<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 September 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.
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(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
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(Address of principal executive offices) (Zip Code)
(312)661-4600
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(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
------- -------
67,903,391 shares of common stock, $0.10 par value, were outstanding as of
September 30, 2000.
<PAGE>
UNITRIN, INC.
INDEX
<TABLE>
<CAPTION>
Page
---------------
<S> <C> <C>
PART I. Financial Information.
Item 1. Financial Statements.
Condensed Consolidated Statements of 1
Income for the Three and Nine Months Ended
September 30, 2000 and 1999 (Unaudited).
Condensed Consolidated Balance Sheets as of 2
September 30, 2000 (Unaudited) and
December 31, 1999.
Condensed Consolidated Statements of Cash 3
Flows for the Nine Months Ended
September 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 6. Exhibits and Reports on Form 8-K. 14
Signatures 15
</TABLE>
<PAGE>
UNITRIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
--------------------- ----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
-------- -------- ------ ------
<S> <C> <C> <C> <C>
Revenues:
Premiums $1,083.8 $1,012.8 $363.9 $360.6
Consumer Finance Revenues 103.9 91.1 36.3 31.9
Net Investment Income 167.5 151.1 58.1 50.6
Net Gains on Sales of Investments 133.2 94.0 37.8 54.6
-------- -------- ------ ------
Total Revenues 1,488.4 1,349.0 496.1 497.7
-------- -------- ------ ------
Expenses:
Insurance Claims and Policyholders' Benefits 785.5 671.7 245.1 243.6
Insurance Expenses 463.4 420.6 145.6 144.6
Consumer Finance Expenses 85.0 74.1 29.8 25.4
Interest and Other Expenses 29.8 11.0 18.8 3.9
-------- -------- ------ ------
Total Expenses 1,363.7 1,177.4 439.3 417.5
-------- -------- ------ ------
Income before Income Taxes and Equity
in Net Income of Investees 124.7 171.6 56.8 80.2
Income Tax Expense 43.8 58.6 18.6 27.6
-------- -------- ------ ------
Income before Equity in Net Income of Investees 80.9 113.0 38.2 52.6
Equity in Net Income (Loss) of Investees (17.8) 27.4 (42.5) (0.9)
-------- -------- ------ ------
Net Income (Loss) $ 63.1 $ 140.4 $ (4.3) $ 51.7
======== ======== ====== ======
Net Income (Loss) Per Share $ 0.91 $ 1.92 $(0.06) $ 0.71
======== ======== ====== ======
Net Income (Loss) Per Share Assuming Dilution $ 0.91 $ 1.91 $(0.07) $ 0.71
======== ======== ====== ======
</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)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
Assets:
Investments:
Fixed Maturities at Fair Value (Amortized
Cost: 2000 - $2,791.7; 1999 - $2,726.8) $2,742.9 $2,651.8
Equity Securities at Fair Value
(Cost: 2000 - $223.6; 1999 - $450.8) 379.9 512.6
Investees at Cost Plus Cumulative Undistributed Earnings
(Fair Value: 2000 - $822.3; 1999 - $957.5) 606.6 640.6
Other 501.7 291.8
-------- --------
Total Investments 4,231.1 4,096.8
-------- --------
Cash 20.4 24.1
Consumer Finance Receivables at Cost (Fair
Value: 2000 - $658.1; 1999 - $593.6) 661.1 595.0
Other Receivables 410.2 376.6
Deferred Policy Acquisition Costs 325.5 324.2
Other Assets 488.2 518.1
-------- --------
Total Assets $6,136.5 $5,934.8
======== =========
Liabilities and Shareholders' Equity:
Insurance Reserves:
Life and Health $2,088.7 $2,097.5
Property and Casualty 528.4 520.6
-------- --------
Total Insurance Reserves 2,617.1 2,618.1
-------- --------
Investment Certificates and Savings Accounts at Cost
(Fair Value: 2000 - $677.1; 1999 - $606.6) 681.1 608.8
Unearned Premiums 388.9 341.4
Accrued and Deferred Income Taxes 245.2 251.1
Notes Payable 211.8 116.8
Accrued Expenses and Other Liabilities 320.3 281.6
-------- --------
Total Liabilities 4,464.4 4,217.8
-------- --------
Shareholders' Equity:
Common Stock, $0.10 par value, 100 million Shares Authorized;
67,903,391 and 70,992,897 Shares Issued and Outstanding at
September 30, 2000 and December 31, 1999 6.8 7.1
Paid-in Capital 428.9 439.6
Retained Earnings 1,170.9 1,280.1
Accumulated Other Comprehensive Income (Loss) 65.5 (9.8)
-------- --------
Total Shareholders' Equity 1,672.1 1,717.0
-------- --------
Total Liabilities and Shareholders' Equity $6,136.5 $5,934.8
======== ========
</TABLE>
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)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------
Sept. 30, Sept. 30,
2000 1999
------------ -----------
<S> <C> <C>
Operating Activities:
Net Income $ 63.1 $ 140.4
Adjustments to Reconcile Net Income to Net Cash
Provided (Used) by Operations:
Change in Deferred Policy Acquisition Costs (6.3) 4.7
Equity in Net (Income) Loss of Investees before Taxes 28.2 (41.7)
Cash Dividends from Investee 1.1 1.1
Amortization of Investments 10.6 17.4
(Increase) Decrease in Receivables (49.4) 5.9
Increase in Insurance Reserves and Unearned Premiums 127.6 23.0
Decrease in Accrued and Deferred Income Taxes (52.1) (84.5)
Increase (Decrease) in Accrued Expenses and Other Liabilities 41.7 (6.2)
Net Gains on Sales of Investments (133.2) (94.0)
Provision for Loan Losses 20.3 17.8
Other, Net 24.8 21.8
------- -------
Net Cash Provided by Operating Activities 76.4 5.7
------- -------
Investing Activities:
Sales and Maturities of Fixed Maturities 766.7 256.3
Purchases of Fixed Maturities (922.2) (351.8)
Sales and Redemptions of Equity Securities 357.8 431.9
Purchases of Equity Securities - (2.4)
Acquisition of Business, Net of Cash Acquired - (103.4)
Disposition of Businesses, Net of Cash Disposed 33.1 -
Change in Consumer Finance Receivables (86.9) (63.0)
Change in Short-term Investments (210.9) 40.0
Other, Net (9.2) (22.1)
------- -------
Net Cash Provided (Used) by Investing Activities (71.6) 185.5
------- -------
Financing Activities:
Change in Investment Certificates and Savings Accounts 72.3 47.0
Change in Universal Life and Annuity Contracts 6.9 6.7
Notes Payable Proceeds 490.7 280.3
Notes Payable Payments (395.7) (319.0)
Cash Dividends Paid (77.7) (76.6)
Common Stock Repurchases (107.9) (129.9)
Other, Net 2.9 4.9
------- -------
Net Cash Used by Financing Activities (8.5) (186.6)
------- -------
Increase (Decrease) in Cash (3.7) 4.6
Cash, Beginning of Year 24.1 8.6
------- -------
Cash, End of Period $ 20.4 $ 13.2
======= =======
</TABLE>
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. Net Gains on Sale of Investments for the
nine and three months ended September 30, 2000 includes a gain of $4.7 million,
related to the sale. Premiums for Pyramid included in the Company's results for
the nine months ended September 30, 2000 and 1999 were $37.9 million and $46.4
million, respectively.
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 nine and three months ended September 30, 2000 and
1999 was as follows:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
--------------------- ----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Dollars and Shares in Millions, Except Per Share Amounts) 2000 1999 2000 1999
---------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Income (Loss) $ 63.1 $ 140.4 $ (4.3) $ 51.7
Dilutive Effect on Net Income from Investees' Equivalent
Shares (0.3) (0.4) (0.2) --
--------- --------- --------- ---------
Net Income (Loss) Assuming Dilution $ 62.8 $ 140.0 $ (4.5) $ 51.7
========= ========= ========= =========
Weighted Average Common Shares Outstanding 69.0 73.1 68.2 72.4
Dilutive Effect of Unitrin Stock Option Plans 0.1 0.3 0.1 0.4
--------- --------- --------- ---------
Weighted Average Common Shares and Equivalent Shares
Outstanding Assuming Dilution 69.1 73.4 68.3 72.8
========= ========= ========= =========
Net Income (Loss) Per Share $ 0.91 $ 1.92 $ (0.06) $ 0.71
========= ========= ========= =========
Net Income (Loss) Per Share Assuming Dilution $ 0.91 $ 1.91 $ (0.07) $ 0.71
========= ========= ========= =========
</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 September 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 nine and three month periods ended July 31,
2000 and 1999. Summarized financial information reported by Litton for such
periods was:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
--------------------- ----------------------
July 31, July 31, July 31, July 31,
(Dollars in Millions) 2000 1999 2000 1999
---------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $4,217.4 $3,620.0 $1,469.4 $1,233.6
======== ======== ======== ========
Cost of Sales $3,339.5 $2,829.3 $1,151.5 $ 977.3
======== ======== ======== ========
Income (Loss) from Continuing
Operations $ 168.4 $ 73.4 $ 69.8 $ (21.5)
======== ======== ======== ========
Net Income (Loss) $ 168.4 $ 73.4 $ 69.8 $ (21.5)
======== ======== ======== ========
</TABLE>
Equity in Net Income of Investees was a loss of $17.8 million and $42.5 million
for the nine and three months ended September 30, 2000, respectively, compared
to income of $27.4 million and a loss of $0.9 million for the nine and three
months ended September 30, 1999, respectively.
On June 20, 2000, the fair value of Unitrin's investment in UNOVA declined below
Unitrin's carrying value of its investment in UNOVA. During the third quarter of
2000, Unitrin determined that the decline in the fair value of its investment in
UNOVA was other than temporary under applicable accounting standards.
Accordingly, Unitrin recorded an after-tax loss of $60.7 million to reduce the
carrying value of its investment in UNOVA to its current estimated realizable
value. The current realizable value has been estimated using the most recent and
sufficiently timely closing price of UNOVA prior to the filing of this Form
10-Q. The loss is being allocated to Unitrin's proportionate share of UNOVA's
non-current assets. On a going-forward basis, Unitrin's reported equity in the
net income of UNOVA will differ from Unitrin's proportionate share of UNOVA's
reported results to the extent that such results include depreciation,
amortization or other charges related to such non-current assets. Additionally
during the third quarter of 2000, Unitrin recorded an after-tax gain of $4.2
million for its proportionate share of UNOVA's gain from the sale of a business
less certain severance charges.
Equity in Net Income of Investees for the nine and three months ended September
30, 1999 included an after-tax loss of $13.9 million resulting from Unitrin's
proportionate share of Litton's charges related to costs to exit its mainframe
outsourcing and professional services businesses, the consolidation of certain
manufacturing facilities and the effect of its voluntary settlement agreement
with the United States Attorney's office relating to foreign sales consultants.
Equity in Net Income of Investees for the nine months ended September 30, 1999
included income of $3.4 million resulting from Unitrin's proportionate share of
UNOVA's gain on sale of its headquarters building.
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 September 30, 2000 and December 31, 1999, the Company had outstanding
borrowings under the revolving credit agreement of $211 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 $10.3 million
and $4.0 million for the nine and three months ended September 30, 2000,
respectively, compared to $3.7 million and $1.2 million for the nine and three
months ended September 30, 1999, respectively.
Note 6 - Write-down of the Carrying Value of Internal Use Software
In accordance with Statement of Position ("SOP") No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" the Company
is required to capitalize qualifying computer software costs incurred internally
and externally during the application development stage. In 1997, a
Company subsidiary entered into an agreement (the "Agreement") with TenFold
Corporation ("TenFold") to develop an integrated software application
("PowerPAC") for Unitrin's Property and Casualty Insurance segment. Under the
terms of the Agreement, as amended, Tenfold was required to complete and deliver
a PowerPAC system that satisfied all contractual requirements by September 1,
2000. Tenfold did not deliver PowerPAC by the required deadline. The Company
notified TenFold on September 14, 2000 that it considers TenFold to be in
material breach of the Agreement and, pursuant to its express terms, has
requested that TenFold refund to the Company all amounts it has paid to TenFold
for the PowerPAC project, totaling approximately $13.3 million. To date, TenFold
has refused to issue such a refund and has denied that the Company has a basis
for terminating the Agreement. The Company has submitted this dispute to non-
binding mediation as provided by the Agreement. In the event that the parties
are unable to resolve the matter through mediation, the Agreement provides for
binding arbitration as the exclusive means of dispute resolution.
Accordingly, Interest and Other Expenses for the nine and three months ended
September 30, 2000 includes a $12.3 million before-tax charge primarily to
write-off internal payroll costs previously capitalized under SOP No. 98-1.
Note 7 - Other Comprehensive Income
Other Comprehensive Income related to the Company's Investments for the nine and
three months ended September 30, 2000 and 1999 was:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
--------------------- -----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 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 $ 120.7 $ 148.3 $ 52.2 $ (173.7)
Equity in Other Comprehensive Income (Loss) of Investees (4.7) (4.0) (2.0) (2.0)
Effect of Income Taxes (40.7) (50.8) (17.5) 61.8
--------- ------- -------- ---------
Other Comprehensive Income (Expense) $ 75.3 $ 93.5 $ 32.7 $ (113.9)
========= ======= ======== =========
</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 nine months
ended September 30, 2000 and 1999 was $138.4 million and $233.9 million,
respectively. Total Comprehensive Income (Loss) for the three months ended
September 30, 2000 and 1999 was income of $28.4 million and a loss of $62.2
million, respectively.
6
<PAGE>
Note 8 - Business Segments
Segment Revenues and Operating Profit (Loss) for the nine and three months ended
September 30, 2000 and 1999 were:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
----------------------- ----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Dollars in Millions) 2000 1999 2000 1999
----------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Property and Casualty Insurance:
Premiums $ 562.0 $ 479.3 $ 198.5 $ 182.5
Net Investment Income 44.9 34.4 16.6 12.0
-------- -------- -------- --------
Total Property and Casualty Insurance 606.9 513.7 215.1 194.5
-------- -------- -------- --------
Life and Health Insurance:
Premiums 521.8 533.5 165.4 178.1
Net Investment Income 135.4 122.4 47.0 40.9
-------- -------- -------- --------
Total Life and Health Insurance 657.2 655.9 212.4 219.0
-------- -------- -------- --------
Consumer Finance 103.9 91.1 36.3 31.9
-------- -------- -------- --------
Unitrin Direct - - - -
-------- -------- -------- --------
Total Segment Revenues 1,368.0 1,260.7 463.8 445.4
-------- -------- -------- --------
Net Gains on Sales of Investments 133.2 94.0 37.8 54.6
Corporate and Other (12.8) (5.7) (5.5) (2.3)
-------- -------- -------- --------
Total Revenues $1,488.4 $1,349.0 $ 496.1 $ 497.7
======== ======== ======== ========
Segment Operating Profit (Loss):
Property and Casualty Insurance $ (20.7) $ 13.5 $ (0.8) $ (0.1)
Life and Health Insurance 34.1 60.2 37.5 25.0
Consumer Finance 18.9 17.0 6.5 6.4
Unitrin Direct (3.9) - (2.3) -
-------- -------- -------- --------
Total Segment Operating Profit 28.4 90.7 40.9 31.3
-------- -------- -------- --------
Net Gains on Sales of Investments 133.2 94.0 37.8 54.6
Corporate and Other Expense, Net (36.9) (13.1) (21.9) (5.7)
-------- -------- -------- --------
Income before Income Taxes and
Equity in Net Income of Investees $ 124.7 $ 171.6 $ 56.8 $ 80.2
======== ======== ======== ========
</TABLE>
7
<PAGE>
Note 9 - 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 thirteen similar lawsuits have been
filed in other jurisdictions 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, and accordingly the orders have been stayed pending
further proceedings. In July, 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. Further meetings with these departments are expected but
have not yet been scheduled. 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>
Nine Months Ended Three Months Ended
------------------------------- -------------------------------
September 30, September 30, September 30, September 30,
(Dollars in Millions) 2000 1999 2000 1999
----------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Personal Lines Premiums:
Automobile $285.5 $247.7 $100.7 $ 99.2
Homeowners 53.0 49.0 18.0 18.2
Other 8.3 7.9 2.9 2.7
Commercial Lines Premiums:
Property and Commercial Liability 98.8 80.0 33.3 34.2
Automobile 74.9 63.9 27.6 21.4
Other 41.5 30.8 16.0 6.8
------ ------ ------ ------
Total Premiums 562.0 479.3 198.5 182.5
------ ------ ------ ------
Net Investment Income 44.9 34.4 16.6 12.0
------ ------ ------ ------
Total Revenues $606.9 $513.7 $215.1 $194.5
====== ====== ====== ======
Operating Profit (Loss) $(20.7) $ 13.5 $ (0.8) $ (0.1)
====== ====== ====== ======
GAAP Incurred Loss Ratio (excluding Storms) 70.2% 64.0% 70.7% 68.2%
GAAP Incurred Storm Ratio 10.2% 10.0% 8.1% 8.1%
Total GAAP Incurred Loss Ratio 80.4% 74.0% 78.8% 76.3%
GAAP Combined Ratio 111.6% 104.3% 108.8% 106.6%
</TABLE>
Premiums in the Property and Casualty Insurance segment increased by $82.7
million and $16.0 million for the nine and three months ended September 30,
2000, respectively, compared to the same period in 1999. Premiums increased by
$73.9 million for the nine months ended September 30, 2000, compared to the same
period last year due to the effects of the June 17, 1999 acquisition of the
Valley Group, Inc. ("VGI"). Excluding the effects of the VGI acquisition,
premiums for the nine and three months ended September 30, 2000 increased by
$8.8 million and $16.0 million, respectively, compared to the same periods last
year due primarily to higher rates, partially offset by lower volume. Net
Investment Income increased by $10.5 million and $4.6 million for the nine and
three months ended September 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 $34.2 million and $0.7 million for the nine and three
months ended September 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 $57.2 million and
$16.0 million for the nine and three months ended September 30, 2000,
respectively, an increase of $8.6 million and $1.2 million, respectively,
compared to the same periods in 1999 and a decrease of $7.3 million compared to
the second quarter of 2000. While operating results in the third quarter of 2000
reflect an improvement of $4.4 million, excluding losses attributable to storm
damage, compared to the second quarter of 2000, underwriting results continue to
reflect inadequate margins resulting from higher frequency and severity of
losses due to inadequate pricing. Rate actions initiated earlier this year will
not be fully realized until 2001. The Company is continuing to implement
certain rate increases, subject to regulatory approvals.
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 nine months ended September 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>
Nine Months Ended Three Months Ended
--------------------- ----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Dollars in Millions) 2000 1999 2000 1999
---------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Premiums:
Life $ 305.9 $ 312.7 $ 101.1 $ 106.2
Accident and Health 152.0 159.7 42.7 52.0
Property 63.9 61.1 21.6 19.9
-------- -------- -------- --------
Total Premiums 521.8 533.5 165.4 178.1
Net Investment Income 135.4 122.4 47.0 40.9
-------- -------- -------- --------
Total Revenues $ 657.2 $ 655.9 $ 212.4 $ 219.0
======== ======== ======== ========
Operating Profit $ 34.1 $ 60.2 $ 37.5 $ 25.0
======== ======== ======== ========
</TABLE>
Premiums in the Life and Health Insurance segment decreased by $11.7 million and
$12.7 million for the nine and three months ended September 30, 2000,
respectively, compared to the same periods in 1999 due primarily to the sale of
The Pyramid Life Insurance Company. Net Investment Income in the Life and Health
Insurance segment increased by $13.0 million and $6.1 million for the nine and
three months ended September 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 9 to the Condensed Consolidated Financial
Statements). Excluding the estimated settlement cost, Operating Profit in the
Life and Health Insurance segment increased by $22.7 million for the nine months
ended September 30, 2000, compared to the same period in 1999, due primarily to
the higher net investment income and improved loss experience. Operating Profit
in the Life and Health Insurance segment increased by $12.5 million for the
three months ended September 30, 2000, compared to the same period in 1999, due
primarily to the higher net investment income and improved loss experience.
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. Net Gains on Sales of Investments for the
nine and three months ended September 30, 2000 includes a gain of $4.7 million
related to the sale. Premiums for Pyramid included in the Company's results for
the nine months ended September 30, 2000 and 1999 were $37.9 million and $46.4
million, respectively.
10
<PAGE>
Consumer Finance
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
--------------------- ----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Dollars in Millions) 2000 1999 2000 1999
---------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest, Loan Fees
and Earned Discount $ 94.4 $ 83.9 $ 32.7 $ 29.2
Net Investment Income 5.9 4.1 2.4 1.5
Other 3.6 3.1 1.2 1.2
-------- -------- -------- --------
Total Revenues $ 103.9 $ 91.1 $ 36.3 $ 31.9
======== ======== ======== ========
Operating Profit $ 18.9 $ 17.0 $ 6.5 $ 6.4
======== ======== ======== ========
Consumer Finance Loan
Originations $ 355.9 $ 307.1 $ 120.5 $ 107.1
Percentage of Consumer
Finance Receivables
Greater than Ninety Days
Past Due 0.5% 2.0% 0.5% 2.0%
Ratio of Reserve for Losses
on Consumer Finance Receivables
to Gross Consumer Finance
Receivables 5.2 7.3 5.2 7.3
Weighted-Average Yield on
Investment Certificates and
Savings Accounts 5.8 5.3 5.9 5.3
</TABLE>
Revenues in the Consumer Finance segment increased by $12.8 million and $4.4
million for the nine and three months ended September 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 $1.9 million for
the nine months ended September 30, 2000, compared to the same period in 1999,
due primarily to the higher level of loans outstanding partially offset by
higher interest expense and a $0.5 million charge for non-recurring professional
fees. Operating Profit in the Consumer Finance segment increased by $0.1 million
for the three months ended September 30, 2000, compared to the same period in
1999, due primarily to the higher level of loans outstanding partially offset by
higher interest expense and a $0.5 million charge for non-recurring professional
fees. The Ratio of Reserve for Losses on Consumer Finance Receivables to Gross
Consumer Finance Receivables decreased from 7.3% at September 30, 1999 to 5.2%
at September 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 $3.9 million
and $2.3 million for the nine and three months ended September 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 $133.2 million and $37.8 million,
respectively, for the nine and three months ended September 30, 2000, compared
to $94.0 million and $54.6 million, respectively, for the same periods in 1999.
Net Gains on Sales of Investments included pre-tax gains of $125.4 million and
$33.5 million, respectively, for the nine and three months ended September 30,
2000, and $93.7 million and $53.6 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 a loss of $17.8 million and $42.5 million
for the nine and three months ended September 30, 2000, respectively, compared
to income of $27.4 million and a loss of $0.9 million for the nine and three
months ended September 30, 1999, respectively.
On June 20, 2000, the fair value of Unitrin's investment in UNOVA declined below
Unitrin's carrying value of its investment in UNOVA. During the third quarter of
2000, Unitrin determined that the decline in the fair value of its investment in
UNOVA was other than temporary under applicable accounting standards.
Accordingly, Unitrin recorded an after-tax loss of $60.7 million to reduce the
carrying value of its investment in UNOVA to its current estimated realizable
value. The current realizable value has been estimated using the most recent and
sufficiently timely closing price of UNOVA prior to the filing of this
Form 10-Q. The loss is being allocated to Unitrin's proportionate share of
UNOVA's non-current assets. On a going-forward basis, Unitrin's reported equity
in the net income of UNOVA will differ from Unitrin's proportionate share of
UNOVA's reported results to the extent that such results include depreciation,
amortization or other charges related to such non-current assets. Additionally
during the third quarter of 2000, Unitrin recorded an after-tax gain of $4.2
million for its proportionate share of UNOVA's gain from the sale of a business
less certain severance charges.
Equity in Net Income of Investees for the nine and three months ended September
30, 1999 included an after-tax loss of $13.9 million resulting from Unitrin's
proportionate share of Litton's charges related to costs to exit its mainframe
outsourcing and professional services businesses, the consolidation of certain
manufacturing facilities and the effect of its voluntary settlement agreement
with the United States Attorney's office relating to foreign sales consultants.
Equity in Net Income of Investees for the nine months ended September 30, 1999
included income of $3.4 million resulting from Unitrin's proportionate share of
UNOVA's gain on sale of its headquarters building.
Other Items
Corporate and Other Expense, Net increased by $23.8 million and $16.2 million,
respectively, for the nine and three months ended September 30, 2000, compared
to the same periods in 1999. Corporate and Other Expense, Net for the nine and
three months ended September 30, 2000 includes a charge of $12.3 million to
write-down the carrying value of certain internal use software (See Note 6 to
the Condensed Consolidated Financial Statements). Corporate and Other Expense,
Net includes interest expense, under the Company's revolving credit agreement,
of $10.3 million and $4.0 million for the nine and three months ended September
30, 2000, respectively, compared to $3.7 million and $1.2 million, respectively,
for the same periods last year. Corporate and Other Expense, Net also reflects
lower dividend income of $2.5 million and $1.3 million for the nine and three
months ended September 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 nine months of 2000.
During the first nine months of 2000, the Company repurchased 3,190,300 shares
of its common stock in open market transactions at an aggregate cost of $107.9
million. The repurchases were made with general corporate funds. At September
30, 2000, the Company had approximately 1.0 million shares remaining under the
existing repurchase authorization.
At September 30, 2000, the unused commitment under the Company's revolving
credit facility was $229 million. In addition, for the remainder of 2000, the
Company's subsidiaries would be able to pay approximately $168 million in
dividends to the Company without prior regulatory approval.
12
<PAGE>
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.
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 and stock market fluctuations), 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 insurance rates,
license applications and similar matters, 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 9 to the Condensed Consolidated Financial Statements
(Unaudited) in Part I of this Form 10-Q.
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 until 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 September 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: October 25, 2000 /s/ Richard C. Vie
------------------------------
Richard C. Vie
Chairman, President
and Chief Executive Officer
Date: October 25, 2000 /s/ Richard Roeske
------------------------------
Richard Roeske
Corporate Controller
(Principal Accounting Officer)
15
