<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended June 30, 2000
-----------------------------------------------------
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Transition Period from to
---------------------- ---------------------
Commission file number 0-18298
---------------------------------------------------------
Unitrin, Inc.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-4255452
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One East Wacker Drive, Chicago, Illinois 60601
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(312) 661-4600
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
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
---------- ----------
68,219,833 shares of common stock, $0.10 par value, were outstanding as of July
31, 2000.
<PAGE>
UNITRIN, INC.
INDEX
Page
----
PART I. Financial Information.
Item 1. Financial Statements.
Condensed Consolidated Statements of 1
Income for the Three and Six Months Ended
June 30, 2000 and 1999 (Unaudited).
Condensed Consolidated Balance Sheets as of 2
June 30, 2000 (Unaudited) and
December 31, 1999.
Condensed Consolidated Statements of Cash 3
Flows for the Six Months Ended
June 30, 2000 and 1999 (Unaudited).
Notes to the Condensed Consolidated 4-8
Financial Statements (Unaudited).
Item 2. Management's Discussion and Analysis of 9-13
Results of Operations and Financial Condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 13
PART II. Other Information.
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Securities Holders. 13
Item 6. Exhibits and Reports on Form 8-K. 14
Signatures 15
<PAGE>
UNITRIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
-------------------- ---------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Premiums $719.9 $652.2 $364.2 $328.0
Consumer Finance Revenues 67.6 59.2 34.1 30.1
Net Investment Income 109.4 100.5 55.5 50.7
Net Gains on Sales of Investments 95.4 39.4 58.9 15.1
------ ------ ------ ------
Total Revenues 992.3 851.3 512.7 423.9
------ ------ ------ ------
Expenses:
Insurance Claims and Policyholders' Benefits 540.4 428.1 288.7 218.6
Insurance Expenses 317.8 276.0 170.1 140.1
Consumer Finance Expenses 55.2 48.7 27.9 24.7
Interest and Other Expenses 11.0 7.1 6.0 3.1
------ ------ ------ ------
Total Expenses 924.4 759.9 492.7 386.5
------ ------ ------ ------
Income before Income Taxes and Equity
in Net Income of Investees 67.9 91.4 20.0 37.4
Income Tax Expense 25.2 31.0 8.2 12.9
------ ------ ------ ------
Income before Equity in Net Income of Investees 42.7 60.4 11.8 24.5
Equity in Net Income of Investees 24.7 28.3 13.7 12.0
------ ------ ------ ------
Net Income $ 67.4 $ 88.7 $ 25.5 $ 36.5
====== ====== ====== ======
Net Income Per Share $ 0.97 $ 1.21 $ 0.37 $ 0.50
====== ====== ====== ======
Net Income Per Share Assuming Dilution $ 0.97 $ 1.20 $ 0.37 $ 0.50
====== ====== ====== ======
</TABLE>
The Notes to the Condensed Consolidated Financial Statements are an integral
part of these financial statements.
1
<PAGE>
UNITRIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
June 30, December 31,
2000 1999
----------- ------------
(Unaudited)
Assets:
Investments:
Fixed Maturities at Fair Value (Amortized
Cost: 2000 - $2,850.1; 1999 - $2,726.8) $2,772.1 $2,651.8
Equity Securities at Fair Value
(Cost: 2000 - $267.7; 1999 - $450.8) 401.0 512.6
Investees at Cost Plus Cumulative Undistributed
Earnings (Fair Value: 2000 - $787.2; 1999 - $957.5) 675.4 640.6
Other 399.3 291.8
-------- --------
Total Investments 4,247.8 4,096.8
-------- --------
Cash 19.4 24.1
Consumer Finance Receivables at Cost (Fair
Value: 2000 - $635.7; 1999 - $593.6) 637.7 595.0
Other Receivables 403.0 376.6
Deferred Policy Acquisition Costs 331.8 324.2
Other Assets 513.8 518.1
-------- --------
Total Assets $6,153.5 $5,934.8
======== ========
Liabilities and Shareholders' Equity:
Insurance Reserves:
Life and Health $2,154.3 $2,097.5
Property and Casualty 525.7 520.6
-------- --------
Total Insurance Reserves 2,680.0 2,618.1
-------- --------
Investment Certificates and Savings Accounts at Cost
(Fair Value: 2000 - $653.8; 1999 - $606.6) 657.2 608.8
Unearned Premiums 373.6 341.4
Accrued and Deferred Income Taxes 238.6 251.1
Notes Payable 202.2 116.8
Accrued Expenses and Other Liabilities 318.2 281.6
-------- --------
Total Liabilities 4,469.8 4,217.8
-------- --------
Shareholders' Equity:
Common Stock, $0.10 par value, 100 million Shares
Authorized; 68,372,289 and 70,992,897 Shares
Issued and Outstanding at June 30, 2000 and
December 31, 1999 6.8 7.1
Paid-in Capital 431.5 439.6
Retained Earnings 1,212.6 1,280.1
Accumulated Other Comprehensive Income (Loss) 32.8 (9.8)
-------- --------
Total Shareholders' Equity 1,683.7 1,717.0
-------- --------
Total Liabilities and Shareholders' Equity $6,153.5 $5,934.8
======== ========
The Notes to the Condensed Consolidated Financial Statements are an integral
part of these financial statements.
2
<PAGE>
UNITRIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Six Months Ended
----------------------
June 30, June 30,
2000 1999
-------- --------
Operating Activities:
Net Income $ 67.4 $ 88.7
Adjustments to Reconcile Net Income to Net Cash
Provided (Used) by Operations:
Change in Deferred Policy Acquisition Costs (5.6) 6.6
Equity in Net Income of Investees before Taxes (38.1) (43.4)
Cash Dividends from Investee 0.6 0.6
Amortization of Investments 9.0 11.5
(Increase) Decrease in Receivables (31.4) 13.1
Increase in Insurance Reserves and Unearned Premiums 94.8 7.1
Decrease in Accrued and Deferred Income Taxes (35.3) (50.8)
Increase (Decrease) in Accrued Expenses and
Other Liabilities 33.5 (11.9)
Net Gains on Sales of Investments (95.4) (39.4)
Provision for Loan Losses 13.4 11.7
Other, Net 7.7 2.4
------ -------
Net Cash Provided (Used) by Operating Activities 20.6 (3.8)
------ -------
Investing Activities:
Sales and Maturities of Fixed Maturities 636.6 182.1
Purchases of Fixed Maturities (774.2) (250.2)
Sales and Redemptions of Equity Securities 280.7 292.3
Purchases of Equity Securities - (2.4)
Acquisition of Business, Net of Cash Acquired - (104.0)
Disposition of Business, Net of Cash Disposed 4.3 -
Change in Consumer Finance Receivables (56.6) (39.9)
Change in Short-term Investments (107.0) 100.8
Other, Net (5.6) (12.0)
------- -------
Net Cash Provided (Used) by Investing Activities (21.8) 166.7
------- -------
Financing Activities:
Change in Investment Certificates and Savings Accounts 48.4 32.6
Change in Universal Life and Annuity Contracts 5.5 4.5
Notes Payable Proceeds 344.7 171.8
Notes Payable Payments (259.3) (159.2)
Cash Dividends Paid (52.2) (51.2)
Common Stock Repurchases (93.3) (127.0)
Other, Net 2.7 3.3
------- -------
Net Cash Provided (Used) by Financing Activities (3.5) (125.2)
------- -------
Increase (Decrease) in Cash (4.7) 37.7
Cash, Beginning of Year 24.1 8.6
------- -------
Cash, End of Period $ 19.4 $ 46.3
======= =======
The Notes to the Condensed Consolidated Financial Statements are an integral
part of these financial statements.
3
<PAGE>
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The unaudited Condensed Consolidated Financial Statements included herein have
been prepared by Unitrin, Inc. ("Unitrin" or the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission but do not
include all information and footnotes required by generally accepted accounting
principles ("GAAP"). In the opinion of the Company's management, the Condensed
Consolidated Financial Statements reflect all adjustments necessary for a fair
presentation. Certain prior year amounts have been reclassified to conform to
the current year's presentation. The preparation of interim financial statements
relies heavily on estimates. This factor and certain other factors, such as the
seasonal nature of some portions of the insurance business, as well as market
conditions, call for caution in drawing specific conclusions from interim
results. The accompanying Condensed Consolidated Financial Statements should be
read in conjunction with the Consolidated Financial Statements and related notes
included in the Company's Annual Report on Form 10-K, filed with the Commission
for the year ended December 31, 1999.
Note 2 - Divestitures of Businesses
On March 1, 2000, Unitrin's indirect subsidiary, Valley Insurance Company,
completed the previously announced sale of its subsidiary, Mountain Valley
Indemnity Company ("Mountain Valley"), to Motor Club of America for $7.5 million
in cash. No gain or loss was recorded in connection with the sale. The Company's
results in 2000 included Premiums of $3.3 million and a pre-tax Operating Loss
of $2.0 million attributable to Mountain Valley.
On July 26, 2000, United Insurance Company of America ("United"), a subsidiary
of the Company, completed the previously announced sale of United's subsidiary,
The Pyramid Life Insurance Company ("Pyramid") to Ceres Group, Inc. ("Ceres")
for $7.5 million worth of convertible voting preferred stock of Ceres plus $60
million in cash, less an adjustment for a $25.0 million cash dividend paid by
Pyramid immediately prior to closing. The Company estimates that it will record
a gain of approximately $5 million in the third quarter of 2000. Pyramid's
premiums for the six months ended June 30, 2000 were $33.0 million.
Note 3 - Net Income Per Share
Net Income Per Share and Net Income Per Share Assuming Dilution determined in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share" for the six and three months ended June 30, 2000 and 1999
was as follows:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
-------------------- ---------------------
June 30, June 30, June 30, June 30,
(Dollars and Shares in Millions, Except Per Share Amounts) 2000 1999 2000 1999
---------------------------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income $ 67.4 $ 88.7 $ 25.5 $ 36.5
Dilutive Effect on Net Income from
Investees' Equivalent Shares (0.1) (0.4) (0.1) (0.2)
------ ------ ------ ------
Net Income Assuming Dilution $ 67.3 $ 88.3 $ 25.4 $ 36.3
====== ====== ====== ======
Weighted Average Common Shares Outstanding 69.4 73.5 68.8 72.7
Dilutive Effect of Unitrin Stock Option Plans 0.2 0.2 0.1 0.3
------ ------ ------ ------
Weighted Average Common Shares and
Equivalent Shares Outstanding Assuming Dilution 69.6 73.7 68.9 73.0
====== ====== ====== ======
Net Income Per Share $ 0.97 $ 1.21 $ 0.37 $ 0.50
====== ====== ====== ======
Net Income Per Share Assuming Dilution $ 0.97 $ 1.20 $ 0.37 $ 0.50
====== ====== ====== ======
</TABLE>
4
<PAGE>
Note 4 - Investment in Investees
Unitrin accounts for its Investments in Investees (Curtiss-Wright Corporation
("Curtiss-Wright"), Litton Industries, Inc. ("Litton") and UNOVA, Inc.
("UNOVA")) under the equity method of accounting using the most recent and
sufficiently timely publicly-available financial reports and other publicly-
available information which generally results in a two or three-month-delay
basis depending on the investee being reported.
Based on the most recently available public information, Unitrin's voting
percentage in Litton common stock at June 30, 2000 was approximately 27.8% and
Unitrin's investment in Litton exceeded 10% of Unitrin's Shareholders' Equity.
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 these financial statements represent the amounts reported by
Litton for the six and three month periods ended April 30, 2000 and 1999.
Summarized financial information reported by Litton for such periods was:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
---------------------- -----------------------
April 30, April 30, April 30, April 30,
(Dollars in Millions) 2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $2,748.0 $2,386.4 $1,399.0 $1,255.5
========= ========= ========= =========
Cost of Sales $2,188.0 $1,852.0 $1,094.0 $ 967.6
========= ========= ========= =========
Income from Continuing Operations $ 98.6 $ 94.9 $ 61.8 $ 50.9
========= ========= ========= =========
Net Income $ 98.6 $ 94.9 $ 61.8 $ 50.9
========= ========= ========= =========
</TABLE>
Equity in Net Income of Investees was $24.7 million and $13.7 million for the
six and three months ended June 30, 2000, respectively, compared to $28.3
million and $12.0 million for the six and three months ended June 30, 1999,
respectively. Equity in Net Income of Investees for the six months ended June
30, 1999 included income of $3.4 million resulting from Unitrin's proportionate
share of UNOVA's gain on sale of its headquarters building.
On June 20, 2000, the fair value of the Company's investment in UNOVA declined
below the Company's carrying value of its investment in UNOVA. The Company has
not yet determined whether or not the decline in the fair value of its
investment in UNOVA is other than temporary. Accordingly, the Company has not
recorded an impairment loss. At June 30, 2000, the Company owned approximately
12.7 million shares of UNOVA common stock with a fair value of $92.6 million and
a carrying value of $160.3 million.
5
<PAGE>
Note 5 - Notes Payable
The Company has an unsecured revolving credit agreement with a group of banks,
which expires in September 2002 and provides for fixed and floating rate
advances for periods of up to 180 days at various interest rates. Effective
March 28, 2000, the Company's available borrowing capacity under the agreement
was increased to $440 million. 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 revolving credit agreement may be used for
general corporate purposes, including repurchases of the Company's common stock.
At June 30, 2000 and December 31, 1999, the Company had outstanding borrowings
under the revolving credit agreement of $201 million and $111 million at
weighted average interest rates of 7.00% and 6.26%, respectively. The Company
incurred interest expense under the revolving credit agreement of $6.3 million
and $3.7 million for the six and three months ended June 30, 2000, respectively,
compared to $2.5 million and $0.8 million for the six and three months ended
June 30, 1999, respectively.
Note 6 - Other Comprehensive Income
Other Comprehensive Income related to the Company's Investments for the six and
three months ended June 30, 2000 and 1999 was:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
-------------------- ---------------------
June 30, June 30, June 30, June 30,
(Dollars in Millions) 2000 1999 2000 1999
-------------------------------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Increase (Decrease) in Unrealized Gains, Net of
Reclassification Adjustment for Gains Included in Net Income $ 68.5 $ 322.0 $(47.1) $158.8
Equity in Other Comprehensive Income (Loss) of Investees (2.7) (2.0) (1.2) (2.0)
Effect of Income Taxes (23.2) (112.6) 16.8 (55.4)
------ ------- ------ ------
Other Comprehensive Income (Expense) $ 42.6 $ 207.4 $(31.5) $101.4
====== ======= ====== ======
</TABLE>
The Company's Investments in Investees are accounted for under the equity method
of accounting and, accordingly, changes in the fair value of the Company's
Investments in Investees are excluded from the determination of Total
Comprehensive Income and Other Comprehensive Income under SFAS No. 130
"Reporting Comprehensive Income." Total Comprehensive Income for the six months
ended June 30, 2000 and 1999 was $110.0 million and $296.1 million, respectively
Total Comprehensive Income for the three months ended June 30, 2000 and 1999 was
a loss of $6.0 million and income of $137.9 million, respectively.
6
<PAGE>
Note 7 - Business Segments
Segment Revenues and Operating Profit (Loss) for the six and three months ended
June 30, 2000 and 1999 were:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
-------------------- ---------------------
June 30, June 30, June 30, June 30,
(Dollars in Millions) 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Property and Casualty Insurance:
Premiums $363.5 $296.8 $185.3 $150.5
Net Investment Income 28.3 22.4 14.8 11.8
------ ------ ------ ------
Total Property and Casualty Insurance 391.8 319.2 200.1 162.3
------ ------ ------ ------
Life and Health Insurance:
Premiums 356.4 355.4 178.9 177.5
Net Investment Income 88.4 81.5 44.7 40.9
------ ------ ------ ------
Total Life and Health Insurance 444.8 436.9 223.6 218.4
------ ------ ------ ------
Consumer Finance 67.6 59.2 34.1 30.1
------ ------ ------ ------
Unitrin Direct - - - -
------ ------ ------ ------
Total Segment Revenues 904.2 815.3 457.8 410.8
------ ------ ------ ------
Net Gains on Sales of Investments 95.4 39.4 58.9 15.1
Corporate and Other (7.3) (3.4) (4.0) (2.0)
------ ------ ------ ------
Total Revenues $992.3 $851.3 $512.7 $423.9
====== ====== ====== ======
Segment Operating Profit (Loss):
Property and Casualty Insurance $(19.9) $ 13.6 $(12.5) $ 1.7
Life and Health Insurance (3.4) 35.2 (23.3) 18.7
Consumer Finance 12.4 10.6 6.2 5.6
Unitrin Direct (1.6) - (0.9) -
------ ------ ------ ------
Total Segment Operating Profit (Loss) (12.5) 59.4 (30.5) 26.0
------ ------ ------ ------
Net Gains on Sales of Investments 95.4 39.4 58.9 15.1
Corporate and Other Expense, Net (15.0) (7.4) (8.4) (3.7)
------ ------ ------ ------
Income before Income Taxes and
Equity in Net Income of Investees $ 67.9 $ 91.4 $ 20.0 $ 37.4
====== ====== ====== ======
</TABLE>
7
<PAGE>
Note 8 - Legal Proceedings and Other Regulatory Matters
In October 1999, the Florida Department of Insurance filed and served a subpoena
upon the Company's subsidiary, United Insurance Company of America ("United"),
in connection with that Department's investigation into the sale and servicing
of industrial life insurance and small face amount life insurance policies in
the State of Florida. Subsequently, on December 15, 1999, a purported nationwide
class action lawsuit was filed against United in the United States District
Court for the Middle District of Florida (Wilson, et al. v. United Insurance
Company of America), on behalf of "all African-American persons who have (or
have had at the time of the Policy's termination), an ownership interest in one
or more Industrial Life Insurance Policies issued, serviced, administered or
purchased from United ...." Plaintiffs allege discrimination in premium rates in
violation of 42 U.S.C. (S)1981 in addition to various state law claims.
Unspecified compensatory and punitive damages are sought together with equitable
relief. United filed a motion to dismiss the lawsuit on March 14, 2000 and the
case has been stayed by agreement of the parties to allow time for discussions
regarding possible resolution. The Company has determined that United and its
other career agency life insurance subsidiaries have in force insurance policies
in which race was used as a factor in pricing or benefits; however, to the best
of the Company's knowledge, all such practices ceased 30 or more years ago with
regard to newly-issued policies. At least five similar lawsuits have been filed
in other jurisdictions in July 2000 against the Company and/or its career agency
life insurance subsidiaries. The Company believes that it and its subsidiaries
have meritorious defenses in these matters. On July 17, 2000 the Florida
Department of Insurance issued orders to more than two dozen life insurers,
including United and the Company's other career agency subsidiaries, to cease
collecting a portion of the premiums on certain industrial life policies
attributable to past race-distinct underwriting practices. These subsidiaries
have appealed the orders directed at them. On July 26, 2000, the Company met
with representatives of various insurance departments to discuss a potential
nationwide resolution of these matters with respect to United and the Company's
other career agency life insurance subsidiaries. In the second quarter of 2000,
the Company recorded an after-tax charge of $32.4 million for its estimated cost
to ultimately settle these matters. Actual costs may differ from this estimate.
However, the Company believes that such difference will not have a material
adverse effect on the Company's financial position, but could have a material
adverse effect on the Company's results for a given period.
The Company and its subsidiaries are defendants in various other legal actions
incidental to their businesses; some of these actions seek substantial punitive
damages that bear no apparent relationship to the actual damages alleged. In
addition, the plaintiffs in certain of these suits seek class action status
which, if granted, could expose the Company to potentially significant liability
by virtue of the size of the purported classes. 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 other matters will not have a
material adverse effect on the Company's financial position.
On September 27, 1999, Fireside Securities Corporation ("Fireside"), a
subsidiary of Unitrin, received Notices of Proposed Adjustment to its California
franchise tax returns from the State of California Franchise Tax Board (the
"FTB") in the amount of $7.5 million for 1992 and $8.3 million for 1993
excluding interest. The FTB is asserting that Fireside and Unitrin and its
insurance company subsidiaries are members of a single unitary group. The FTB's
assertion has the effect of taxing the inter-company dividends from the
insurance company subsidiaries to Unitrin, but excluding the apportionment
factors of the insurance subsidiaries in determining income taxable in
California. The Company believes that it has a number of meritorious defenses to
the FTB's assertion and intends to vigorously contest the proposed adjustments.
Accordingly, on November 23, 1999, Fireside filed a formal protest with the FTB.
However, the ultimate outcome of this matter cannot presently be predicted.
Accordingly, the assessments did not have an impact on the results of operation
for 2000 and 1999.
On June 29, 2000, Unitrin was notified by the FTB that the tax returns for tax
years 1995 and 1996 may be examined for the same issue pending the outcome of
the 1992 and 1993 protest. This notification did not have an impact on the
results of operation for 2000.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Property and Casualty Insurance
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
------------------ ------------------
June 30, June 30, June 30, June 30,
(Dollars in Millions) 2000 1999 2000 1999
----------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Personal Lines Premiums:
Automobile $184.8 $148.5 $ 94.8 $ 73.4
Homeowners 35.0 30.8 17.5 15.4
Other 5.4 5.2 2.4 2.6
Commercial Lines Premiums:
Property and Commercial Liability 65.5 45.8 33.5 22.5
Automobile 47.3 42.5 24.9 21.2
Other 25.5 24.0 12.2 15.4
------ ------ ------ ------
Total Premiums 363.5 296.8 185.3 150.5
------ ------ ------ ------
Net Investment Income 28.3 22.4 14.8 11.8
------ ------ ------ ------
Total Revenues $391.8 $319.2 $200.1 $162.3
====== ====== ====== ======
Operating Profit (Loss) $(19.9) $ 13.6 $(12.5) $ 1.7
====== ====== ====== ======
GAAP Incurred Loss Ratio (excluding
Storms) 70.0% 61.5% 70.0% 62.2%
GAAP Incurred Storm Ratio 11.4% 11.1% 12.6% 13.5%
Total GAAP Incurred Loss Ratio 81.4% 72.6% 82.6% 75.7%
GAAP Combined Ratio 113.3% 103.0% 114.8% 106.6%
</TABLE>
Premiums in the Property and Casualty Insurance segment increased by $66.7
million and $34.8 million for the six and three months ended June 30, 2000,
respectively, compared to the same period in 1999. Premiums increased by $73.9
million and $34.1 million for the six and three months ended June 30, 2000,
respectively, due to the June 17, 1999, acquisition of the Valley Group, Inc.
("VGI"). Excluding the VGI acquisition, premiums for the six months ended June
30, 2000 decreased by $7.2 million due primarily to lower volume of automobile
insurance. Premiums, excluding the VGI acquistion, increased by $0.7 million for
the three months ended June 30, 2000. Net Investment Income increased by $5.9
million and $3.0 million for the six and three months ended June 30, 2000,
respectively, compared to the same periods last year due to higher levels of
investments and higher yields on fixed maturity securities. Operating Profit in
the Property and Casualty Insurance segment decreased by $33.5 million and $14.2
million for the six and three months ended June 30, 2000, respectively, compared
to the same periods in 1999, due primarily to lower margins resulting from
inadequate pricing and higher severity and frequency of losses. Storm losses
were $41.2 million and $23.3 million for the six and three months ended June 30,
2000, respectively, an increase of $8.3 million and $3.0 million, respectively,
compared to the same periods in 1999. The Company has either implemented certain
rate increases or, subject to regulatory approvals, is in the process of
implementing additional rate increases in consideration of recent loss
experience. The effects of such rate actions will not be fully realized until
2001.
On March 1, 2000, Valley Insurance Company, a subsidiary of VGI, completed the
previously announced sale of its subsidiary, Mountain Valley Indemnity Company
("Mountain Valley"), to Motor Club of America for $7.5 million in cash. No gain
or loss was recorded in connection with the sale. Results for the Property and
Casualty Insurance segment for the six months ended June 30, 2000 included
Premiums of $3.3 million and a pre-tax Operating Loss of $2.0 million
attributable to Mountain Valley.
9
<PAGE>
Life and Health Insurance
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
------------------ ------------------
June 30, June 30, June 30, June 30,
(Dollars in Millions) 2000 1999 2000 1999
----------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Premiums:
Life $204.8 $206.5 $102.5 $103.3
Accident and Health 109.3 107.7 54.9 53.2
Property 42.3 41.2 21.5 21.0
------ ------ ------ ------
Total Premiums 356.4 355.4 178.9 177.5
Net Investment Income 88.4 81.5 44.7 40.9
------ ------ ------ ------
Total Revenues $444.8 $436.9 $223.6 $218.4
====== ====== ====== ======
Operating Profit (Loss) $ (3.4) $ 35.2 $(23.3) $ 18.7
====== ====== ====== ======
</TABLE>
Premiums in the Life and Health Insurance segment increased by $1.0 million and
$1.4 million for the six and three months ended June 30, 2000, respectively,
compared to the same periods in 1999. Property insurance premiums increased for
both the quarter and year to date due primarily to higher rates. Net Investment
Income in the Life and Health Insurance segment increased by $6.9 million and
$3.8 million for the six and three months ended June 30, 2000, respectively,
compared to the same periods in 1999, due to higher levels of investments and
higher yields on investments. Results for the Life and Health Insurance segment
included a charge of $48.8 million in the second quarter of 2000 for the
Company's estimate of the cost to ultimately settle certain matters initially
arising from the Florida Department of Insurance's investigation into the sale
and servicing of industrial life insurance (See Note 8 to the Condensed
Consolidated Financial Statements). Excluding the estimated settlement cost,
Operating Profit in the Life and Health Insurance segment increased by $10.2
million and $6.8 million for the six and three months ended June 30, 2000,
respectively, compared to the same period in 1999, due primarily to the higher
net investment income and lower underwriting expense as a percentage of
premiums, partially offset by higher storm losses from certain property
insurance products marketed by the Life and Health Insurance segment's employee-
agents.
On July 26, 2000, United Insurance Company of America ("United"), a subsidiary
of the Company, completed the previously announced sale of United's subsidiary,
The Pyramid Life Insurance Company ("Pyramid") to Ceres Group, Inc. ("Ceres")
for $7.5 million worth of convertible voting preferred stock of Ceres plus $60
million in cash, less an adjustment for a $25.0 million cash dividend paid by
Pyramid immediately prior to closing. The Company estimates that it will record
a gain of approximately $5 million in the third quarter of 2000. Pyramid's
premiums for the six months ended June 30, 2000 were $33.0 million.
10
<PAGE>
Consumer Finance
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
------------------ ------------------
June 30, June 30, June 30, June 30,
(Dollars in Millions) 2000 1999 2000 1999
----------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest, Loan Fees and Earned Discount $ 61.7 $ 54.7 $ 31.1 $ 27.8
Net Investment Income 3.5 2.6 1.9 1.3
Other 2.4 1.9 1.1 1.0
------ ------ ------ ------
Total Revenues $ 67.6 $ 59.2 $ 34.1 $ 30.1
====== ====== ====== ======
Operating Profit $ 12.4 $ 10.6 $ 6.2 $ 5.6
====== ====== ====== ======
Consumer Finance Loan Originations $235.4 $200.0 $120.3 $105.3
Percentage of Consumer Finance Receivables
Greater than Ninety Days Past Due 1.0% 2.1% 1.0% 2.1%
Ratio of Reserve for Losses on Consumer
Finance Receivables to Gross Consumer
Finance Receivables 5.7 7.3 5.7 7.3
Weighted-Average Yield on
Investment Certificates and Savings Accounts 5.7 5.3 5.9 5.3
</TABLE>
Revenues in the Consumer Finance segment increased by $8.4 million and $4.0
million for the six and three months ended June 30, 2000, compared to the same
periods in 1999, as a result of a higher level of loans outstanding. Operating
Profit in the Consumer Finance segment increased by $1.8 million and $0.6
million for the six and three months ended June 30, 2000, compared to the same
periods in 1999, due primarily to the higher level of loans outstanding,
partially offset by higher interest expense. The Ratio of Reserve for Losses on
Consumer Finance Receivables to Gross Consumer Finance Receivables decreased
from 7.3% at June 30, 1999 to 5.7% at June 30, 2000 due primarily to the
accelerated charge-off of certain classes of higher risk loans.
Unitrin Direct
On January 3, 2000, the Company established a new business unit to market
personal automobile insurance through direct mail, radio and television
advertising and over the Internet. The business unit will utilize one of the
Company's existing insurance subsidiaries, which was renamed as "Unitrin Direct
Insurance Company" ("Unitrin Direct"), and is managed and reported as a separate
business segment. Unitrin Direct incurred start-up related costs of $1.6 million
and $0.9 million for the six and three months ended June 30, 2000, respectively.
The Company anticipates that Unitrin Direct will continue to incur various
start-up costs devoted to hiring employees, refining products and product rates
as well as developing advertising and marketing materials. Accordingly, it is
expected that Unitrin Direct will have an insignificant amount of revenue in
2000 relative to expenses, and that it will produce operating losses for at
least the next few years.
Net Gains on Sales of Investments
Net Gains on Sales of Investments were $95.4 million and $58.9 million,
respectively, for the six and three months ended June 30, 2000, compared to
$39.4 million and $15.1 million, respectively, for the same periods in 1999. Net
Gains on Sales of Investments included pre-tax gains of $91.9 million and $60.6
million, respectively, for the six and three months ended June 30, 2000, and
$40.1 million and $15.6 million, respectively, for the same periods last year,
resulting from sales of a portion of the Company's investment in Baker Hughes
common stock. The Company cannot anticipate when or if similar investment gains
or losses may occur in the future.
11
<PAGE>
Equity in Net Income of Investees
Equity in Net Income of Investees was income of $24.7 million and $13.7 million
for the six and three months ended June 30, 2000, respectively, compared to
$28.3 million and $12.0 million, respectively for the same periods in 1999.
On June 20, 2000 the fair value of the Company's investment in UNOVA, Inc.
("UNOVA") declined below the Company's carrying value of its investment in
UNOVA. The Company has not yet determined whether or not the decline in the fair
value of its investment in UNOVA is other than temporary. Accordingly, the
Company has not recorded an impairment loss. At June 30, 2000, the Company owned
approximately 12.7 million shares of UNOVA common stock with a fair value of
$92.6 million and a carrying value of $160.3 million.
Other Items
Corporate and Other Expense, Net increased by $7.6 million and $4.7 million,
respectively, for the six and three months ended June 30, 2000, compared to the
same periods in 1999. Corporate and Other Expense, Net increased due primarily
to lower dividend income of $3.5 million and $1.4 million for the six and three
months ended June 30, 2000, respectively, from the Company's investment in Baker
Hughes common stock. The Company sold a portion of its Baker Hughes common stock
holdings in 1999 and the first six months of 2000.
During the first six months of 2000, the Company repurchased 2,715,100 shares of
its common stock in open market transactions at an aggregate cost of $93.3
million. The repurchases were made with general corporate funds. At June 30,
2000, the Company had approximately 1.5 million shares remaining under the
existing repurchase authorization.
At June 30, 2000, the unused commitment under the Company's revolving credit
facility was $239 million. In addition, for the remainder of 2000, the Company's
subsidiaries would be able to pay approximately $166 million in dividends to the
Company without prior regulatory approval.
Accounting Changes
In June 2000, the Financial Accounting Standards Board ("FASB") issued SFAS
No.138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities--an amendment of FASB Statement No.133." SFAS No. 138 addresses a
limited number of implementation issues related to SFAS No. 133 "Accounting for
Derivatives Instruments and for Hedging Activities." SFAS No. 133 requires all
derivatives to be recorded on the balance sheet at fair value and establishes
"special accounting" for the following three different types of hedges: hedges
of changes in the fair value of assets, liabilities or firm commitments; hedges
of the variable cash flows of forecasted transactions; and hedges of foreign
currency exposures of net investments in foreign operations. In June 1999, the
FASB issued SFAS No.137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133" which
deferred the effective date of SFAS No. 133, Accordingly, SFAS No. 133 is
effective for years beginning after June 15, 2000, with earlier adoption
permitted. The Company believes that the effect of adoption of SFAS No. 133 will
not be material.
On March 31, 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). This
Interpretation provides guidance for issues that have arisen in applying APB
Opinion No. 25, "Accounting for Stock Issued to Employees". The Company's
implementation of the provisions of FIN 44 had no impact.
12
<PAGE>
Caution Regarding Forward-Looking Statements
Management's Discussion and Analysis of Results of Operations and Financial
Condition and the accompanying Condensed Consolidated Financial Statements
(including the notes thereto) contain forward-looking statements, which usually
include words such as "believe(s)," "goal(s)," "target(s)," "estimate(s),"
"anticipate(s)" and similar expressions. Readers are cautioned not to place
undue reliance on such statements, which speak only as of the date of this
Quarterly Report. Forward-looking statements are subject to risks and
uncertainties which could cause actual results to differ materially from those
contemplated in such statements. Such risks and uncertainties include, but are
not limited to, those described under this Item 2 above, changes in economic
factors (such as interest rates), changes in competitive conditions (including
availability of labor with required technical or other skills), the number and
severity of insurance claims (including those associated with catastrophe
losses), regulatory approval of certain insurance rates, governmental actions
(including new laws or regulations or court decisions interpreting existing laws
and regulations) and adverse judgments in litigation to which the Company or its
subsidiaries are parties. No assurances can be given that the results
contemplated in any forward-looking statements will be achieved. The Company
assumes no obligation to release publicly any revisions to any forward-looking
statements as a result of events or developments subsequent to the date of this
Quarterly Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information required by Item 305 of Regulation S-K has been omitted because
the sources and effects of changes in the information provided under Item 305 of
Regulation S-K from the end of the preceding year to the date of this Quarterly
Report on Form 10-Q are not material.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Information concerning pending legal proceedings is incorporated herein by
reference to Note 8 to the Condensed Consolidated Financial Statements
(Unaudited) in Part I of this Form 10-Q.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of Unitrin, Inc. was held on May 3, 2000 for
the purpose of electing seven directors.
The final tabulation for each of the seven nominees for director is as follows:
Nominee For Withheld
------------------------ ---------- --------
James E. Annable 63,039,951 169,684
Douglas G. Geoga 62,966,509 243,126
Reuben L. Hedlund 63,032,001 177,634
Jerrold V. Jerome 63,038,733 170,902
William E. Johnston, Jr. 63,033,067 176,568
Fayez S. Sarofim 63,036,791 172,844
Richard C. Vie 63,048,656 160,979
13
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
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 the Company 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
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.)
10.2 Unitrin, Inc. 1997 Stock Option Plan as amended and restated
(Incorporated herein by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.)
10.3 Unitrin, Inc. 1995 Non-Employee Director Stock Option Plan as amended
and restated (Incorporated herein by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1999.)
10.4 Unitrin, Inc. Pension Equalization Plan (Incorporated herein by
reference to Exhibit 10.4 to Company's Annual Report on Form 10-K for
the year ended December 31, 1994.)
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:
Richard C. Vie (Chairman, President and Chief Executive Officer)
David F. Bengston (Vice President)
James W. Burkett (Senior Vice President)
Eric J. Draut (Senior Vice President, Treasurer & Chief Financial
Officer)
Scott Renwick (General Counsel and Secretary)
Donald G. Southwell (Senior Vice President)
(Note: Each of the foregoing agreements is identical except that the
severance compensation multiple is 2.99 for Mr. 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 January 1,
2001.)
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
Unitrin's board of directors through January 1, 2001.)
10.7 1998 Bonus Plan for Senior Executives (Incorporated herein by
reference to Exhibit A of the Company's Proxy Statement, dated April
9, 1998, in connection with Company's annual meeting of
shareholders.)
10.8 Amended and Restated Credit Agreement, dated September 17, 1997 among
Unitrin, Inc., the Lenders party thereto, and NationsBank of Texas,
N.A. as Administrative Agent (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. Pursuant to the terms of such
agreement, the Company's borrowing capacity thereunder has been
increased to $440 million, effective March 28, 2000.)
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 2000.
14
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Unitrin, Inc.
Date: August 11, 2000 /s/ Richard C. Vie
-----------------------------------
Richard C. Vie
Chairman, President
and Chief Executive Officer
Date: August 11, 2000 /s/ Richard Roeske
-----------------------------------
Richard Roeske
Corporate Controller
(Principal Accounting Officer)
15
