<PAGE>
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A No. 2
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 Jurisdiction of (I.R.S. Employer
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.
_______________________________________________________________________________
<PAGE>
AMENDMENT NO. 2 TO FORM 10-K
This Form 10-K/A No. 2, filed with the Securities and Exchange Commission on
October 29, 1997, amends and restates in its entirety Item 14 of the Form 10-K/A
No. 1 of Unitrin, Inc. ("Unitrin" or the "Company") which was filed September
22, 1997.
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 the Form 10-K, have been filed as Exhibit 13.1 and are
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 and the report of KPMG Peat
Marwick LLP thereon, dated January 7, 1997, except as to Note 5, which is
as of October 29, 1997.
2. Financial Statement Schedules. The following four financial statement
schedules are incorporated herein by reference to Item 14(a)2 of Unitrin's
Form 10-K/A No. 1 filed September 22, 1997:
Schedule I: Investments - Other Than Investments in Related Parties
Schedule II: Parent Company Financial Statements
Schedule III: Supplementary Insurance Information
Schedule IV: Reinsurance Schedule
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.
The consolidated financial statements of Litton Industries, Inc., a fifty
percent or less owned person, have been filed as Exhibit 99 hereof and are
incorporated by reference into this Item 14.
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)
1
<PAGE>
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 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)
2
<PAGE>
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 No.
2)
13.2 MD&A (included as Exhibit 13.2 to Unitrin's 1996 Annual Report on
Form 10-K/A No. 1 filed September 22, 1997)
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
1996 Annual Report on Form 10-K filed February 27, 1997)
23.1 Reports of KPMG Peat Marwick LLP (included in Exhibit 13.1 of this
Form 10-K/A No. 2 and included as Exhibit 23.1 to this Form 10-K/A
No. 2)
23.2 Consent of KPMG Peat Marwick LLP
23.3 Report of Deloitte & Touche LLP (included in Exhibit 99 of this Form
10-K/A No. 2)
23.4 Consent of Deloitte & Touche LLP
24 Power of attorney (included on the signature page of Unitrin's 1996
Annual Report on Form 10-K/A No. 1 filed September 22, 1997)
27 Financial Data Schedule (included as Exhibit 27 to Unitrin's 1996
Annual Report on Form 10-K filed February 27, 1997)
99 The consolidated financial statements of Litton Industries, Inc.
(incorporated herein by reference to pages F-2 through F-21 of the
Form 10-K filed October 10, 1997 by Litton Industries, Inc.
(commission file no. 1-03998), for its fiscal year ended July 31,
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.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange 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 October 29, 1997.
UNITRIN, INC.
(Registrant)
By: /S/ Richard C. Vie*
------------------
Richard C. Vie
President and Chief Executive Officer
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 October 29, 1997.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/S/Richard C. Vie* President, Chief Executive Officer and Director
- ------------------
Richard C. Vie
/S/ Jerrold V. Jerome* Chairman of the Board and Director
- ----------------------
Jerrold V. Jerome
/S/ Eric J. Draut Treasurer and Chief Financial Officer
- ----------------- (principal accounting and financial officer)
Eric J. Draut
/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>
*By: /S/ Eric J. Draut
-----------------
Eric J. Draut, Attorney-in-Fact
Pursuant to a Power of Attorney
4
<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 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, 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 October 29, 1997
- ------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 19
<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
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
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:
- -------------------------------------------------------------------------------------------------------------
[Dollars in millions] 1996 1995 1994
<S> <C> <C> <C>
Revenues
Three Months Ended:
January 31, $ 740 $ 694 $ 804
April 30, 1,004 862 957
July 31, 1,032 975 844
October 31, 1,049 836 789
--------- --------- --------
Revenues for Twelve Months Ended October 31, $ 3,825 $ 3,367 $ 3,394
========= ========= ========
Cost of Sales
Three Months Ended:
January 31, $ 568 $ 538 $ 645
April 30, 789 682 785
July 31, 786 796 670
October 31, 825 663 631
--------- --------- --------
Cost of Sales for Twelve Months Ended October 31, $ 2,968 $ 2,679 $ 2,731
========= ========= ========
Income from Continuing Operations before
Discontinued Operations and Extraordinary Item
Three Months Ended:
January 31, $ 33 $ 28 $ 23
April 30, 39 36 30
July 31, 42 39 (28)
October 31, 40 37 32
--------- --------- --------
Income from Continuing Operations before
Discontinued Operations and Extraordinary
Item for Twelve Months Ended October 31, $ 154 $ 140 $ 57
========= ========= ========
Net Income (Loss)
Three Months Ended:
January 31, $ 33 $ 28 $ (152)
April 30, 39 36 23
July 31, 42 39 (59)
October 31, 40 37 32
--------- --------- --------
Net Income (Loss) for Twelve Months Ended October 31, $ 154 $ 140 $ (156)
========= ========= ========
Current Assets at October 31, $ 1,770 $ 1,503
========= =========
Non-current Assets at October 31, $ 1,668 $ 1,090
========= =========
Current Liabilities at October 31, $ 1,649 $ 1,308
========= =========
Non-current Liabilities at October 31, $ 837 $ 491
========= =========
- -------------------------------------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------------------------------------
</TABLE>
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 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 October 29,
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 October 29, 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 Nos.
33-58300, 33-47530 and 333-4530 on Form S-8, No. 333-36201 on Form S-3 and No.
333-31423 on Form S-4, of Unitrin, Inc., of our reports dated January 7, 1997,
except as to Note 5, which is as of October 29, 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 amended December 31, 1996 Annual Report on Form 10-K/A of Unitrin, Inc.
KPMG Peat Marwick LLP
Chicago, Illinois
October 29, 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 on Form S-8, No. 333-36201 on Form S-3, and No.
333-31423 on Form S-4 of Unitrin, Inc. of our report dated September 17, 1997
(relating to the financial statements of Litton Industries, Inc. and
subsidiaries presented separately herein) in the Annual Report on Form 10-K/A
No. 2 of Unitrin, Inc. for the year ended December 31, 1996.
Deloitte & Touche LLP
Los Angeles, California
October 27, 1997
