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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the fiscal year ended December 31, 1997.
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from N/A to N/A.
Commission file number 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
(Titles of classes)
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 January
30, 1998, the aggregate market value of such stock held by non-affiliates of
Registrant is approximately $1.7 billion. Solely for purposes of this
calculation, all executive officers and directors of Registrant are considered
affiliates.
Registrant had 37,576,586 shares of common stock outstanding as of
January 31, 1998.
Documents Incorporated by Reference
Part of the Form 10-K
Document into which incorporated
Portions of 1997 Annual Report to Shareholders Parts I, II and IV
Portions of Proxy Statement for 1998 Annual Meeting Part III
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PART I
ITEM 1. Business
Unitrin, Inc. ("Unitrin" or the "Company") was incorporated in Delaware in
1990. Unitrin's subsidiaries serve the basic financial needs of individuals,
families and small businesses by providing property and casualty insurance, life
and health insurance, and consumer finance services.
(a) General development of business
During 1997, Unitrin repurchased 395,500 shares of its common stock in open
market transactions at an aggregate cost of approximately $20.7 million.
Unitrin has repurchased approximately 18.8 million shares of its common stock at
an aggregate cost of approximately $870 million since 1990. At December 31,
1997, approximately 2.8 million shares of Unitrin common stock remained under
the Company's outstanding repurchase authorizations.
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.
Effective January 1, 1997, Unitrin's principal life and health insurance
subsidiary, United Insurance Company of America ("United"), sold all its life
and health insurance business in the states of Missouri and Arkansas to The
Reliable Life Insurance Company ("Reliable") by means of a 100% coinsurance
agreement. Reliable paid a ceding commission of approximately $14 million to
United and reinsured liabilities of approximately $28 million. Reliable offered
employment to approximately 150 persons who had been all the employees of United
in Missouri and Arkansas. The transaction also contemplated an eventual
assumption reinsurance of the affected policies, which has not yet occurred.
Accordingly, under applicable accounting requirements, the Company continues to
include the life insurance reserves for these policies on its balance sheet
along with a corresponding amount classified as "Other Receivables." As a
result of this transaction, premiums in Unitrin's Life and Health Insurance
segment decreased by approximately $10 million in 1997.
Subsequent to the successful consummation of United's coinsurance
transaction with and transfer of employees to Reliable, the Company first
considered acquiring Reliable. At that time, the Company concluded that there
might be significant economies of scale from combining United's business in
Texas with Reliable's larger life operations there. Based in St. Louis,
Reliable operates primarily in Missouri, Arkansas and Texas and has
approximately 1,400 employees. On June 20, 1997, Unitrin and Reliable entered
into a definitive agreement, subject to certain approvals and other customary
closing conditions, providing for the acquisition of Reliable by Unitrin.
On October 31, 1997, the Missouri Department of Insurance (the "Missouri
Department") held a hearing to consider approval of the transaction. On
December 12, 1997, the Missouri Department issued an order disapproving the
proposed acquisition. The Missouri Department found that the effect of the
acquisition would be substantially to lessen competition in insurance in the
State of Missouri. On December 23, 1997, Unitrin filed suit in the Circuit
Court of Cole County, Missouri seeking a reversal of the Missouri Department's
order.
If the acquisition is consummated as proposed, Unitrin would issue
approximately 3,760,000 shares of its common stock for all of Reliable's
outstanding common stock. If consummated, the acquisition would be accounted
for by the purchase method and, accordingly, the operations of Reliable would be
included in Unitrin's financial statements from the date of acquisition. The
acquisition would increase annual premiums in Unitrin's Life and Health
Insurance segment by approximately $90 million.
<PAGE>
(b) Business segment financial data
Financial information about the Company's business segments for the years
ended December 31, 1997, 1996, and 1995 is contained in the following portions
of Unitrin's 1997 Annual Report and is incorporated herein by reference: (i)
Note 17 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").
(c) Description of business
Through its subsidiaries, Unitrin conducts its operations in three
segments: Property and Casualty Insurance, Life and Health Insurance, and
Consumer Finance. Unitrin and its subsidiaries have approximately 6,900 full-
time employees of which approximately 4,600 are employed in the Life and Health
Insurance segment, 1,600 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 and affiliates (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 730,000 policyholders in 32 states. The five states which
provided the largest amount of 1997 premium are Texas (31%), California (15%),
Wisconsin (8%), Illinois (7%), 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 40%, 37%, and 33% of
Unitrin's consolidated insurance premiums for the years ended December 31, 1997,
1996, and 1995, respectively.
Preferred and standard risk insurance products are marketed exclusively by
over 2,000 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 certain of Unitrin's
subsidiaries (Union, Milwaukee Guardian Insurance, Inc., Milwaukee Safeguard
Insurance Company, Security National Insurance Company, and Trinity Universal
Insurance Company of Kansas, Inc.) and affiliates (Milwaukee Mutual Insurance
Company and Trinity Lloyd's Insurance Company) principally provide the Property
and Casualty Group's preferred and standard products in 32 states including
Texas, Wisconsin, Illinois, Louisiana, Minnesota, and other southern, mid-
western, and northwestern states. These products accounted for approximately
73% of the Property and Casualty Group's 1997 premium revenue.
<PAGE>
Specialty products are principally provided by two Trinity subsidiaries,
Financial Indemnity Company and Alpha Property & Casualty Insurance Company, and
include nonstandard personal and commercial 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 records. Nonstandard
automobile insurance products are marketed through over 4,600 independent agents
in California and 22 other states.
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 require
consideration of investment income when approving or setting rates, which
reduces 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
18 to the Financial Statements.
Competition
Based on the most recent data published by A.M. Best Company ("A.M. Best")
as of the end of 1996, there were approximately 1,140 property and casualty
insurance organizations in the United States, made up of more than 2,400
companies. The Unitrin Property and Casualty Group ranked among the 100 largest
property and casualty insurance company organizations in the United States,
measured by admitted assets (67th), net premiums written (62nd), and
policyholders' surplus (50th).
In 1996, the industry's estimated net premiums written were $268 billion,
more than 73% 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 1996 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.
<PAGE>
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 ordinary life insurance, including
permanent and term insurance. This product accounted for 26%, 28%, and 32% of
Unitrin's consolidated insurance premiums for the years ended December 31, 1997,
1996, and 1995, respectively. Permanent policies are offered primarily on a
non-participating, guaranteed-cost basis.
United, together with Union National Life Insurance Company, is one of the
largest providers of insurance through the home service method of distribution
in the United States. Under the home service method of distribution, agents who
are full-time employees of the insurer call on customers in their homes to sell
insurance products (primarily ordinary life insurance), provide services related
to policies in force, and collect premiums, typically monthly. These customers
generally are middle and lower income families.
Approximately 2,700 Life and Health Group employee-agents offer a variety
of individual life, accident, and health insurance in 26 states. The Life and
Health Group's home service operations generated over 80% of the Group's
premiums in 1997.
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.
United also specializes in employer-paid and voluntary group and individual
life insurance products. It provides such products primarily through brokers
and independent agents, as well as directly, on behalf of employers and
employees.
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, and supplemental health insurance. Products are marketed in
34 states through over 2,000 independent agents and agencies. Medicare
supplement insurance is also marketed through hospital networks.
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 higher cost of
home service distribution. As a result of such higher expenses, incurred claims
as a percentage of premium income tend to be lower for companies utilizing the
home service method of distribution 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.
<PAGE>
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. Under these reinsurance
arrangements, 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 these and certain other reinsurance
arrangements of the Company's Life and Health Group, see Items 1(a) and 7 of
this Form 10-K and Note 18 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 15%, 19%, and 18% for the years 1997, 1996, and 1995, respectively.
The lapse ratios of companies utilizing the home service method of
distribution tend to be higher than the lapse ratios of most 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.
Competition
Based on the most recent data published by A.M. Best as of the end of 1996,
there were approximately 610 life and health insurance company groups in the
United States, made up of about 1,150 companies. Unitrin's Life and Health
Group ranked among the 100 largest life and health insurance company groups, as
measured by admitted assets (99th) and capital and surplus (43rd).
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 loan production office in Arizona.
Fireside Thrift is organized under California law as an industrial loan
company and is a member of the Federal Deposit Insurance Corporation (the
"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.
<PAGE>
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 and money market
accounts. It competes for funds primarily with banks, savings and loan
associations, and other industrial loan companies.
Investments
The quality, nature, and amount of the 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.
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 and investments in investees. 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 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, 1997, the total adjusted capital
of every one of Unitrin's insurance subsidiaries significantly exceeded the
minimum RBC requirements.
<PAGE>
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 proportion to its voluntary writings of related lines of business
in such states.
Fireside Thrift is regulated by the California Department of Financial
Institutions 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 160,000 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 211,000 square feet in 29 Company-owned
buildings located in 14 states.
Leased Facilities
The Life and Health Group leases facilities at 171 locations in 26 states
and the District of Columbia with aggregate square footage of approximately
382,000. The latest expiration date of the existing leases is October 2002.
The Property and Casualty Group leases facilities at 19 locations in 11
states with an aggregate square footage of approximately 313,000. The latest
expiration date of the existing leases is July 2007.
Fireside Thrift occupies 41 leased facilities (including consumer finance
branches and home office buildings) with an aggregate square footage of
approximately 129,000. The latest expiration date of the existing leases is
February 2003.
The properties described above are in good condition and suitable for all
presently anticipated requirements of the Company.
<PAGE>
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 legal action, the Company and
its subsidiaries believe that 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 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 appealed the judgment to the Thirteenth Court of Appeals in Corpus
Christi, Texas. On February 27, 1997, the court of appeals issued its decision
affirming in part and reversing and remanding in part the judgment of the trial
court. The effect of the Court of Appeals decision was to reduce the judgment
to $12.8 million plus interest, and to remand the case back to the trial court
for a new trial on the plaintiffs' claim of unconscionability. Trinity then
filed an application for writ of error in the Supreme Court of Texas and, on
January 29, 1998, that court agreed to review the decision of the Court of
Appeals. The Company continues to believe that Trinity has a number of
meritorious defenses. The Company believes that resolution of this action will
not have a material adverse effect on the Company's financial position.
ITEM 4. Submission of Matters to a Vote of Security Holders
During the quarter ended December 31, 1997, 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 1997 and 1996 are incorporated herein by reference to Note
20 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 1997 and 1996 is incorporated herein by
reference to the following portions of the Financial Statements:
(a) Consolidated Statements of Shareholders' Equity, and
<PAGE>
(b) Dividends Paid to Common Shareholders (Per Share) included in Note 20
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, 1997, the approximate number of record holders of
Unitrin's common stock was 9,300.
ITEM 6. Selected Financial Data
Selected consolidated financial data for the five years ended December 31,
1997 is incorporated herein by reference to the data captioned "Financial
Highlights" on page 1 of Unitrin's 1997 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.
On January 22, 1998, Navistar International Corporation announced its
intent to redeem its $6.00 Cumulative Convertible Preferred Stock, Series G, at
a price of $50 per share. Unitrin owns 949,600 shares and expects to recognize
an after-tax gain of approximately $27.7 million upon their redemption, which is
anticipated in the first quarter of 1998. The Company expects to use the net
proceeds from the redemption, approximately $40.2 million, for general corporate
purposes.
On February 23, 1998, Starwood Hotels & Resorts Worldwide, Inc.
("Starwood") announced the completion of its acquisition of ITT Corporation
("ITT"). The Company owned 243,100 shares of ITT common stock which were
acquired by Starwood in the acquisition and, accordingly, will recognize an
after-tax gain of approximately $11.7 million in the first quarter of 1998.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
(a) Quantitative Information About Market Risk
The Company 's balance sheet reflects three types of financial instruments
subject to the market risk disclosures required by Item 7A of Form 10-K:
investments in fixed maturities, consumer finance receivables, and investment
certificates. None of the three is entered into for trading purposes. These
financial instruments are subject to interest rate risk.
The fair value analysis set forth in the following table illustrates the
sensitivity of these financial instruments to adverse changes in interest rates.
Interest rates were assumed to increase by 100 basis points for investments in
fixed maturities and consumer finance receivables and decrease by 100 basis
points for investment certificates.
<PAGE>
<TABLE>
<CAPTION>
In Millions at December 31, 1997 Increase
Fair Value Pro Forma (Decrease) Percent
---------- --------- ---------- -------
Assets
<S> <C> <C> <C> <C>
Investments in Fixed Maturities $2,315.4 $2,262.3 $(53.1) (2.3)%
Consumer Finance Receivables 542.1 535.2 (6.9) (1.3)
Liabilities
Investment Certificates $ 565.0 $ 568.7 $ 3.7 0.7%
</TABLE>
The pro forma fair values of fixed maturities and consumer finance
receivables have been estimated by discounting the future contractual cash flows
using the current rates in effect at December 31, 1997, plus 100 basis points,
at which similar investments and loans, respectively, would be made in and to
issuers and borrowers, respectively, with similar credit ratings and the same
remaining maturities. Similarly, the pro forma fair values of investment
certificates have been estimated using the rates currently offered for deposits
of similar remaining maturities, less 100 basis points.
To the extent that an adverse 100 basis point change occurs in increments
over a period of time, such as one year instead of a one-time shock at the
beginning of a year, the adverse impact on fair values would be partially
mitigated because portions of the underlying financial instruments would have
matured. Proceeds from maturing assets can be reinvested and any new
liabilities would be incurred at then current interest rates.
(b) Qualitative Information About Market Risk
The Company's primary market risk exposures are interest rate risks related
to fixed maturities, consumer finance receivables, and investment certificates
listed in the preceding table. The Company manages the interest rate exposures
with respect to fixed maturity investments primarily by investing in investment-
grade securities of relatively short duration.
The interest rate risks with respect to the fair value of consumer finance
receivables should be partially offset by the impact of interest rate movements
on investment certificates which Fireside Thrift issues to fund the receivables.
The Company's investments in equity securities and in investees ($245.7
million and $705.8 million at December 31, 1997, respectively) also provide
diversification away from interest rate risks. The Company believes that the
liquidity from its operations and investments in fixed maturities permit the
Company to hold its investments in equity securities and investees for the
foreseeable future.
ITEM 8. Financial Statements and Supplementary Data
The Financial Statements (including their related notes and the report of
KPMG Peat Marwick 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, 1997.
<PAGE>
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 1998 Annual
Meeting of Shareholders of Unitrin. Unitrin plans to file such proxy statement
within 120 days after December 31, 1997, the end of Unitrin's fiscal year.
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 1998 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 1998 Annual
Meeting of Shareholders of Unitrin.
ITEM 13. Certain Relationships and Related Transactions
This information is incorporated herein by reference to the section
captioned "Compensation Committee Interlocks and Insider Participation" in the
Proxy Statement for the 1998 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 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 and subsidiaries as of December
31, 1997 and 1996, and the consolidated statements of income, cash flows
and shareholders' equity for the years ended December 31, 1997, 1996 and
1995, together with the notes thereto and the report of KPMG Peat Marwick
LLP thereon, dated January 7, 1998.
2. Financial Statement Schedules. The following four financial statement
schedules are included on the following pages hereof. Schedules not listed
here have been omitted because they are not applicable or not material or
the required information is included in the Financial Statements.
Schedule I: Investments - Other Than Investments in Related Parties
Schedule II: Parent Company Financial Statements
Schedule III: Supplementary Insurance Information
Schedule IV: Reinsurance Schedule
<PAGE>
SCHEDULE 1
UNITRIN, INC. AND SUBSIDIARES
INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
(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 $ 2,000.1 $ 2,032.3 $ 2,032.3
States, Municipalities
and Political Subdivisions 103.8 106.6 106.6
Corporate Securities:
Other Bonds and Notes 121.0 125.0 125.0
Redemptive Preferred Stocks 49.5 51.5 51.5
------------- ------------- -------------
Total Investments in Fixed Maturities 2,274.4 2,315.4 2,315.4
------------- ------------- -------------
Equity Securities:
Common Stocks 19.7 77.1 77.1
Non-redemptive Preferred Stocks 111.3 168.6 168.6
------------- ------------- -------------
Total Investments in Equity Securities 131.0 245.7 245.7
------------- ------------- -------------
Investees (A)
Litton Industries, Inc. 291.0 727.8 291.0
Western Atlas Inc. 188.8 936.7 188.8
UNOVA, Inc. 143.3 208.1 143.3
Curtiss-Wright Corporation 82.7 159.1 82.7
------------- ------------- -------------
Total Investees 705.8 2,031.7 705.8
------------- ------------- -------------
Loans, Real Estate and Short-term Investments 181.6 XXX.X 181.6
------------- -------------
Total Investments $ 3,292.8 $ 3,448.5
============= =============
</TABLE>
(A) - Amortized Cost = Cost Plus Cumulative Undistributed Earnings.
<PAGE>
UNITRIN, INC. SCHEDULE II
PARENT COMPANY BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(Dollars in Millions)
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
---------- ---------
ASSETS
- ------
<S> <C> <C>
Investment in Subsidiaries and Investees $ 1,641.0 $ 1,663.9
Equity Securities at Fair Value
(Cost: 1997 and 1996 - $50.0) 56.7 53.6
Short Term Investments 10.8 -
Other Assets 2.0 7.1
--------- ---------
Total Assets $ 1,710.5 $ 1,724.6
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Notes Payable $ 75.0 $ 53.0
Accrued Expenses and Other Liabilities 102.5 191.3
--------- ---------
Total Liabilities 177.5 244.3
--------- ---------
Shareholders' Equity:
Common Stock 3.8 3.7
Additional Paid-in Capital 217.8 133.0
Retained Earnings 1,209.7 1,265.8
Net Unrealized Appreciation on Equity Securities 4.4 2.4
Net Unrealized Appreciation in Subsidiaries' Securities 97.3 75.4
--------- ---------
Total Shareholders' Equity 1,533.0 1,480.3
--------- ---------
Total Liabilities and Shareholders' Equity $ 1,710.5 $ 1,724.6
========= =========
</TABLE>
<PAGE>
SCHEDULE II
UNITRIN, INC.
PARENT COMPANY STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars in Millions)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net Investment Income $ 5.5 $ 7.1 $ 1.9
Interest Expense 10.0 9.8 10.5
Other Operating (Income) Expenses (2.7) 1.6 6.0
------ ------ ------
Total Operating Expenses 7.3 11.4 16.5
------ ------ ------
Income (Loss) Before Income Taxes and Equity
in Net Income of Subsidiaries and Investees (1.8) (4.3) (14.6)
Income Tax (Benefit) Expense (2.0) (3.2) (5.4)
------ ------ ------
Income (Loss) Before Equity in
Net Income of Subsidiaries and Investees 0.2 (1.1) (9.2)
Equity in Net Income of Subsidiaries and Investees 117.7 133.6 159.8
------ ------ ------
Net Income $117.9 132.5 150.6
====== ====== ======
</TABLE>
<PAGE>
SCHEDULE II
UNITRIN, INC.
PARENT COMPANY STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars in Millions)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Operating Activities:
Net Income $ 117.9 $ 132.5 $ 150.6
Adjustment Required to Reconcile Net Income
to Net Cash Provided by Operations:
Equity in Net Income of Subsidiaries and Investees (117.7) (133.6) (159.8)
Cash Dividends from Subsidiaries 181.1 149.8 441.1
Cash Dividends from Investee 2.2 1.4 -
Other, Net (95.8) 128.4 52.4
------- ------- -------
Net Cash Provided by Operating Activities 87.7 278.5 484.3
------- ------- -------
Investing Activities:
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 (10.8) - 41.0
Purchases of Property - (3.7) -
------- ------- -------
Net Cash Used by Investing Activities (10.8) (99.1) (86.0)
------- ------- -------
Financing Activities:
Notes Payable Proceeds 515.0 170.0 401.0
Notes Payable Payments (493.0) (210.0) (308.0)
Cash Dividends Paid (89.9) (83.0) (80.7)
Common Stock Repurchases (20.7) (61.1) (416.0)
Issuance of Unitrin Common Stock 11.7 4.7 4.6
------- ------- -------
Net Cash Used by Financing Activities (76.9) (179.4) (399.1)
------- ------- -------
Increase (Decrease) in Cash - - (0.8)
Cash, Beginning of Year - - 0.8
------- ------- -------
Cash, End of Year $ - $ - $ -
======= ======= =======
</TABLE>
<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, 1997:
Life and Health $ 446.7 $ N/A $ 119.8 $ 255.3 $ 52.6
Property and Casualty 775.3 784.7 56.4 524.8 114.8
Other - N/A 3.3 - -
-------- -------- ---------- -------------- -----------
Total $1,222.0 $ N/A $ 179.5 $ 780.1 $ 167.4
======== ======== ========== ============== ===========
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
======== ======== ========== ============== ===========
</TABLE>
<TABLE>
<CAPTION>
Deferred
Other Policy
Insurance Acquisition Insurance Unearned
Expenses Costs Reserves Premiums
--------- ----------- --------- --------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997:
Life and Health $ 208.4 $ 195.3 $ 1,567.5 $ 5.6
Property and Casualty 108.4 41.8 468.5 273.9
Other (3.8) - - -
--------- ----------- --------- --------
Total $ 313.0 $ 237.1 $ 2,036.0 $ 279.5
========= =========== ========= ========
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
Property and Casualty 73.1
Other (2.3)
---------
Total $ 300.9
=========
</TABLE>
<PAGE>
SCHEDULE IV
UNITRIN, INC.
REINSURANCE SCHEDULE
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
(Dollars in Millions)
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed to
Amount Companies Companies Amount Net
--------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997:
- -----------------------------
Life Insurance in Force $17,709.2 $ 1,797.8 $ - $15,911.4 -
Premiums
Life Insurance $ 350.7 $ 19.8 $ - $ 330.9 -
Accident and Health Insurance 119.1 3.3 - 115.8 -
Property and Liability Insurance 697.9 18.0 95.4 775.3 12.3%
--------- --------- ---------- --------- ----------
Total Premiums $ 1,167.7 $ 41.1 $ 95.4 $ 1,222.0 7.8%
========= ========= ========== ========= ==========
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%
========= ========= ========== ========= ==========
</TABLE>
<PAGE>
3. Exhibits. The following exhibits are either filed as a part hereof or are
incorporated by reference. Exhibit numbers correspond to the numbering
system in Item 601 of Regulation S-K. Exhibits 10.1 through 10.7 relate to
compensatory plans filed or incorporated by reference as exhibits hereto
pursuant to Item 14(c) of Form 10-K.
2 Agreement and Plan of Reorganization among Unitrin, Inc., Unitrin
Acquisition Corporation and The Reliable Life Insurance Company dated
June 20, 1997, as amended (incorporated herein by reference to
Appendix A to the Company's Amendment No. 3 to Form S-4 filed on
November 6, 1997)
3.1 Certificate of Incorporation (incorporated herein by reference to
Exhibit 3.1 to the Company'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 Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997)
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. 1997 Stock Option Plan (incorporated herein by reference
to Exhibit A to the Proxy Statement dated April 9, 1997 for the Annual
Meeting of Shareholders of Unitrin held May 14, 1997)
10.3 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)
10.4 Unitrin, Inc. Pension Equalization Plan (incorporated herein by
reference to Exhibit 10.4 to the Company's 1994 Annual Report on Form
10-K)
10.5 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 and General Counsel)
Eric J. Draut (Vice President, 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, 1998.)
<PAGE>
10.6 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, 1998)
10.7 Description of Bonus Plan for Senior Executives dated August 6, 1997
(incorporated herein by reference to Exhibit 10.9 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1997)
10.8 Amended and Restated Credit Agreement, dated September 17, 1997
among Unitrin, Inc., the Lenders party thereto, and NationsBank of
Texas, N.A. (incorporated herein by reference to Exhibit 10.7 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997)
13.1 Financial Statements (pages 23 through 47 of Unitrin's 1997 Annual
Report)
13.2 MD&A (pages 16 through 22 of Unitrin's 1997 Annual Report)
13.3 Financial Highlights (page 1 of Unitrin's 1997 Annual Report)
21 Subsidiaries of Unitrin, Inc.
23.1 Reports of KPMG Peat Marwick LLP (included in Exhibit 13.1 hereof
and filed as Exhibit 23.1 hereof)
23.2 Consent of KPMG Peat Marwick LLP
24 Power of Attorney (included on the signature page hereof)
27 Financial Data Schedule
(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.
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints each of Richard
C. Vie, President and Chief Executive Officer, Eric J. Draut, Vice President,
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 this Annual Report
on Form 10-K of Unitrin, Inc., together with any and all 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 Exchange Act
of 1934, Unitrin, Inc. has duly caused this Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois, on February 20, 1998.
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 Unitrin, Inc.
in the capacities indicated on February 20, 1998.
<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 Vice President, 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/ William E. Johnston, Jr. Director
- ----------------------------
William E. Johnston, Jr.
/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>
<PAGE>
EXHIBIT 13.1
CONSOLIDATED FINANCIAL STATEMENTS
OF
UNITRIN, INC. AND SUBSIDIARIES
The following pages reproduce pages 23 through 47 from Unitrin, Inc.'s 1997
Annual Report to Shareholders.
<PAGE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
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, 1997 and 1996 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, 1997. 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, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
January 7, 1998
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 23
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
[Dollars in Millions] December 31,
- ------------------------------------------------------------------------------------------------------
1997 1996
<S> <C> <C>
ASSETS
Investments:
Fixed Maturities at Fair Value (Amortized Cost:
1997--$2,274.4; 1996--$2,176.4) $2,315.4 $2,207.4
Equity Securities at Fair Value (Cost: 1997--$131.0; 1996--$172.0) 245.7 259.7
Investees at Cost Plus Cumulative Undistributed
Earnings (Fair Value: 1997--$2,031.7; 1996--$1,610.3) 705.8 670.1
Other 181.6 154.2
-------- --------
Total Investments 3,448.5 3,291.4
-------- --------
Cash 14.5 17.0
Consumer Finance Receivables 543.6 608.6
Other Receivables 335.4 376.1
Deferred Policy Acquisition Costs 237.1 265.3
Cost in Excess of Net Assets of Purchased Businesses 237.3 228.2
Other Assets 104.3 84.5
-------- --------
Total Assets $4,920.7 $4,871.1
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Insurance Reserves:
Life and Health $1,567.5 $1,599.0
Property and Casualty 468.5 454.8
-------- --------
Total Insurance Reserves 2,036.0 2,053.8
-------- --------
Investment Certificates 566.4 589.9
Unearned Premiums 279.5 260.5
Accrued and Deferred Income Taxes 187.8 166.4
Notes Payable 81.1 59.9
Accrued Expenses and Other Liabilities 236.9 260.3
-------- --------
Total Liabilities 3,387.7 3,390.8
-------- --------
Shareholders' Equity:
Common Stock, $0.10 par value, 100 Million Shares
Authorized, 37,584,928 and 37,340,894 Shares Issued
and Outstanding at December 31, 1997 and 1996 3.8 3.7
Paid-in Capital 217.8 133.0
Retained Earnings 1,209.7 1,265.8
Net Unrealized Appreciation on Securities 101.7 77.8
-------- --------
Total Shareholders' Equity 1,533.0 1,480.3
-------- --------
Total Liabilities and Shareholders' Equity $4,920.7 $4,871.1
======== ========
- ------------------------------------------------------------------------------------------------------
The Notes to the Consolidated Financial Statements are an integral part of these financial statements.
- ------------------------------------------------------------------------------------------------------
</TABLE>
Unitrin, Inc. and Subsidiaries | 24
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
[Dollars in Millions, Except Per Share Amounts] For the Years Ended December 31,
- ------------------------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
REVENUES
Premiums $1,222.0 $1,220.3 $1,099.1
Consumer Finance Revenues 125.0 120.4 106.5
Net Investment Income 179.5 179.0 186.6
Net Gains on Sales of Investments 3.6 3.4 55.2
-------- -------- --------
Total Revenues 1,530.1 1,523.1 1,447.4
-------- -------- --------
EXPENSES
Insurance Claims and Policyholders' Benefits 780.1 799.7 717.5
Insurance Expenses 480.4 486.2 458.4
Consumer Finance Expenses 116.7 99.6 84.9
Interest and Other Expenses 13.1 15.5 25.8
-------- -------- --------
Total Expenses 1,390.3 1,401.0 1,286.6
-------- -------- --------
Income before Income Taxes and Equity in
Net Income of Investees 139.8 122.1 160.8
Income Tax Expense 47.1 40.2 55.3
-------- -------- --------
Income before Equity in Net Income of Investees 92.7 81.9 105.5
Equity in Net Income of Investees (Note 5) 25.2 50.6 45.1
-------- -------- --------
NET INCOME $ 117.9 $ 132.5 $ 150.6
======== ======== ========
NET INCOME PER SHARE (NOTE 11) $ 3.15 $ 3.51 $ 3.73
======== ======== ========
NET INCOME PER SHARE ASSUMING DILUTION (NOTE 11) $ 3.11 $ 3.47 $ 3.69
======== ======== ========
- ------------------------------------------------------------------------------------------------------
The Notes to the Consolidated Financial Statements are an integral part of these financial statements.
- ------------------------------------------------------------------------------------------------------
</TABLE>
Unitrin, Inc. and Subsidiaries | 25
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
[Dollars in Millions] For the Years Ended December 31,
- ------------------------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 117.9 $ 132.5 $ 150.6
Adjustments to Reconcile Net Income to
Net Cash Provided by Operations:
Policy Acquisition Costs Deferred (145.6) (149.1) (148.5)
Amortization of Deferred Policy Acquisition Costs 167.4 170.1 157.5
Equity in Net Income of Investees before Taxes (37.9) (77.1) (68.8)
Cash Dividends from Investee 2.2 2.2 2.2
Amortization of Investments 23.1 24.6 22.5
Provisions for Losses on Consumer Finance Receivables 35.0 27.4 22.4
Increase in Insurance Reserves and Unearned Premiums 7.8 27.8 42.8
Decrease in Accrued Expenses and Other Liabilities (40.0) (6.0) (20.1)
Increase in Accrued and Deferred Income Taxes 10.2 17.6 28.1
Net Gains on Sales of Investments (3.6) (3.4) (55.2)
Other, Net 17.1 4.0 12.7
------- ------- -------
Net Cash Provided by Operating Activities 153.6 170.6 146.2
------- ------- -------
INVESTING ACTIVITIES
Sales and Maturities of Fixed Maturities 364.4 279.6 623.1
Purchases of Fixed Maturities (478.2) (111.6) (322.3)
Sales of Equity Securities 51.6 10.0 85.0
Purchases of Equity Securities (12.2) (84.1) (57.0)
Repayments of Consumer Finance Receivables 344.0 329.0 297.9
Acquisitions of Consumer Finance Receivables (317.4) (417.9) (402.5)
Change in Short-term Investments 19.0 21.7 27.7
Acquisitions and Improvements of Investment Real Estate (12.1) (2.9) (3.6)
Acquisition of Milwaukee Insurance Group, Inc. -- -- (92.6)
Other, Net (25.2) (14.6) (13.5)
------- ------- -------
Net Cash Provided (Used) by Investing Activities (66.1) 9.2 142.2
------- ------- -------
FINANCING ACTIVITIES
Investment Certificate Deposits 203.7 229.7 247.4
Investment Certificate Withdrawals (227.2) (158.8) (166.0)
Universal Life and Annuity Receipts from Policyholders 14.1 21.0 30.7
Universal Life and Annuity Payments to Policyholders (2.9) (7.6) (11.5)
Universal Life and Annuity Payments to Reinsurer -- (76.1) --
Notes Payable Proceeds 515.0 170.0 401.0
Notes Payable Payments (493.8) (210.8) (312.1)
Cash Dividends Paid (89.9) (83.0) (80.7)
Common Stock Repurchases (20.7) (61.1) (416.0)
Other, Net 11.7 4.8 4.6
------- ------- -------
Net Cash Used by Financing Activities (90.0) (171.9) (302.6)
------- ------- -------
Increase (Decrease) in Cash (2.5) 7.9 (14.2)
Cash, Beginning of Year 17.0 9.1 23.3
------- ------- -------
Cash, End of Year $ 14.5 $ 17.0 $ 9.1
======= ======= =======
- ------------------------------------------------------------------------------------------------------
The Notes to the Consolidated Financial Statements are an integral part of these financial statements.
- ------------------------------------------------------------------------------------------------------
</TABLE>
Unitrin, Inc. and Subsidiaries | 26
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
[Dollars in Millions] For the Years Ended December 31, 1997, 1996 and 1995
- ---------------------------------------------------------------------------------------------------------------
Net
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, 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
Net Income -- -- -- 117.9 -- 117.9
Dividends to Common
Shareholders
($2.40 per share) -- -- -- (89.9) -- (89.9)
Change in Net Unrealized
Appreciation on Securities -- -- -- -- 23.9 23.9
Acquisition of
Union Automobile
Indemnity Company 342,000 0.1 18.5 -- -- 18.6
Repurchases of Unitrin
Common Stock (395,500) (0.1) (1.5) (19.1) -- (20.7)
Exercise of Employee
Stock Options, Net
of Shares Exchanged
(Note 10) 297,534 0.1 67.8 (65.0) -- 2.9
---------- ----- ------ -------- ------ --------
BALANCE,
DECEMBER 31, 1997 37,584,928 $ 3.8 $217.8 $1,209.7 $101.7 $1,533.0
========== ===== ====== ======== ====== ========
- ---------------------------------------------------------------------------------------------------------------
The Notes to the Consolidated Financial Statements are an integral part of these financial statements.
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Unitrin, Inc. and Subsidiaries | 27
<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. Certain prior year amounts have
been reclassifed to conform to the current year's presentation.
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 to California residents
which are secured by automobiles 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.
Costs deferred on property and casualty insurance products and health
insurance products are amortized over the term of the related policies.
The deferred policy acquisition costs on traditional life insurance
products are primarily 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.
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, 1997, 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 | 28
<PAGE>
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 2. SUMMARY OF ACCOUNTING POLICIES [CONTINUED]
- --------------------------------------------------------------------------------
Impairment of Long-Lived Assets
The Company accounts for the impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of."
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 $5.4 million,
$2.7 million and $2.1 million in 1997, 1996 and 1995, 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.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 29
<PAGE>
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 2. SUMMARY OF ACCOUNTING POLICIES [CONTINUED]
- --------------------------------------------------------------------------------
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.
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.
Supplemental Cash Flow Information
Assets acquired and liabilities assumed in connection with the acquisition of
Union Automobile Indemnity Company in 1997 were:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions] 1997
<S> <C>
Investments $(36.1)
Receivables (2.3)
Deferred Policy Acquisition Costs (0.9)
Cost in Excess of Net Assets of Purchased Businesses (12.1)
Accrued and Deferred Income Taxes (1.8)
Insurance Reserves 19.6
Unearned Premiums 11.2
Accrued Expenses and Other Liabilities 3.8
------
Common Stock and Paid-in Capital from Acquisition of Union Automobile Indemnity
Company $(18.6)
======
</TABLE>
- --------------------------------------------------------------------------------
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>
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 30
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2. SUMMARY OF ACCOUNTING POLICIES [CONTINUED]
- --------------------------------------------------------------------------------
Accounting Changes
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share." Under SFAS No. 128, the dual presentation of
basic and diluted Earnings Per Share ("EPS") is required on the face of the
income statement for all entities with complex capital structures. In addition,
SFAS No. 128 requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. The Company adopted SFAS No. 128 in 1997 (see Note 11 to the
Consolidated Financial Statements). Prior to the adoption of SFAS No. 128, the
Company was not required to present diluted EPS because the effect of dilution
was less than 3%.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." SFAS No. 129 establishes standards for disclosing
information about an entity's capital structure. The Company adopted SFAS No.
129 in 1997. SFAS No. 129 contains no change in disclosure requirements for
entities that were previously subject to the requirements of Accounting
Principles Board Opinions Nos. 10 and 15 and SFAS No. 47 and as such the
adoption of SFAS No. 129 did not have any effect on the Company's reporting.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." Under SFAS No. 130, enterprises that provide a full set of financial
statements that report financial position, results of operations and cash flows
should also include a Statement of Comprehensive Income for fiscal years
beginning after December 15, 1997, with earlier adoption permitted. The Company
intends to adopt SFAS No. 130 in 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." Under SFAS No. 131, public business
enterprises are required to provide disclosures about operating segments using
the "management approach" for fiscal years beginning after December 15, 1997,
with earlier adoption permitted. The Company intends to adopt SFAS No. 131 in
1998. The Company has not yet determined what its operating segments will be
under SFAS No. 131.
NOTE 3. ACQUISITIONS
- --------------------------------------------------------------------------------
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 Emerging Issues Task Force No. 95-19,
"Determination of the Measurement Date for the Market Price of Securities Issued
In a Purchased Business Combination." The acquisition has been accounted for by
the purchase method and, accordingly, the operations of Union have been
included in the Company's financial statements from the date of acquisition.
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.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 31
<PAGE>
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 4. INVESTMENTS OTHER THAN INVESTEES
- --------------------------------------------------------------------------------
The amortized cost and estimated fair values of the Company's investments in
Fixed Maturities at December 31, 1997 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 $2,000.1 $33.3 $(1.1) $2,032.3
States, Municipalities and Political Subdivisions 103.8 2.8 -- 106.6
Corporate Securities:
Bonds and Notes 121.0 4.1 (0.1) 125.0
Redemptive Preferred Stocks 49.5 2.0 -- 51.5
-------- ----- ----- --------
Investments in Fixed Maturities $2,274.4 $42.2 $(1.2) $2,315.4
======== ===== ===== ========
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
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, 1997 by contractual maturity were:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Amortized Fair
[Dollars in Millions] Cost Value
<S> <C> <C>
Due in One Year or Less $ 397.1 $ 398.4
Due After One Year to Five Years 1,456.0 1,478.0
Due After Five Years to Fifteen Years 272.6 280.7
Due After Fifteen Years 148.7 158.3
-------- --------
Total Investments in Fixed Maturities $2,274.4 $2,315.4
======== ========
- -----------------------------------------------------------------------------------------------------------------------
</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, 1997, 1996 and 1995 was:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
[Dollars in Millions] 1997 1996 1995
<S> <C> <C> <C>
Increase (Decrease) in Unrealized Appreciation on Fixed Maturities $10.0 $(61.0) $174.8
Effect of Income Taxes (3.6) 21.5 (61.4)
----- ------ ------
Increase (Decrease) in Net Unrealized Appreciation on Fixed Maturities $ 6.4 $(39.5) $113.4
===== ====== ======
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Unitrin, Inc. and Subsidiaries | 32
<PAGE>
Notes to the Consolidated Financial Statements
NOTE 4. INVESTMENTS OTHER THAN INVESTEES [continued]
-------------------------------------------------------------------------------
At December 31, 1997, 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 $ 19.7 $ 57.4 $ -- $ 77.1
Preferred Stocks 111.3 57.5 (0.2) 168.6
------ ------ ----- ------
Total $131.0 $114.9 $(0.2) $245.7
====== ====== ===== ======
</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>
-------------------------------------------------------------------------------
The change in Net Unrealized Appreciation on Equity Securities included in
Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995 was:
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions] 1997 1996 1995
<S> <C> <C> <C>
Increase (Decrease) in Unrealized Appreciation
on Equity Securities $27.0 $ 6.1 $(18.9)
Effect of Income Taxes (9.5) (2.2) 6.4
----- ---- -----
Increase (Decrease) in Net Unrealized
Appreciation on Equity Securities $17.5 $ 3.9 $(12.5)
===== ===== ======
</TABLE>
-------------------------------------------------------------------------------
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, 1997 were:
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Curtiss-Wright Litton Western
[Dollars in Millions] Corporation Industries, Inc. UNOVA, Inc. Atlas Inc. Total
<S> <C> <C> <C> <C> <C>
Carrying Value $ 82.7 $291.0 $143.3 $188.8 $ 705.8
Fair Value $159.1 $727.8 $208.1 $936.7 $2,031.7
Approximate Voting Percentage 43.1% 27.5% 23.2% 23.2%
</TABLE>
-------------------------------------------------------------------------------
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 carrying value of its investment exceeded its equity in the
reported net assets of its investees by approximately $1.6 million at December
31, 1997. This difference is not being amortized.
The carrying values of the Company's investments in Litton and Western
Atlas exceeded 10% of the Company's Shareholders' Equity at December 31, 1997
and 1996.
-------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 33
<PAGE>
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 5. INVESTMENTS IN INVESTEES [CONTINUED]
- --------------------------------------------------------------------------------
Unitrin's Equity in Net Income of Investees was $25.2 million, $50.6 million and
$45.1 million in 1997, 1996 and 1995, respectively. Unitrin's Equity in Net
Income of Investees for 1997 includes after-tax losses of $31.0 million and $1.8
million related to Unitrin's share of Western Atlas' charge and UNOVA's
announced charge, respectively, for the write-off of recently acquired
in-process research and development and an after-tax loss of $0.8 million for
Unitrin's share of expenses related to Western Atlas' spin-off of UNOVA.
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, 1997, 1996
and 1995. Summarized financial information reported by Litton for such periods
was:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions] 1997 1996 1995
<S> <C> <C> <C>
Revenues
Three Months Ended:
January 31, $ 960 $ 740 $ 694
April 30, 1,096 1,004 862
July 31, 1,070 1,032 975
October 31, 1,039 1,049 836
------ ------ ------
Revenues for Twelve Months Ended October 31, $4,165 $3,825 $3,367
====== ====== ======
Cost of Sales
Three Months Ended:
January 31, $ 750 $ 568 $ 538
April 30, 865 789 682
July 31, 826 786 796
October 31, 800 825 663
------ ------ ------
Cost of Sales for Twelve Months Ended October 31, $3,241 $2,968 $2,679
====== ====== ======
Income from Continuing Operations
Three Months Ended:
January 31, $ 36 $ 33 $ 28
April 30, 42 39 36
July 31, 44 42 39
October 31, 43 40 37
------ ------ ------
Income from Continuing Operations
for Twelve Months Ended October 31, $ 165 $ 154 $ 140
====== ====== ======
Net Income
Three Months Ended:
January 31, $ 36 $ 33 $ 28
April 30, 42 39 36
July 31, 44 42 39
October 31, 43 40 37
------ ------ ------
Net Income for Twelve Months Ended October 31, $ 165 $ 154 $ 140
====== ====== ======
Current Assets at October 31, $1,801 $1,770
Non-current Assets at October 31, $1,753 $1,668
====== ======
Current Liabilities at October 31, $1,638 $1,649
====== ======
Non-current Liabilities at October 31, $ 831 $ 837
====== ======
</TABLE>
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 34
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. INVESTMENTS IN INVESTEES [CONTINUED]
- --------------------------------------------------------------------------------
The amounts included in Unitrin's financial statements for Western Atlas
represent amounts reported by Western Atlas for periods ending three months
earlier. Accordingly, amounts included in Unitrin's financial statements
represent the amounts reported by Western Atlas for the twelve-month periods
ending September 30, 1997, 1996 and 1995. Summarized financial information
reported by Western Atlas for such periods was:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions] 1997 1996 1995
<S> <C> <C> <C>
Revenues $1,603 $2,433 $2,191
====== ====== ======
Cost of Sales $1,080 $1,683 $1,493
====== ====== ======
Income from Continuing Operations $ 80 $ 116 $ 95
====== ====== ======
Net Income $ (61) $ 116 $ 95
====== ====== ======
Current Assets $1,386 $1,024
====== ======
Non-current Assets $1,432 $1,553
====== ======
Current Liabilities $ 631 $ 570
====== ======
Non-current Liabilities $ 767 $ 549
====== ======
</TABLE>
- --------------------------------------------------------------------------------
On October 31, 1997, Western Atlas completed the distribution of all of the
common stock of UNOVA to Western Atlas' shareholders in the form of a tax-free
dividend. The Company owns approximately 23.2% of UNOVA's common stock, and
accordingly, accounts for its investment in UNOVA under the equity method of
accounting. Prior to the October 31, 1997 distribution, the 1997 results of
UNOVA were reflected in Western Atlas' 1997 results as a discontinued operation.
Western Atlas' net income for the twelve months ended September 30, 1997
includes an after-tax loss of approximately $203 million related to the write-
off of recently acquired in-process research and development.
NOTE 6. CONSUMER FINANCE RECEIVABLES AND INVESTMENT CERTIFICATES
- --------------------------------------------------------------------------------
Consumer Finance Receivables consists primarily of loans to California residents
which are secured by automobiles and is stated net of unearned discount, loan
fees and reserve for losses.
The fair values of Consumer Finance Receivables have 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 differences between the carrying values and the
estimated fair values of Consumer Finance Receivables at December 31, 1997 and
1996 were not material.
The reserve for losses on Consumer Finance Receivables was $39.5 million
and $36.4 million at December 31, 1997 and 1996, respectively.
Investment Certificates are generally fixed in maturity. The fair values of
Investment Certificates have been estimated using the rates currently offered
for deposits of similar remaining maturities. The differences between the
carrying values and the estimated fair values of Investment Certificates at
December 31, 1997 and 1996 were not material.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 35
<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, 1997, 1996 and 1995 was:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
[Dollars in Millions] 1997 1996 1995
Property and Casualty Insurance Reserves,
Net of Reinsurance--Beginning of Year $417.9 $395.0 $296.7
Acquired, Net of Reinsurance of $36.4 in 1995 19.6 -- 93.4
Incurred related to:
Current Year 540.7 550.4 444.8
Prior Years (15.9) (40.4) (29.6)
------ ------ ------
Total Incurred 524.8 510.0 415.2
------ ------ ------
Paid related to:
Current Year 303.8 314.6 263.1
Prior Years 209.7 172.5 147.2
------ ------ ------
Total Paid 513.5 487.1 410.3
------ ------ ------
Property and Casualty Insurance Reserves,
Net of Reinsurance--End of Year $448.8 $417.9 $395.0
====== ====== ======
</TABLE>
- --------------------------------------------------------------------------------
Reinsurance Recoverables were $19.7 million, $36.9 million and $42.8 million
at December 31, 1997, 1996 and 1995, respectively.
NOTE 8. NOTES PAYABLE
- --------------------------------------------------------------------------------
In September 1997, the Company entered into a $340 million unsecured revolving
credit agreement with a group of banks which expires in September 2002 and
provides for fixed and floating rate advances for periods up to 180 days at
various interest rates. The agreement amends and restates the Company's
previous credit agreement which was due to expire in January 1998. 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, 1997 and 1996, the Company had outstanding borrowings under
the revolving credit agreement, classified as Notes Payable in the Consolidated
Balance Sheet, of $75.0 million and $53.0 million at weighted average interest
rates of 6.15% and 5.97%, respectively. Other borrowings, principally a
mortgage note payable on a property occupied by the Company, were $6.1 million
and $6.9 million at December 31, 1997 and 1996, respectively. The Company paid
interest of $5.7 million, $6.8 million and $9.0 million in 1997, 1996 and 1995,
respectively.
The differences between the carrying values and the estimated fair values of
Notes Payable at December 31, 1997 and 1996 were 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, 1997.
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 | 36
<PAGE>
Notes to the Consolidated Financial Statements
NOTE 9. SHAREHOLDERS' EQUITY [continued]
- --------------------------------------------------------------------------------
At December 31, 1997, there are approximately 2.8 million shares of the
Company's outstanding common stock that can be repurchased under the Company's
Board of Directors' outstanding repurchase authorizations. Common stock can be
repurchased in open market or in privately negotiated transactions from time to
time subject to market conditions and other factors. The Company has repurchased
and retired 18.8 million shares of its common stock in open market transactions
at an aggregate cost of approximately $870 million since 1990. Common Stock,
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, 1997 also includes $398.1 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 $850 million and $760 million at December 31,
1997 and 1996, respectively. Statutory Capital and Surplus for the Company's
Property and Casualty Insurance subsidiaries was approximately $1,180 million
and $990 million at December 31, 1997 and 1996, respectively. Statutory Net
Income for the Company's Life and Health Insurance subsidiaries was
approximately $20 million, $34 million and $60 million for the years ended
December 31, 1997, 1996 and 1995, respectively. Statutory Net Income for the
Company's Property and Casualty Insurance subsidiaries was approximately $63
million, $67 million and $95 million for the years ended December 31, 1997, 1996
and 1995, 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 $181.1 million to the Company
in 1997. In 1998, the Company's subsidiaries would be able to pay approximately
$248 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 months prior notice to the
Company. As of December 31, 1997 options for 14,000 common shares were
outstanding and options for 186,000 common shares were available for future
grant under the Director Plan.
On May 14, 1997, the Company's shareholders approved the Unitrin, Inc. 1997
Stock Option Plan (the "1997 Option Plan") covering an aggregate of 2,000,000
shares of Unitrin common stock. Under the 1997 Option Plan, options to purchase
shares of Unitrin common stock may be granted to key employees (including
employee directors) and other key persons providing services to the Company and
its subsidiaries or its affiliates ("Participants"). 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 Stock
Option Committee of the Board of Directors, at its discretion, may grant either
incentive stock options, non-qualified stock options, or stock appreciation
rights pursuant to either the 1997 Option Plan or the 1990 Option Plan. The
Stock Option Committee has sole discretion to determine the persons to whom
options are granted, the number of shares covered by such options and the
exercise price, vesting and expiration dates of such options.
Options are nontransferable and are exercisable in installments. Only
non-qualified stock options have been granted under both the 1997 Option Plan
and the 1990 Option Plan.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 37
<PAGE>
Notes to the Consolidated Financial Statements
NOTE 10. STOCK OPTION PLANS [CONTINUED]
- --------------------------------------------------------------------------------
To encourage stock ownership by the Company's key employees, both the 1997
Option Plan and the 1990 Option Plan include 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.
On August 6, 1997, the Stock Option Committee of the Board of Directors
revised the vesting schedule of all options then outstanding under the Company's
1990 Stock Option Plan so that such options shall vest in four annual
installments beginning six months after their respective dates of grant. As of
December 31, 1997, options for 63,312 common shares were outstanding and options
covering 1,936,500 common shares were available for future grant under the 1997
Stock Option Plan. As of December 31, 1997, options for 1,835,326 common shares
were outstanding and options covering 61,800 common shares were available for
future grant under the 1990 Stock Option Plan.
The following table summarizes information about stock options outstanding
at December 31, 1997:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C>
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
$31.75-$47.00 293,216 5.5 years $41.14 202,841 $39.06
$47.50-$67.625 1,619,422 5.6 years $58.07 319,359 $55.81
</TABLE>
- --------------------------------------------------------------------------------
Had the Company accounted for stock options granted in 1997, 1996 and 1995
under the provisions of SFAS 123, "Accounting for Stock-Based Compensation," pro
forma net income would have been $110.7 million, $130.8 million and $149.9
million for the years ended December 31, 1997, 1996 and 1995, respectively, and
pro forma net income per share would have been $2.96, $3.47 and $3.71 for the
years ended December 31, 1997, 1996 and 1995, respectively. Pro forma
compensation expense in 1997 includes $1.3 million for initial options granted
in 1997, $3.6 million for restorative options granted in 1997, $3.0 million for
amortization of expense for grants made in 1996 and 1995 and $3.1 million for
the change in the vesting schedule. Pro forma compensation expense in 1996
includes $1.2 million for initial options granted in 1996, $0.3 million for
restorative options granted in 1996 and $1.2 million for amortization of expense
for grants made in 1995. Pro forma compensation expense in 1995 includes $1.1
million for initial options granted in 1995. Under the provisions of SFAS 123,
the fair value of initial option grants excludes any value attributable to the
restorative feature. 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 different levels of awards, including restorative
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 1997, 1996 and 1995, the expected
dividend yield used was 4.51%, 3.46% and 3.28%, 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 average yield on U.S.
Treasury securities with a maturity comparable to the expected life of each
option. The expected lives of the options ranged between 1 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.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 38
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10. STOCK OPTION PLANS [CONTINUED]
- --------------------------------------------------------------------------------
A summary of the status of the Company's three stock option plans as of December
31, 1997, 1996 and 1995, 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, 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
Granted 1,651,403 58.71 $ 5.55
Exercised (1,471,437) 44.71
Forfeited (75,046) 51.39
--------- ----------------
Outstanding at December 31, 1997 1,912,638 $55.47 522,200
========= ================
</TABLE>
- --------------------------------------------------------------------------------
Options granted in 1997 and 1996 include 1,173,903 and 162,972 Restorative
Options, respectively.
NOTE 11. NET INCOME PER SHARE
- --------------------------------------------------------------------------------
The Company determined Net Income Per Share and Net Income Per Share Assuming
Dilution in accordance with SFAS No. 128 for the years ended December 31, 1997,
1996 and 1995 as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars and Shares in Millions, Except Per Share Amounts] 1997 1996 1995
<S> <C> <C> <C>
Net Income $117.9 $132.5 $150.6
Dilutive Effect on Net Income from
Investees' Equivalent Shares (1.0) (1.0) (0.9)
------ ------ ------
Net Income Assuming Dilution $116.9 $131.5 $149.7
====== ====== ======
Weighted Average Common Shares Outstanding 37.4 37.7 40.4
Dilutive Effect of Unitrin Stock Option Plans 0.2 0.2 0.2
------ ------ ------
Weighted Average Common Shares and
Equivalent Shares Outstanding Assuming Dilution 37.6 37.9 40.6
====== ====== ======
Net Income Per Share $ 3.15 $ 3.51 $ 3.73
====== ====== ======
Net Income Per Share Assuming Dilution $ 3.11 $ 3.47 $ 3.69
====== ====== ======
</TABLE>
- --------------------------------------------------------------------------------
Options outstanding at December 31, 1997, 1996 and 1995 to purchase 0.2 million,
0.1 million and 0.1 million shares, respectively, of Unitrin common stock were
excluded from the computation of Net Income Per Share Assuming Dilution in 1997,
1996 and 1995, respectively, because the exercise price exceeded the average
market price.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 39
<PAGE>
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 12. INCOME FROM INVESTMENTS
- --------------------------------------------------------------------------------
Net Investment Income for the years ended
December 31, 1997, 1996 and 1995 was:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions] 1997 1996 1995
<S> <C> <C> <C>
Interest and Dividends on Fixed Maturities $147.2 $150.4 $164.0
Dividends on Equity Securities 16.5 16.1 8.7
Other 30.4 24.6 25.6
------ ------ -------
Investment Income 194.1 191.1 198.3
Investment Expenses 14.6 12.1 11.7
------ ------ ------
Net Investment Income $179.5 $179.0 $186.6
====== ====== ======
</TABLE>
- --------------------------------------------------------------------------------
The components of Net Gains on Sales of Investments
for the years ended December 31, 1997, 1996 and
1995 were:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions] 1997 1996 1995
<S> <C> <C> <C>
Fixed Maturities:
Gains $ 2.4 $ 1.6 $ 2.2
Losses (0.2) (0.9) (0.8)
Equity Securities:
Gains 0.4 1.5 54.1
Losses (0.1) -- (1.1)
Other Investments:
Gains 1.1 1.2 0.8
Losses -- -- --
------ ------ ------
Net Gains on Sales of Investments $ 3.6 $ 3.4 $ 55.2
====== ====== ======
</TABLE>
- --------------------------------------------------------------------------------
NOTE 13. INSURANCE EXPENSES
- --------------------------------------------------------------------------------
Insurance Expenses for the years ended
December 31, 1997, 1996 and 1995 were:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions] 1997 1996 1995
<S> <C> <C> <C>
Commissions $224.4 $233.7 $239.4
General Expenses 207.3 203.9 184.4
Taxes, Licenses and Fees 26.9 27.6 25.6
------ ------ ------
Total Costs Incurred 458.6 465.2 449.4
------ ------ ------
Policy Acquisition Costs:
Deferred (145.6) (149.1) (148.5)
Amortized 167.4 170.1 157.5
------ ------ ------
Net Policy Acquisition Costs Amortized 21.8 21.0 9.0
------ ------ ------
Insurance Expenses $480.4 $486.2 $458.4
====== ====== ======
</TABLE>
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 40
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14. 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, 1997 and 1996 were:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions] 1997 1996
<S> <C> <C>
Deferred Tax Assets:
Insurance Reserves $ 64.3 $ 66.7
Unearned Premium Reserves 21.8 20.2
Tax Capitalization of Policy Acquisition Costs 45.1 42.4
Reserve for Losses on Consumer Finance Receivables 10.1 11.1
Postretirement Benefits Other Than Pensions 26.2 25.4
Other 17.9 20.8
------ ------
Total Deferred Tax Assets 185.4 186.6
------ ------
Deferred Tax Liabilities:
Deferred Policy Acquisition Costs 81.7 91.3
Fixed Maturities 18.7 15.3
Equity Securities 32.6 23.4
Investments in Investees 192.2 179.6
Pension Asset 13.1 12.7
Other 3.3 1.5
------ ------
Total Deferred Tax Liability 341.6 323.8
------ ------
Net Deferred Tax Liability 156.2 137.2
Current Tax Liability 31.6 29.2
------ ------
Accrued and Deferred Income Taxes $187.8 $166.4
====== ======
</TABLE>
- --------------------------------------------------------------------------------
A deferred tax asset valuation allowance was not required at December 31, 1997
and 1996. Income taxes paid were $41.7 million, $47.2 million and $49.6 million
in 1997, 1996 and 1995, 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 included in the Consolidated Financial
Statements for the years ended December 31, 1997, 1996 and 1995 was:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions] 1997 1996 1995
<S> <C> <C> <C>
Income Tax Expense $ 47.1 $ 40.2 $ 55.3
Equity in Net Income of Investees 12.7 26.5 23.7
Unrealized Appreciation (Depreciation) on
Securities 13.1 (19.3) 55.0
Effect on Paid-in Capital from Exercise of
Stock Options (8.0) (1.8) (0.6)
------ ------ ------
Comprehensive Income Tax Expense $ 64.9 $ 45.6 $133.4
====== ====== ======
</TABLE>
- --------------------------------------------------------------------------------
The components of Income Tax Expense for the years ended December 31, 1997, 1996
and 1995 were:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions] 1997 1996 1995
<S> <C> <C> <C>
Current Tax Expense $ 52.6 $ 50.0 $ 57.9
Deferred Tax Benefit (5.5) (9.8) (2.6)
------ ------ ------
Income Tax Expense $ 47.1 $ 40.2 $ 55.3
====== ====== ======
</TABLE>
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 41
<PAGE>
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 14. INCOME TAXES [CONTINUED]
- --------------------------------------------------------------------------------
Components of the effective income tax rate on pre-tax income for the years
ended December 31, 1997, 1996 and 1995 were:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Statutory Federal Income Tax Rate 35.0% 35.0% 35.0%
Tax-exempt Income (3.6) (5.0) (2.7)
State Income Taxes 0.7 1.6 1.4
Amortization of Cost in Excess of Net
Assets of Purchased Businesses 1.6 0.9 0.5
Other, Net -- 0.4 0.2
------- ------- -------
Effective Income Tax Rate 33.7% 32.9% 34.4%
======= ======= =======
</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.
NOTE 15. 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,
1997, 1996 and 1995 were:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions] 1997 1996 1995
<S> <C> <C> <C>
Service Cost Benefits Earned During the Year $ 5.4 $ 4.1 $ 3.9
Interest Cost on Projected Benefit Obligation 7.4 7.0 6.6
Actual Gain on Plan Assets (11.6) (8.4) (8.0)
Net Amortization and Deferral (0.8) (3.1) (3.4)
------ ----- -----
Pension Expense (Income) $ 0.4 $(0.4) $(0.9)
====== ===== =====
</TABLE>
- --------------------------------------------------------------------------------
The actuarial assumptions used to develop the components of Pension Expense
(Income) for the years ended December 31, 1997, 1996 and 1995 were:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Discount Rate 7.0% 7.0% 7.5%
Rate of Increase in Future Compensation Levels 4.0% 4.0% 4.5%
Expected Long-term Rate of Return on Plan Assets 6.5% 6.0% 6.0%
</TABLE>
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 42
<PAGE>
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 15. PENSION BENEFITS [continued]
- --------------------------------------------------------------------------------
Plan Assets in Excess of Projected Benefit Obligations at December 31, 1997 and
1996 were:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions] 1997 1996
Plan Assets at Fair Value, Primarily U.S. Government Obligations $174.3 $163.3
------ ------
<S> <C> <C>
Present Value of Projected Benefit Obligations:
Vested Benefit Obligation 97.5 88.4
Non-vested Benefit Obligation 1.8 2.0
------ ------
Accumulated Benefit Obligation 99.3 90.4
Additional Benefits Related to Future Compensation Levels 16.6 17.3
------ ------
Projected Benefit Obligations 115.9 107.7
------ ------
Plan Assets in Excess of Projected Benefit Obligations $ 58.4 $ 55.6
====== ======
Plan Assets in Excess of Projected Benefit Obligations:
Included in Balance Sheet:
Prepaid Pension Cost $ 37.0 $ 36.2
Accrued Pension Liability -- (4.3)
Not Included in Balance Sheet:
Unrecognized Net Asset at Adoption of SFAS No. 87, Net of Amortization 5.3 7.3
Unrecognized Net Gain Due to Past Experience Different from that
Assumed and Changes in the Assumptions 16.1 16.4
------ ------
Plan Assets in Excess of Projected Benefit Obligations $ 58.4 $ 55.6
====== ======
</TABLE>
- --------------------------------------------------------------------------------
At both December 31, 1997 and 1996 a discount rate of 7.0 percent and a rate of
increase in future compensation levels of 4.0 percent were assumed for the
valuation of pension obligations.
NOTE 16. 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 $4.4 million in 1997,
$4.7 million in 1996 and $5.4 million in 1995. This expense primarily represents
interest on the accumulated postretirement benefit obligation. Service cost was
not material.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 43
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS [CONTINUED]
- --------------------------------------------------------------------------------
The plans' combined Accumulated Postretirement Benefit Obligation at December
31, 1997 and 1996 was:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions] 1997 1996
<S> <C> <C>
Retirees $43.8 $42.9
Fully Eligible Active Participants 7.1 7.9
Other Active Plan Participants 16.6 17.3
----- -----
Accumulated Postretirement Benefit Obligation 67.5 68.1
Unrecognized Net Gain Due to
Experience Different from that Assumed 7.6 5.8
----- -----
Net Postretirement Liability
Recognized in the Balance Sheet $75.1 $73.9
===== =====
</TABLE>
- --------------------------------------------------------------------------------
The assumed health care cost trend rate used in measuring the Accumulated
Postretirement Benefit Obligation at December 31, 1997 was 8.15 percent in 1997,
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, 1996 was 8.5
percent in 1996, 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, 1997 by approximately $7.2 million and 1997 postretirement
expense by $0.5 million.
The assumed discount rate used in determining the Accumulated
Postretirement Benefit Obligation was 7.0 percent at both December 31, 1997 and
1996.
NOTE 17. 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, 1997, 1996 and 1995 were:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions] 1997 1996 1995
<S> <C> <C> <C>
SEGMENT REVENUES
Property and Casualty Insurance $ 831.7 $ 781.2 $ 631.5
Life and Health Insurance 566.5 612.1 649.7
Consumer Finance 125.0 120.4 106.5
-------- -------- --------
Total Segment Revenues 1,523.2 1,513.7 1,387.7
-------- -------- --------
Net Gains on Sales of Investments 3.6 3.4 55.2
Other 3.3 6.0 4.5
-------- -------- --------
Total Revenues $1,530.1 $1,523.1 $1,447.4
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 44
<PAGE>
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 17. BUSINESS SEGMENTS [continued]
- --------------------------------------------------------------------------------
Segment Operating Profit and Segment Assets for the years ended December 31,
1997, 1996 and 1995 were:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[Dollars in Millions]
1997 1996 1995
<S> <C> <C> <C>
SEGMENT OPERATING PROFIT
Property and Casualty Insurance $ 83.7 $ 63.2 $ 50.2
Life and Health Insurance 50.1 40.3 52.8
Consumer Finance 13.9 26.4 25.7
-------- -------- --------
Total Segment Operating Profit 147.7 129.9 128.7
-------- -------- --------
Net Gains on Sales of Investments 3.6 3.4 55.2
Other (11.5) (11.2) (23.1)
-------- -------- --------
Income before Income Taxes and Equity in
Net Income of Investees $ 139.8 $ 122.1 $ 160.8
======= ======== ========
SEGMENT ASSETS
Property and Casualty Insurance $1,083.7 $1,109.0 $1,051.3
Life and Health Insurance 2,457.4 2,505.1 2,543.1
Consumer Finance 657.3 676.8 598.7
Investees and Other 722.3 580.2 625.6
-------- -------- --------
Total Assets $4,920.7 $4,871.1 $4,818.7
</TABLE>
- --------------------------------------------------------------------------------
NOTE 18. REINSURANCE
- --------------------------------------------------------------------------------
Effective January 1, 1997, United Insurance Company of America ("United"), one
of the Company's Life and Health Insurance segment subsidiaries, entered into a
long-duration reinsurance agreement to cede certain in-force life and health
insurance policies principally in the states of Arkansas and Missouri to a third
party. As a result of this transaction, premiums in the Life and Health
Insurance segment decreased by approximately $10 million in 1997.
Effective May 31, 1996, United entered into a long-duration reinsurance
agreement to cede certain in-force life insurance policies to a third party. As
a result of this transaction, premiums in the Life and Health Insurance segment
decreased by approximately $6 million and $7 million in 1997 and 1996,
respectively.
At December 31, 1997 and 1996, United had not been relieved of its primary
obligation to certain policyholders under these reinsurance agreements.
Accordingly, pursuant to the provisions of SFAS No. 113, "Accounting and
Reporting for Reinsurance of Short Duration and Long Duration Contracts," the
Company continues to include the life insurance reserves related to these
policyholders on its balance sheet along with a corresponding amount classified
as Other Receivables. Life insurance reserves related to these policyholders
were approximately $78 million and $112 million at December 31, 1997 and 1996,
respectively.
Premiums on short-duration policies assumed were $95.4 million and $109.6
million for the years ended December 31, 1997 and 1996, respectively. Premiums
on short-duration policies assumed were not material for the year ended December
31, 1995. Premiums on long-duration policies assumed were not material for the
years ended December 31, 1997, 1996 and 1995. Premiums ceded on short-duration
and long-duration policies were not material for the years ended December 31,
1997, 1996 and 1995.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 45
<PAGE>
Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 19. 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 that 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 appealed the judgment to the Thirteenth Court of Appeals in Corpus
Christi, Texas. On February 27, 1997, the court of appeals issued its decision
affirming in part and reversing and remanding in part the judgment of the trial
court. The result is that the judgment has been reduced to $12.8 million plus
interest, and the case has been remanded for a new trial on the plaintiffs'
claim of unconscionability. Trinity has filed an application for writ of error
in the Supreme Court of Texas. The Company continues to believe that Trinity has
a number of meritorious defenses. The Company believes that resolution of this
action will not have a material adverse effect on the Company's financial
position.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 46
<PAGE>
Notes to the Consolidated Financial Statements
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
NOTE 20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------
[Dollars in Millions, Except Per Share Amounts] Three Months Ended
- ----------------------------------------------------------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, Total
1997
<S> <C> <C> <C> <C> <C>
Premiums and Consumer Finance Revenues $338.4 $342.3 $338.7 $327.6 $1,347.0
Net Investment Income 42.4 46.4 43.8 46.9 179.5
Net Gains on Sales of Investments 1.3 1.8 0.1 0.4 3.6
------ ------ ------ ------ --------
Total Revenues $382.1 $390.5 $382.6 $374.9 $1,530.1
====== ====== ====== ====== ========
Net Income:
From Operations $ 20.0 $ 18.1 $ 21.2 $ 31.0 $ 90.3
From Investees Before
One-Time Items 12.8 13.7 15.8 16.5 58.8
From Investees' One-Time Items -- (31.8) -- (1.8) (33.6)
From Sales of Investments 0.9 1.2 -- 0.3 2.4
------ ------ ------ ------ --------
Total Net Income $ 33.7 $ 1.2 $ 37.0 $ 46.0 $ 117.9
====== ====== ====== ====== ========
Net Income Per Share (A) $ 0.90 $ 0.03 $ 0.99 $ 1.23 $ 3.15
====== ====== ====== ====== ========
Net Income Per Share Assuming Dilution (A) $ 0.89 $ 0.03 $ 0.97 $ 1.21 $ 3.11
====== ====== ====== ====== ========
Dividends Paid to Common Shareholders
(Per Share) $ 0.60 $ 0.60 $ 0.60 $ 0.60 $ 2.40
====== ====== ====== ====== ========
Common Stock Market Prices:
High 55 3/4 62 7/8 66 1/4 68 1/2 68 1/2
Low 49 1/2 48 1/2 56 1/4 60 5/8 48 1/2
Close 49 3/4 61 65 64 5/8 64 5/8
- ----------------------------------------------------------------------------------------------------------------------------------
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 Before
One-Time Items 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
====== ====== ====== ====== ========
Net Income Per Share Assuming Dilution (A) $ 0.65 $ 0.77 $ 1.01 $ 1.05 $ 3.47
====== ====== ====== ====== ========
Dividends Paid to Common Shareholders
(Per Share) $ 0.55 $ 0.55 $ 0.55 $ 0.55 $ 2.20
====== ====== ====== ====== ========
Common Stock Market Prices:
High 51 3/4 49 1/2 51 56 3/8 56 3/8
Low 45 1/4 45 3/4 44 1/4 49 44 1/4
Close 46 47 49 1/4 55 3/4 55 3/4
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(A) The cumulative sum of quarterly Net Income Per Share and Net Income Per
Share Assuming Dilution amounts does not equal Total Net Income Per Share
and Total Net Income Per Share Assuming Dilution for the year due to
differences in weighted average shares and equivalent shares outstanding
for each of the periods presented.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 47
<PAGE>
EXHIBIT 13.2
MANAGEMENT DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following pages reproduce pages 16 through 22 from Unitrin, Inc.'s 1997
Annual Report to Shareholders.
<PAGE>
Management's Discussion and Analysis of Results
of Operations and Financial Condition
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
PROPERTY AND CASUALTY INSURANCE
- ------------------------------------------------------------------------------
[Dollars in Millions] 1997 1996 1995
<S> <C> <C> <C>
Premiums $775.3 $731.2 $587.3
Net Investment Income 56.4 50.0 44.2
------ ------ ------
Total Revenues $831.7 $781.2 $631.5
====== ====== ======
Operating Profit $ 83.7 $ 63.2 $ 50.2
====== ====== ======
- ------------------------------------------------------------------------------
</TABLE>
Premiums in the Property and Casualty Insurance segment increased by $44.1
million in 1997. Premiums increased by $33.4 million as a result of the January
1997 acquisition of Union Automobile Indemnity Company ("Union"). Excluding the
Union acquisition, premiums increased due primarily to higher volume of
automobile insurance, partially offset by lower volume of home service products.
Net Investment Income in the Property and Casualty Insurance segment
increased by $6.4 million in 1997 due primarily to the inclusion of Union net
investment income in 1997 and interest resulting from the settlement of prior
year taxes.
Operating Profit in the Property and Casualty Insurance segment increased
by $20.5 million in 1997. Losses directly attributed to storms decreased $15.3
million in 1997 partially resulting from the Company's continuing efforts to
reduce its concentration of business in storm prone areas. Excluding the effect
of storms, Operating Profit increased in 1997 due primarily to improved loss
experience in automobile insurance and the higher net investment income,
partially offset by expenses related to Year 2000 and other system development
costs.
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 due primarily to higher prices, partially offset by
the comparative effect of $5.7 million of favorable premium adjustments related
to Proposition 103 in 1995.
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.
- ------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
LIFE AND HEALTH INSURANCE
- --------------------------------------------------------------------------------------------------------------
[Dollars in Millions] 1997 1996 1995
<S> <C> <C> <C>
Life Insurance Premiums $330.9 $359.4 $368.6
Accident and Health Insurance Premiums 115.8 129.7 143.2
------ ------ ------
Total Premiums 446.7 489.1 511.8
Net Investment Income 119.8 123.0 137.9
------ ------ ------
Total Revenues $566.5 $612.1 $649.7
====== ====== ======
Operating Profit $ 50.1 $ 40.3 $ 52.8
====== ====== ======
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Life Insurance Premiums decreased by $28.5 million in 1997 due primarily to the
ceding of certain life insurance policies to third parties (see below) and
lower volume. Accident and Health Insurance Premiums decreased by $13.9 million
due primarily to lower volume, partially offset by higher prices. In 1997, the
Company began exiting certain Accident and Health Insurance markets. As a result
of exiting these markets, annual Accident and Health Insurance premiums are
expected to decrease by approximately $12 million in 1998.
Net Investment Income in the Life and Health Insurance segment decreased by
$3.2 million in 1997 due primarily to a lower level of investments as a result
of the ceding of certain life insurance policies to third parties.
Operating Profit in the Life and Health Insurance segment in 1997 increased
by $9.8 million due primarily to lower benefits as a percentage of premiums.
Policy Acquisition Costs Amortized exceeded Policies Acquisition Costs Deferred
by $23.3 million in 1997 due to a lower volume of new business written in 1997
and the continuing amortization of costs deferred in prior years.
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 January 1, 1997, United Insurance Company of America ("United"),
one of the Company's Life and Health Insurance segment subsidiaries, entered
into a long-duration reinsurance agreement to cede certain in-force life and
health insurance policies principally in the states of Arkansas and Missouri to
a third party. As a result of this transaction, premiums in the Life and Health
Insurance segment decreased by approximately $10 million in 1997. See Note 18 to
the Consolidated Financial Statements.
Effective May 31, 1996, United entered into a long-duration reinsurance
agreement to cede certain in-force life insurance policies to a third party. As
a result of this transaction, premiums in the Life and Health Insurance segment
decreased by approximately $6 million and $7 million in 1997 and 1996,
respectively. See Note 18 to the Consolidated Financial Statements.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 17
<PAGE>
Management's Discussion and Analysis of Results
of Operations and Financial Condition
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
CONSUMER FINANCE
- ----------------------------------------------------------------------------------------------------------------------
[Dollars in Millions] 1997 1996 1995
<S> <C> <C> <C>
Revenues $125.0 $120.4 $106.5
====== ====== ======
Operating Profit $ 13.9 $ 26.4 $ 25.7
====== ====== ======
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Consumer Finance Revenues increased by $4.6 million in 1997 due primarily to a
higher level of loans outstanding during the first half of the year and to a
higher level of investments. Operating Profit in the Consumer Finance segment
decreased by $12.5 million in 1997 due primarily to higher provisions for loan
losses.
Consumer Finance Revenues increased by $13.9 million in 1996 due primarily
to a higher level of loans outstanding. Operating Profit in the Consumer
Finance segment increased by $0.7 million in 1996 due primarily to the higher
level of loans outstanding.
Loans more than 90 days past due were $17.8 million and $19.2 million at
December 31, 1997 and 1996, respectively, while the reserve for loan losses was
$39.5 million and $36.4 million, respectively. Loans more than 90 days past due
decreased primarily due to a lower level of loans outstanding at December 31,
1997, compared to December 31, 1996, while the reserve for loan losses increased
due primarily to current economic conditions.
INVESTEES
- --------------------------------------------------------------------------------
Unitrin's investment portfolio includes equity securities or "investees"
accounted for by the equity method of accounting: Curtiss-Wright Corporation
("Curtiss-Wright"), Litton Industries, Inc. ("Litton"), UNOVA, Inc. ("UNOVA"),
and Western Atlas Inc. ("Western Atlas"). 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 Unitrin's
insurance subsidiaries. The market value of Unitrin's Investments in Investees
was approximately $2.0 billion at December 31, 1997 compared to an asset
carrying value of $706 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, 1997, Unitrin 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."
At December 31, 1997, Unitrin owned approximately 27.5% of Litton's common
stock. Litton stated in its 1997 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 surface combatant ships for the U.S. Navy," and that it is "an
international supplier of connectors, multilayer circuit boards, laser crystals,
solder materials and other equipment used primarily in the telecommunications,
industrial and computer markets."
At December 31, 1997, Unitrin owned approximately 23.2% of Western Atlas'
common stock. Western Atlas stated in its 1996 annual report to shareholders
that Western Atlas was 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 efficiency and productivity of customer projects."
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
- --------------------------------------------------------------------------------
INVESTEES [CONTINUED]
- --------------------------------------------------------------------------------
On October 31, 1997, Western Atlas completed the distribution of its industrial
automation businesses in the form of the common stock of UNOVA to Western Atlas'
shareholders in a tax-free dividend. At December 31, 1997, Unitrin owned
approximately 23.2% of UNOVA's common stock. UNOVA stated in its September 30,
1997 quarterly report on Form 10-Q that it is "an industrial technologies
company providing global customers with solutions for improving their efficiency
and productivity. The company is engaged in the industrial automation and
automated data systems businesses."
Unitrin's Equity in Net Income of Investees was $25.2 million, $50.6
million and $45.1 million in 1997, 1996 and 1995, respectively. Unitrin's Equity
in Net Income of Investees for 1997 includes after-tax losses of $31.0 million
and $1.8 million related to Unitrin's share of Western Atlas' charge and UNOVA's
announced charge, respectively, for the write-off of recently acquired in-
process research and development and an after-tax loss of $0.8 million for
Unitrin's share of expenses related to Western Atlas' spin-off of UNOVA.
Summarized financial and other information about Unitrin's Investments in
Investees can be found in Note 5 to the Consolidated Financial Statements.
INVESTMENT RESULTS
- --------------------------------------------------------------------------------
Net Investment Income was $179.5 million, $179.0 million and $186.6 million in
1997, 1996 and 1995, respectively.
Net Investment Income increased by $0.5 million in 1997 due primarily to
the inclusion of Union net investment income in 1997 and interest resulting from
the settlement of prior year taxes, partially offset by lower investment income
from the Company's investment in Navistar $6.00 Cumulative Convertible Preferred
Stock, Series G (see below).
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 from the Company's investment in Navistar's $6.00
Cumulative Convertible Preferred Stock, Series G was $5.7 million in 1997, $7.1
million in 1996 and $4.3 million in 1995. It is the Company's policy to record
dividend income on its preferred and common stock investments based on the ex-
dividend date. Net Investment Income from the Company's investment in Navistar
decreased by $1.4 million in 1997 and increased by $2.8 million in 1996 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, a subsidiary of
the Company, sold the investment to the Unitrin, Inc. parent company.
Net Gains on Sales of Investments was $3.6 million in 1997, $3.4 million in
1996 and $55.2 million in 1995. Net Gains on Sales of Investments in 1995
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.
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.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 19
<PAGE>
Management's Discussion and Analysis of Results
of Operations and Financial Condition
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
At December 31, 1997, there are approximately 2.8 million shares of the
Company's outstanding common stock that can be repurchased under the Company's
Board of Directors' outstanding repurchase authorizations. Common stock can be
repurchased in open market or in privately negotiated transactions from time to
time subject to market conditions and other factors. During 1997, the Company
repurchased and retired 395,500 shares of its common stock in open market
transactions at an aggregate cost of $20.7 million. The Company has repurchased
and retired 18.8 million shares of its common stock in open market transactions
at an aggregate cost of approximately $870 million since 1990.
On February 5, 1997, the Company's Board of Directors increased the
Company's quarterly dividend from $0.55 per common share to $0.60 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 five-year $340 million unsecured revolving
credit agreement with a group of banks in September 1997. 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 $75 million in advances outstanding under the agreement on December 31, 1997
was 6.15%. At December 31, 1997, the unused commitment under the Company's
revolving credit agreement was $265 million. In addition, the Company's
subsidiaries in 1998 would be able to pay approximately $248 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, 1997, the Company had capacity to write
additional premiums relative to statutory capital and surplus requirements.
Litton, UNOVA 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 1997, 1996 and 1995. 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, 1997 includes $398.1 million representing the
undistributed equity in net income of investees.
INTEREST AND OTHER EXPENSES
- --------------------------------------------------------------------------------
Interest and Other Expenses was $13.1 million in 1997, $15.5 million in 1996 and
$25.8 million in 1995. Expenses attributed to an unsolicited business
combination proposal were $8.0 million in 1995. Interest Expense was $5.3
million, $6.3 million and $10.5 million in 1997, 1996 and 1995, respectively.
Other corporate expenses were $7.8 million in 1997, $9.2 million in 1996 and
$7.3 million in 1995.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
- --------------------------------------------------------------------------------
THE YEAR 2000 ISSUE
- --------------------------------------------------------------------------------
The Year 2000 issue (i.e. the ability of computer systems to accurately identify
and process dates beginning with the year 2000 and beyond) affects virtually
all companies and organizations. Some of Unitrin's computer systems are already
Year 2000 compliant. However, certain of Unitrin's computer systems use only
two digits to identify a year in a date field. For example, the year 2000 would
be represented in these systems as "00," but would in most cases be interpreted
by the computer as "1900" rather than "2000," thereby potentially resulting in
processing errors.
The ability to process information in a timely and accurate manner is vital
to Unitrin's data-intensive insurance and consumer finance businesses. Unitrin
recognizes that the computer systems used by these businesses must be Year 2000
compliant by December 31, 1999 and, in some instances, well in advance of that
date (e.g., by January 1999 in the case of certain property and casualty
insurance policies with one-year terms expiring on or after January 1, 2000).
Unitrin is taking steps it deems appropriate to meet this challenge, including
rewriting existing computer applications to be Year 2000 compliant and replacing
other existing computer applications with new applications that improve
functionality in addition to being Year 2000 compliant. Unitrin is also
reviewing the Year 2000 issue with key service providers. The goal of Unitrin
and its operating companies is to be substantially "Year 2000" compliant by the
end of 1998, although there can be no assurances that this goal will be met. If
one or more of Unitrin's operating companies, key service providers or investee
companies fails to make its computer systems Year 2000 compliant by the
necessary dates, such failure could adversely affect Unitrin's operations and
financial results.
Expense recognized directly related to rewriting existing applications or
replacing existing applications with new Year 2000 compliant applications
totaled $8.5 million, $3.0 million and $1.8 million for the years ended December
31, 1997, 1996 and 1995, respectively. Unitrin expects such expense recognition
to continue in 1998 at levels comparable to 1997.
THE RELIABLE LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
On June 20, 1997, Unitrin and The Reliable Life Insurance Company ("Reliable")
entered into a definitive agreement, subject to certain approvals and other
customary closing conditions, providing for the acquisition of Reliable by
Unitrin. If the acquisition is consummated as proposed, Unitrin would issue
approximately 3,760,000 shares of its common stock for all of Reliable's
outstanding common stock.
On October 31, 1997, the Missouri Department of Insurance (the "Missouri
Department") held a hearing to consider approval of the transaction. On
December 12, 1997, the Missouri Department issued an order disapproving the
proposed acquisition of Reliable by Unitrin. In issuing its order, the Missouri
Department found that the effect of the transaction will be substantially to
lessen competition in insurance in the state of Missouri. On December 23, 1997,
Unitrin filed suit in the Circuit Court of Cole County, Missouri seeking a
reversal of the Missouri Department's order disapproving Unitrin's proposed
acquisition of Reliable.
Unitrin or Reliable may terminate the acquisition agreement at any time.
However, Unitrin is firmly committed to the goal of consummating the proposed
transaction.
If consummated, the acquisition would be accounted for by the purchase
method and, accordingly, the operations of Reliable would be included in
Unitrin's financial statements from the date of acquisition. Consummation of the
acquisition would increase annual premiums in Unitrin's Life and Health
Insurance segment by approximately $90 million.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
- --------------------------------------------------------------------------------
ACCOUNTING CHANGES
- --------------------------------------------------------------------------------
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." Under SFAS No. 128, the dual presentation of basic and diluted Earnings
Per Share ("EPS") is required on the face of the income statement for all
entities with complex capital structures. In addition, SFAS No. 128 requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. The Company
adopted SFAS No. 128 in 1997 (see Note 11 to the Consolidated Financial
Statements). Prior to the adoption of SFAS No. 128, the Company was not required
to present diluted EPS because the effect of dilution was less than 3%.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." SFAS No. 129 establishes standards for disclosing
information about an entity's capital structure. The Company adopted SFAS No.
129 in 1997. SFAS No. 129 contains no change in disclosure requirements for
entities that were previously subject to the requirements of Accounting
Principles Board Opinions Nos. 10 and 15 and SFAS No. 47 and as such the
adoption of SFAS No. 129 did not have any effect on the Company's reporting.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." Under SFAS No. 130, enterprises that provide a full set of financial
statements that report financial position, results of operations and cash flows
should also include a Statement of Comprehensive Income for fiscal years
beginning after December 15, 1997, with earlier adoption permitted. The Company
intends to adopt SFAS No. 130 in 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." Under SFAS No. 131, public business
enterprises are required to provide disclosures about operating segments using
the "management approach" for fiscal years beginning after December 15, 1997,
with earlier adoption permitted. The Company intends to adopt SFAS No. 131 in
1998. The Company has not yet determined what its operating segments will be
under SFAS No. 131.
- --------------------------------------------------------------------------------
Unitrin, Inc. and Subsidiaries | 22
<PAGE>
EXHIBIT 13.3
FINANCIAL HIGHLIGHTS
The following page reproduces page 1 from Unitrin, Inc.'s 1997 Annual Report to
Shareholders.
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
[Dollars in Millions, Except Per Share Amounts] 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR
Premiums and Consumer
Finance Revenues $1,347.0 $1,340.7 $1,205.6 $1,140.2 $1,137.5
Net Investment Income 179.5 179.0 186.6 207.2 216.4
Net Gains on Sales of Investments 3.6 3.4 55.2 18.1 9.3
-------- -------- -------- -------- --------
Total Revenues $1,530.1 $1,523.1 $1,447.4 $1,365.5 $1,363.2
======== ======== ======== ======== ========
Net Income:
From Operations $ 90.3 $ 79.7 $ 69.4 $ 102.8 $ 105.8
From Investees Before
One-Time Items 58.8 50.6 45.1 30.6 36.8
From Investees' One-Time Items (33.6) -- -- 3.2 (52.9)
From Sales of Investments 2.4 2.2 36.1 11.8 5.3
-------- -------- -------- -------- --------
Total Net Income $ 117.9 $ 132.5 $ 150.6 $ 148.4 $ 95.0
======== ======== ======== ======== ========
Net Income Per Share:
From Operations $ 2.41 $ 2.11 $ 1.72 $ 2.05 $ 2.04
From Investees Before
One-Time Items 1.57 1.34 1.12 0.61 0.71
From Investees' One-Time Items (0.90) -- -- 0.06 (1.02)
From Sales of Investments 0.07 0.06 0.89 0.24 0.10
-------- -------- -------- -------- --------
Total Net Income Per Share $ 3.15 $ 3.51 $ 3.73 $ 2.96 $ 1.83
======== ======== ======== ======== ========
Total Net Income Per Share
Assuming Dilution $ 3.11 $ 3.47 $ 3.69 $ 2.94 $ 1.76
======== ======== ======== ======== ========
Repurchases of
Unitrin Common Stock $ 20.7 $ 61.1 $ 416.0 $ 245.3 $ --
Dividends Paid to Common
Shareholders $ 89.9 $ 83.0 $ 80.7 $ 75.8 $ 67.4
Dividends Paid to Common
Shareholders (Per Share) $ 2.40 $ 2.20 $ 2.00 $ 1.50 $ 1.30
AT YEAR END
Number of Employees 6,866 7,401 7,629 7,289 7,501
Investments $3,448.5 $3,291.4 $3,409.7 $3,321.1 $3,707.0
Total Assets 4,920.7 4,871.1 4,818.7 4,569.8 4,895.3
Insurance Reserves 2,036.0 2,053.8 2,007.3 1,828.3 1,802.2
Shareholders' Equity 1,533.0 1,480.3 1,524.5 1,765.1 2,098.5
Shares of Unitrin Common Stock
Outstanding (In Millions of Shares) 37.6 37.3 38.5 47.1 51.8
Book Value Per Share $ 40.79 $ 39.64 $ 39.61 $ 37.51 $ 40.49
Fair Value Per Share of
Investments in Investees
in Excess of Carrying Value 22.90 16.35 12.23 6.84 5.20
-------- -------- -------- -------- --------
Adjusted Book Value Per Share $ 63.69 $ 55.99 $ 51.84 $ 44.35 $ 45.69
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Unitrin, Inc. and Subsidiaries | 1
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF UNITRIN, INC.
Subsidiaries of Unitrin, Inc., with their states of incorporation in
parentheses, are as follows:
1. Alpha Property & Casualty Insurance Company (Wisconsin)
2. Financial Indemnity Company (California)
3. Fireside Mortgage Loans (California)
4. Fireside Securities Corporation (California)
5. Fireside Thrift Co. (California)
6. Milwaukee Guardian Insurance, Inc. (Wisconsin)
7. Milwaukee Insurance Group, Inc. (Wisconsin)
8. Milwaukee Safeguard Insurance Company (Wisconsin)
9. The Pyramid Life Insurance Company (Kansas)
10. Security National Insurance Company (Texas)
11. Southern States Finance Corporation (Louisiana)
12. Southern States General Agency, Inc. (Louisiana)
13. Trinity Lloyd's Corporation (Texas)
14. Trinity Universal Insurance Company (Texas)
15. Trinity Universal Insurance Company of Kansas, Inc. (Kansas)
16. Union Automobile Indemnity Company (Illinois)
17. Union National Fire Insurance Company (Louisiana)
18. Union National Life Insurance Company (Louisiana)
19. United Casualty Insurance Company of America (Pennsylvania)
20. United Insurance Company of America (Illinois)
21. United Lloyd's Corporation (Texas)
22. Unitrin Acquisition Corporation (Missouri)
23. Unitrin Services Company (Illinois)
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Unitrin, Inc.:
Under date of January 7, 1998, we reported on the consolidated balance sheets of
Unitrin, Inc. and subsidiaries as of December 31, 1997 and 1996 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, 1997. These
consolidated financial statements and our report thereon are incorporated by
reference in the December 31, 1997 Annual Report on Form 10-K 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. 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.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
January 7, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of Unitrin, Inc.:
We consent to incorporation by reference in Registration Statements 333-31423 of
Unitrin, Inc., on Form S-4, and 33-58300, 33-47530, 333-4530 and 333-38981 of
Unitrin, Inc., on Form S-8, of our reports dated January 7, 1998, relating to
the consolidated balance sheets of Unitrin, Inc. and subsidiaries as of December
31, 1997 and 1996 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, 1997, which reports appear
in the December 31, 1997 Annual Report on Form 10-K of Unitrin, Inc.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
March 6, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND> This schedule contains summary financial information extracted from
the Consolidated Financial Statements and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 2,315,400
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 245,700
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 3,448,500
<CASH> 14,500
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 237,100
<TOTAL-ASSETS> 4,920,700
<POLICY-LOSSES> 2,036,000
<UNEARNED-PREMIUMS> 279,500
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 81,100
<COMMON> 3,800
0
0
<OTHER-SE> 1,529,200
<TOTAL-LIABILITY-AND-EQUITY> 4,920,700
1,222,000
<INVESTMENT-INCOME> 179,500
<INVESTMENT-GAINS> 3,600
<OTHER-INCOME> 125,000
<BENEFITS> 780,100
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 610,200<F1>
<INCOME-PRETAX> 139,800
<INCOME-TAX> 47,100
<INCOME-CONTINUING> 117,900<F2>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 117,900
<EPS-PRIMARY> 3.15
<EPS-DILUTED> 3.11
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> Includes Consumer Finance Expenses of $116.7 million and Other Expenses of
$13.1 million.
<F2> Includes Equity in Net Income of Investees of $25.2 million.
</FN>
</TABLE>
