Burkett (Vice President)
Thomas H. Maloney (Vice President & General Counsel)
Eric J. Draut (Treasurer and Chief Financial Officer)
Scott Renwick (Secretary)
(Note: Each of the foregoing agreements is identical except that the
severance compensation multiple is 2.99 for Messrs. Jerome and Vie and
2.0 for the other executive officers. The term of these agreements has
been extended by action of Unitrin's board of directors through
December 31, 1997.)
10.5 Severance Compensation Plan After Change of Control (incorporated
herein by reference to Exhibit 10.6 to the Company's 1994 Annual
Report on Form 10-K; the term of this plan has been extended by action
of Unitrin's board of directors through December 31, 1997)
10.6 Credit Agreement, dated January 24, 1995 among Unitrin, Inc.,
NationsBank, N.A. (Carolinas), The First National Bank of Chicago and
First Interstate Bank of
18
<PAGE>
California (incorporated herein by reference to Exhibit 10.7 to the
Company's 1994 Annual Report on Form 10-K)
10.7 First Amendment to Credit Agreement among Unitrin, Inc., NationsBank,
N.A. (Carolinas), The First National Bank of Chicago, First Interstate
Bank of California, The Fuji Bank, Limited, Union Bank and The Long-
Term Credit Bank of Japan, Ltd., Chicago Branch (incorporated herein
by reference to Exhibit 10.10 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995)
10.8 Tax Allocation Agreement by and among Unitrin, Inc. and its
Subsidiaries and Teledyne, Inc. (incorporated herein by reference to
Amendment No. One, dated April 5, 1990, on Form 8 to Unitrin's
Registration Statement on Form 10)
13.1 Financial Statements (pages 19 through 39 of Unitrin's 1996 Annual
Report, amended as of the date of the filing of this Form 10-K/A)
13.2 MD&A (pages 14 through 18 of Unitrin's 1996 Annual Report, amended as
of the date of the filing of this Form 10-K/A)
13.3 Financial Highlights (included as Exhibit 13.3 to Unitrin's 1996
Annual Report on Form 10-K filed February 27, 1997)
21 Subsidiaries of Unitrin, Inc. (included as Exhibit 21 to Unitrin's
Form 10-K filed February 27, 1997)
23.1 Reports of KPMG Peat Marwick LLP (included in Item 8 of this Form
10-K/A and included as Exhibit 23.1 to this Form 10-K/A)
23.2 Consent of KPMG Peat Marwick LLP
23.3 Reports of Deloitte & Touche LLP (included in Item 8 of this Form
10-K/A)
23.4 Consent of Deloitte & Touche LLP
24 Power of attorney (included on the signature page hereof)
27 Financial Data Schedule (included as Exhibit 27 to Unitrin's 1996
Annual Report on Form 10-K filed February 27, 1997)
(b) Reports on Form 8-K. None
(c) Exhibits. Included in Item 14(a)3 above.
(d) Financial Statement Schedules. Included in Item 14(a)2 above.
19
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Richard C. Vie,
President and Chief Executive Officer, Eric J. Draut, Treasurer and Chief
Financial Officer, and Scott Renwick, Secretary, his true and lawful attorney-
in-fact with authority together or individually to execute in the name of each
such signatory, and with authority to file with the Securities and Exchange
Commission, any and all amendments to the Annual Report on Form 10-K of Unitrin,
Inc., together with any exhibits thereto and other documents therewith,
necessary or advisable to enable Unitrin, Inc. to comply with the Securities
Exchange Act of 1934, as amended, and any rules, regulations, and requirements
of the Securities and Exchange Commission in respect thereof, which amendments
may make such other changes in the Annual Report on Form 10-K as the aforesaid
attorney-in-fact executing the same deems appropriate.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Act of 1934,
Unitrin, Inc. has duly caused this amendment to its Annual Report on Form 10-K
for the fiscal year ended December 31, 1996 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois, on September 22, 1997.
UNITRIN, INC.
(Registrant)
By: /S/ Richard C. Vie
---------------------------------
Richard C. Vie
President and Chief Executive Office
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Registrant in
the capacities indicated on September 22, 1997.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Richard C. Vie
- ----------------------------- President, Chief Executive Officer and
Richard C. Vie Director
/S/ Jerrold V. Jerome
- ----------------------------- Chairman of the Board and Director
Jerrold V. Jerome
/s/ Eric J. Draut
- ----------------------------- Treasurer and Chief Financial Officer
Eric J. Draut (principal accounting and financial
officer)
/s/ James E. Annable
- ----------------------------- Director
James E. Annable
/s/ Reuben L. Hedlund
- ----------------------------- Director
Reuben L. Hedlund
/s/ George A. Roberts
- ----------------------------- Director
George A. Roberts
/s/ Fayez S. Sarofim
- ----------------------------- Director
Fayez S. Sarofim
/s/ Henry E. Singleton
- ----------------------------- Director
Henry E. Singleton
</TABLE>
20
<PAGE>
EXHIBIT 13.1
CONSOLIDATED FINANCIAL STATEMENTS
OF
UNITRIN, INC. AND SUBSIDIARIES
The following pages reproduce certain pages from Unitrin, Inc.'s 1996 Annual
Report to Shareholders, amended as of the date of the filing of this Form 10-K/A
of which these pages constitute Exhibit 13.1.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Unitrin, Inc.:
We have audited the accompanying consolidated balance sheets of Unitrin, Inc.
and subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of income, cash flows and shareholders' equity for each of the years
in the three-year period ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits. We did not audit
the financial statements of Litton Industries, Inc. and Western Atlas Inc.
(Notes 2 and 5). The Company's investment in Litton Industries, Inc. and Western
Atlas Inc. at December 31, 1996 and 1995 was $595.2 million and $525.8 million,
respectively, and its equity in net income of Litton Industries, Inc. and
Western Atlas Inc. was $45.0 million, $39.3 million and $33.4 million for the
years 1996, 1995 and 1994, respectively. The financial statements of Litton
Industries, Inc. and Western Atlas Inc. were audited by other auditors, whose
reports have been furnished to us, and our opinion, insofar as it relates to the
amounts included for Litton Industries, Inc. and Western Atlas Inc., is based
solely upon the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Unitrin, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Chicago, Illinois
January 7, 1997, except as to Note 5, which is as of September 22, 1997
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 19A
<PAGE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
Board of Directors and Shareholders
Litton Industries, Inc.
Woodland Hills, California
We have audited the accompanying consolidated balance sheets of Litton
Industries, Inc. and subsidiary companies as of July 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' investment and cash
flows for each of the three years in the period ended July 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Litton Industries, Inc. and
subsidiary companies as of July 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
July 31, 1996, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Los Angeles, California
September 19, 1996
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 19B
<PAGE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
Board of Directors and Shareholders
Western Atlas Inc.
Beverly Hills, California
We have audited the accompanying consolidated balance sheets of Western Atlas
Inc. and subsidiary companies as of December 31, 1995 and 1994, and the related
consolidated and combined statements of operations and cash flows for the years
ended December 31, 1995 and 1994, five months ended December 31, 1993, and year
ended July 31, 1993. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated and combined financial statements present
fairly, in all material respects, the financial position of Western Atlas Inc.
and subsidiary companies as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for the years ended December 31, 1995 and
1994, five months ended December 31, 1993, and year ended July 31, 1993 in
conformity with generally accepted accounting principles.
As discussed in Note H to the consolidated and combined financial
statements, in fiscal year 1993, the Company changed its method of accounting
for postretirement benefits other than pensions to conform with Statement of
Financial Accounting Standards No. 106.
Deloitte & Touche LLP
Los Angeles, California
February 13, 1996
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 19C
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
[Dollars in Millions] December 31,
- ----------------------------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
ASSETS
Investments:
Fixed Maturities at Fair Value (Amortized Cost:
1996--$2,176.4; 1995--$2,365.1) $2,207.4 $2,457.1
Equity Securities at Fair Value (Cost: 1996--$172.0; 1995--$97.7) 259.7 179.3
Investees at Cost Plus Cumulative Undistributed
Earnings (Fair Value: 1996--$1,610.3; 1995--$1,320.3) 670.1 595.2
Other 154.2 178.1
-------- --------
Total Investments 3,291.4 3,409.7
-------- --------
Cash 17.0 9.1
Consumer Finance Receivables 608.6 547.1
Other Receivables 376.1 250.4
Deferred Policy Acquisition Costs 265.3 288.5
Cost in Excess of Net Assets of Purchased Businesses 228.2 230.1
Other Assets 84.5 83.8
-------- --------
Total Assets $4,871.1 $4,818.7
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Insurance Reserves:
Life and Health $1,599.0 $1,569.5
Property and Casualty 454.8 437.8
-------- --------
Total Insurance Reserves 2,053.8 2,007.3
-------- --------
Investment Certificates 589.9 519.0
Unearned Premiums 260.5 252.9
Accrued and Deferred Income Taxes 166.4 171.3
Notes Payable 59.9 100.2
Accrued Expenses and Other Liabilities 260.3 243.5
-------- --------
Total Liabilities 3,390.8 3,294.2
-------- --------
Shareholders' Equity:
Common Stock, $0.10 par value, 100 Million Shares
Authorized, 37,340,894 and 38,490,287 Shares Issued
and Outstanding at December 31, 1996 and 1995 3.7 3.8
Additional Paid-in Capital 133.0 126.2
Retained Earnings 1,265.8 1,281.1
Net Unrealized Appreciation on Securities 77.8 113.4
-------- --------
Total Shareholders' Equity 1,480.3 1,524.5
-------- --------
Total Liabilities and Shareholders' Equity $4,871.1 $4,818.7
======== ========
- ----------------------------------------------------------------------------------------------------
</TABLE>
The Notes to the Consolidated Financial Statements are an integral part of these
financial statements.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 20
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
[Dollars in Millions, Except Per Share Amounts] For the Years Ended December 31,
- ----------------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
REVENUES
Premiums $1,220.3 $1,099.1 $1,048.8
Consumer Finance Revenues 120.4 106.5 91.4
Net Investment Income 179.0 186.6 207.2
Net Gains on Sales of Investments 3.4 55.2 18.1
-------- -------- --------
Total Revenues 1,523.1 1,447.4 1,365.5
-------- -------- --------
EXPENSES
Insurance Claims and Policyholders' Benefits 799.7 717.5 654.4
Insurance Expenses 486.2 458.4 452.5
Consumer Finance Expenses 99.6 84.9 63.8
Interest and Other Expenses 15.5 25.8 17.3
-------- -------- --------
Total Expenses 1,401.0 1,286.6 1,188.0
-------- -------- --------
Income before Income Taxes and Equity in
Net Income of Investees 122.1 160.8 177.5
Income Tax Expense 40.2 55.3 62.9
-------- -------- --------
Income before Equity in Net Income of Investees 81.9 105.5 114.6
Equity in Net Income of Investees (Note 5) 50.6 45.1 33.8
-------- -------- --------
NET INCOME $ 132.5 $ 150.6 $ 148.4
======== ======== ========
NET INCOME PER SHARE $ 3.51 $ 3.73 $ 2.96
======== ======== ========
- ----------------------------------------------------------------------------------------------
</TABLE>
The Notes to the Consolidated Financial Statements are an integral part of these
financial statements.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 21
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
[Dollars in Millions] For the Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 132.5 $ 150.6 $ 148.4
Adjustments to Reconcile Net Income to
Net Cash Provided by Operations:
Policy Acquisition Costs Deferred (149.1) (148.5) (139.2)
Amortization of Deferred Policy Acquisition Costs 170.1 157.5 148.4
Equity in Net Income of Investees before Taxes (77.1) (68.8) (51.3)
Cash Dividends from Investee 2.2 2.2 2.2
Amortization of Fixed Maturities 24.6 22.5 30.5
Provisions for Losses on Consumer Finance Receivables 27.4 22.4 16.1
Increase in Insurance Reserves and
Unearned Premiums 27.8 42.8 9.1
Increase (Decrease) in Accrued Expenses and Other Liabilities (6.0) (20.1) 16.5
Increase in Accrued and Deferred Income Taxes 17.6 28.1 4.6
Net Gains on Sales of Investments (3.4) (55.2) (18.1)
Other, Net 4.0 12.7 6.3
------- ------- -------
Net Cash Provided by Operating Activities 170.6 146.2 173.5
------- ------- -------
INVESTING ACTIVITIES
Sales and Maturities of Fixed Maturities 279.6 623.1 504.7
Purchases of Fixed Maturities (111.6) (322.3) (293.2)
Sales of Equity Securities 10.0 85.0 24.2
Purchases of Equity Securities (84.1) (57.0) (17.0)
Repayments of Consumer Finance Receivables 329.0 297.9 243.3
Acquisitions of Consumer Finance Receivables (417.9) (402.5) (326.4)
Change in Short-term Investments 21.7 27.7 (35.6)
Acquisition of Milwaukee Insurance Group, Inc. -- (92.6) --
Other, Net (17.5) (17.1) (20.8)
------- ------- -------
Net Cash Provided by Investing Activities 9.2 142.2 79.2
------- ------- -------
FINANCING ACTIVITIES
Investment Certificate Deposits 229.7 247.4 209.0
Investment Certificate Withdrawals (158.8) (166.0) (163.5)
Universal Life and Annuity Receipts from Policyholders 21.0 30.7 31.5
Universal Life and Annuity Payments to Policyholders (7.6) (11.5) (11.4)
Universal Life and Annuity Payments to Reinsurer (76.1) -- --
Notes Payable Proceeds 170.0 401.0 --
Notes Payable Payments (210.0) (308.0) --
Cash Dividends Paid (83.0) (80.7) (75.8)
Common Stock Repurchases (61.1) (416.0) (245.3)
Other, Net 4.0 0.5 0.9
------- ------- -------
Net Cash Used by Financing Activities (171.9) (302.6) (254.6)
------- ------- -------
Increase (Decrease) in Cash 7.9 (14.2) (1.9)
Cash, Beginning of Year 9.1 23.3 25.2
------- ------- -------
Cash, End of Year $ 17.0 $ 9.1 $ 23.3
======= ======= =======
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to the Consolidated Financial Statements are an integral part of
these financial statements.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 22
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
[Dollars in Millions] For the Years Ended December 31, 1996, 1995 and 1994
- -------------------------------------------------------------------------------------------------------------------------------
Net
Additional Unrealized Total
Number of Common Paid-in Retained Appreciation Shareholders'
Shares Stock Capital Earnings on Securities Equity
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
DECEMBER 31, 1993 51,833,545 $5.2 $163.6 $1,755.6 $174.1 $2,098.5
Net Income -- -- -- 148.4 -- 148.4
Dividends to Common
Shareholders
($1.50 per share) -- -- -- (75.8) -- (75.8)
Change in Net Unrealized
Appreciation on Securities -- -- -- -- (161.6) (161.6)
Repurchases of Unitrin
Common Stock (4,804,750) (0.5) (15.2) (229.6) -- (245.3)
Exercise of Employee
Stock Options 24,025 -- 0.9 -- -- 0.9
---------- ---- ------ -------- ----- --------
BALANCE,
DECEMBER 31, 1994 47,052,820 $4.7 $149.3 $1,598.6 $12.5 $1,765.1
Net Income -- -- -- 150.6 -- 150.6
Dividends to Common
Shareholders
($2.00 per share) -- -- -- (80.7) -- (80.7)
Change in Net Unrealized
Appreciation on Securities -- -- -- -- 100.9 100.9
Repurchases of Unitrin
Common Stock (8,681,708) (0.9) (27.7) (387.4) -- (416.0)
Exercise of Employee
Stock Options 119,175 -- 4.6 -- -- 4.6
---------- ---- ------ -------- ----- --------
BALANCE,
DECEMBER 31, 1995 38,490,287 $3.8 $126.2 $1,281.1 $113.4 $1,524.5
Net Income -- -- -- 132.5 -- 132.5
Dividends to Common
Shareholders
($2.20 per share) -- -- -- (83.0) -- (83.0)
Change in Net Unrealized
Appreciation on Securities -- -- -- -- (35.6) (35.6)
Repurchases of Unitrin
Common Stock (1,277,175) (0.1) (4.2) (56.8) -- (61.1)
Exercise of Employee
Stock Options, Net
of Shares Exchanged
(Note 10) 127,782 -- 11.0 (8.0) -- 3.0
---------- ---- ------ -------- ----- --------
BALANCE,
DECEMBER 31, 1996 37,340,894 $3.7 $133.0 $1,265.8 $77.8 $1,480.3
========== ==== ====== ======== ===== ========
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to the Consolidated Financial Statements are an integral part of these
financial statements.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 23
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
- --------------------------------------------------------------------------------
The Consolidated Financial Statements included herein have been prepared on the
basis of generally accepted accounting principles, which differ from statutory
insurance accounting practices, and include the accounts of Unitrin, Inc. and
its subsidiaries ("Unitrin" or the "Company"). All significant intercompany
accounts and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
NOTE 2. SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Investments Other Than Investees
Investments in Fixed Maturities include bonds, notes and redemptive preferred
stocks at fair value and are classified as Available for Sale. Investments in
Equity Securities include common and nonredemptive preferred stocks at fair
value and are classified as Available for Sale. Unrealized appreciation or
depreciation, net of applicable deferred income taxes, on Fixed Maturities and
Equity Securities is included in Shareholders' Equity. Other Investments
include fixed maturities which mature within one year from the date of
purchase, loans to policyholders, real estate, and mortgage loans and are
carried at cost or unpaid principal balance. Gains and losses on sales of
investments are computed on the specific identification method and are
reflected in Net Income.
Investments in Investees
Investments in Investees are accounted for by the equity method in the
accompanying financial statements. The Company's voting percentage and share of
earnings or losses of each investee company are determined using the most
recent publicly available audited financial statements, subsequent unaudited
interim reports and other publicly available information. As a result, the
amounts included in the Company's financial statements represent amounts
reported by the investee companies for periods ending two to three months
earlier. The Company recognizes into income its equity share of changes in an
investee's reported net assets resulting from an investee's issuance of stock
that is not part of a broader corporate reorganization.
Consumer Finance Receivables
Consumer Finance Receivables consists primarily of loans, secured by
automobiles, to California residents and is stated net of unearned discount,
loan fees and reserve for losses. Unearned discount arises when the loan amount
includes unearned precomputed interest. The reserve for losses on Consumer
Finance Receivables is maintained at a level which exceeds minimum regulatory
requirements and considers other factors, including actual loan loss experience
and economic conditions to provide for estimated losses on Consumer Finance
Receivables.
Deferred Policy Acquisition Costs
Certain costs directly associated with the acquisition of new business,
principally commissions, are deferred. Deferred Policy Acquisition Costs also
include the costs of acquiring insurance in force from other companies.
Interest accreted on the cost of acquired insurance in force is not material.
The deferred policy acquisition costs on traditional life and health
insurance products are amortized over the anticipated premium-paying period of
the related policies in proportion to the ratio of the annual premiums to the
total premiums anticipated, which is estimated using the same assumptions used
in calculating policy reserves.
Costs deferred on property and casualty insurance products are amortized
over the term of the related policies.
Cost in Excess of Net Assets of Purchased Businesses
Cost in Excess of Net Assets of Purchased Businesses of $143.2 million at
December 31, 1996, relating to acquisitions prior to November 1970, is not
being amortized. Amounts applicable to subsequent acquisitions are being
amortized ratably over 40 years.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 24
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF ACCOUNTING POLICIES [CONTINUED]
- --------------------------------------------------------------------------------
Insurance Reserves
Reserves for losses and loss adjustment expenses on property and casualty
coverage represent the estimated claim cost and loss adjustment expense
necessary to cover the ultimate net cost of investigating and settling all
losses incurred and unpaid and include provisions for adverse deviation. Such
estimates are based on individual case estimates for reported claims and
estimates for incurred but not reported losses. These estimates are adjusted in
the aggregate for ultimate loss expectations based on historical experience
patterns and current economic trends, with any change in the probable ultimate
liabilities being reflected in Net Income.
For traditional life products, the reserves for future life policy benefits
are primarily estimated on the net level premium method based on expected
mortality, interest and withdrawal rates, including provisions for adverse
mortality. These assumptions vary by such characteristics as plan, age at issue
and policy duration. Mortality assumptions reflect the Company's historical
experience and industry standards. Interest rate assumptions principally range
from 3.0 percent to 7.0 percent. Withdrawal assumptions are based on actual and
industry experience. Benefit reserves for universal life-type products
represent policy account balances before applicable surrender charges.
Recognition of Premium Revenues and Related Expenses
Property and casualty insurance and health insurance premiums are recognized
ratably over the periods to which the premiums relate. Insurance Claims and
Policyholders' Benefits include provisions for reported claims, claims incurred
but not reported and loss adjustment expenses.
Traditional life insurance premiums are recognized as revenue when due.
Insurance Claims and Policyholders' Benefits are associated with related
premiums to result in recognition of profits over the periods that the benefits
are provided.
Premium revenues for universal life-type products consist of charges for
the cost of insurance, policy administration and policy surrenders that have
been assessed against policy account balances during the period. Benefit
payments in excess of policy account balances are expensed.
Reinsurance
In the normal course of business, the Company's insurance subsidiaries reinsure
certain risks above certain retention levels with other insurance enterprises.
Amounts recoverable from reinsurers for benefits and losses for which the
Company has not been relieved of its legal obligation to the policyholder are
included in Other Receivables.
Gains related to long-duration reinsurance contracts are deferred and
amortized over the life of the underlying reinsured policies. Losses related to
long-duration reinsurance contracts are recognized immediately. Any gain or
loss associated with reinsurance agreements for which the Company has been
legally relieved of its obligation to the policyholder is recognized in the
current period.
Consumer Finance Revenues and Expenses
Consumer Finance Revenues include interest on Consumer Finance Receivables and
Net Investment Income on Investments in Fixed Maturities made by the Company's
Consumer Finance Operations. Interest income on Consumer Finance Receivables is
recorded as interest is earned, using the effective yield method. Net
Investment Income included in Consumer Finance Revenues was $2.7 million, $2.1
million and $2.0 million in 1996, 1995 and 1994, respectively.
Consumer Finance Expenses include interest expense on Investment
Certificates, Provisions for Losses on Consumer Finance Receivables, and
general and administrative expenses. Interest expense on Investment
Certificates is recorded using the effective yield method.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period in which the change
is enacted.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 25
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF ACCOUNTING POLICIES [CONTINUED]
- --------------------------------------------------------------------------------
Stock-Based Compensation
The Company accounts for its stock option plans in accordance with APB Opinion
25 "Accounting for Stock Issued to Employees." The Company has not issued stock
options where the exercise price is less than the market value of the Company's
common stock on the date of grant and, accordingly, no compensation expense has
been recognized.
Net Income Per Share
The Weighted Average Shares of Common Stock used in the computation of Net
Income Per Share were 37,720,806, 40,403,366 and 50,112,781 in 1996, 1995 and
1994, respectively.
Common stock equivalents resulting from the Company's stock option plans,
which were excluded from the computation of earnings per share because dilution
was not material, are as follows:
<TABLE>
<CAPTION>
[Number of Equivalent Shares in Thousands] 1996 1995 1994
<S> <C> <C> <C>
Primary Net Income Per Share 235 283 216
Fully Diluted Net Income Per Share 388 289 219
</TABLE>
Accounting Changes
The Company adopted SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" for the year ended December
31, 1996. The adoption of SFAS 121 did not have a material effect on Net
Income.
The Company adopted the disclosure requirements of SFAS 123, "Accounting
for Stock-Based Compensation" for the year ended December 31, 1996. The
adoption of SFAS 123 had no effect on the Company's financial position or on
its results of operations.
Fair Value of Financial Instruments
The Company has no derivative financial instruments subject to the provisions
of SFAS No. 119, "Disclosure About Derivative Financial Instruments and Fair
Value of Financial Instruments." The carrying values and fair values of the
Company's financial instruments are disclosed in Note 4 -- Investments Other
Than Investees, Note 5 -- Investments in Investees, Note 6 -- Consumer Finance
Receivables and Investment Certificates and Note 8 -- Notes Payable.
Supplemental Cash Flow Information
Assets acquired and liabilities assumed in connection with the acquisition of
Milwaukee Insurance Group, Inc. in 1995 were:
<TABLE>
<CAPTION>
[Dollars in Millions] 1995
<S> <C>
Investments $(181.5)
Receivables (66.6)
Deferred Policy Acquisition Costs (6.9)
Cost in Excess of Net Assets of Purchased Businesses (23.0)
Accrued and Deferred Income Taxes (11.0)
Other Assets (8.9)
Insurance Reserves 129.8
Unearned Premiums 49.6
Accrued Expenses and Other Liabilities 25.9
-------
Cash Used by Acquisition of Milwaukee Insurance Group, Inc. $ (92.6)
</TABLE> =======
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 26
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. ACQUISITIONS
- --------------------------------------------------------------------------------
On October 2, 1995, Trinity Universal Insurance Company ("Trinity"), one of the
Company's subsidiaries, acquired Milwaukee Insurance Group, Inc. ("MIG") for
$92.6 million in cash. As part of the transaction, MIG and its affiliated
company, Milwaukee Mutual Insurance Company ("Mutual"), entered into
arrangements with Trinity under which Trinity reinsures certain business of
Mutual and MIG. In connection with the reinsurance agreement, Mutual paid $17.4
million in cash to Trinity, which represented the difference between the
unearned premium reserves assumed by Trinity and a ceding commission owed to
Mutual. The acquisition is accounted for by the purchase method and,
accordingly, the operations of MIG are included in the Company's financial
statements from the date of acquisition. In 1996, the Company completed the
allocation of the purchase price to the assets and liabilities acquired.
On January 7, 1997, the Company completed the acquisition of Union
Automobile Indemnity Company ("Union") for approximately $18.6 million in
Unitrin, Inc. common stock valued in accordance with EITF No. 95-19,
"Determination of the Measurement Date for the Market Price of Securities Issued
In a Purchased Business Combination." The acquisition will be accounted for by
the purchase method and, accordingly, the operations of Union will be included
in the Company's financial statements from the date of acquisition.
NOTE 4. INVESTMENTS OTHER THAN INVESTEES
- --------------------------------------------------------------------------------
The amortized cost and estimated fair values of the Company's investments in
Fixed Maturities at December 31, 1996 were:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ---------------- Fair
[Dollars in Millions] Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government and Government
Agencies and Authorities $1,930.3 $30.1 $(3.4) $1,957.0
States, Municipalities and Political Subdivisions 133.4 3.5 (0.2) 136.7
Corporate Securities:
Bonds and Notes 58.5 0.6 (0.2) 58.9
Redemptive Preferred Stocks 54.2 0.8 (0.2) 54.8
-------- ----- ----- --------
Investments in Fixed Maturities $2,176.4 $35.0 $(4.0) $2,207.4
======== ===== ===== ========
</TABLE>
- --------------------------------------------------------------------------------
The amortized cost and estimated fair values of the Company's investments in
Fixed Maturities at December 31, 1995 were:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ---------------- Fair
[Dollars in Millions] Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Government and Government
Agencies and Authorities $2,097.9 $85.3 $(0.7) $2,182.5
States, Municipalities and Political Subdivisions 178.3 4.9 (0.2) 183.0
Corporate Securities:
Bonds and Notes 62.7 2.2 -- 64.9
Redemptive Preferred Stocks 26.2 0.6 (0.1) 26.7
-------- ----- ----- --------
Investments in Fixed Maturities $2,365.1 $93.0 $(1.0) $2,457.1
======== ===== ===== ========
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 27
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. INVESTMENTS OTHER THAN INVESTEES [CONTINUED]
- --------------------------------------------------------------------------------
The amortized cost and estimated fair values of the Company's investments in
Fixed Maturities at December 31, 1996 by contractual maturity were:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amortized Fair
[Dollars in Millions] Cost Value
<S> <C> <C>
Due in One Year or Less $ 265.7 $ 268.8
Due After One Year to Five Years 1,635.8 1,653.8
Due After Five Years to Fifteen Years 197.5 203.8
Due After Fifteen Years 77.4 81.0
-------- --------
Total Investments in Fixed Maturities $2,176.4 $2,207.4
======== ========
</TABLE>
The expected maturities may differ from the contractual maturities because
debtors may have the right to call or prepay obligations with or without call or
prepayment penalties.
The change in Net Unrealized Appreciation on Fixed Maturities included in
Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 was:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions] 1996 1995 1994
<S> <C> <C> <C>
Increase (Decrease) in Unrealized Appreciation on Fixed Maturities $(61.0) $174.8 $(236.6)
Effect of Income Taxes 21.5 (61.4) 83.5
------ ------ -------
Increase (Decrease) in Net Unrealized Appreciation on Fixed Maturities $(39.5) $113.4 $(153.1)
====== ====== =======
</TABLE>
- --------------------------------------------------------------------------------
At December 31, 1996, gross unrealized gains and gross unrealized losses on
Equity Securities were:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Gross Unrealized
---------------- Fair
[Dollars in Millions] Cost Gains Losses Value
<S> <C> <C> <C> <C>
Common Stocks $ 20.0 $38.0 $(0.1) $ 57.9
Preferred Stocks 152.0 51.7 (1.9) 201.8
------ ----- ----- ------
Total $172.0 $89.7 $(2.0) $259.7
====== ===== ===== ======
</TABLE>
- --------------------------------------------------------------------------------
At December 31, 1995, gross unrealized gains and gross unrealized losses on
Equity Securities were:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Gross Unrealized
---------------- Fair
[Dollars in Millions] Cost Gains Losses Value
<S> <C> <C> <C> <C>
Common Stocks $20.0 $33.8 $ - $ 53.8
Preferred Stocks 77.7 48.9 (1.1) 125.5
----- ----- ----- ------
Total $97.7 $82.7 $(1.1) $179.3
===== ===== ===== ======
</TABLE>
- --------------------------------------------------------------------------------
The change in Net Unrealized Appreciation on Equity Securities included in
Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 was:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions] 1996 1995 1994
<S> <C> <C> <C>
Increase (Decrease) in Unrealized Appreciation
on Equity Securities $ 6.1 $(18.9) $(12.8)
Effect of Income Taxes (2.2) 6.4 4.3
----- ------ ------
Increase (Decrease) in Net Unrealized
Appreciation on Equity Securities $ 3.9 $(12.5) $ (8.5)
===== ====== ======
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 28
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. INVESTMENTS IN INVESTEES
- --------------------------------------------------------------------------------
The Company's Investments in Investees and approximate voting percentages, based
on the most recent publicly available data at December 31, 1996 were:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Curtiss-Wright Litton Western
[Dollars in Millions] Corporation Industries, Inc. Atlas Inc. Total
<S> <C> <C> <C> <C>
Carrying Value $ 74.9 $ 245.9 $ 349.3 $ 670.1
Fair Value $ 110.4 $ 602.8 $ 897.1 $1,610.3
Approximate Voting Percentage 43.1% 27.2% 23.6%
- ----------------------------------------------------------------------------------------------------
</TABLE>
The Company's Investments in Investees and approximate voting percentages, based
on the most recent publicly available data at December 31, 1995 were:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Curtiss-Wright Litton Western
[Dollars in Millions] Corporation Industries, Inc. Atlas Inc. Total
<S> <C> <C> <C> <C>
Carrying Value $ 69.4 $ 204.1 $ 321.7 $ 595.2
Fair Value $ 117.8 $ 563.3 $ 639.2 $1,320.3
Approximate Voting Percentage 43.3% 27.4% 23.8%
- ----------------------------------------------------------------------------------------------------
</TABLE>
The Company's equity in the reported net assets of its investees exceeded the
carrying value of its investment by approximately $2.4 million at December 31,
1996. This difference is not being amortized.
The Company's investments in Litton and Western Atlas exceeded 10% of the
Company's Shareholders' Equity at December 31, 1996 and 1995.
Equity in Net Income of Investees was $50.6 million in 1996, $45.1 million
in 1995 and $33.8 million in 1994. Equity in Net Income of Investees for 1994
includes: an after-tax loss of $3.8 million for Unitrin's share of Curtiss-
Wright Corporation's charges for the settlement of certain litigation, certain
restructuring and environmental costs and for certain tax adjustments; an after-
tax loss of $5.6 million for Unitrin's share of Litton Industries, Inc.'s
extraordinary charge on redemption of debt; and an after-tax loss of $9.7
million for Unitrin's share of Litton's charges for settlement of certain
litigation. Equity in Net Income of Investees for 1994 includes an after-tax
gain of $22.3 million reflecting the increase in Unitrin's share of Western
Atlas Inc.'s reported net assets as a result of Western Atlas' issuance of
common stock.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 29A
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. INVESTMENTS IN INVESTEES [continued]
- --------------------------------------------------------------------------------
Unitrin accounts for its Investments in Investees under the equity method of
accounting using the most recent publicly-available financial reports.
Summarized financial information for Litton and Western Atlas is presented
below.
The amounts included in Unitrin's financial statements for Litton
represent amounts reported by Litton for periods ending two months earlier.
Accordingly, amounts included in Unitrin's financial statements represent the
amounts reported by Litton for the twelve-month periods ending October 31,
1996, 1995 and 1994. Summarized financial information reported by Litton for
such periods was:
<TABLE>
<CAPTION>
[Dollars in million] 1996 1995 1994
<S> <C> <C> <C>
Revenues $ 3,825 $ 3,367 $ 3,394
========= ========= ========
Cost of Sales $ 2,968 $ 2,679 $ 2,731
========= ========= ========
Income from Continuing Operations before
Discontinued Operations and Extraordinary Item $ 154 $ 140 $ 57
========= ========= ========
Net Income (Loss) $ 154 $ 140 $ (156)
========= ========= ========
Current Assets $ 1,770 $ 1,503
========= =========
Non-current Assets $ 1,668 $ 1,090
========= =========
Current Liabilities $ 1,649 $ 1,308
========= =========
Non-current Liabilities $ 837 $ 491
========= =========
</TABLE>
- --------------------------------------------------------------------------------
On March 17, 1994, Litton completed the distribution of all of the common stock
of Western Atlas to Litton's shareholders in the form of a tax-free dividend.
Prior to the March 17, 1994 distribution, the results of Western Atlas were
reflected in Litton's results as a discontinued operation.
Litton's net loss for 1994 includes the extraordinary charge on redemption
of debt and the charges for settlement of certain litigation as well as charges
for the write-down of certain assets related to its discontinued operations.
Unitrin's Equity in Net Income of Investees for the year ended December 31, 1993
included a loss of $31.0 million related to Litton's write-down of certain
assets related to its discontinued operations.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 29B
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. Investments In Investees [Continued]
- --------------------------------------------------------------------------------
In 1994, Western Atlas changed its fiscal year end from July 31 to December 31.
As a result of this change, Unitrin's share of Western Atlas' results are
reported on a three-month-delay basis rather than on a two-month-delay basis.
Unitrin's financial results for the second quarter of 1994 reflect its share of
two months of Western Atlas' results rather than three months. Unitrin's results
for the third quarter of 1994 and all subsequent quarters reflect its share of
three months of Western Atlas' results. Accordingly, amounts included in
Unitrin's financial statements for 1996 and 1995 represent the amounts reported
by Western Atlas for the twelve-month periods ending September 30, 1996 and
1995. Summarized financial information reported by Western Atlas for such
periods was:
<TABLE>
<CAPTION>
[Dollars in Millions] 1996 1995
<S> <C> <C>
Revenues $ 2,433 $ 2,191
========== ==========
Cost of Sales $ 1,683 $ 1,493
========== ==========
Income from Continuing Operations $ 116 $ 95
========== ==========
Net Income $ 116 $ 95
========== ==========
Current Assets $ 1,024 $ 961
========== ==========
Non-current Assets $ 1,553 $ 1,445
========== ==========
Current Liabilities $ 570 $ 504
========== ==========
Non-current Liabilities $ 549 $ 573
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
Summarized financial information for Western Atlas for the twelve-month period
ending September 30, 1994 is not available.
- --------------------------------------------------------------------------------
NOTE 6. Consumer Finance Receivables And Investment Certificates
- --------------------------------------------------------------------------------
Consumer Finance Receivables consists primarily of loans, secured by
automobiles, to California residents and is stated net of unearned discount,
loan fees and reserve for losses.
The fair value of Consumer Finance Receivables has been estimated by
discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and the same
remaining maturities. The difference between the carrying value and the
estimated fair value of Consumer Finance Receivables at December 31, 1996 and
1995 was not material.
The reserve for losses on Consumer Finance Receivables was $36.4 million
and $31.1 million at December 31, 1996 and 1995, respectively.
Investment Certificates are generally fixed in maturity. The fair value of
Investment Certificates has been estimated using the rates currently offered for
deposits of similar remaining maturities. The difference between the carrying
value and the estimated fair value of Investment Certificates at December 31,
1996 and 1995 was not material.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 29C
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. PROPERTY AND CASUALTY INSURANCE RESERVES
- --------------------------------------------------------------------------------
Property and Casualty Insurance Reserve activity for the years ended December
31, 1996, 1995 and 1994 was:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions]
1996 1995 1994
<S> <C> <C> <C>
Property and Casualty Insurance Reserves,
Net of Reinsurance--Beginning of Year $395.0 $296.7 $303.5
Acquired, Net of Reinsurance of $36.4 in 1995 -- 93.4 --
Incurred related to:
Current Year 550.4 444.8 387.5
Prior Years (40.4) (29.6) (28.5)
------ ------ ------
Total Incurred 510.0 415.2 359.0
------ ------ ------
Paid related to:
Current Year 314.6 263.1 220.6
Prior Years 172.5 147.2 145.2
------ ------ ------
Total Paid 487.1 410.3 365.8
------ ------ ------
Property and Casualty Insurance Reserves,
Net of Reinsurance--End of Year $417.9 $395.0 $296.7
====== ====== ======
</TABLE>
- --------------------------------------------------------------------------------
Reinsurance Recoverables were $36.9 million, $42.8 million and $6.0 million at
December 31, 1996, 1995 and 1994, respectively.
- --------------------------------------------------------------------------------
NOTE 8. NOTES PAYABLE
- --------------------------------------------------------------------------------
In January 1995, the Company entered into a $350 million unsecured revolving
credit agreement with a group of banks which expires in January 1998 and
provides for fixed and floating rate advances for periods up to 180 days at
various interest rates. The agreement contains various financial covenants,
including limits on total debt to total capitalization and minimum risk-based
capital ratios for the Company's direct insurance subsidiaries. The proceeds
from advances under the agreement may be used for general corporate purposes,
including repurchases of the Company's common stock.
At December 31, 1996 and 1995, the Company had outstanding borrowings under
the revolving credit agreement, classified as Notes Payable in the Consolidated
Balance Sheet, of $53.0 million and $93.0 million at weighted average interest
rates of 5.97% and 6.09%, respectively. Other borrowings, principally a
mortgage note payable on a property occupied by the Company, were $6.9 million
and $7.2 million at December 31, 1996 and 1995, respectively. The Company paid
interest of $6.8 million and $9.0 million in 1996 and 1995, respectively.
The difference between the carrying value and the estimated fair value of
Notes Payable at December 31, 1996 and 1995 was not material.
- --------------------------------------------------------------------------------
NOTE 9. SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
The Company is authorized to issue 20 million shares of $0.10 par value
preferred stock and 100 million shares of $0.10 par value common stock. No
preferred shares were issued or outstanding at December 31, 1996.
On August 3, 1994, the Board of Directors declared a dividend distribution of
one preferred share purchase right for each outstanding share of common stock
of the Company, pursuant to a Shareholder Rights Plan. The description and
terms of the rights are set forth in a Rights Agreement between the Company and
First Chicago Trust Company of New York, as Rights Agent, dated as of August 3,
1994.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 30
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9. SHAREHOLDERS' EQUITY [CONTINUED]
- --------------------------------------------------------------------------------
On August 11, 1994, the Company's Board of Directors authorized the repurchase
of up to ten million shares of the Company's outstanding common stock,
including approximately 1.4 million shares remaining under its August 8, 1990
repurchase authorization, in open market or privately negotiated transactions
from time to time subject to market conditions and other factors. On February
17, 1995 and July 31, 1996, the Company's Board of Directors authorized the
repurchase of an additional five million and three million shares of the
Company's outstanding common stock, respectively, for an aggregate
authorization of eighteen million common shares. During 1996, the Company
repurchased and retired 1,277,175 shares of its common stock in open market
transactions at an aggregate cost of $61.1 million. During 1995, the Company
repurchased and retired 8,681,708 shares of its common stock in open market
transactions at an aggregate cost of $416.0 million. During 1994, the Company
repurchased and retired 4,804,750 shares of its common stock in open market
transactions at an aggregate cost of $245.3 million. Common Stock, Additional
Paid-in Capital and Retained Earnings have been reduced on a pro rata basis for
the cost of the repurchased shares.
Various state insurance laws restrict the amount that an insurance subsidiary
may pay in the form of dividends, loans or advances without the prior approval
of regulatory authorities. Also, that portion of an insurance subsidiary's net
equity which results from differences between statutory insurance accounting
practices and generally accepted accounting principles would not be available
for cash dividends, loans or advances. Retained Earnings at December 31, 1996
also includes $374.9 million representing the undistributed earnings of
investees.
The Company's insurance subsidiaries are required to file financial
statements prepared on the basis of statutory insurance accounting practices.
Statutory Capital and Surplus for the Company's Life and Health Insurance
subsidiaries was approximately $760 million and $730 million at December 31,
1996 and 1995, respectively. Statutory Capital and Surplus for the Company's
Property and Casualty Insurance subsidiaries was approximately $990 million and
$890 million at December 31, 1996 and 1995, respectively. Statutory Net Income
for the Company's Life and Health Insurance subsidiaries was approximately $34
million, $60 million and $53 million for the years ended December 31, 1996,
1995 and 1994, respectively. Statutory Net Income for the Company's Property
and Casualty Insurance subsidiaries was approximately $67 million, $95 million
and $45 million for the years ended December 31, 1996, 1995 and 1994,
respectively. Statutory Capital and Surplus and Statutory Net Income exclude
the Company's Consumer Finance and Parent Company operations.
The Company's subsidiaries paid dividends of $167.7 million to the Company in
1996. In 1997, the Company's subsidiaries would be able to pay approximately
$211 million in dividends to the Company without prior regulatory approval.
- --------------------------------------------------------------------------------
NOTE 10. STOCK OPTION PLANS
- --------------------------------------------------------------------------------
On May 1, 1996, the Company's shareholders approved the Unitrin, Inc. 1995 Non-
Employee Director Stock Option Plan (the "Director Plan") covering an aggregate
of 200,000 shares of Unitrin common stock. Under the Director Plan, directors
of the Company who are not employees and who first became directors after
November 1, 1993 will be granted an initial option to purchase 2,000 shares of
the Company's common stock and thereafter, on the date of each of the Company's
annual meetings of shareholders, will automatically receive annual grants of
options to purchase the same number of shares for so long as they remain
eligible directors. Options granted under the Director Plan are exercisable one
year from the date of grant at an exercise price equal to the fair market value
of the Company's common stock on the date of grant and expire 10 years from the
date of grant. In addition, each eligible director may elect to convert his
annual director's fees into stock options upon six month's prior notice to the
Company. As of December 31, 1996 options for 192,000 common shares were
available for future grant under the Director Plan.
In February 1990, the Company's Board of Directors adopted the 1990 Stock
Option Plan (the "1990 Option Plan") covering an aggregate of 2,500,000 shares
of Unitrin common stock. Under the 1990 Option Plan, options to purchase shares
of Unitrin common stock may be granted to executives and other key employees of
the Company. The Board of Directors, at its discretion, may grant either
incentive stock options, non-qualified stock options, or stock appreciation
rights. Under the terms of the 1990 Option Plan, the exercise price of
incentive stock options is the fair market value of the shares on the date of
the grant. Non-qualified stock options may be granted with an exercise price
below the fair market value of the shares on the date of the grant. Options are
nontransferable and are exercisable in installments. Only non-qualified stock
options have been granted under the 1990 Option Plan.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 31
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10. STOCK OPTION PLANS [CONTINUED]
- --------------------------------------------------------------------------------
The options are exercisable in installments beginning 2 years from the date of
grant and expiring 10 years from the date of grant. As of December 31, 1996,
options for 400,300 common shares were available for future grant under the 1990
Option Plan.
To encourage stock ownership by the Company's key employees, the 1990
Option Plan includes a provision to automatically grant restorative stock
options (Restorative Options) to replace shares of previously-owned Unitrin
common stock that an exercising employee surrenders, either actually or
constructively, in order to satisfy the exercise price and/or tax withholding
obligations relating to the exercise. Restorative Options are subject to the
same terms and conditions as the original options, including the expiration
date, except that the option price of a Restorative Option is equal to the fair
market value of Unitrin common stock on the date of its grant. Restorative
Options cannot be exercised until six months after the date of grant. The grant
of a Restorative Option does not result in an increase in the total number of
shares and options held by an employee.
Had the Company accounted for stock options granted in 1996 and 1995 under
the provisions of SFAS 123, "Accounting for Stock-Based Compensation", pro forma
net income would have been $130.8 million and $149.9 million for the years ended
December 31, 1996 and 1995, respectively, and pro forma net income per share
would have been $3.47 and $3.71 for the years ended December 31, 1996 and 1995,
respectively. These pro forma amounts may not be representative of the effects
of SFAS 123 on pro forma net income for future years because options vest over
several years and additional awards may be granted in future years.
The Black-Scholes option pricing model was used to estimate the fair value
of each option on the date granted. The assumptions used in the pricing model
were as follows. For options granted in 1996, 1995 and 1994, the expected
dividend yield used was 3.46%, 3.28% and 3.0%, respectively. The weighted
average expected volatility used was 20% for options granted in all three years.
The weighted average risk free interest rate used was the yield on U.S. Treasury
securities with a maturity comparable to the term of the option. The weighted
average expected lives of the options ranged between one-half of the contractual
term to 7 years. In the case of options issued pursuant to the Director Plan,
the expected lives equaled the full contractual term of 10 years.
A summary of the status of the Company's two stock option plans as of
December 31, 1996, 1995 and 1994, and stock option activity for the years then
ended is presented below:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Estimated Weighted
Average Fair Value of
Number Weighted-Average Options Exercisable Options Granted
of Shares Exercise Price at Year End during the Year
<S> <C> <C> <C> <C>
Outstanding at December 31, 1993 1,093,000 $ 35.77 188,100
Granted 359,500 38.85 $10.49
Exercised (24,025) 33.32
Forfeited (31,800) 38.77
--------- -------
Outstanding at December 31, 1994 1,396,675 $ 36.54 347,275
Granted 395,500 46.08 $12.14
Exercised (119,175) 33.91
Forfeited (139,000) 39.96
--------- -------
Outstanding at December 31, 1995 1,534,000 $ 38.91 440,500
Granted 640,472 50.80 $10.08
Exercised (290,754) 33.73
Forfeited (76,000) 47.20
--------- -------
Outstanding at December 31, 1996 1,807,718 $ 43.58 403,818
========= =======
</TABLE>
- --------------------------------------------------------------------------------
Options granted in 1996 include 162,972 Restorative Options.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 32
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10. STOCK OPTION PLANS [CONTINUED]
- --------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
December 31, 1996:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------- -----------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at Year End Contractual Life Exercise Price at Year End Exercise Price
<S> <C> <C> <C> <C> <C>
$31.75--$47.00 1,212,887 6.3 years $39.99 397,746 $35.98
$47.50--$56.25 594,831 7.9 years $50.91 6,072 $47.99
</TABLE>
- --------------------------------------------------------------------------------
NOTE 11. INCOME FROM INVESTMENTS
- --------------------------------------------------------------------------------
Net Investment Income for the years ended December 31, 1996, 1995 and 1994 was:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions] 1996 1995 1994
<S> <C> <C> <C>
Interest and Dividends on Fixed Maturities $150.4 $164.0 $186.8
Dividends on Equity Securities 16.1 8.7 10.0
Other 24.6 25.6 22.1
------ ------ ------
Investment Income 191.1 198.3 218.9
Investment Expenses 12.1 11.7 11.7
------ ------ ------
Net Investment Income $179.0 $186.6 $207.2
====== ====== ======
</TABLE>
- ------------------------------------------------------------------------------
The components of Net Gains on Sales of Investments for the years ended
December 31, 1996, 1995 and 1994 were:
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions] 1996 1995 1994
<S> <C> <C> <C>
Fixed Maturities:
Gains $ 1.6 $ 2.2 $ 5.2
Losses (0.9) (0.8) (6.2)
Equity Securities:
Gains 1.5 54.1 18.4
Losses - (1.1) -
Other Investments:
Gains 1.2 0.8 0.7
Losses - - -
----- ----- -----
Net Gains on Sales of Investments $ 3.4 $55.2 $18.1
===== ===== =====
</TABLE>
- ------------------------------------------------------------------------------
NOTE 12. INSURANCE EXPENSES
- ------------------------------------------------------------------------------
Insurance Expenses for the years ended December 31, 1996, 1995 and 1994 were:
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions] 1996 1995 1994
<S> <C> <C> <C>
Commissions $233.7 $239.4 $238.1
General Expenses 203.9 184.4 178.9
Taxes, Licenses and Fees 27.6 25.6 26.3
------ ------ ------
Total Costs Incurred 465.2 449.4 443.3
------ ------ ------
Policy Acquisition Costs:
Deferred (149.1) (148.5) (139.2)
Amortized 170.1 157.5 148.4
------ ------ ------
Net Policy Acquisition Costs Amortized 21.0 9.0 9.2
------ ------ ------
Insurance Expenses $486.2 $458.4 $452.5
====== ====== ======
</TABLE>
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 33
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13. INCOME TAXES
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions
of the Company's Net Deferred Tax Liability at December 31, 1996 and 1995 were:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions] 1996 1995
<S> <C> <C>
Deferred Tax Assets:
Insurance Reserves $ 66.7 $ 69.7
Unearned Premium Reserves 20.2 18.2
Tax Capitalization of Policy Acquisition Costs 42.4 40.1
Reserve for Losses on Consumer Finance Receivables 11.1 13.0
Postretirement Benefits Other Than Pensions 25.4 25.4
Other 20.8 16.2
------ ------
Total Deferred Tax Assets 186.6 182.6
------ ------
Deferred Tax Liabilities:
Deferred Policy Acquisition Costs 91.3 98.5
Fixed Maturities 15.3 36.9
Equity Securities 23.4 21.3
Investments in Investees 179.6 153.4
Pension Asset 12.7 11.3
Other 1.5 4.7
------ ------
Total Deferred Tax Liability 323.8 326.1
------ ------
Net Deferred Tax Liability 137.2 143.5
Current Tax Liability 29.2 27.8
------ ------
Accrued and Deferred Income Taxes $166.4 $171.3
====== ======
</TABLE>
- --------------------------------------------------------------------------------
A deferred tax asset valuation allowance was not required at December 31, 1996
and 1995. Income taxes paid were $47.2 million, $49.6 million and $75.8 million
in 1996, 1995 and 1994, respectively.
The Company has not provided Federal income taxes on a portion of the
Company's life insurance subsidiaries' income earned prior to 1984 which is not
subject to Federal income taxes under certain circumstances. Federal income
taxes would be paid on the amount of such income, approximately $170 million, if
it is distributed to shareholders in the future or if it does not continue to
meet certain limitations.
Comprehensive Income Tax Expense (Benefit) included in the Consolidated
Financial Statements for the years ended December 31, 1996, 1995 and 1994 was:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions] 1996 1995 1994
<S> <C> <C> <C>
Income Tax Expense $ 40.2 $ 55.3 $ 62.9
Equity in Net Income of Investees 26.5 23.7 17.5
Unrealized Appreciation (Depreciation)
on Securities (19.3) 55.0 (87.8)
Effect on Paid-in Capital from Exercise
of Stock Options (1.8) (0.6) --
------ ------ ------
Comprehensive Income Tax Expense (Benefit) $ 45.6 $133.4 $ (7.4)
====== ====== ======
</TABLE>
- --------------------------------------------------------------------------------
The components of Income Tax Expense for the years ended December 31, 1996, 1995
and 1994 were:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions] 1996 1995 1994
<S> <C> <C> <C>
Current Tax Expense $ 50.0 $ 57.9 $ 69.0
Deferred Tax Benefit (9.8) (2.6) (6.1)
----- ----- -----
Income Tax Expense $ 40.2 $ 55.3 $ 62.9
====== ====== ======
</TABLE>
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 34
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13. INCOME TAXES [CONTINUED]
- --------------------------------------------------------------------------------
Components of the effective income tax rate on pre-tax income for the years
ended December 31, 1996, 1995 and 1994 were:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Statutory Federal Income Tax Rate 35.0% 35.0% 35.0%
Tax-exempt Income (5.0) (2.7) (2.5)
State Income Taxes 1.6 1.4 1.5
Amortization of Cost in Excess of Net
Assets of Purchased Businesses 0.9 0.5 0.4
Other, Net 0.4 0.2 1.0
---- ---- ----
Effective Income Tax Rate 32.9% 34.4% 35.4%
==== ==== ====
</TABLE>
- --------------------------------------------------------------------------------
Beginning with the year ended December 31, 1995 the Company filed a consolidated
Federal income tax return with all of its subsidiaries. For the years ended
December 31, 1994, 1993, 1992 and 1991 and the nine months ended December 31,
1990, the Company filed a consolidated Federal income tax return with all of its
subsidiaries except for Union National Life Insurance Company and Union National
Fire Insurance Company. Prior to April 1, 1990, all of the Company's
subsidiaries, except for Union National Life Insurance Company and Union
National Fire Insurance Company, filed a consolidated Federal income tax return
with Teledyne, Inc.
- --------------------------------------------------------------------------------
NOTE 14. PENSION BENEFITS
- --------------------------------------------------------------------------------
The Company sponsors several defined benefit pension plans covering most of its
employees. Participation in certain plans requires employee contributions of 3
percent of pay, as defined, per year. Benefits for contributory plans are based
on compensation during plan participation and the number of years of
participation. Benefits for non-contributory plans are based on years of service
and final average pay, as defined. The Company funds the pension plans in
accordance with the requirements of the Employee Retirement Income Security Act
of 1974, as amended.
The components of Pension Expense (Income) for the years ended December 31,
1996, 1995 and 1994 were:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions] 1996 1995 1994
<S> <C> <C> <C>
Service Cost Benefits Earned During the Year $ 4.1 $ 3.9 $ 4.0
Interest Cost on Projected Benefit Obligation 7.0 6.6 5.9
Actual (Gain) Loss on Plan Assets (8.4) (8.0) 4.2
Net Amortization and Deferral (3.1) (3.4) (15.4)
----- ----- ------
Pension Expense (Income) $(0.4) $(0.9) $ (1.3)
===== ===== ======
</TABLE>
- --------------------------------------------------------------------------------
The actuarial assumptions used to develop the components of Pension Expense
(Income) for the years ended December 31, 1996, 1995 and 1994 were:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Discount Rate 7.00% 7.50% 6.75%
Rate of Increase in Future Compensation Levels 4.00% 4.50% 4.50%
Expected Long-term Rate of Return on Plan Assets 6.00% 6.00% 6.00%
</TABLE>
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 35
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14. PENSION BENEFITS [CONTINUED]
- --------------------------------------------------------------------------------
Plan Assets in Excess of Projected Benefit Obligations at December 31, 1996 and
1995 were:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions] 1996 1995
<S> <C> <C>
Plan Assets at Fair Value, Primarily U.S. Government
Obligations $163.3 $159.3
------ ------
Present Value of Projected Benefit Obligations:
Vested Benefit Obligation 88.4 79.1
Non-vested Benefit Obligation 2.0 5.1
------ ------
Accumulated Benefit Obligation 90.4 84.2
Additional Benefits Related to Future
Compensation Levels 17.3 17.5
------ ------
Projected Benefit Obligations 107.7 101.7
------ ------
Plan Assets in Excess of Projected Benefit Obligations $ 55.6 $ 57.6
====== ======
Plan Assets in Excess of Projected Benefit Obligations:
Included in Balance Sheet:
Prepaid Pension Cost $ 36.2 $ 32.1
Accrued Pension Liability (4.3) (3.7)
Not Included in Balance Sheet:
Unrecognized Net Asset at Adoption of SFAS No. 87,
Net of Amortization 7.3 9.3
Unrecognized Net Gain Due to Past Experience
Different from that Assumed and Changes
in the Assumptions 16.4 19.9
------ ------
Plan Assets in Excess of Projected Benefit Obligations $ 55.6 $ 57.6
====== ======
</TABLE>
- --------------------------------------------------------------------------------
At both December 31, 1996 and 1995 a discount rate of 7.00 percent and a rate
of increase in future compensation levels of 4.00 percent were assumed for the
valuation of pension obligations.
- --------------------------------------------------------------------------------
NOTE 15. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
- --------------------------------------------------------------------------------
The Company sponsors several postretirement benefit plans that provide medical
and life insurance benefits to approximately 1,000 retired and 2,000 active
employees. The Company is self-insured and the plans are not funded. The medical
plans generally provide for a limited number of years of medical insurance
benefits at retirement based upon the participant's attained age at retirement
and number of years of service until specified dates and are generally
contributory, with most contributions adjusted annually. Postretirement life
insurance benefits are generally contributory and generally limited to $10,000
per participant.
Postretirement medical and life insurance expense was $4.7 million in 1996,
$5.4 million in 1995 and $4.4 million in 1994. This expense primarily represents
interest on the accumulated postretirement benefit obligation. Service cost was
not material.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 36
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS [CONTINUED]
- --------------------------------------------------------------------------------
The plans' combined Accumulated Postretirement Benefit Obligation at December
31, 1996 and 1995 was:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions] 1996 1995
<S> <C> <C>
Retirees $42.9 $47.3
Fully Eligible Active Participants 7.9 8.4
Other Active Plan Participants 17.3 19.2
----- -----
Accumulated Postretirement Benefit Obligation 68.1 74.9
Unrecognized Net Gain (Loss) Due to
Experience Different from that Assumed 5.8 (0.9)
----- -----
Net Postretirement Liability
Recognized in the Balance Sheet $73.9 $74.0
===== =====
</TABLE>
- --------------------------------------------------------------------------------
The assumed health care cost trend rate used in measuring the Accumulated
Postretirement Benefit Obligation at December 31, 1996 was 8.5 percent in 1996,
gradually declining to 5.0 percent in the year 2006 and remaining at that level
thereafter. The assumed health care cost trend rate used in measuring the
Accumulated Postretirement Benefit Obligation at December 31, 1995 was 9.0
percent in 1995, gradually declining to 5.0 percent in the year 2006 and
remaining at that level thereafter.
A one percentage point increase in the assumed health care cost trend rate
for each year would increase the Accumulated Postretirement Benefit Obligation
at December 31, 1996 by approximately $7.1 million and 1996 postretirement
expense by $0.5 million.
The assumed discount rate used in determining the Accumulated
Postretirement Benefit Obligation was 7.00 percent at both December 31, 1996
and 1995.
- --------------------------------------------------------------------------------
NOTE 16. BUSINESS SEGMENTS
- --------------------------------------------------------------------------------
The Company is engaged in the property and casualty insurance, life and health
insurance and consumer finance businesses. Insurance provided in the Property
and Casualty Insurance Segment consists of automobile, homeowners, motorcycle,
watercraft, fire, casualty, workers compensation and other related lines. The
Life and Health Insurance Segment includes both individual and group life,
accident, health and hospitalization insurance. The Consumer Finance Segment
makes consumer loans primarily for the purchase of automobiles and offers
savings accounts in the form of investment certificates and money market
accounts.
Segment Revenues for the years ended December 31, 1996, 1995 and 1994 were:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions] 1996 1995 1994
SEGMENT REVENUES
<S> <C> <C> <C>
Property and Casualty Insurance $ 781.2 $ 631.5 $ 575.6
Life and Health Insurance 612.1 649.7 667.6
Consumer Finance 120.4 106.5 91.4
-------- -------- -------
Total Segment Revenues 1,513.7 1,387.7 1,334.6
-------- -------- -------
Net Gains on Sales of Investments 3.4 55.2 18.1
Other 6.0 4.5 12.8
-------- -------- -------
Total Revenues $1,523.1 $1,447.4 $1,365.5
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 37
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 16. Business Segments [continued]
- --------------------------------------------------------------------------------
Segment Operating Profit and Segment Assets for the years ended December 31,
1996, 1995 and 1994 were:
- --------------------------------------------------------------------------------
[Dollars in Millions] 1996 1995 1994
Segment Operating Profit
Property and Casualty Insurance $ 63.2 $ 50.2 $ 65.5
Life and Health Insurance 40.3 52.8 68.7
Consumer Finance 26.4 25.7 31.0
---------- --------- ----------
Total Segment Operating Profit 129.9 128.7 165.2
---------- --------- ----------
Net Gains on Sales of Investments 3.4 55.2 18.1
Other (11.2) (23.1) (5.8)
---------- --------- ----------
Income before Income Taxes and Equity in
Net Income of Investees $ 122.1 $ 160.8 $ 177.5
========== ========= ==========
Segment Assets
Property and Casualty Insurance $ 1,109.0 $ 1,051.3 $ 788.1
Life and Health Insurance 2,505.1 2,543.1 2,700.3
Consumer Finance 676.8 598.7 508.2
Investees and Other 580.2 625.6 573.2
---------- --------- ----------
Total Assets $ 4,871.1 $ 4,818.7 $ 4,569.8
========== ========= ==========
- --------------------------------------------------------------------------------
Note 17. Reinsurance
- --------------------------------------------------------------------------------
Effective May 31, 1996, one of the Company's Life and Health Insurance
subsidiaries entered into an agreement to cede its entire obligation for certain
life insurance policies to a third party. Life insurance reserves related to
this block were approximately $112 million at December 31, 1996. At December
31, 1996, the Company had not been relieved of its legal obligation to its
policyholders under the agreement and, accordingly, the Company continues to
include the life insurance reserves related to this block of business on its
balance sheet along with a corresponding amount classified as other receivables.
Premiums on short-duration policies assumed were $109.6 million for the
year ended December 31, 1996. Premiums on short-duration policies assumed were
not material for the years ended December 31, 1995 and 1994. Premiums on long-
duration policies assumed were not material for the years ended December 31,
1996, 1995 and 1994. Premiums ceded on short-duration and long-duration
policies were not material for the years ended December 31, 1996, 1995 and 1994.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 38A
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 18. CONTINGENCIES
- --------------------------------------------------------------------------------
The Company and its subsidiaries are defendants in various legal actions
incidental to their businesses. Some of these actions seek substantial punitive
damages that bear no apparent relationship to the actual damages alleged.
Although no assurances can be given and no determination can be made at this
time as to the outcome of any particular legal action, the Company and its
subsidiaries believe there are meritorious defenses to these legal actions and
are defending them vigorously. The Company believes that resolution of these
matters will not have a material adverse effect on the Company's financial
position.
In connection with one action, Ronnie Dale Bleeker v. Trinity
Universal Insurance Company ("Trinity"), et al., the District Court of Hildalgo
County, Texas, on February 9, 1995 entered a judgment in the amount of $77.0
million, including attorney's fees of $38.5 million, against Trinity, one of
the Company's subsidiaries. The case involves an accident in which Ronnie
Bleeker, a former insured of Trinity under a $40 thousand automobile insurance
policy, while driving his truck struck another truck parked alongside a road,
killing one person and injuring several others. Suit was filed against Bleeker
by the injured parties (the "Claim Case"). In 1993, the plaintiffs in the Claim
Case were awarded damages in excess of $9 million. In 1994, these plaintiffs,
acting as assignees of a purported claim by Bleeker against Trinity, filed suit
against Trinity (the "Bad Faith Case") alleging that negligent claim handling by
Trinity led to the large verdict against Bleeker in the Claim Case. The Bad
Faith Case was tried in 1995 and resulted in the judgment against Trinity
described above. Trinity has strongly denied any wrongdoing and intends to
pursue vigorously all avenues for relief from the judgment. The matter is
presently on appeal to the Thirteenth Court of Appeals in Corpus Christi, Texas.
The ultimate outcome of this litigation cannot presently be predicted. However,
the Company believes that Trinity has a number of meritorious grounds for
appeal and, accordingly, the judgment has not been accrued in the financial
statements.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 38B
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions, Except Per Share Amounts] Three Months Ended
- --------------------------------------------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, Total
<S> <C> <C> <C> <C> <C>
1996
Premiums and Consumer Finance Revenues $334.4 $337.6 $334.4 $334.3 $1,340.7
Net Investment Income 45.1 44.4 44.0 45.5 179.0
Net Gains on Sales of Investments 1.1 0.1 0.4 1.8 3.4
------ ------ ------ ------ --------
Total Revenues $380.6 $382.1 $378.8 $381.6 $1,523.1
====== ====== ====== ====== ========
Net Income:
From Operations $ 13.3 $ 18.0 $ 24.2 $ 24.2 $ 79.7
From Investees 11.4 11.4 13.7 14.1 50.6
From Sales of Investments 0.7 0.1 0.2 1.2 2.2
------ ------ ------ ------ --------
Total Net Income $ 25.4 $ 29.5 $ 38.1 $ 39.5 $ 132.5
====== ====== ====== ====== ========
Net Income Per Share (A) $ 0.66 $ 0.78 $ 1.02 $ 1.06 $ 3.51
====== ====== ====== ====== ========
Dividends Paid to Common
Shareholders (Per Share) $ 0.55 $ 0.55 $ 0.55 $ 0.55 $ 2.20
====== ====== ====== ====== ========
Common Stock Market Prices:
High 50 13/16 48 7/8 50 56 1/4 56 1/4
Low 45 5/8 46 44 1/4 50 1/16 44 1/4
Close 46 47 49 1/4 55 3/4 55 3/4
- --------------------------------------------------------------------------------------------------------------------
1995
Premiums and Consumer Finance Revenues $289.5 $292.0 $290.5 $333.6 $1,205.6
Net Investment Income 48.9 48.1 43.6 46.0 186.6
Net Gains on Sales of Investments 0.5 33.2 20.6 0.9 55.2
------ ------ ------ ------ --------
Total Revenues $338.9 $373.3 $354.7 $380.5 $1,447.4
====== ====== ====== ====== ========
Net Income:
From Operations $ 20.7 $ 9.4 $ 14.7 $ 24.6 $ 69.4
From Investees 10.2 10.4 11.9 12.6 45.1
From Sales of Investments 0.3 21.8 13.4 0.6 36.1
------ ------ ------ ------ --------
Total Net Income $ 31.2 $41.6 $ 40.0 $ 37.8 $ 150.6
====== ====== ====== ====== ========
Net Income Per Share (A) $ 0.73 $1.03 $ 1.01 $ 0.97 $ 3.73
====== ====== ====== ====== ========
Dividends Paid to Common Shareholders
(Per Share) $ 0.50 $0.50 $ 0.50 $ 0.50 $ 2.00
====== ====== ====== ====== ========
Common Stock Market Prices:
High 50 1/2 50 49 1/4 49 50 1/2
Low 43 46 1/4 44 1/2 45 43
Close 48 1/2 47 1/2 47 48 48
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) The cumulative sum of quarterly Net Income Per Share amounts does not equal
Total Net Income Per Share for the year due to differences in weighted
average shares outstanding for each of the periods presented.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 39
<PAGE>
EXHIBIT 13.2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS AND FINANCIAL CONDITION
The following pages reproduce certain pages from Unitrin, Inc.'s 1996 Annual
Report to Shareholders, amended as of the date of the filing of this Form 10-K/A
of which these pages constitute Exhibit 13.2.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
- --------------------------------------------------------------------------------
PROPERTY AND CASUALTY INSURANCE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions] 1996 1995 1994
<S> <C> <C> <C>
Premiums $ 731.2 $ 587.3 $ 530.1
Net Investment Income 50.0 44.2 45.5
------ ------- -------
Total Revenues $ 781.2 $ 631.5 $ 575.6
Operating Profit $ 63.2 $ 50.2 $ 65.5
</TABLE>
Premiums in the Property and Casualty Insurance segment increased by $143.9
million in 1996. Premiums increased by $135.3 million in 1996 as a result of the
October 2, 1995 acquisition of Milwaukee Insurance Group, Inc. ("Milwaukee
Insurance"). Automobile insurance premiums unrelated to the acquisition
increased by $14.2 million primarily due to higher prices, partially offset by
the comparative effect of $5.7 million of favorable premium adjustments related
to Proposition 103 in 1995. On January 7, 1997 the Company completed the
acquisition of Union Automobile Indemnity Company ("Union"). As a result of the
Union acquisition, premiums are expected to increase by approximately $35
million in 1997.
Net Investment Income in the Property and Casualty Insurance segment
increased by $5.8 million in 1996. Net Investment Income increased by $10.5
million due to the inclusion of Milwaukee Insurance net investment income for a
full year in 1996, partially offset by a $4.7 million decrease in other
investment income due primarily to a lower level of investments.
Operating Profit increased by $13.0 million in 1996. Losses directly
attributed to storms decreased by $20.2 million in 1996 partially resulting
from the Company's efforts to reduce its concentration of business in storm
prone areas. Operating Profit in 1995 included the favorable effect of $7.1
million of premium and other accrual adjustments related to Proposition 103.
Premiums in the Property and Casualty Insurance segment increased by $57.2
million in 1995. Premiums increased by $43.2 million as a result of the
acquisition of Milwaukee Insurance. Premiums also increased by $14.0 million due
primarily to higher prices for automobile insurance and the premium adjustments
related to Proposition 103.
Net Investment Income in the Property and Casualty Insurance segment
decreased by $1.3 million in 1995. Net Investment Income decreased by $4.4
million due primarily to a lower level of investments in fixed maturities,
partially offset by $3.1 million of Milwaukee Insurance net investment income.
Operating Profit decreased by $15.3 million in 1995 due to higher
automobile insurance claims and higher losses directly attributable to storms,
partially offset by the premium and other accrual adjustments related to
Proposition 103. Losses directly attributable to storms increased by $12.4
million in 1995.
- --------------------------------------------------------------------------------
UNITRIN, INC. AND SUBSIDIARIES | 14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
LIFE AND HEALTH INSURANCE
- --------------------------------------------------------------------------------
[Dollars in Millions] 1996 1995 1994
<S> <C> <C> <C>
Life Insurance Premiums $ 359.4 $ 368.6 $ 359.4
Accident and Health Insurance Premiums 129.7 143.2 159.3
-------- -------- --------
Total Premiums 489.1 511.8 518.7
Net Investment Income 123.0 137.9 148.9
-------- -------- --------
Total Revenues $ 612.1 $ 649.7 $ 667.6
Operating Profit $ 40.3 $ 52.8 $ 68.7
</TABLE>
- --------------------------------------------------------------------------------
Life Insurance Premiums decreased by $9.2 million in 1996 due primarily to the
ceding of certain life insurance policies to a third party (see below).
Accident and Health Insurance Premiums decreased by $13.5 million in 1996 due
primarily to lower volume.
Net Investment Income in the Life and Health Insurance segment decreased by
$14.9 million in 1996 due to a lower level of investments primarily the result
of certain intercompany transactions (see "Liquidity and Capital Resources") and
the ceding of certain life insurance policies to a third party.
Operating Profit in the Life and Health Insurance segment decreased by
$12.5 million in 1996 due primarily to the lower net investment income. Policy
Acquisition Costs Amortized exceeded Policy Acquisition Costs Deferred by $26.1
million in 1996 due to lower volume of new business written in 1996 and the
continuing amortization of costs deferred in prior years.
Effective May 31, 1996, United Insurance Company of America ("United"), one
of the Company's Life and Health Insurance subsidiaries, entered into an
agreement to cede certain life insurance policies to a third party. Life
insurance reserves related to this block were approximately $112 million at
December 31, 1996. At December 31, 1996 the Company had not been relieved of its
primary obligation to these policyholders. In accordance with the provisions of
SFAS Statement 113, "Accounting and Reporting for Reinsurance of Short Duration
and Long Duration Contracts," the Company therefore continues to include the
life insurance reserves related to this block of business on its balance sheet
along with a corresponding amount classified as Other Receivables. As a result
of this transaction, premiums in the Life and Health Insurance segment
decreased by $7.3 million in 1996 and will decrease by an additional $6 million
in 1997. The effect of this transaction on Operating Profit is not material.
Effective January 1, 1997, United entered into an agreement to cede all in-
force life, health, property and casualty insurance policies written by the
Life and Health Group's home service operations in the states of Arkansas and
Missouri to a third party. As a result of this transaction, annual premium
income will decrease by approximately $10.8 million in the Company's Life and
Health segment and by $3.2 million in the Property and Casualty segment. The
effect of this transaction on operating profit is not material.
Premiums in the Life and Health Insurance segment decreased by $6.9
million in 1995. Life Insurance Premiums increased by $9.2 million due to
higher volume. Accident and Health Insurance premiums decreased by $16.1 million
due primarily to lower volume.
Net Investment Income in the Life and Health Insurance segment decreased by
$11.0 million in 1995 due to a lower level of investments as a result of the
intercompany transactions and due to lower yields on investments.
Operating Profit decreased by $15.9 million in 1995 due primarily to the
lower Net Investment Income and also due to higher claims as a percentage of
premium in Accident and Health Insurance.
- --------------------------------------------------------------------------------
UNITRIN, INC. AND SUBSIDIARIES | 15A
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
- --------------------------------------------------------------------------------
Consumer Finance
- --------------------------------------------------------------------------------
[Dollars in Millions] 1996 1995 1994
Revenues $ 120.4 $ 106.5 $ 91.4
Operating Profit $ 26.4 $ 25.7 $ 31.0
- --------------------------------------------------------------------------------
Consumer Finance Revenues increased by $13.9 million and $15.1 million in 1996
and 1995, respectively, primarily as a result of a higher level of loans
outstanding. Operating Profit increased by $0.7 million in 1996 due primarily to
the higher level of loans outstanding. Operating Profit decreased by $5.3
million in 1995 due to higher cost of funds and higher provisions for loan
losses. Loans more than 90 days past due were $19.2 million and $13.5 million at
December 31, 1996 and December 31, 1995, respectively, while the reserve for
loan losses was $36.4 million and $31.1 million, respectively. These increases
primarily reflect higher levels of loans outstanding and current economic
conditions.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 15B
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
- --------------------------------------------------------------------------------
INVESTEES
- --------------------------------------------------------------------------------
The Company's investment portfolio includes equity securities or "investees"
accounted for by the equity method of accounting: Litton Industries, Inc.
("Litton"), Western Atlas Inc. ("Western Atlas"), and Curtiss-Wright Corporation
("Curtiss-Wright"). Each of the investee companies is listed on the New York
Stock Exchange and is subject to the reporting requirements of the federal
securities laws. These securities are held for investment purposes primarily as
part of the investment portfolios of the Company's insurance subsidiaries. The
market value of the Company's Investments in Investees was approximately $1.6
billion at December 31, 1996 compared to an asset carrying value of $670 million
under the equity method of accounting.
Unitrin accounts for its Investments in Investees under the equity method
of accounting in accordance with Accounting Principles Board Opinion No. 18
using the most recent publicly-available financial reports. See Note 2 to the
Consolidated Financial Statements. The amounts included in Unitrin's financial
statements represent amounts reported by the investee companies for periods
ending two to three months earlier.
At December 31, 1996 the Company owned approximately 27.2% of Litton's
common stock. Litton stated in its 1996 annual report to shareholders that it
is an "aerospace, defense and commercial electronics company," that it provides
"advanced electronic, defense and information systems and is a primary builder
of large multi-mission surface combatant ships for the U.S. Navy," and that it
is "a major provider of overhaul, repair, modernization, ship design and
engineering services; a world leader in integrated marine electronics and a
leading innovator of information technology based systems and products."
At December 31, 1996 the Company owned approximately 23.6% of Western
Atlas' common stock. Western Atlas stated in its 1996 annual report to
shareholders that Western Atlas is a "global solutions company whose success is
based on information and systems integration technologies for the energy and
industrial markets. Its two primary business segments--oilfield information and
industrial automation--are centered on high-technology products, systems and
services that are designed to improve the efficiency and productivity of
customer projects."
At December 31, 1996 the Company owned approximately 43.1% of Curtiss-
Wright's common stock. Curtiss-Wright stated in its 1996 annual report to
shareholders that it "is a diversified multi-national manufacturing and service
concern that designs, manufactures and overhauls precision components and
systems and provides highly engineered services to the aerospace, automotive,
shipbuilding, oil, petrochemical, agricultural equipment, power generation,
metal working and fire & rescue industries."
Unitrin's Equity in Net Income of Investees was income of $50.6 million,
$45.1 million and $33.8 million in 1996, 1995 and 1994, respectively. Unitrin's
Equity in Net Income of Investees for 1994 includes: an after-tax loss of $3.8
million for Unitrin's share of Curtiss-Wright's charges for the settlement of
certain litigation, certain restructuring and environmental costs and for
certain tax adjustments; an after-tax loss of $5.6 million for Unitrin's share
of Litton's extraordinary charge on redemption of debt; and an after-tax loss of
$9.7 million for Unitrin's share of Litton's charges for settlement of certain
litigation. Equity in Net Income of Investees for 1994 includes an after-tax
gain of $22.3 million reflecting the increase in Unitrin's share of Western
Atlas' reported net assets as a result of Western Atlas' issuance of common
stock.
In 1994, Western Atlas changed its fiscal year end from July 31 to
December 31. As a result of this change, Unitrin's share of Western Atlas'
results are reported on a three-month-delay basis rather than on a two-month-
delay basis. Unitrin's financial results for the second quarter of 1994 reflect
its share of two months of Western Atlas' results rather than three months.
Unitrin's financial results for the third quarter of 1994 and all subsequent
quarters reflect its share of three months of Western Atlas' results.
Summarized financial and other information about the Company's Investments
in Investees can be found in Note 5 to the Consolidated Financial Statements.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 16A
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
- --------------------------------------------------------------------------------
INVESTMENT RESULTS
- --------------------------------------------------------------------------------
Net Investment Income decreased by $7.6 million in 1996 due primarily to the
funding of the Company's common stock repurchase program, partially offset by
the inclusion of Milwaukee Insurance net investment income for a full year in
1996.
Net Investment Income decreased by $20.6 million in 1995 due to the funding
of the Company's common stock repurchase program and due to lower yields on
investments.
Net Investment Income from the Company's investment in Navistar's $6.00
Cumulative Convertible Preferred Stock, Series G was $7.1 million in 1996, $4.3
million in 1995 and $5.7 million in 1994. It is the Company's policy to record
dividend income on its preferred and common stock investments on the ex-dividend
date. Net Investment Income from the Company's investment in Navistar increased
by $2.8 million in 1996 and decreased by $1.4 million in 1995 due to the timing
of the Navistar Preferred Stock ex-dividend date. Net Investment Income on this
investment was recorded in the Company's Life and Health Insurance segment until
the third quarter of 1995 when United Insurance Company of America ("United"), a
subsidiary of the Company, sold the investment to the Unitrin, Inc. parent
company.
Net Gains on Sales of Investments was $3.4 million in 1996, $55.2 million
in 1995 and $18.1 million in 1994. Net Gains on Sales of Investments in 1995 and
1994 resulted primarily from sales of certain equity securities. The Company
cannot anticipate when or if investment gains or losses may occur in the future.
The Company's investment strategy is based on current market conditions and
other factors which it reviews from time to time. The Company's consolidated
investment portfolio is concentrated in United States Government obligations and
investment-grade fixed maturities. The Company's investment in non-investment-
grade fixed maturity investments is insignificant.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 16B
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
- --------------------------------------------------------------------------------
PROPOSITION 103
- --------------------------------------------------------------------------------
On November 8, 1988, California voters passed Proposition 103, an insurance
initiative which required a 20 percent rollback in insurance rates for policies
written or renewed during the twelve-month period beginning November 8, 1988
(the "rollback period") and provided that changes in insurance premiums after
November 8, 1989 must be submitted for the approval of the California Insurance
Commissioner prior to implementation. While Proposition 103 had the most
significant impact on automobile insurance, its provisions also applied to other
property and casualty insurance.
In June 1995, the Company reached an agreement with the State of California
Department of Insurance to settle its obligation under Proposition 103 by
refunding $15.3 million to its policyholders. The Company had previously
estimated and accrued for its obligation under Proposition 103.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
In August 1994, the Company's Board of Directors authorized the repurchase of up
to ten million shares of the Company's outstanding common stock, including
approximately 1.4 million shares remaining under its August 8, 1990 repurchase
authorization, in open market or privately negotiated transactions from time to
time subject to market conditions and other factors. On February 17, 1995 and
July 31, 1996, the Company's Board of Directors authorized the repurchase of an
additional five million and three million shares of the Company's outstanding
common stock, respectively, for an aggregate authorization of eighteen million
common shares. During 1996, the Company repurchased and retired 1,277,175 shares
of its common stock in open market transactions at an aggregate cost of $61.1
million. The Company has repurchased and retired 14,763,633 shares of its common
stock in open market transactions at an aggregate cost of $722.4 million since
August, 1994.
On January 31, 1996, the Company's Board of Directors increased the
Company's quarterly dividend from $0.50 per common share to $0.55 per common
share.
United, one of the Company's Life and Health Insurance segment
subsidiaries, paid a $300 million extraordinary dividend to the Company during
the third quarter of 1995. The proceeds of this dividend were used primarily to
reduce the Company's borrowings under its revolving credit agreement, to fund
the Company's common stock repurchase program and to purchase approximately $50
million of Navistar International Corporation $6.00 Cumulative Convertible
Preferred Stock, Series G from United.
The Company entered into a three-year $350 million unsecured revolving
credit agreement with a group of banks in January 1995. Proceeds from advances
under the agreement may be used for general corporate purposes, including
repurchases of the Company's common stock. The weighted average interest rate on
the $53 million in advances outstanding under the agreement on December 31, 1996
was 5.97%. At December 31, 1996, the unused commitment under the Company's
revolving credit agreement was $297 million. In addition, the Company's
subsidiaries in 1997 would be able to pay approximately $211 million in
dividends to the Company without prior regulatory approval.
The Company has no significant commitments for capital expenditures. The
Company's subsidiaries maintain levels of cash and liquid assets sufficient to
meet ongoing obligations to policyholders and claimants, as well as ordinary
operating expenses. The Company's reserves are set at levels expected to meet
contractual liabilities and provide a margin for adverse deviation. The Company
maintains adequate levels of liquidity and surplus capacity to manage the risks
inherent with any differences between the duration of its liabilities and
invested assets. At December 31, 1996, the Company had capacity to write
additional premiums relative to statutory capital and surplus requirements.
Litton and Western Atlas do not presently pay dividends on their common
stock. Cash dividends received from Curtiss-Wright totaled $2.2 million in each
of 1996, 1995 and 1994. The Company cannot anticipate when or if dividends will
be paid by the investee companies in the future. The Company's retained earnings
at December 31, 1996 includes $374.9 million representing the undistributed
equity in net income of investees.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
- --------------------------------------------------------------------------------
Interest And Other Expenses
- --------------------------------------------------------------------------------
Interest and Other Expenses was $15.5 million in 1996, $25.8 million in 1995 and
$17.3 million in 1994. Expenses attributed to an unsolicited business
combination proposal were $8.0 million in 1995 and $10.1 million in 1994.
Interest Expense was $6.3 million and $10.5 million in 1996 and 1995,
respectively, resulting primarily from funding the Company's common stock
repurchase program. Interest Expense in 1994 was not significant. Other
corporate expenses were $9.2 million in 1996, $7.3 million in 1995 and $7.2
million in 1994.
Accounting Changes
- --------------------------------------------------------------------------------
The Company adopted SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" for the year ended December
31, 1996. Adoption of SFAS 121 did not have a material effect on Net Income.
The Company has no mortgage servicing rights subject to the provisions of
SFAS 122, "Accounting for Mortgage Servicing Rights."
The Company adopted the disclosure requirements of SFAS 123, "Accounting
for Stock-Based Compensation" for the year ended December 31, 1996. The
adoption of SFAS 123 had no effect on the Company's financial position or on its
results of operations.
The Company has no significant transactions subject to the provisions of
SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities."
- --------------------------------------------------------------------------------
UNITRIN, INC. AND SUBSIDIARIES | 18
<PAGE>
Exhibit 23.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Unitrin, Inc.:
Under date of January 7, 1997, except as to Note 5, which is as of September 22,
1997, we reported on the consolidated balance sheets of Unitrin, Inc. and
subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of income, cash flows, and shareholders' equity for each of the years
in the three-year period ended December 31, 1996. These consolidated financial
statements and our report thereon are incorporated by reference in the December
31, 1996 Annual Report on Form 10-K/A of Unitrin, Inc. In connection with our
audits of the aforementioned consolidated financial statements, we also audited
the related supplementary financial statement schedules as listed in item 14 of
such Annual Report on Form 10-K/A. These supplementary financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these supplementary financial statement schedules
based on our audits.
In our opinion, such supplementary 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
therein.
KPMG Peat Marwick LLP
Chicago, Illinois
January 7, 1997, except as to Note 5, which is as of September 22, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Unitrin, Inc.:
We consent to incorporation by reference in Registration Statements 33-58300,
33-47530 and 333-4530 of Unitrin, Inc., on Form S-8, of our reports dated
January 7, 1997, except as to Note 5, which is as of September 22, 1997,
relating to the consolidated balance sheets of Unitrin, Inc. and subsidiaries as
of December 31, 1996 and 1995 and the related consolidated statements of income,
cash flows and shareholders' equity and related financial statement schedules
for each of the years in the three-year period ended December 31, 1996, which
reports appear in the December 31, 1996 Annual Report on Form 10-K/A of Unitrin,
Inc.
KPMG Peat Marwick LLP
Chicago, Illinois
September 22, 1997
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement Nos.
33-58300, 33-47530 and 333-4530 of Unitrin, Inc. on Form S-8, of our report
dated February 13, 1996 (relating to the financial statements of Western Atlas
Inc. and subsidiaries not presented separately herein) and our report dated
September 19, 1996 (relating to the financial statements of Litton Industries,
Inc. and subsidiaries not presented separately herein) appearing in this Annual
Report on Form 10-K/A of Unitrin, Inc. for the year ended December 31, 1996.
Deloitte & Touche LLP
Los Angeles, California
September 22, 1997
