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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the fiscal year ended December 31, 1999.
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from N/A to N/A.
Commission file number 0-18298
UNITRIN, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4255452
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
One East Wacker Drive
Chicago, Illinois 60601
(Address of Principal Executive Offices) (Zip Code)
(312) 661-4600
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value
Preferred Share Purchase Rights Pursuant to Rights Agreement
(Titles of classes)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Based on the closing market price of Registrant's common stock on December
31, 1999 the aggregate market value of such stock held by non-affiliates of
Registrant is approximately $2.4 billion. Solely for purposes of this
calculation, all executive officers and directors of Registrant are considered
affiliates.
Registrant had 70,992,897 shares of common stock outstanding as of
December 31, 1999.
Documents Incorporated by Reference
Part of the Form 10-K
Document into which incorporated
Portions of Proxy Statement for 2000 Annual Meeting Part III
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PART I
ITEM 1. Business
Unitrin, Inc. ("Unitrin" or the "Company") was incorporated in Delaware in
1990. Unitrin's subsidiaries serve the basic financial needs of individuals,
families and small businesses by providing property and casualty insurance, life
and health insurance, and consumer finance services.
(a) General development of business
In February 1999, Unitrin's Board of Directors authorized a 2-for-1 stock
split in the form of a dividend distribution of one new share of common stock
for each share of common stock outstanding on the dividend's record date of
March 5, 1999. The stock dividend was paid on March 26, 1999. Based on the
approximately 36.7 million shares outstanding at the record date, the stock
dividend resulted in approximately 73.4 million shares outstanding as of March
26, 1999.
In June 1999, Unitrin's common stock was added to Standard & Poor's MidCap
400 Index. The S&P MidCap 400 Index consists of 400 domestic stocks chosen for
market size, liquidity and industry representation. Unitrin is now included in
the S&P MidCap 400 Index's property and casualty insurance industry group.
According to statistics published by S&P, the mean market capitalization of
stocks included in the S&P MidCap 400 Index as of June 1999 was approximately
$2.2 billion. Unitrin's market capitalization is approximately $2.5 billion.
On June 17, 1999, Unitrin completed its stock acquisition of Valley Group,
Inc. ("Valley Group") from Fund American Enterprises Holdings, Inc. (now known
as White Mountains Insurance Group Ltd.) for a total purchase price of
approximately $138.4 million in cash, including related transaction costs. As a
result of the acquisition, the Valley Group companies, including Valley
Insurance Company of Albany, Oregon and Charter Indemnity Company of Dallas,
Texas, became part of the Unitrin Property and Casualty Insurance Group. The
Valley Group companies write personal and commercial lines property and casualty
insurance, primarily in the Pacific Northwest, California and Texas. The
acquisition of Valley Group added approximately $88.1 million to Unitrin's
consolidated premium revenues for 1999.
On October 7, 1999, Unitrin's subsidiary, United Insurance Company of
America ("United"), entered into an agreement with Ceres Group, Inc. for the
sale of United's subsidiary, The Pyramid Life Insurance Company ("Pyramid"), to
Ceres Group, Inc. for $67.5 million in cash, subject to adjustment for a
dividend to be paid by Pyramid immediately prior to closing. Based in Mission,
Kansas, Pyramid specializes in the sale of health insurance products, including
Medicare Supplement, targeted at the senior market. Pyramid had premium
revenues of approximately $63.6 million in 1999, representing less than 5% of
Unitrin's consolidated insurance premium revenues. The transaction is subject
to regulatory approvals and the satisfaction of other customary closing
conditions, and is required to close by February 15, 2000, unless extended by
both parties.
In 1999, United discontinued the sales operations of its Worksite Products
Division. Worksite Products Division specialized in employer-paid and voluntary
group and individual life insurance products and Section 125 administration
programs sold to employers, financial institutions, credit unions and banks.
Worksite Products Division had premium revenues of approximately $8 million in
1999. United currently is in the process of completing the wind-down of all
Worksite Products Division operations.
On December 16, 1999, Unitrin's subsidiary, Valley Insurance Company,
entered into an agreement with Motor Club of America for the sale of Valley's
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subsidiary, Mountain Valley Indemnity Company ("Mountain Valley"), to Motor Club
of America for $7.5 million in cash. Acquired by Unitrin in June 1999 in
connection with the Valley Group acquisition, Mountain Valley is based in
Manchester, New Hampshire and sells mainly commercial property and casualty
insurance in the New England states. Results for the Unitrin Property and
Casualty Insurance Group in 1999 include premiums of $8.7 million and an
operating loss of $3.1 million attributable to Mountain Valley. The transaction
is subject to regulatory approvals and the satisfaction of other customary
closing conditions, and is required to close by February 29, 2000, unless
extended by both parties.
Effective January 3, 2000, Unitrin established a separate business unit
that will use a distribution methodology for the marketing and sale of personal
automobile insurance through direct mail, radio and television advertising and
over the Internet. This business unit will utilize one of Unitrin's existing
insurance subsidiaries to be renamed as "Unitrin Direct Insurance Company"
("Unitrin Direct") and its operations will be accounted for as a separate
business segment. It is anticipated that the majority of 2000 will be devoted to
hiring employees, identifying and renting office space, refining products and
product rates, developing advertising and marketing materials, and other
matters. Accordingly, it is expected that Unitrin Direct will have an
insignificant amount of revenue in 2000 relative to its expenses, and that it
likely will produce operating losses for at least the next few years.
During 1999, Unitrin repurchased, on a post-split basis, approximately 5.5
million shares of its common stock in open market transactions at an aggregate
cost of approximately $191.4 million. Unitrin has repurchased, on a post-split
basis, approximately 50.0 million shares of its common stock at an aggregate
cost of approximately $1.3 billion since 1990. At December 31, 1999,
approximately 4.2 million shares of Unitrin common stock remained under the
Company's outstanding repurchase authorizations.
(b) Business segment financial data
Financial information about the Company's business segments for the years
ended December 31, 1999, 1998, and 1997 is contained in the following portions
of this 1999 Annual Report on Form 10-K of Unitrin, Inc. and is incorporated
herein by reference: (i) Note 17 to the Company's Consolidated Financial
Statements, which financial statements are further described in Item 14(a)1
hereto and filed as Exhibit 13.1 hereto and incorporated by reference into Item
8 hereof (the "Financial Statements"), and (ii) "Management's Discussion and
Analysis of Results of Operations and Financial Condition," which is filed as
Exhibit 13.2 hereto and incorporated by reference into Item 7 hereof (the
"MD&A").
Caution Regarding Forward-Looking Statements
This 1999 Annual Report on Form 10-K, and the accompanying Financial
Statements and MD&A, contain forward-looking statements which usually include
words such as "believe(s)," "goal(s)," "target(s)," "estimate(s),"
"anticipate(s)," "forecast(s)" and similar expressions. Readers are cautioned
not to place undue reliance on such statements, which speak only as of the date
of this 1999 Annual Report on Form 10-K. 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 in the MD&A, 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), 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
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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 1999 Annual Report on Form 10-K.
(c) Description of business
Unitrin's subsidiaries currently operate in three segments: Property and
Casualty Insurance, Life and Health Insurance, and Consumer Finance. Unitrin
and its subsidiaries have nearly 7,800 full-time employees of which
approximately 5,200 are employed in the Life and Health Insurance segment, 1,800
in the Property and Casualty Insurance segment, and 600 in the Consumer Finance
segment. Beginning in 2000, Unitrin Direct's activities will be accounted for
as Unitrin's fourth business segment.
Property and Casualty Insurance
Trinity Universal Insurance Company ("Trinity"), together with its
subsidiaries and affiliates (collectively, the "Unitrin Property and Casualty
Insurance Group"), comprise a network of regional insurers operating mainly in
the southern, midwestern, western and northwestern regions of the United States.
With principal operations located in 33 states, the Unitrin Property and
Casualty Insurance Group has over 630,000 policies in force. The states which
provided the largest amount of 1999 premium are Texas (35%), California (13%),
Oregon (6%), Wisconsin (6%), Illinois (5%), Washington (5%), and Louisiana (4%).
Property insurance indemnifies an insured with an interest in physical
property for loss of such property or the loss of its income-producing
abilities. Casualty insurance primarily covers liability for damage to property
of, or injury to, a person or entity other than the insured.
Products and Distribution
The Unitrin Property and Casualty Insurance Group provides automobile,
homeowners, commercial multi-peril, motorcycle, boat and watercraft, fire,
casualty, workers compensation, and other types of property and casualty
insurance to individuals and businesses. Automobile insurance accounted for
31%, 36%, and 40% of Unitrin's consolidated insurance premiums for the years
ended December 31, 1999, 1998, and 1997, respectively.
Preferred and standard risk insurance products are marketed exclusively by
over 2,200 independent agents in 2,700 locations. These personal and commercial
products are designed and priced for those individuals and businesses that have
demonstrated favorable risk characteristics and loss history. Typical customers
include "main street" businesses and middle income families. Products are
marketed primarily in suburban and rural communities. Trinity and certain of
Unitrin's subsidiaries (Milwaukee Casualty Insurance Co., Milwaukee Safeguard
Insurance Company, Security National Insurance Company, Trinity Universal
Insurance Company of Kansas, Inc., Union Automobile Indemnity Company, Valley
Insurance Company and Valley Property & Casualty Insurance Company) and
affiliates (Milwaukee Mutual Insurance Company and Trinity Lloyd's Insurance
Company) principally provide the Unitrin Property and Casualty Insurance Group's
preferred and standard products in 30 states including Texas, California,
Oregon, Wisconsin, Illinois, Washington, Louisiana, Minnesota, and other
southern, midwestern, western and northwestern states. These products accounted
for approximately 75% of the Unitrin Property and Casualty Insurance Group's
1999 premium revenue.
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Specialty insurance products are principally provided by Financial
Indemnity Company, Alpha Property & Casualty Insurance Company, Charter
Indemnity Company and Charter County Mutual Insurance Company, and include
nonstandard personal and commercial automobile, motorcycle, and specialty
watercraft insurance. Nonstandard automobile insurance is provided for
individuals and companies that have had difficulty obtaining standard or
preferred risk insurance, usually because of their driving records. Nonstandard
automobile insurance products are marketed through approximately 9,800
independent agents in 10,500 locations in California, Texas and 31 other states.
Storms/Catastrophe Losses
Severe weather and catastrophic events, such as hurricanes, tornadoes,
earthquakes and wind, ice and hail storms, are inherent risks of the property
insurance business. Such occurrences result in insurance losses that are and
will continue to be a material factor in the results of operations and financial
position of the Unitrin Property and Casualty Insurance Group. Further, because
the level of these insurance losses experienced in any year cannot be predicted,
these losses contribute to the year-to-year fluctuations in the Unitrin Property
and Casualty Insurance Group's results of operations and financial position. As
a consequence, the Unitrin Property and Casualty Insurance Group has implemented
certain management strategies intended to reduce exposure to storm and
catastrophe losses, including, as described below, geographic diversification of
property insurance risk and catastrophe reinsurance arrangements. Although
management believes that such strategies have reduced or will reduce the Unitrin
Property and Casualty Insurance Group's exposure to storm and catastrophe losses
over time, the extent of such reduction is uncertain.
With respect to storm losses, the frequency and occurrence of severe
weather cannot be predicted in any year. However, geographic location can have
an impact on a property insurer's exposure to losses from storms. Moreover,
these storms add an element of seasonality to property insurance claims, since
windstorms and tornadoes tend to occur in the spring of the year, while
hurricanes generally occur in the summer and fall. Historically, the Unitrin
Property and Casualty Insurance Group has written a sizable portion of its
business in Texas, the plains states, and certain coastal areas that are prone
to storms. The Unitrin Property and Casualty Insurance Group has endeavored to
reduce its vulnerability to storm losses through a combination of geographic
expansion outside of these areas and reduced concentration of property business
in storm-prone areas.
As a part of the Unitrin Property and Casualty Insurance Group's overall
reinsurance program, management acquires excess of loss reinsurance coverage
designed specifically to protect against losses arising from catastrophic events
such as storms. The Group's catastrophe reinsurance program is typically
purchased annually and is structured according to a series of coverage layers
based on geographic region. For example, the 1999 catastrophe reinsurance
program for the Unitrin Property and Casualty Insurance Group (excluding the
Valley Group companies which had their own independent program) provided for $15
million in reinsurance protection for losses that exceeded $10 million in Texas,
Louisiana and Alabama. For losses in states other than Texas, Louisiana and
Alabama that were covered by the 1999 catastrophe program, the reinsurance
provided $21 million in protection for losses that exceeded $4 million. In
addition, for losses in all states covered by the 1999 catastrophe program, the
reinsurance provided $30 million in protection for losses exceeding $25 million.
Based on external modeling studies, the Unitrin Property and Casualty Insurance
Group's estimated probable maximum loss for storms occurring in all states with
a statistical frequency of occurrence of once per 100 years is approximately $30
million. For further discussion of the Unitrin Property and Casualty Insurance
Group reinsurance program, see discussion below and Note 18 to the Financial
Statements.
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Pricing
Pricing levels for property and casualty insurance are influenced by many
factors, including the frequency and severity of claims, state regulation and
legislation, competition, general business conditions, inflation, expense
levels, and judicial decisions. In addition, many state regulators require
consideration of investment income when approving or setting rates, which
reduces underwriting margins.
Reinsurance
Consistent with insurance industry practice, the Unitrin Property and
Casualty Insurance Group companies utilize reinsurance arrangements to limit
their maximum loss, provide greater diversification of risk and minimize
exposures on larger risks. Under these arrangements, the Unitrin Property and
Casualty Insurance Group is indemnified by reinsurers for losses incurred under
insurance policies issued by the Group's companies. As reinsurance does not
discharge the Unitrin Property and Casualty Insurance Group from its direct
obligations to policyholders on risks insured, the Group remains contingently
liable. However, so long as the reinsurers meet their obligations, the Unitrin
Property and Casualty Insurance Group's net liability is limited to the amount
of risk it retains. See Note 18 to the Financial Statements.
Competition
Based on the most recent data published by A.M. Best Company ("A.M. Best")
as of the end of 1998, there were approximately 1,100 property and casualty
insurance organizations in the United States, made up of nearly 2,500 companies.
Prior to the acquisition of Valley Group, the Unitrin Property and Casualty
Insurance Group ranked among the 75 largest property and casualty insurance
company organizations in the United States, measured by admitted assets (74th),
net premiums written (67th), and policyholders' surplus (51st). With Valley
Group, the Unitrin Property and Casualty Insurance Group now ranks among the 60
largest property and casualty insurance groups in the nation.
In 1998, the industry's estimated net premiums written were over $281
billion, more than 76% of which were accounted for by 50 groups of companies.
The Unitrin Property and Casualty Insurance Group wrote less than 1% of the
industry's estimated 1998 premium volume.
Over the past several years, the property and casualty insurance industry
has experienced progressively intense competition. This escalation is due in
large part to the entry of new capital into the industry and the efforts of
incumbent companies to maintain and expand existing market shares. As a
consequence, the industry's capacity to underwrite risks in many cases has
outpaced consumer demand for property and casualty coverage, particularly with
respect to personal lines products such as automobile insurance. This
competitive environment has manifested itself throughout the industry in a
number of ways, including falling prices, low revenue growth and deterioration
in operating profits.
The Unitrin Property and Casualty Insurance Group has not been immune to
the effects of this environment and expects competitive pricing, particularly in
personal automobile lines, to continue to put pressure on premium growth and
profit margins. To remain competitive, the Group's strategy includes, among
other measures, (i) using appropriate pricing, (ii) maintaining underwriting
discipline, (iii) selling to selected markets, (iv) utilizing technological
innovations for the marketing and sale of insurance, (v) controlling expenses,
(vi) maintaining ratings from A.M. Best, (vii) providing quality services to
agents and policyholders, and (viii) making strategic acquisitions of suitable
property and casualty insurers.
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Life and Health Insurance
Unitrin conducts its life and health insurance business through United and
United's subsidiaries, Union National Life Insurance Company ("Union National
Life"), Reserve National Insurance Company ("Reserve National") and Pyramid, and
Unitrin's subsidiary, The Reliable Life Insurance Company ("Reliable")
(collectively, the "Unitrin Life and Health Insurance Group"). As disclosed in
Item 1(a) above, the sale of Pyramid by Unitrin is currently pending.
The Unitrin Life and Health Insurance Group mainly focuses on providing
individual life and health insurance products to customers who desire
fundamental protection for themselves and their families. The leading product
of the Unitrin Life and Health Insurance Group is ordinary life insurance,
including permanent and term insurance, with an average face amount of
approximately $8,000. This product accounted for 29%, 29%, and 26% of Unitrin's
consolidated insurance premiums for the years ended December 31, 1999, 1998, and
1997, respectively. Premiums are typically charged on a monthly basis and
average approximately $22 per month. Permanent policies are offered primarily
on a non-participating, guaranteed-cost basis.
Career Agents
Approximately 74% of the Unitrin Life and Health Insurance Group's premiums
result from insurance products offered and distributed by the Group's career
agents. United, along with Reliable and Union National Life, employ over 3,100
career agents to distribute traditional whole life insurance products in 26
states. These career agents are full-time employees who call on customers in
their homes to sell life and health insurance products, provide services related
to policies in force and collect premiums, typically monthly. Property
insurance products written by United's subsidiaries, United Casualty Insurance
Company of America ("United Casualty") and Union National Fire Insurance Company
("Union National Fire"), are also distributed by the Group's career agents.
Customers of Unitrin's career agency companies generally are families with
an annual income of less than $25,000. According to figures assembled by the
U.S. Bureau of the Census as of 1995, there are over 36 million households in
the United States with less than $25,000 of annual income, representing about
37% of all households.
In 1999, Unitrin's career agency companies, United, Reliable and Union
National Life, underwent a rigorous self and independent assessment of their
market conduct practices and earned membership in the Insurance Marketplace
Standards Association ("IMSA"). IMSA is a voluntary membership organization
whose purpose is to promote high ethical standards in the sale of individual
life insurance and individual annuity products. IMSA membership must be renewed
every three years.
Independent Agents
Reserve National has approximately 200 independent agents appointed to
market and distribute health insurance products. Licensed in 31 states
throughout the South, Southwest and Midwest, Reserve National specializes in the
sale of limited benefit accident and health insurance products and Medicare
Supplement insurance, primarily to individuals living in rural areas where
health maintenance organizations and preferred provider organizations are less
prevalent.
Pricing
Premiums for life and health insurance products are based on assumptions
with respect to mortality, morbidity, investment yields, expenses, and lapses
and are also affected by state laws and
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regulations, as well as competition. Pricing assumptions are based on the
experience of the Unitrin Life and Health Insurance Group, as well as the
industry in general, depending upon the factor being considered. The actual
profit or loss produced by a product will vary from the anticipated profit if
the actual experience differs from the assumptions used in pricing the product.
Premiums for policies sold through the Unitrin Life and Health Insurance
Group's career agents are set at levels designed to cover the relatively higher
cost of this method of distribution. As a result of such higher expenses,
incurred claims as a percentage of premium income tend to be lower for companies
utilizing this method of distribution than the insurance industry average.
Premiums for Medicare Supplement and other accident and health policies
must take into account the rising costs of medical care. The annual rate of
medical cost inflation has historically been higher than the general rate of
inflation, necessitating frequent rate increases, most of which are subject to
approval by state regulatory agencies.
Reinsurance
Consistent with insurance industry practice, the Unitrin Life and Health
Insurance Group companies utilize reinsurance arrangements to limit their
maximum loss, provide greater diversification of risk and minimize exposures on
larger risks. Under these arrangements, the Unitrin Life and Health Insurance
Group is indemnified by reinsurers for losses incurred under insurance policies
issued by the Group's companies. Included among the Group's reinsurance
arrangements is excess of loss reinsurance coverage specifically designed to
protect against losses arising from catastrophic events such as storms under the
property insurance policies written by United Casualty and Union National Fire.
As reinsurance does not discharge the Unitrin Life and Health Insurance
Group from its direct obligations to policyholders on risks insured, the Group
remains contingently liable. However, so long as the reinsurers meet their
obligations, the Unitrin Life and Health Insurance Group's net liability is
limited to the amount of risk it retains. For descriptions of certain of the
reinsurance arrangements of the Unitrin Life and Health Insurance Group, see the
MD&A and Note 18 to the Financial Statements.
Lapse Ratio
The lapse ratio is a measure reflecting a life insurer's loss of existing
business. For a given year, this ratio is commonly computed as the total face
amount of individual life insurance policies lapsed, surrendered, expired and
decreased during such year, less policies increased and revived during such
year, divided by the total face amount of policies at the beginning of the year
plus the face amount of policies issued and reinsurance assumed in the prior
year. The Unitrin Life and Health Insurance Group's lapse ratios for individual
life insurance were 10%, 12%, and 15% for the years 1999, 1998, and 1997,
respectively.
The customer base served by the Unitrin Life and Health Insurance Group's
career agents and competing life insurance companies tends to have a higher
incidence of lapse than other demographic segments of the population. Thus, to
maintain or increase the level of its business, the Unitrin Life and Health
Insurance Group's career agents must continue to write a high volume of new
policies.
Competition
Based on the most recent data published by A.M. Best as of the end of 1998,
there were approximately 550 life and health insurance company groups in the
United States, made up of more than
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1,100 companies. The Unitrin Life and Health Insurance Group ranked among the
100 largest life and health insurance company groups, as measured by admitted
assets (88th), net premiums written (93rd), and capital and surplus (53rd).
Unitrin's insurance subsidiaries generally compete using appropriate
pricing, selling to selected markets, controlling expenses, maintaining ratings
from A.M. Best, and providing competitive services to agents and policyholders.
Consumer Finance
Unitrin's subsidiary, Fireside Thrift Co. ("Fireside Thrift"), is engaged
in the consumer finance business. Fireside Thrift is organized under California
law as an industrial loan company and is a member of the Federal Deposit
Insurance Corporation (the "FDIC"). Industrial loan companies are sometimes
also referred to as thrift and loan companies and are distinct from both savings
and loan associations and banks. See also "Regulation" below.
Fireside Thrift's principal business is the financing of used automobiles
through the purchase of conditional sales contracts from automobile dealers.
Fireside Thrift also makes personal loans, mostly secured by automobiles. The
borrowers under these contracts and loans typically have marginal credit
histories.
Fireside Thrift has 35 branches in California and one loan production
office in Arizona. In addition, 1999 marked Fireside Thrift's geographic
expansion into a third state of operation with the opening of a new loan
production office in Portland, Oregon. Fireside Thrift does business with over
2,000 automobile dealers in California, Arizona and Oregon, and is one of the
largest sub-prime automobile lenders in California. Fireside Thrift has in
excess of $600 million in loans outstanding representing loans to over 100,000
consumers.
Strong loan underwriting and collection practices are key elements to
successful operating performance in the sub-prime automobile finance business.
Nearly 80% of Fireside Thrift's operating expenses are devoted to underwriting
and collection activities. Fireside Thrift individually underwrites each loan
application and historically has declined to extend credit to more than three
quarters of its loan applicants. See the discussion of Fireside Thrift's loan
loss reserves under the heading "Consumer Finance" in the MD&A and Note 6 to the
Financial Statements. Fireside Thrift competes for loans primarily on the basis
of timely service to its customers and by offering competitive loan terms.
Principal competitors include banks, finance companies, "captive" credit
subsidiaries of automobile manufacturers, and other industrial loan companies.
Fireside Thrift's financing activities are funded primarily by thrift
investment certificates (i.e., interest-bearing instruments that may be redeemed
by the owner or repurchased by Fireside Thrift under certain circumstances)
ranging from thirty-one days to five years in maturity and money market
accounts. Fireside Thrift competes for funds primarily with banks, savings and
loan associations, and other industrial loan companies.
Investments
The quality, nature, and amount of the various types of investments which
can be made by insurance companies are regulated by state laws. Depending on
the state, these laws permit investments in qualified assets, including
municipal, state and federal government obligations, corporate bonds, real
estate, preferred and common stocks, and mortgages where the value of the
underlying real estate exceeds the amount of the loan.
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Unitrin's investment strategy is based on current market conditions and
other factors that it reviews from time to time. Unitrin's consolidated
investment portfolio consists primarily of United States Government obligations,
investment-grade fixed maturities, equity securities and investments in
investees. The Company's investment in non-investment grade, fixed maturity
investments is insignificant. See the discussions of the Company's investments
under the headings "Investees," "Investment Results," "Quantitative and
Qualitative Disclosures about Market Risk," and "Liquidity and Capital
Resources" in the MD&A and Notes 4, 5 and 13 to the Financial Statements.
Regulation
Insurance Regulation
Unitrin is subject to the insurance holding company laws of several states.
Certain dividends and distributions by an insurance subsidiary to its holding
company are subject to approval by the insurance regulators of the state of
incorporation of such subsidiary. Other significant transactions between an
insurance subsidiary and its holding company or other subsidiaries of the
holding company may require approval by insurance regulators in the state of
incorporation of each of the insurance subsidiaries participating in such
transactions.
Unitrin's insurance subsidiaries are subject to regulation in the states in
which they do business. Such regulation pertains to matters such as approving
policy forms and various premium rates, licensing agents, granting and revoking
licenses to transact business and regulating trade practices. The majority of
Unitrin's insurance operations are in states requiring prior approval by
regulators before proposed rates for property, casualty, or health insurance
policies may be implemented. However, rates proposed for life insurance
generally become effective immediately upon filing with a state, even though the
same state may require prior rate approval for other types of insurance.
Insurance regulatory authorities perform periodic examinations of an insurer's
market conduct and other affairs.
State insurance regulators also prescribe the form and content of statutory
financial statements, perform periodic financial examinations of insurers, set
minimum reserve and loss ratio requirements, establish standards for the types
and amounts of investments and require minimum capital and surplus levels. Such
statutory capital and surplus requirements include risk-based capital ("RBC")
rules promulgated by the National Association of Insurance Commissioners (the
"NAIC"). Compliance with the RBC rules is determined by the ratio of total
adjusted capital to the authorized control level RBC, in each case as defined by
the NAIC. At December 31, 1999, each of Unitrin's insurance subsidiaries was in
compliance with RBC requirements.
The NAIC annually calculates certain statutory financial ratios for most
insurance companies in the United States. These calculations are known as the
Insurance Regulatory Information System ("IRIS") ratios. There presently are
twelve IRIS ratios. The primary purpose of the ratios is to provide an "early
warning" of any negative developments. The NAIC reports the ratios to state
regulators who may then contact the companies if three or more ratios fall
outside the NAIC's "usual ranges." Based upon calculations as of December 31,
1998 no Unitrin companies, including the Valley Group, had three or more IRIS
ratios outside the usual range.
In addition, the Company's insurance subsidiaries are required under the
guaranty fund laws of most states in which they transact business to pay
assessments up to prescribed limits to fund policyholder losses or liabilities
of insolvent insurance companies. The Company's insurance subsidiaries also are
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required to participate in various involuntary pools, principally involving
workers compensation and windstorms. In most states, the involuntary pool
participation of the Company's insurance subsidiaries is in proportion to their
voluntary writings of related lines of business in such states.
Consumer Finance Regulation
Fireside Thrift is regulated by the California Department of Financial
Institutions and is subject to the provisions of the California Industrial Loan
Law, which imposes minimum capitalization requirements, limits dividends,
regulates loan terms, collection practices and remedies, and mandates disclosure
of certain contract terms. In addition, since Fireside Thrift is a member of
the FDIC, it is subject to regulations imposed by the FDIC on member
institutions, including federal consumer credit regulations. Fireside Thrift is
also governed by Federal Reserve Board regulations applicable to non-member
state banks.
ITEM 2. Properties
Owned Properties
Unitrin's subsidiary, United, owns the 41-story office building at One East
Wacker Drive, Chicago, Illinois, that houses the executive offices of Unitrin
and United. Unitrin and United occupy approximately 109,000 square feet of the
527,000 rentable square feet in the building. In addition, Unitrin subsidiaries
together own 21 buildings located in 12 states consisting of approximately
493,000 square feet in the aggregate.
Leased Facilities
The Unitrin Life and Health Insurance Group leases facilities at 193
locations in 25 states with aggregate square footage of approximately 415,000.
The latest expiration date of the existing leases is October 2006.
The Unitrin Property and Casualty Insurance Group leases facilities at 17
locations in 11 states with an aggregate square footage of approximately
356,000. The latest expiration date of the existing leases is July 2007.
Fireside Thrift occupies 39 leased facilities (including consumer finance
branches and main office buildings) with an aggregate square footage of
approximately 152,000. The latest expiration date of the existing leases is
September 2008.
The properties described above are in good condition and suitable for all
presently anticipated requirements of the Company.
ITEM 3. Legal Proceedings
Unitrin and its subsidiaries are parties to various legal actions
incidental to their businesses; some of these actions seek substantial punitive
damages that bear no apparent relationship to the actual damages alleged. 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 as of the date hereof as to the outcome
of any particular legal action, the Company and its subsidiaries believe that
there are meritorious defenses to these legal actions and are defending them
vigorously. Unitrin believes that resolution of these matters will not have a
material adverse effect on Unitrin's financial position.
10
<PAGE>
ITEM 4. Submission of Matters to a Vote of Security Holders
During the quarter ended December 31, 1999, no matters were submitted to a
vote of shareholders.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
Unitrin's common stock is traded on the National Market Tier of the Nasdaq
Stock Market. The high and low prices for Unitrin's common stock during each
quarterly period in 1999 and 1998 are incorporated herein by reference to Note
19 to the Financial Statements, captioned "Quarterly Financial Information
(Unaudited)."
Information as to the amount and frequency of cash dividends declared by
Unitrin on its common stock during 1999 and 1998 is incorporated herein by
reference to the following portions of the Financial Statements:
(a) Consolidated Statements of Shareholders' Equity and Comprehensive
Income; and
(b) Dividends Paid to Common Shareholders (Per Share) included in Note 19
under the caption "Quarterly Financial Information (Unaudited)."
Information as to restrictions on the ability of Unitrin's subsidiaries to
transfer funds to Unitrin in the form of cash dividends, loans, or advances is
incorporated herein by reference to the following items:
(a) Note 9 to the Financial Statements, captioned "Shareholders' Equity;"
and
(b) The "Liquidity and Capital Resources" section of the MD&A.
As of December 31, 1999, the approximate number of record holders of
Unitrin's common stock was 8,500.
ITEM 6. Selected Financial Data
Selected consolidated financial data for the five years ended December 31,
1999 is incorporated herein by reference to the data captioned "Financial
Highlights" and filed as Exhibit 13.3 hereto.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The MD&A is incorporated herein by reference and filed as Exhibit 13.2
hereto.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
These disclosures are contained in the section of the MD&A entitled
"Quantitative and Qualitative Disclosures About Market Risk" which is
incorporated herein by reference and filed as Exhibit 13.2 hereto.
11
<PAGE>
ITEM 8. Financial Statements and Supplementary Data
The Financial Statements (including their related notes and the report of
KPMG LLP) are incorporated herein by reference and filed as Exhibit 13.1 hereto.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There was no change in, or disagreement with, the Company's accountants
during or relating to the year ended December 31, 1999.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information regarding directors and executive officers, including, to the
extent applicable, information required by Item 405 of Regulation S-K, is
incorporated herein by reference to the sections captioned "Election of
Directors" and "Executive Officers" in the Proxy Statement for the 2000 Annual
Meeting of Shareholders of Unitrin. Unitrin plans to file such proxy statement
within 120 days after December 31, 1999, the end of Unitrin's fiscal year.
ITEM 11. Executive Compensation
Information regarding compensation of executive officers is incorporated
herein by reference to the section captioned "Compensation of Executive
Officers" in the Proxy Statement for the 2000 Annual Meeting of Shareholders of
Unitrin. Neither the joint report by the Compensation and Stock Option
Committees of Unitrin's Board of Directors nor the Unitrin stock performance
graph to be included in such proxy statement shall be deemed to be incorporated
herein by this reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
This information is incorporated herein by reference to the section
captioned "Ownership of Common Stock" in the Proxy Statement for the 2000 Annual
Meeting of Shareholders of Unitrin.
ITEM 13. Certain Relationships and Related Transactions
This information is incorporated herein by reference to the section
captioned "Compensation Committee Interlocks and Insider Participation" in the
Proxy Statement for the 2000 Annual Meeting of Shareholders of Unitrin.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of this Report:
1. Financial Statements. The following financial statements, in response to
Item 8 of the Form 10-K, have been filed as Exhibit 13.1 and are
incorporated by reference into Item 8 hereof:
The consolidated balance sheets of Unitrin and subsidiaries as of December
31, 1999 and 1998, and the consolidated statements of income, cash flows
and shareholders' equity and
12
<PAGE>
comprehensive income for the years ended December 31, 1999, 1998 and 1997,
together with the notes thereto and the report of KPMG LLP thereon, dated
January 24, 2000.
2. Financial Statement Schedules. The following four financial statement
schedules are included on the following pages hereof. Schedules not listed
here have been omitted because they are not applicable or not material or
the required information is included in the Financial Statements.
Schedule I: Investments Other Than Investments in Related Parties
Schedule II: Parent Company Financial Statements
Schedule III: Supplementary Insurance Information
Schedule IV: Reinsurance Schedule
Financial Statements of Litton Industries, Inc., a 50% or less owned
person, to be filed by amendment.
3. Exhibits. The following exhibits are either filed as a part hereof or are
incorporated by reference. Exhibit numbers correspond to the numbering
system in Item 601 of Regulation S-K. Exhibits 10.1 through 10.7 relate to
compensatory plans filed or incorporated by reference as exhibits hereto
pursuant to Item 14(c) of Form 10-K.
3.1 Certificate of Incorporation (incorporated herein by reference to
Exhibit 3.1 to the Company's Registration Statement on Form 10 dated
February 15, 1990)
3.2 Amended and Restated By-Laws (incorporated herein by reference to
Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997)
4 Rights Agreement between Unitrin, Inc. and First Chicago Trust
Company of New York, as rights agent, dated as of August 3, 1994
(incorporated herein by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A dated August 3, 1994)
10.1 Unitrin, Inc. 1990 Stock Option Plan, as amended and restated
(incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999)
10.2 Unitrin, Inc. 1997 Stock Option Plan (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
(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 the Company's 1994 Annual Report on
Form 10-K)
10.5 Unitrin is a party to individual severance agreements (the form of
which is incorporated herein by reference to Exhibit 10.5 to the
Company's 1994 Annual Report on Form 10-K), with the following
executive officers:
13
<PAGE>
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 and 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
action of Unitrin's Board of Directors through January 1, 2001)
10.7 1998 Unitrin, Inc. Bonus Plan for Senior Executives (incorporated
herein by reference to Exhibit A to the Proxy Statement dated April
9, 1998, in connection with the Annual Meeting of Shareholders of
Unitrin held May 13, 1998)
10.8 Amended and Restated Credit Agreement, dated September 17, 1997
among Unitrin, Inc., the Lenders party thereto, and NationsBank of
Texas, N.A. (incorporated herein by reference to Exhibit 10.7 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997)
13.1 Financial Statements
13.2 MD&A
13.3 Financial Highlights
21 Subsidiaries of Unitrin, Inc.
23.1 Reports of KPMG LLP (included in Exhibit 13.1 hereof and filed as
Exhibit 23.1 hereof)
23.2 Consent of KPMG LLP
24 Power of Attorney (included on the signature page hereof)
27 Financial Data Schedule
(b) Reports on Form 8-K. None
(c) Exhibits. Included in Item 14(a)3 above.
(d) Financial Statement Schedules. Included in Item 14(a)2 above.
14
<PAGE>
SCHEDULE I
UNITRIN, INC. AND SUBSIDIARIES
INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1999
(Dollars in Millions)
<TABLE>
<CAPTION>
Amount
Amortized Fair Carried in
Cost Value Balance Sheet
------------- -------------- -------------
<S> <C> <C> <C>
Fixed Maturities:
Bonds and Notes:
United States Government and
Government Agencies and Authorities $ 1,902.3 $ 1,870.6 $ 1,870.6
States, Municipalities
and Political Subdivisions 187.4 184.2 184.2
Corporate Securities:
Other Bonds and Notes 518.8 488.5 488.5
Redemptive Preferred Stocks 118.3 108.5 108.5
------------- -------------- -------------
Total Investments in Fixed Maturities 2,726.8 2,651.8 2,651.8
------------- -------------- -------------
Equity Securities:
Common Stocks 358.8 423.2 423.2
Non-redemptive Preferred Stocks 92.0 89.4 89.4
------------- -------------- -------------
Total Investments in Equity Securities 450.8 512.6 512.6
------------- -------------- -------------
Investees (A)
Litton Industries, Inc. 374.0 631.3 374.0
UNOVA, Inc. 158.6 164.6 158.6
Curtiss-Wright Corporation 108.0 161.6 108.0
------------- -------------- -------------
Total Investees 640.6 957.5 640.6
------------- -------------- -------------
Loans, Real Estate and Short-term Investments 291.8 XXX.X 291.8
------------- -------------
Total Investments $ 4,110.0 $ 4,096.8
============= =============
</TABLE>
(A) - Amortized Cost = Cost Plus Cumulative Undistributed Earnings.
See Accompanying Independent Auditors' Report.
<PAGE>
SCHEDULE II
UNITRIN, INC.
PARENT COMPANY BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(Dollars in Millions)
<TABLE>
<CAPTION>
December 31,
------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS
Investment in Subsidiaries and Investees $ 2,392.5 $ 2,288.5
Equity Securities at Fair Value (Cost: 1999 - $0.3; 1998 - $310.0) 0.5 259.4
Short Term Investments 29.0 90.0
Other Assets 1.2 19.0
-------------- --------------
Total Assets $ 2,423.2 $ 2,656.9
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes Payable - Revolving Credit Agreement $ 111.0 110.0
Notes Payable to Subsidiary, 6.75% Due 2008 450.0 450.0
Accrued Expenses and Other Liabilities 145.2 274.5
-------------- --------------
Total Liabilities 706.2 834.5
-------------- --------------
Shareholders' Equity:
Common Stock 7.1 7.6
Additional Paid-in Capital 439.6 427.6
Retained Earnings 1,280.1 1,374.0
Accumulated Other Comprehensive Income (9.8) 13.2
-------------- --------------
Total Shareholders' Equity 1,717.0 1,822.4
-------------- --------------
Total Liabilities and Shareholders' Equity $ 2,423.2 $ 2,656.9
============== ==============
</TABLE>
See Accompanying Independent Auditors' Report.
<PAGE>
SCHEDULE II
UNITRIN, INC.
PARENT COMPANY STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in Millions)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Operating Activities:
Net Income $ 201.0 $ 510.8 $ 117.9
Adjustment Required to Reconcile Net Income
to Net Cash Provided by Operations:
Equity in Net Income of Subsidiaries and Investees (169.6) (518.5) (117.7)
Cash Dividends from Subsidiaries 7.5 26.0 181.1
Cash Dividends from Investee 2.3 2.3 2.2
(Gain) Loss on Sale of Investments (82.1) 2.5 -
Other, Net (132.6) 170.7 (95.8)
----------- ----------- ------------
Net Cash Provided (Used) by Operating Activities (173.5) 193.8 87.7
----------- ----------- ------------
Investing Activities:
Purchase of Securities from Subsidiaries:
Baker Hughes Common Stock - (310.0) -
Purchase of Common Stock (0.3) - -
Sale of Baker Hughes Common Stock 392.1
Redemption of Equity Securities - 47.5 -
Change in Short-term Investments 61.0 (79.2) (10.8)
Other, Net - (0.7) -
----------- ----------- ------------
Net Cash Provided (Used) by Investing Activities 452.8 (342.4) (10.8)
----------- ----------- ------------
Financing Activities:
Notes Payable Proceeds:
Revolving Credit Agreement 436.3 381.6 515.0
From Subsidiary - 450.0 -
Notes Payable Payments:
Revolving Credit Agreement (435.3) (356.6) (493.0)
Cash Dividends Paid (101.7) (100.7) (89.9)
Common Stock Repurchases (191.4) (232.9) (20.7)
Issuance of Unitrin Common Stock 12.8 7.2 11.7
----------- ----------- ------------
Net Cash Provided (Used) by Financing Activities (279.3) 148.6 (76.9)
----------- ----------- ------------
Increase (Decrease) in Cash - - -
Cash, Beginning of Year - - -
----------- ----------- ------------
Cash, End of Year $ - $ - $ -
=========== =========== ============
</TABLE>
See Accompanying Independent Auditors' Report.
<PAGE>
SCHEDULE II
UNITRIN, INC.
PARENT COMPANY STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in Millions)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net Investment Income $ 2.7 $ 2.4 $ 5.5
Net Gains (Losses) on Sales of Investments 82.1 (2.5) -
---------- ---------- ----------
Total Revenues 84.8 (0.1) 5.5
---------- ---------- ----------
Interest Expense 38.8 14.1 10.0
Other Operating (Income) Expenses (1.6) (1.4) (2.7)
---------- ---------- ----------
Total Operating Expenses 37.2 12.7 7.3
---------- ---------- ----------
Income (Loss) Before Income Taxes and Equity
in Net Income of Subsidiaries and Investees 47.6 (12.8) (1.8)
Income Tax (Benefit) Expense 16.2 (5.1) (2.0)
---------- ---------- ----------
Income (Loss) Before Equity in
Net Income of Subsidiaries and Investees 31.4 (7.7) 0.2
Equity in Net Income of Subsidiaries and Investees 169.6 518.5 117.7
---------- ---------- ----------
Net Income $ 201.0 $ 510.8 $ 117.9
========== ========== ==========
</TABLE>
See Accompanying Independent Auditors' Report.
<PAGE>
SCHEDULE II
UNITRIN, INC.
PARENT COMPANY STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in Millions)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Net Income $ 201.0 $ 510.8 $ 117.9
Other Comprehensive Income:
Gross Unrealized Holding Gains (Losses) Arising During Year:
Securities Held by Subsidiaries (54.5) (11.5) 36.4
Securities Held by Parent 132.9 (59.8) 3.1
Other (2.0) 0.2 -
------------- ----------- -----------
Gross Unrealized Holding Gains (Losses) Arising During Year 76.4 (71.1) 39.5
Income Tax Benefit (Expense) (26.9) 25.0 (14.0)
------------ ----------- -----------
Unrealized Holding Gains (Losses) Arising During Year, Net 49.5 (46.1) 25.5
------------ ----------- -----------
Reclassification Adjustment for Gross (Gains) Losses Realized in Net Income:
Securities Held by Subsidiaries (29.5) (66.9) (2.5)
Securities Held by Parent (82.1) 2.5 -
------------ ----------- -----------
Reclassification Adjustment for Gross Gains Realized in Net Income (111.6) (64.4) (2.5)
Income Tax Expense 39.1 22.0 0.9
------------ ----------- -----------
Reclassification Adjustment for Gains Realized in Net Income, Net (72.5) (42.4) (1.6)
------------ ----------- -----------
Other Comprehensive Income (23.0) (88.5) 23.9
------------ ----------- -----------
Total Comprehensive Income $ 178.0 $ 422.3 $ 141.8
============ =========== ===========
</TABLE>
See Accompanying Independent Auditors' Report.
<PAGE>
SCHEDULE III
UNITRIN, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(Dollars in Millions)
<TABLE>
<CAPTION>
Insurance Amortization
Claims Of Deferred
Net and Policy Other
Premiums Investment Policyholders' Acquisition Insurance
Premiums Written Income Benefits Costs Expenses
------------ ----------- ---------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1999:
Life and Health (1) $ 713.2 $ N/A $ 164.8 $ 406.4 $ 74.2 $ 300.0
Property and Casualty 660.1 656.7 47.0 482.7 88.9 115.3
Other - N/A (8.8) - - (4.8)
----------- ---------- ----------- ----------- ---------- ----------
Total $ 1,373.3 $ N/A $ 203.0 $ 889.1 $ 163.1 $ 410.5
=========== ========== =========== =========== ========== ==========
Year Ended December 31, 1998:
Life and Health (1) $ 580.0 $ N/A $ 143.1 $ 326.2 $ 50.5 $ 275.3
Property and Casualty 648.3 608.2 43.5 455.6 98.8 92.6
Other - N/A (0.2) - - (9.5)
----------- ---------- ----------- ----------- ---------- ----------
Total $ 1,228.3 $ N/A $ 186.4 $ 781.8 $ 149.3 $ 358.4
=========== ========== =========== =========== ========== ==========
Year Ended December 31, 1997:
Life and Health (1) $ 499.1 $ N/A $ 124.6 $ 275.3 $ 55.3 $ 230.5
Property and Casualty 722.9 732.3 51.6 504.8 112.1 94.4
Other - N/A 3.3 - - (11.9)
----------- ---------- ----------- ----------- ---------- ----------
Total $ 1,222.0 $ N/A $ 179.5 $ 780.1 $ 167.4 $ 313.0
=========== ========== =========== =========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Deferred
Policy
Acquisition Insurance Unearned
Costs Reserves Premiums
--------------- ------------ -------------
<S> <C> <C> <C>
Year Ended December 31, 1999:
Life and Health (1) $ 276.9 $ 2,097.5 $ 30.9
Property and Casualty 47.3 520.6 310.5
Other - - -
---------- ------------ ------------
Total $ 324.2 $ 2,618.1 $ 341.4
========== =========== ===========
Year Ended December 31, 1998:
Life and Health (1) $ 296.7 $ 2,086.2 $ 30.4
Property and Casualty 35.3 440.5 232.8
Other - - -
---------- ------------ ------------
Total $ 332.0 $ 2,526.7 $ 263.2
========== =========== ===========
</TABLE>
(1) The Company's Life and Health Insurance employee-agents also market certain
property and casualty insurance products under common management. Accordingly,
the Company includes the results of these property and casualty insurance
products in its Life and Health Insurance segment.
See Accompanying Independent Auditors' Report.
<PAGE>
SCHEDULE IV
UNITRIN, INC.
REINSURANCE SCHEDULE
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
(Dollars in Millions)
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed to
Amount Companies Companies Amount Net
---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1999:
- -----------------------------
Life Insurance in Force $ 21,307.7 $ 1,505.1 $ - $ 19,802.6 -
Premiums
Life Insurance $ 416.4 $ 3.2 $ - $ 413.2 -
Accident and Health Insurance 223.9 6.0 0.1 218.0 0.0%
Property and Liability Insurance 670.4 24.4 96.1 742.1 12.9%
---------- --------- -------- ---------- ----------
Total Premiums $ 1,310.7 $ 33.6 $ 96.2 1,373.3 7.0%
========== ========= ======== ========== ==========
Year Ended December 31, 1998:
- -----------------------------
Life Insurance in Force $ 21,221.4 $ 1,567.2 $ - $ 19,654.2 -
Premiums
Life Insurance $ 378.1 $ 2.1 $ - $ 376.0 -
Accident and Health Insurance 140.7 5.4 0.2 135.5 0.1%
Property and Liability Insurance 651.2 16.2 81.8 716.8 11.4%
---------- --------- -------- ---------- ----------
Total Premiums $ 1,170.0 $ 23.7 82.0 $ 1,228.3 6.7%
========== ========= ======== ========== ==========
Year Ended December 31, 1997:
- -----------------------------
Life Insurance in Force $ 17,709.2 $ 1,797.8 $ - $ 15,911.4 -
Premiums
Life Insurance $ 350.7 $ 19.8 $ - $ 330.9 -
Accident and Health Insurance 119.1 3.3 - 115.8 -
Property and Liability Insurance 697.9 18.0 95.4 775.3 12.3%
---------- --------- -------- ---------- ----------
Total Premiums $ 1,167.7 $ 41.1 95.4 $ 1,222.0 7.8%
========== ========= ======== ========== ==========
</TABLE>
See Accompanying Independent Auditors' Report.
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints each of Richard
C. Vie, Chairman of the Board, President and Chief Executive Officer, Eric J.
Draut, Senior Vice President, Treasurer and Chief Financial Officer, and Scott
Renwick, General Counsel and Secretary, his true and lawful attorney-in-fact
with authority together or individually to execute in the name of each such
signatory, and with authority to file with the Securities and Exchange
Commission, any and all amendments to this Annual Report on Form 10-K of
Unitrin, Inc., together with any and all exhibits thereto and other documents
therewith, necessary or advisable to enable Unitrin, Inc. to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations, and
requirements of the Securities and Exchange Commission in respect thereof, which
amendments may make such other changes in the Annual Report on Form 10-K as the
aforesaid attorney-in-fact executing the same deems appropriate.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, Unitrin, Inc. has duly caused this Annual Report on Form 10-K for the
fiscal year ended December 31, 1999 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois, on February 2, 2000.
UNITRIN, INC.
(Registrant)
By: /S/ Richard C. Vie
------------------
Richard C. Vie
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Unitrin, Inc.
in the capacities indicated on February 2, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/S/ Richard C. Vie Chairman of the Board, President, Chief Executive Officer
- ------------------ and Director
Richard C. Vie
/S/ Eric J. Draut Senior Vice President, Treasurer and Chief Financial Officer
- ----------------- (principal financial officer)
Eric J. Draut
/S/ Richard Roeske Corporate Controller
- ------------------ (principal accounting officer)
Richard Roeske
/S/ James E. Annable Director
- --------------------
James E. Annable
/S/ Reuben L. Hedlund Director
- ---------------------
Reuben L. Hedlund
/S/ Jerrold V. Jerome Director
- ---------------------
Jerrold V. Jerome
/S/ William E. Johnston, Jr. Director
- ----------------------------
William E. Johnston, Jr.
/S/ George A. Roberts Director
- ---------------------
George A. Roberts
/S/ Fayez S. Sarofim Director
- --------------------
Fayez S. Sarofim
</TABLE>
15
<PAGE>
EXHIBIT 13.1
CONSOLIDATED FINANCIAL STATEMENTS
OF
UNITRIN, INC. AND SUBSIDIARIES
This Exhibit 13.1 contains the consolidated balance sheets of Unitrin, Inc.
and Subsidiaries as of December 31, 1999 and 1998 and the related consolidated
statements of income, cash flows and shareholders' equity and comprehensive
income for each of the years in the three-year period ended December 31, 1999.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Unitrin, Inc.:
We have audited the accompanying consolidated balance sheets of Unitrin, Inc.
and subsidiaries as of December 31, 1999 and 1998 and the related consolidated
statements of income, cash flows and shareholders' equity and comprehensive
income for each of the years in the three-year period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Unitrin, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Chicago, Illinois
January 24, 2000
23. UNITRIN, INC. & SUBSIDIARIES
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
--------------------------
[Dollars in Millions] DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed Maturities at Fair Value (Amortized Cost:
1999--$2,726.8; 1998--$2,492.5) $ 2,651.8 $ 2,557.3
Equity Securities at Fair Value (Cost: 1999--$450.8; 1998--$831.2) 512.6 786.3
Investees at Cost Plus Cumulative Undistributed
Earnings (Fair Value: 1999--$957.5; 1998--$1,223.2) 640.6 581.2
Other 291.8 379.4
--------- ---------
Total Investments 4,096.8 4,304.2
--------- ---------
Cash 24.1 8.6
Consumer Finance Receivables at Cost (Fair Value: 1999--$593.6; 1998--$531.2) 595.0 532.0
Other Receivables 376.6 290.8
Deferred Policy Acquisition Costs 324.2 332.0
Cost in Excess of Net Assets of Purchased Businesses 369.7 298.1
Other Assets 148.4 144.2
--------- ---------
Total Assets $ 5,934.8 $ 5,909.9
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Insurance Reserves:
Life and Health $ 2,097.5 $ 2,079.0
Property and Casualty 520.6 447.7
--------- ---------
Total Insurance Reserves 2,618.1 2,526.7
--------- ---------
Investment Certificates and Savings Accounts at Cost
(Fair Value:1999--$606.6; 1998--$544.2) 608.8 544.6
Unearned Premiums 341.4 263.2
Accrued and Deferred Income Taxes 251.1 378.8
Notes Payable 116.8 116.2
Accrued Expenses and Other Liabilities 281.6 258.0
--------- ---------
Total Liabilities 4,217.8 4,087.5
--------- ---------
Shareholders' Equity:
Common Stock, $0.10 par value, 100 Million Shares
Authorized, 70,992,897 and 75,977,750 Shares Issued
and Outstanding at December 31, 1999 and 1998 (NOTE 1) 7.1 7.6
Paid-in Capital 439.6 427.6
Retained Earnings 1,280.1 1,374.0
Accumulated Other Comprehensive Income (Loss) (9.8) 13.2
--------- ---------
Total Shareholders' Equity 1,717.0 1,822.4
--------- ---------
Total Liabilities and Shareholders' Equity $ 5,934.8 $ 5,909.9
========= =========
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to the Consolidated Financial Statements are an integral part of these
financial statements.
UNITRIN, INC. & SUBSIDIARIES 24
F-1
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
--------------------------------
[Dollars in Millions, Except Per Share Amounts] FOR THE YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums $ 1,373.3 $ 1,228.3 $ 1,222.0
Consumer Finance Revenues 123.6 113.8 125.0
Net Investment Income 203.0 186.4 179.5
Net Gains on Sales of Investments 113.7 557.4 3.6
--------- --------- ---------
Total Revenues 1,813.6 2,085.9 1,530.1
--------- --------- ---------
EXPENSES
Insurance Claims and Policyholders' Benefits 889.1 781.8 780.1
Insurance Expenses 573.6 507.7 480.4
Consumer Finance Expenses 99.5 95.6 116.7
Interest and Other Expenses 14.4 13.7 13.1
--------- --------- ---------
Total Expenses 1,576.6 1,398.8 1,390.3
--------- --------- ---------
Income before Income Taxes and Equity in
Net Income of Investees 237.0 687.1 139.8
Income Tax Expense 77.9 238.6 47.1
--------- --------- ---------
Income before Equity in Net Income of Investees 159.1 448.5 92.7
Equity in Net Income of Investees (NOTE 5) 41.9 62.3 25.2
--------- --------- ---------
NET INCOME $ 201.0 $ 510.8 $ 117.9
========= ========= =========
NET INCOME PER SHARE (NOTES 1 AND 12) $ 2.76 $ 6.55 $ 1.58
========= ========= =========
NET INCOME PER SHARE ASSUMING DILUTION (NOTES 1 AND 12) $ 2.74 $ 6.51 $ 1.56
========= ========= =========
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to the Consolidated Financial Statements are an integral part of these
financial statements.
25. UNITRIN. INC. & SUBSIDIARIES
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
------------------------------------
[Dollars in Millions] FOR THE YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net Income $ 201.0 $ 510.8 $ 117.9
Adjustments to Reconcile Net Income to
Net Cash Provided by Operations:
Policy Acquisition Costs Deferred (156.1) (142.2) (145.6)
Amortization of Deferred Policy Acquisition Costs 163.1 149.3 167.4
Equity in Net Income of Investees before Taxes (63.7) (95.0) (37.9)
Cash Dividends from Investee 2.3 2.3 2.2
Amortization of Investments 23.2 23.9 23.1
Provision for Losses on Consumer Finance Receivables 23.6 22.7 35.0
(Increase) Decrease in Other Receivables (5.2) 32.0 8.5
Increase (Decrease) in Insurance Reserves and Unearned Premiums 18.8 (21.9) 7.8
Increase (Decrease) in Accrued and Deferred Income Taxes (113.1) 212.5 10.2
Increase (Decrease) in Accrued Expenses and Other Liabilities 0.5 (23.1) (40.0)
Net Gains on Sales of Investments (113.7) (557.4) (3.6)
Other, Net 31.3 23.4 8.6
------- ------- -------
Net Cash Provided by Operating Activities 12.0 137.3 153.6
------- ------- -------
INVESTING ACTIVITIES
Sales and Maturities of Fixed Maturities 380.6 811.7 364.4
Purchases of Fixed Maturities (551.2) (475.3) (478.2)
Sales of Equity Securities 499.1 98.7 51.6
Purchases of Equity Securities (5.3) (21.5) (12.2)
Repayments of Consumer Finance Receivables 322.6 307.1 344.0
Acquisitions of Consumer Finance Receivables (408.9) (316.6) (317.4)
Change in Short-term Investments 107.6 (103.7) 19.0
Acquisitions and Improvements of Investment Real Estate (4.3) (11.4) (12.1)
Acquisition of Businesses, Net of Cash Acquired (103.4) (99.2) --
Other, Net (24.6) (19.0) (25.2)
-------- ------- -------
Net Cash Provided (Used) by Investing Activities 212.2 170.8 (66.1)
-------- ------- -------
FINANCING ACTIVITIES
Investment Certificate and Savings Account Deposits 221.3 178.2 203.7
Investment Certificate and Savings Account Withdrawals (157.1) (200.0) (227.2)
Universal Life and Annuity Receipts from Policyholders 11.5 13.5 14.1
Universal Life and Annuity Payments to Policyholders (3.3) (3.5) (2.9)
Notes Payable Proceeds 436.3 381.6 515.0
Notes Payable Payments (437.1) (357.4) (493.8)
Cash Dividends Paid (101.7) (100.7) (89.9)
Common Stock Repurchases (191.4) (232.9) (20.7)
Other, Net 12.8 7.2 11.7
------- ------- -------
Net Cash Used by Financing Activities (208.7) (314.0) (90.0)
------- ------- -------
Increase (Decrease) in Cash 15.5 (5.9) (2.5)
Cash, Beginning of Year 8.6 14.5 17.0
------- ------- -------
Cash, End of Year $ 24.1 $ 8.6 $ 14.5
======= ======= =======
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to the Consolidated Financial Statements are an integral part of these
financial statements.
UNITRIN, INC. & SUBSIDIARIES 26.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
[Dollars and Shares in Millions, Except Per Share Amounts] FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- ----------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
NUMBER OF OTHER TOTAL
SHARES COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
(NOTE 1) STOCK CAPITAL EARNINGS INCOME (LOSS) EQUITY
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 74.6 $ 7.4 $ 133.0 $ 1,262.1 $ 77.8 $ 1,480.3
Net Income -- -- -- 117.9 -- 117.9
Other Comprehensive
Income (NOTE 11) -- -- -- -- 23.9 23.9
----------
Total Comprehensive Income $ 141.8
----------
Acquisition of Union Automobile
Indemnity Company 0.8 0.2 18.4 -- -- 18.6
Dividends to Common
Shareholders ($1.20 per share) -- -- -- (89.9) -- (89.9)
Repurchases of Unitrin
Common Stock (0.8) (0.2) (1.5) (19.0) -- (20.7)
Exercise of Employee Stock
Options, Net of Shares
Exchanged (NOTE 10) 0.6 0.2 67.7 (65.0) -- 2.9
------- ------- -------- ---------- -------- ------------
BALANCE, DECEMBER 31, 1997 75.2 $ 7.6 $ 217.6 $ 1,206.1 $ 101.7 $ 1,533.0
Net Income -- -- -- 510.8 -- 510.8
Other Comprehensive
Income (Loss) (NOTE 11) -- -- -- -- (88.5) (88.5)
------------
Total Comprehensive Income $ 422.3
------------
Acquisition of The Reliable Life
Insurance Company 7.6 0.8 196.9 -- -- 197.7
Dividends to Common
Shareholders ($1.30 per share) -- -- -- (100.7) -- (100.7)
Repurchases of Unitrin
Common Stock (7.0) (0.8) (38.4) (193.7) -- (232.9)
Exercise of Employee Stock
Options, Net of Shares
Exchanged (NOTE 10) 0.2 -- 51.9 (48.5) -- 3.4
Other, Net -- -- (0.4) -- -- (0.4)
------- ------ -------- -------- ------ -------
BALANCE, DECEMBER 31, 1998 76.0 $ 7.6 $ 427.6 $ 1,374.0 $ 13.2 $ 1,822.4
Net Income -- -- -- 201.0 -- 201.0
Other Comprehensive
Income (Loss) (NOTE 11) -- -- -- -- (23.0) (23.0)
----------
Total Comprehensive Income $ 178.0
----------
Dividends to Common
Shareholders ($1.40 per share) -- -- -- (101.7) -- (101.7)
Repurchases of Unitrin
Common Stock (5.5) (0.5) (31.6) (159.3) -- (191.4)
Exercise of Employee Stock
Options, Net of Shares
Exchanged (NOTE 10) 0.5 -- 43.6 (33.9) -- 9.7
------- --------- --------- --------- ---------- ----------
BALANCE, DECEMBER 31, 1999 71.0 $ 7.1 $ 439.6 $ 1,280.1 $ (9.8) $ 1,717.0
======= ========= ========= ========= ========== ==========
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to the Consolidated Financial Statements are an integral part of these
financial statements.
27. UNITRIN, INC. & SUBSIDIARIES
F-4
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The Consolidated Financial Statements included herein have been prepared on the
basis of generally accepted accounting principles, which differ from statutory
insurance accounting practices, and include the accounts of Unitrin, Inc. and
its subsidiaries ("Unitrin" or the "Company"). All significant intercompany
accounts and transactions have been eliminated. Certain prior year amounts have
been reclassified to conform to the current year's presentation.
On February 11, 1999, the Company's Board of Directors authorized a 2-for-1
stock split payable on March 26, 1999 in the form of a dividend distribution of
one share of common stock for each share of common stock outstanding on March 5,
1999, the record date for the dividend. Accordingly, prior year share and per
share amounts, including those amounts under the Company's stock option plans
(See Note 10 to the Consolidated Financial Statements), and certain components
of Shareholders' Equity have been restated and adjusted) retroactively as if the
distribution had occurred prior to the periods presented.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates and assumptions.
NOTE 2. SUMMARY OF ACCOUNTING POLICIES
Investments Other Than Investees
Investments in Fixed Maturities include bonds, notes and redemptive preferred
stocks at fair value and are classified as available for sale. Investments in
Equity Securities include common and non-redemptive preferred stocks at fair
value and are classified as available for sale. Unrealized appreciation or
depreciation, net of applicable deferred income taxes, on Fixed Maturities and
Equity Securities is included in Shareholders' Equity. Other Investments include
fixed maturities which mature within one year from the date of purchase, loans
to policyholders, real estate, and mortgage loans and are carried at cost or
unpaid principal balance. Gains and losses on sales of investments are computed
on the specific identification method and are reflected in Net Income.
Investments in Investees
Investments in Investees are accounted for by the equity method in the
accompanying financial statements. The Company's voting percentage and share of
earnings or losses of each investee company are determined using the most recent
publicly-available audited financial statements, subsequent unaudited interim
reports and other publicly-available information. As a result, the amounts
included in the Company's financial statements represent amounts reported by the
investee companies for periods ending two to three months earlier. The Company
recognizes into income its equity share of changes in an investee's reported net
assets resulting from an investee's issuance of stock that is not part of a
broader corporate reorganization.
Consumer Finance Receivables
Consumer Finance Receivables consists primarily of loans to California residents
which are secured by automobiles and is stated net of unearned discount, loan
fees and reserve for losses. Unearned discount arises when the loan amount
includes unearned precomputed interest. The reserve for losses on Consumer
Finance Receivables is maintained at a level which considers such factors as
actual loan loss experience and economic conditions to provide for estimated
losses on Consumer Finance Receivables.
Deferred Policy Acquisition Costs
Costs directly associated with the acquisition of new business, principally
commissions and certain premium taxes and policy issuance costs, are deferred.
The Company accounts for the present value of the future profits embedded in
insurance in force acquired ("VIF") based upon actuarial estimates of the
present value of estimated net cash flows and is classified as Deferred Policy
Acquisition Costs in these financial statements. VIF is amortized using the
effective interest method using interest rates consistent with the rates in the
underlying insurance contracts. The Company estimates that it will record
amortization, net of interest, of $7.0 million, $6.3 million, $5.6 million, $5.1
million and $4.5 million in each of the next five years.
Costs deferred on property and casualty insurance products and health
insurance products are amortized over the term of the related policies. Costs
deferred on traditional life insurance products are primarily amortized over the
anticipated premium-paying period of the related policies in proportion to the
ratio of the annual premiums to the total premiums anticipated, which is
estimated using the same assumptions used in calculating policy reserves.
UNITRIN, INC. & SUBSIDIARIES 28.
F-5
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF ACCOUNTING POLICIES [CONTINUED]
Cost in Excess of Net Assets of Purchased Businesses
Cost in Excess of Net Assets of Purchased Businesses of $143.2 million at
December 31, 1999, relating to acquisitions prior to November 1970, is not being
amortized. Amounts applicable to subsequent acquisitions are being amortized
ratably over periods ranging from twenty to forty years.
Impairment of Long-Lived Assets
The Company accounts for the impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of."
Insurance Reserves
Reserves for losses and loss adjustment expenses on property and casualty
coverage represent the estimated claim cost and loss adjustment expense
necessary to cover the ultimate net cost of investigating and settling all
losses incurred and unpaid and include provisions for adverse deviation. Such
estimates are based on individual case estimates for reported claims and
estimates for incurred but not reported losses. These estimates are adjusted in
the aggregate for ultimate loss expectations based on historical experience
patterns and current economic trends, with any change in the probable ultimate
liabilities being reflected in Net Income.
For traditional life insurance products, the reserves for future policy
benefits are primarily estimated on the net level premium method based on
expected mortality, interest and withdrawal rates, including provisions for
adverse mortality. These assumptions vary by such characteristics as plan, age
at issue and policy duration. Mortality assumptions reflect the Company's
historical experience and industry standards. Interest rate assumptions
principally range from 3.0 percent to 7.0 percent. Withdrawal assumptions are
based on actual and industry experience. Benefit reserves for universal life-
type products represent policy account balances before applicable surrender
charges. In 1999, the Company recorded income of $5.6 million due to a change in
its actuarial estimate of life and health insurance reserves due to the
conversion to a new actuarial system.
Recognition of Premium Revenues and Related Expenses
Property and casualty insurance and health insurance premiums are recognized
ratably over the periods to which the premiums relate. Insurance Claims and
Policyholders' Benefits include provisions for reported claims, claims incurred
but not reported and loss adjustment expenses.
Traditional life insurance premiums are recognized as revenue when due.
Policyholders' benefits are associated with related premiums to result in
recognition of profits over the periods that the benefits are provided.
Premium revenues for universal life-type products consist of charges for
the cost of insurance, policy administration and policy surrenders that have
been assessed against policy account balances during the period. Benefit
payments in excess of policy account balances are expensed.
Reinsurance
In the normal course of business, the Company's insurance subsidiaries reinsure
certain risks above certain retention levels with other insurance enterprises.
Amounts recoverable from reinsurers for benefits and losses for which the
Company has not been relieved of its legal obligation to the policyholder are
included in Other Receivables.
Gains related to long-duration reinsurance contracts are deferred and
amortized over the life of the underlying reinsured policies. Losses related to
long-duration reinsurance contracts are recognized immediately. Any gain or loss
associated with reinsurance agreements for which the Company has been legally
relieved of its obligation to the policyholder is recognized in the current
period.
Consumer Finance Revenues and Expenses
Consumer Finance Revenues include interest on Consumer Finance Receivables and
Net Investment Income on Investments in Fixed Maturities made by the Company's
Consumer Finance Operations. Interest income on Consumer Finance Receivables is
recorded as interest is earned, using the effective yield method. Net Investment
Income included in Consumer Finance Revenues was $5.5 million, $5.6 million and
$5.4 million in 1999, 1998 and 1997, respectively.
29. UNITRIN, INC. & SUBSIDIARIES
F-6
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF ACCOUNTING POLICIES [CONTINUED]
Consumer Finance Expenses include interest expense on Investment Certificates
and Savings Accounts, Provisions for Losses on Consumer Finance Receivables, and
general and administrative expenses. Interest expense on Investment Certificates
and Savings Accounts is recorded using the effective yield method.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period in which the change is
enacted.
Stock-Based Compensation
The Company accounts for its employee stock option plans in accordance with
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees." The Company has not issued stock options where the exercise price is
less than the market value of the Company's common stock on the date of grant
and, accordingly, no compensation expense has been recognized.
Fair Value of Financial Instruments
The fair value of Investments in Fixed Maturities and Investments in Equity
Securities are based upon quoted market prices where available. For securities
not actively traded, fair values were estimated using values obtained from
independent pricing services. The fair values of Investees are based upon quoted
market prices. The fair value of Consumer Finance Receivables are estimated by
discounting the future cash flows using the current rates at which loans would
be made to borrowers with similar credit ratings and the same remaining
maturities. The fair values of Investment Certificates and Savings Accounts have
been estimated by discounting the future cash flows using the rates currently
offered for deposits of similar remaining maturities. The carrying amounts
reported in the Consolidated Balance Sheets approximate fair value for Cash,
Short-term Investments, Notes Payable and certain other assets and other
liabilities because of their short-term nature.
The Company has no derivative financial instruments subject to the
provisions of SFAS No. 119, "Disclosure About Derivative Financial Instruments
and Fair Value of Financial Instruments."
Accounting Changes
Effective January 1, 1999, the Company prospectively adopted Statement of
Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP No. 98-1 requires the Company to
capitalize qualifying computer software costs incurred during the application
development stage. The Company capitalized $5.9 million of qualifying computer
software costs in 1999.
In 1999, the Company revised the management reporting of its segment
results to no longer include dividend income received from its investment in
Baker Hughes Incorporated ("Baker Hughes") in the Company's operating segments.
While the Company continues to report the investment in Baker Hughes in its
Operating Segment Assets, the Company considers the management of its investment
in Baker Hughes to be a corporate responsibility rather than an operating
segment responsibility. Prior period amounts have been reclassified to conform
to the revised reporting. This change had no effect on Net Income.
In June 1999, the Financial Accounting Standards Board 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, "Accounting for Derivative 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. 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.
NOTE 3. ACQUISITIONS AND DIVESTITURES OF BUSINESSES
On June 17, 1999, Trinity Universal Insurance Company, a subsidiary of the
Company, completed the acquisition of Valley Group, Inc. ("Valley Group"), and
its principal subsidiaries (including Valley Insurance Company and Charter
Indemnity
UNITRIN, INC. & SUBSIDIARIES 30.
F-7
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. ACQUISITIONS AND DIVESTITURES OF BUSINESSES [continued]
Company) in a cash transaction for a total purchase price of $138.4 million,
including related transaction costs. The acquisition has been accounted for by
the purchase method and, accordingly, the operations of Valley Group are
included in the Company's financial statements from the date of acquisition.
Cost in excess of Net Assets Acquired is being amortized over twenty years.
Based on the Company's preliminary allocation of the purchase price, assets
acquired and liabilities assumed in connection with the acquisition of Valley
Group were:
<TABLE>
<CAPTION>
[Dollars in Millions]
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Investments $ 98.8
Cash 35.0
Other Receivables 80.7
Insurance In Force Acquired 13.1
Accrued and Deferred Income Taxes 6.0
Cost in Excess of Net Assets of Purchased Businesses 94.4
Other Assets 8.4
Insurance Reserves (99.3)
Unearned Premiums (83.2)
Notes Payable (1.5)
Accrued Expenses and Other Liabilities (14.0)
------------
Total Purchase Price $ 138.4
============
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
On May 29, 1998, the Company completed the acquisition of The Reliable Life
Insurance Company ("Reliable") whereby the Company acquired all of the then
outstanding shares of Reliable common stock in exchange for approximately 7.6
million shares of Unitrin common stock on a post split basis (See Note 1) and
cash. The purchase price determined in accordance with Emerging Issues Task
Force ("EITF") No. 95-19, "Determination of the Measurement Date for the Market
Price of Securities Issued In a Purchased Business Combination," was:
<TABLE>
<CAPTION>
[Dollars in Millions]
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Value of Unitrin Common Stock Issued $ 197.7
Cash and Other Transaction Costs 0.7
------------
Purchase Price $ 198.4
============
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
On September 30, 1998, United Insurance Company of America, a subsidiary of the
Company, completed its acquisition of NationalCare Insurance Company
("NationalCare") and its wholly-owned subsidiary, Reserve National Insurance
Company ("Reserve National"), in a cash transaction for $98.5 million.
The acquisitions have been accounted for by the purchase method and,
accordingly, the operations of Reliable and NationalCare are included in the
Company's financial statements from their respective dates of acquisition. Costs
in Excess of Net Assets Acquired for each of the respective companies is being
amortized over forty years. Based on the Company's final allocation of the
purchase prices, assets acquired and liabilities assumed in connection with the
acquisitions were:
<TABLE>
<CAPTION>
THE RELIABLE LIFE NATIONALCARE
[Dollars in Millions] INSURANCE COMPANY INSURANCE COMPANY
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments $ 537.8 $ 127.5
Cash 1.2 --
Other Receivables 14.7 2.7
Insurance In Force Acquired 78.0 4.5
Cost in Excess of Net Assets of Purchased Businesses 32.3 16.0
Other Assets 34.7 6.9
Life and Health Insurance Reserves (425.0) (32.2)
Unearned Premiums (1.7) (19.7)
Accrued and Deferred Income Taxes (26.4) (2.8)
Notes Payable (10.8) --
Accrued Expenses and Other Liabilities (36.4) (4.4)
----------- -----------
Total Purchase Price $ 198.4 $ 98.5
=========== ===========
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
31. UNITRIN, INC. & SUBSIDIARIES
F-8
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. ACQUISITIONS AND DIVESTITURES OF BUSINESSES [continued]
On October 7, 1999, the United Insurance Company of America ("United"), a
subsidiary of the Company, entered into an agreement with Ceres Group, Inc.
("Ceres") for the sale of United's subsidiary, The Pyramid Life Insurance
Company ("Pyramid") to Ceres for $67.5 million in cash, subject to an adjustment
for a dividend to be paid by Pyramid immediately prior to closing. The
transaction is subject to regulatory approvals and the satisfaction of other
customary closing conditions and is required to close by February 15, 2000,
unless extended by both parties. Pyramid specializes in the sale of health
insurance products, including Medicare Supplement, targeted at the senior
markets. Pyramid's Premiums for the year ended December 31, 1999 were $63.6
million.
On December 16, 1999, Valley Insurance Company ("Valley"), a subsidiary of
Valley Group and the Company, entered into an agreement with Motor Club of
America ("Motor Club") for the sale of Valley's subsidiary, Mountain Valley
Indemnity Company ("Mountain Valley") to Motor Club for $7.5 million in cash.
The transaction is subject to regulatory approval and the satisfaction of other
customary closing conditions and is required to close by February 29, 2000,
unless extended by both parties. Mountain Valley writes mainly commercial
property and casualty insurance in the New England states. The Company's results
in 1999 included Premiums of $8.7 million and an Operating Loss of $3.1 million
related to Mountain Valley.
NOTE 4. INVESTMENTS OTHER THAN INVESTEES
The amortized cost and estimated fair values of the Company's Investments in
Fixed Maturities at December 31, 1999 were:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ---------------------------------- FAIR
[Dollars in Millions] COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and Government
Agencies and Authorities $ 1,902.3 $ 6.6 $ (38.3) $ 1,870.6
States, Municipalities and Political Subdivisions 187.4 0.8 (4.0) 184.2
Corporate Securities:
Bonds and Notes 518.8 0.6 (30.9) 488.5
Redemptive Preferred Stocks 118.3 0.4 (10.2) 108.5
----------- -------- ---------- ----------
Investments in Fixed Maturities $ 2,726.8 $ 8.4 $ (83.4) $ 2,651.8
=========== ======== ========== ==========
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated fair values of the Company's Investments in
Fixed Maturities at December 31, 1998 were:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ---------------------------------- FAIR
[Dollars in Millions] COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and Government
Agencies and Authorities $ 1,903.9 $ 48.9 $ (0.4) $ 1,952.4
States, Municipalities and Political Subdivisions 142.8 3.8 (0.3) 146.3
Corporate Securities:
Bonds and Notes 338.5 12.4 (2.0) 348.9
Redemptive Preferred Stocks 107.3 2.8 (0.4) 109.7
---------- -------- ---------- ----------
Investments in Fixed Maturities $ 2,492.5 $ 67.9 $ (3.1) $ 2,557.3
========== ======== ========== ==========
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
UNITRIN. INC. & SUBSIDIARIES 32.
F-9
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. INVESTMENTS OTHER THAN INVESTEES [continued]
The amortized cost and estimated fair values of the Company's Investments in
Fixed Maturities at December 31, 1999 by contractual maturity were:
<TABLE>
<CAPTION>
AMORTIZED FAIR
[Dollars in Millions] COST VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in One Year or Less $ 731.7 $ 733.0
Due After One Year to Five Years 629.9 625.9
Due After Five Years to Fifteen Years 822.8 787.8
Due After Fifteen Years 542.4 505.1
------------ ----------
Total Investments in Fixed Maturities $ 2,726.8 $ 2,651.8
============ ==========
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The expected maturities may differ from the contractual maturities because
debtors may have the right to call or prepay obligations with or without call or
prepayment penalties.
At December 31, 1999, gross unrealized gains and gross unrealized losses on
Equity Securities were:
<TABLE>
<CAPTION>
GROSS UNREALIZED
----------------------------------- FAIR
[Dollars in Millions] COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stocks $ 358.8 $ 66.3 $ (1.9) $ 423.2
Preferred Stocks 92.0 1.8 (4.4) 89.4
-------------- ------------ ------------ -----------
Total $ 450.8 $ 68.1 $ (6.3) $ 512.6
============== ============ ============ ===========
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, gross unrealized gains and gross unrealized losses on
Equity Securities were:
<TABLE>
<CAPTION>
GROSS UNREALIZED
----------------------------------- FAIR
[Dollars in Millions] COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stocks $ 743.1 $ 54.9 $ (105.0) $ 693.0
Preferred Stocks 88.1 5.2 -- 93.3
-------------- ------------ ------------ -----------
Total $ 831.2 $ 60.1 $ (105.0) $ 786.3
============== ============ ============ ===========
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 5. INVESTMENTS IN INVESTEES
The Company's Investments in Investees and approximate voting percentages, based
on the most recent publicly available data at December 31, 1999 were:
<TABLE>
<CAPTION>
CURTISS-WRIGHT LITTON
[Dollars in Millions] CORPORATION INDUSTRIES, INC. UNOVA, INC. TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Carrying Value $ 108.0 $ 374.0 $ 158.6 $ 640.6
Fair Value $ 161.6 $ 631.3 $ 164.6 $ 957.5
Approximate Voting Percentage 43.5% 27.8% 22.9%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's Investments in Investees and approximate voting percentages, based
on the most recent publicly available data at December 31, 1998 were:
<TABLE>
<CAPTION>
CURTISS-WRIGHT LITTON
[Dollars in Millions] CORPORATION INDUSTRIES, INC. UNOVA, INC. TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Carrying Value $ 92.6 $ 341.6 $ 147.0 $ 581.2
Fair Value $ 167.1 $ 826.7 $ 229.4 $ 1,223.2
Approximate Voting Percentage 43.0% 27.9% 23.1%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's carrying value of its Investments in Investees exceeded its equity
in the reported net assets of its investees by approximately $0.3 million at
December 31, 1999. This difference is not being amortized.
The carrying value of the Company's investment in Litton exceeded 10% of
the Company's Shareholders' Equity at December 31, 1999 and 1998.
33. UNITRIN, INC. & SUBSIDIARIES
F-10
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. INVESTMENTS IN INVESTEES [continued]
Unitrin accounts for its Investments in Investees under the equity method of
accounting using the most recent publicly-available financial reports.
The amounts included in Unitrin's financial statements for Litton represent
amounts reported by Litton for periods ending two months earlier. Accordingly,
amounts included in Unitrin's financial statements represent the amounts
reported by Litton for the twelve-month periods ending October 31, 1999, 1998
and 1997. Summarized financial information reported by Litton for such periods
was:
<TABLE>
<CAPTION>
[Dollars in Millions] 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Three Months Ended:
January 31, $ 1,130.9 $ 973.9 $ 960.5
April 30, 1,255.5 1,143.0 1,095.6
July 31, 1,233.6 1,244.0 1,070.6
October 31, 1,370.8 1,207.5 1,039.0
------------ ------------ ----------
Revenues for Twelve Months Ended October 31, $ 4,990.8 $ 4,568.4 $ 4,165.7
============ ============ ==========
COST OF SALES
Three Months Ended:
January 31, $ 884.4 $ 741.3 $ 750.4
April 30, 967.6 885.1 864.6
July 31, 977.3 964.1 826.7
October 31, 1,082.2 945.2 800.0
------------ ------------ ----------
Cost of Sales for Twelve Months Ended October 31, $ 3,911.5 $ 3,535.7 $ 3,241.7
============ ============ ==========
INCOME FROM CONTINUING OPERATIONS
Three Months Ended:
January 31, $ 44.0 $ 40.6 $ 36.2
April 30, 50.9 46.8 42.0
July 31, (21.5) 50.5 44.0
October 31, 50.0 47.2 43.4
------------ ------------ ----------
Income from Continuing Operations
for Twelve Months Ended October 31, $ 123.4 $ 185.1 $ 165.6
============ ============ ==========
NET INCOME
Three Months Ended:
January 31, $ 44.0 $ 40.6 $ 36.2
April 30, 50.9 46.8 42.0
July 31, (21.5) 50.5 44.0
October 31, 50.0 47.2 43.4
------------ ------------ ----------
Net Income for Twelve Months Ended October 31, $ 123.4 $ 185.1 $ 165.6
============ ============ ==========
Current Assets at October 31, $ 2,170.5 $ 2,016.1
============ ============
Non-current Assets at October 31, $ 2,766.2 $ 2,100.2
============ ============
Current Liabilities at October 31, $ 1,924.2 $ 1,795.0
============ ============
Non-current Liabilities at October 31, $ 1,661.1 $ 1,100.1
============ ============
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
In August 1998, the Company exchanged its investment in Western Atlas Inc.
("Western Atlas") for common stock in Baker Hughes upon the acquisition of
Western Atlas by Baker Hughes in a merger transaction. Prior to the acquisition
of Western Atlas by Baker Hughes, the Company owned more than 20% of Western
Atlas and, accordingly, accounted for its investment in Western Atlas under the
equity method of accounting. The amounts included in Unitrin's financial
statements for Western Atlas represent amounts reported by Western Atlas for
periods ending three months earlier. Accordingly, amounts included in Unitrin's
financial statements for the year ended December 31, 1998 represent the amounts
reported by Western Atlas for the nine-month period ending June 30, 1998.
Amounts included in Unitrin's financial statements for the year ended December
31, 1997
UNITRIN, INC. & SUBSIDIARIES 34.
F-11
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. INVESTMENTS IN INVESTEES [continued]
represent amounts reported by Western Atlas for the twelve-month period ending
September 30, 1997. Summarized financial information reported by Western Atlas
for such periods was:
<TABLE>
<CAPTION>
[Dollars in Millions] 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 1,476.6 $ 1,602.7
============ ============
Income from Continuing Operations $ 101.7 $ 79.7
============ ============
Net Income (Loss) $ 104.5 $ (61.1)
============ ============
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
On October 31, 1997, Western Atlas completed the distribution of all of the
common stock of UNOVA to Western Atlas' shareholders in the form of a tax-free
dividend. The Company owns more than 20% of UNOVA's common stock, and
accordingly, accounts for its investment in UNOVA under the equity method of
accounting. Prior to the October 31, 1997 distribution, the 1997 results of
UNOVA were reflected in Western Atlas' 1997 results as a discontinued operation.
Western Atlas' net income for the twelve months ended September 30, 1997
includes an after-tax loss of approximately $203 million related to the write-
off of recently acquired in-process research and development.
Equity in Net Income of Investees was $41.9 million, $62.3 million and
$25.2 million in 1999, 1998 and 1997, respectively. Equity in Net Income of
Investees for 1999 included a loss of $14.4 million resulting from Unitrin's
proportionate share of Litton's charges primarily 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 1999 includes a gain of $2.0
million resulting from Unitrin's proportionate share of Curtiss-Wright's
recovery from an insurer for certain environmental remediation costs.
Equity in Net Income of Investees in 1998 includes $15.3 million resulting
from Unitrin's proportionate share of Western Atlas' reported earnings for its
nine-month period ended June 30, 1998. As a result of the merger of Western
Atlas into Baker Hughes, Unitrin owns less than 20% of Baker Hughes and the
equity method does not apply. Accordingly, Unitrin does not record a
proportionate share of Baker Hughes' reported earnings into Unitrin's earnings.
However, dividends received from Baker Hughes are reflected in Unitrin's Net
Investment Income.
Equity in Net Income of Investees in 1997 includes a loss of $33.6 million
primarily resulting from Unitrin's proportionate share of the write-off of in-
process research and development activities at certain investees.
NOTE 6. CONSUMER FINANCE RECEIVABLES AND INVESTMENT CERTIFICATES
Consumer Finance Receivables consists primarily of loans to California residents
which are secured by automobiles and is stated net of unearned discount, loan
fees and reserve for losses.
The components of Consumer Finance Receivables at December 31, 1999 and 1998
were:
<TABLE>
<CAPTION>
[Dollars in Millions] 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sales Contracts and Loans Receivables $ 731.0 $ 670.1
Unearned Discounts and Deferred Fees (94.3) (98.0)
Reserve for Losses on Consumer Finance Receivables (41.7) (40.1)
------------ ------------
Consumer Finance Receivables $ 595.0 $ 532.0
============ ============
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Activity in the Reserve for Losses on Consumer Finance Receivables for the years
ended December 31, 1999, 1998 and 1997 was:
<TABLE>
<CAPTION>
[Dollars in Millions] 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserve for Losses on Consumer Finance Receivables--Beginning of the Year $ 40.1 $ 39.5 $ 36.4
Provision for Losses 23.6 22.7 35.0
Consumer Finance Receivables Charged-off (30.3) (30.9) (38.4)
Consumer Finance Receivables Recovered 8.3 8.8 6.5
----------- ------------ ------------
Reserve for Losses on Consumer Finance Receivables--End of Year $ 41.7 $ 40.1 $ 39.5
=========== ============ ============
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Total Consumer Finance Receivables greater than ninety days past due were $12.6
million and $12.1 million at December 31, 1999 and 1998, respectively.
35. UNITRIN, INC. & SUBSIDIARIES
F-12
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. CONSUMER FINANCE RECEIVABLES AND INVESTMENT CERTIFICATES [continued]
Investment Certificates and Savings Accounts and their related interest rates at
December 31, 1999 and 1998 were:
<TABLE>
<CAPTION>
[Dollars in Millions] 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE RANGE OF AVERAGE RANGE OF
INTEREST RATE INTEREST RATES AMOUNT INTEREST RATE INTEREST RATES AMOUNT
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment Certificates 5.60% 3.85-7.95% $ 541.6 5.54% 4.00-8.00% $ 474.9
Savings Accounts 4.65 1.00-5.10 67.2 4.39 1.00-4.75 69.7
------------- -------------- ---------- ------------- -------------- ----------
Total 5.50% 1.00-7.95% $ 608.8 5.41% 1.00-8.00% $ 544.6
============= ============== ========== ============= ============== ==========
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment Certificates are generally fixed in maturity. The contractual
maturities of Investment Certificates at December 31, 1999 and 1998 were:
<TABLE>
<CAPTION>
[Dollars in Millions] 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in One Year or Less $ 387.1 $ 353.9
Due After One Year to Three Years 96.8 96.2
Due After Three Years to Five Years 57.7 24.8
----------- ----------
Total Investment Certificates $ 541.6 $ 474.9
=========== ==========
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 7. PROPERTY AND CASUALTY INSURANCE RESERVES
Property and Casualty Insurance Reserve activity for the years ended December
31, 1999, 1998 and 1997 was:
<TABLE>
<CAPTION>
[Dollars in Millions] 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Property and Casualty Insurance Reserves,
Net of Reinsurance and Indemnification--Beginning of Year $ 432.4 $ 448.8 $ 417.9
Acquired 76.5 -- 19.6
Incurred related to:
Current Year 525.4 497.9 540.7
Prior Years (12.1) (16.8) (15.9)
----------- ---------- ----------
Total Incurred 513.3 481.1 524.8
----------- ---------- ----------
Paid related to:
Current Year 343.9 326.3 303.8
Prior Years 191.1 171.2 209.7
----------- ---------- ----------
Total Paid 535.0 497.5 513.5
----------- ---------- ----------
Property and Casualty Insurance Reserves,
Net of Reinsurance and Indemnification--End of Year $ 487.2 $ 432.4 $ 448.8
=========== ========== ==========
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Reinsurance Recoverables were $27.5 million, $15.3 million and $19.7 million at
December 31, 1999, 1998 and 1997, respectively.
In conjunction with the acquisition of the Valley Group, the Company is
partially indemnified for unfavorable loss development on certain loss reserves
and the seller is partially indemnified for any related favorable development.
At December 31, 1999, the Company has recorded a receivable of $5.9 million
related to the indemnification. Incurred losses are net of the indemnification
in these financial statements.
NOTE 8. NOTES PAYABLE
The Company has a $340.0 million unsecured revolving credit agreement with a
group of banks which expires in September 2002 and provides for fixed and
floating rate advances for periods up to 180 days at various interest rates. The
agreement contains various financial covenants, including limits on total debt
to total capitalization and minimum risk-based capital ratios for
UNITRIN, INC. & SUBSIDIARIES 36.
F-13
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. NOTES PAYABLE [continued]
the Company's direct insurance subsidiaries. The proceeds from advances under
the agreement may be used for general corporate purposes, including repurchases
of the Company's common stock.
At December 31, 1999 and 1998, the Company had outstanding borrowings under
the revolving credit agreement, classified as Notes Payable in the Consolidated
Balance Sheet, of $111.0 million and $110.0 million at weighted-average interest
rates of 6.26% and 5.51%, respectively. Other borrowings, principally a mortgage
note payable on a property occupied by the Company, were $5.8 million and $6.2
million at December 31, 1999 and 1998, respectively. The Company paid interest
of $4.3 million, $5.0 million and $5.7 million in 1999, 1998 and 1997,
respectively.
NOTE 9. SHAREHOLDERS' EQUITY
The Company is authorized to issue 20 million shares of $0.10 par value
preferred stock and 100 million shares of $0.10 par value common stock. No
preferred shares were issued or outstanding at December 31, 1999.
On August 3, 1994, the Board of Directors declared a dividend distribution
of one preferred share purchase right for each outstanding share of common stock
of the Company, pursuant to a Shareholder Rights Plan. The description and terms
of the rights are set forth in a Rights Agreement between the Company and First
Chicago Trust Company of New York, as Rights Agent, dated as of August 3, 1994.
At December 31, 1999, there are approximately 4.2 million shares of the
Company's outstanding common stock that can be repurchased under the outstanding
repurchase authorizations of the Company's Board of Directors. Common stock can
be repurchased in open market or in privately negotiated transactions from time
to time subject to market conditions and other factors. The Company has
repurchased and retired approximately 50.0 million shares of its common stock in
open market transactions at an aggregate cost of approximately $1.3 billion
since 1990. Common Stock, Paid-in Capital and Retained Earnings have been
reduced on a pro rata basis for the cost of the repurchased shares.
Various state insurance laws restrict the amount that an insurance
subsidiary may pay in the form of dividends, loans or advances without the prior
approval of regulatory authorities. Also, that portion of an insurance
subsidiary's net equity which results from differences between statutory
insurance accounting practices and generally accepted accounting principles
would not be available for cash dividends, loans or advances. Retained Earnings
at December 31, 1999 also includes $378.0 million representing the undistributed
earnings of investees.
The Company's insurance subsidiaries are required to file financial
statements prepared on the basis of statutory insurance accounting practices.
Estimated Statutory Capital and Surplus for the Company's Life and Health
Insurance subsidiaries was $907 million and $846 million at December 31, 1999
and 1998, respectively. Estimated Statutory Capital and Surplus for the
Company's Property and Casualty Insurance subsidiaries was $937 million and $980
million at December 31, 1999 and 1998, respectively. Estimated Statutory Net
Income for the Company's Life and Health Insurance subsidiaries was $85 million,
$220 million and $20 million for the years ended December 31, 1999, 1998 and
1997, respectively. Estimated Statutory Net Income for the Company's Property
and Casualty Insurance subsidiaries was approximately $70 million, $428 million
and $63 million for the years ended December 31, 1999, 1998 and 1997,
respectively. Statutory Capital and Surplus and Statutory Net Income exclude the
Company's Consumer Finance and Parent Company operations.
The Company's subsidiaries paid dividends of $7.5 million to the Company in
1999. In 2000, the Company's subsidiaries would be able to pay approximately
$233 million in dividends to the Company without prior regulatory approval.
NOTE 10. STOCK OPTION PLANS
On May 1, 1996, the Company's shareholders approved the Unitrin, Inc. 1995 Non-
Employee Director Stock Option Plan (the "Director Plan") covering an aggregate
of 400,000 shares of Unitrin common stock. Under the Director Plan, directors of
the Company who are not employees and who first became non-employee directors
after November 1, 1993 and each director who has retired as an employee of the
Company will be granted an initial option to purchase 4,000 shares of the
Company's common stock and thereafter, on the date of each of the Company's
annual meetings of shareholders, will automatically receive annual grants of
options to purchase the same number of shares for so long as they remain
eligible directors. Options granted under the Director Plan are exercisable one
year from the date of grant at an exercise price equal to the fair market value
of the Company's common stock on the date of grant and expire 10 years from the
date of grant. In addition, each eligible director may elect to convert his
annual director's fees into stock options upon six months prior notice to the
Company. As of December 31, 1999 options for 56,000 common shares were
outstanding and options for 344,000 common shares were available for future
grant under the Director Plan.
37. UNITRIN, INC. & SUBSIDIARIES
F-14
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. STOCK OPTION PLANS [continued]
On May 14, 1997, the Company's shareholders approved the Unitrin, Inc. 1997
Stock Option Plan (the "1997 Option Plan") covering an aggregate of 4,000,000
shares of Unitrin common stock. Under the 1997 Option Plan, options to purchase
shares of Unitrin common stock may be granted to executive and other key
employees (including employee directors) and other key persons providing
services to the Company and its subsidiaries or its affiliates ("Participants").
In February 1990, the Company's Board of Directors adopted the 1990 Stock Option
Plan (the "1990 Option Plan") covering an aggregate of 5,000,000 shares of
Unitrin common stock. Under the 1990 Option Plan, options to purchase shares of
Unitrin common stock may be granted to executive and other key employees of the
Company (including employee directors). The Stock Option Committee of the Board
of Directors, at its discretion, may grant either incentive stock options, non-
qualified stock options, or stock appreciation rights pursuant to either the
1997 Option Plan or the 1990 Option Plan. The Stock Option Committee has sole
discretion to determine the persons to whom options are granted, the number of
shares covered by such options and the exercise price, vesting and expiration
dates of such options.
Options are nontransferable and are exercisable in installments. Only non-
qualified stock options have been granted under both the 1997 Option Plan and
the 1990 Option Plan.
To encourage stock ownership by the Company's key employees, both the 1997
Option Plan and the 1990 Option Plan include a provision to automatically grant
restorative stock options ("Restorative Options") to replace shares of
previously-owned Unitrin common stock that an exercising option holder
surrenders, either actually or constructively, in order to satisfy the exercise
price and/or tax withholding obligations relating to the exercise. Restorative
Options are subject to the same terms and conditions as the original options,
including the expiration date, except that the exercise price of a Restorative
Option is equal to the fair market value of Unitrin common stock on the date of
its grant. Restorative Options cannot be exercised until six months after the
date of grant. The grant of a Restorative Option does not result in an increase
in the total number of shares and options held by an employee but changes the
mix of the two.
On August 6, 1997, the Stock Option Committee of the Board of Directors
revised the vesting schedule of all options then outstanding under the Company's
1990 Stock Option Plan so that such options shall vest in four annual
installments beginning six months after their respective dates of grant. As of
December 31, 1999, options for 1,602,254 common shares were outstanding and
options covering 2,354,844 common shares were available for future grant under
the 1997 Stock Option Plan. As of December 31, 1999, options for 3,042,070
common shares were outstanding and options covering 38,363 common shares were
available for future grant under the 1990 Stock Option Plan.
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ---------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT YEAR END CONTRACTUAL LIFE EXERCISE PRICE AT YEAR END EXERCISE PRICE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$15.88-$23.50 65,326 4.0 years $20.91 65,326 $20.91
- -------------------------------------------------------------------------------------------------------------------------
$23.75-$33.82 1,362,815 4.1 years $29.88 1,138,565 $30.35
- -------------------------------------------------------------------------------------------------------------------------
$33.84-$41.88 3,272,183 3.6 years $36.38 1,564,962 $36.27
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Had the Company accounted for stock options granted in 1999, 1998 and 1997 under
the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," pro
forma net income would have been $196.8 million, $505.5 million and $110.7
million for the years ended December 31, 1999, 1998 and 1997, respectively, and
pro forma net income per share would have been $2.70, $6.49 and $1.48 for the
years ended December 31, 1999, 1998 and 1997, respectively. Pro forma
compensation expense in 1999 includes $2.0 million for initial options granted
in 1999, $2.0 million for restorative options granted in 1999 and $2.4 million
for amortization of expense for grants made in 1995, 1996, 1997 and 1998. Pro
forma compensation expense in 1998 includes $1.5 million for initial options
granted in 1998, $3.2 million for restorative options granted in 1998, and $3.4
million for amortization of expense for grants made in 1995, 1996 and 1997. Pro
forma compensation expense in 1997 includes $1.3 million for initial options
granted in 1997, $3.6 million for restorative options granted in 1997, $3.0
million for amortization of expense for grants made in 1995 and 1996 and $3.1
million for the change in the vesting schedule. Under the provisions of SFAS No.
123, the fair value of initial option grants excludes any value attributable to
the restorative feature. These pro forma amounts may not be representative of
the effects of SFAS No. 123 on pro forma net income for future years because
options vest over several years and different levels of awards, including
restorative awards, may be granted in future years.
The Black-Scholes option pricing model was used to estimate the fair value
of each option on the date granted. The assumptions used in the pricing model
were as follows. For options granted in 1999, 1998 and 1997, the expected
dividend yield used was 4.29%, 4.39% and 4.51%, respectively. The weighted-
average expected volatility used was 20% for options granted in all three years.
The weighted-average risk-free interest rate used was the average yield on U.S.
Treasury securities with a maturity
UNITRIN, INC. & SUBSIDIARIES 38.
F-15
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. STOCK OPTION PLANS [continued]
comparable to the expected life of each option. The expected lives of the
options ranged between 1 to 7 years. In the case of options issued pursuant to
the Director Plan, the expected lives equaled the full contractual term of 10
years.
A summary of the status of the Company's three stock option plans as of
December 31, 1999, 1998 and 1997, and stock option activity for the years then
ended is presented below:
<TABLE>
<CAPTION>
ESTIMATED WEIGHTED-
NUMBER AVERAGE FAIR VALUE OF
OF SHARES WEIGHTED-AVERAGE OPTIONS EXERCISABLE OPTIONS GRANTED
(NOTE 1) EXERCISE PRICE AT YEAR END DURING THE YEAR
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1996 3,615,436 $ 21.79 807,636
Granted 3,302,806 29.36 $2.78
Exercised (2,942,874) 22.36
Forfeited (150,092) 25.70
---------- --------------
Outstanding at December 31, 1997 3,825,276 $ 27.74 1,044,400
Granted 2,445,920 34.40 $3.27
Exercised (1,942,730) 28.18
Forfeited (126,002) 29.25
---------- --------------
Outstanding at December 31, 1998 4,202,464 $ 31.37 2,363,854
Granted 2,152,940 36.76 $3.76
Exercised (1,542,567) 29.77
Forfeited (112,513) 34.82
---------- --------------
Outstanding at December 31, 1999 4,700,324 $ 34.28 2,768,853
========== ==============
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Options granted in 1999, 1998 and 1997 include 1,071,940, 1,645,920 and
2,347,806 Restorative Options, respectively.
NOTE 11. OTHER COMPREHENSIVE INCOME (LOSS)
Other Comprehensive Income (Loss) determined in accordance with SFAS No. 130 for
the years ended December 31, 1999, 1998 and 1997 was:
<TABLE>
<CAPTION>
[Dollars in Millions] 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross Unrealized Holding Gains (Losses) Arising During Year:
Fixed Maturities $ (141.2) $ 27.5 $ 12.2
Equity Maturities 219.6 (98.8) 27.3
Other (2.0) 0.2 --
--------- ------- -----------
Gross Unrealized Holding Gains (Losses) Arising During Year 76.4 (71.1) 39.5
Income Tax Benefit (Expense) (26.9) 25.0 (14.0)
--------- ------- -----------
Unrealized Holding Gains (Losses) Arising During Year, Net 49.5 (46.1) 25.5
--------- ------- -----------
Reclassification Adjustment for Gross (Gains) Losses
Realized in Net Income:
Fixed Maturities 1.4 (3.7) (2.2)
Equity Securities (113.0) (60.7) (0.3)
--------- ------- -----------
Reclassification Adjustment for Gross Gains Realized in Net Income (111.6) (64.4) (2.5)
Income Tax Expense 39.1 22.0 0.9
--------- ------- -----------
Reclassification Adjustment for Gains Realized in Net Income, Net (72.5) (42.4) (1.6)
--------- ------- -----------
Other Comprehensive Income (Loss) $ (23.0) $ (88.5) $ 23.9
========= ======== ===========
- -----------------------------------------------------------------------------------------------------------------------------
</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 (Loss) under SFAS No. 130.
39. UNITRIN, INC. & SUBSIDIARIES
F-16
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. NET INCOME PER SHARE
The Company determined Net Income Per Share and Net Income Per Share Assuming
Dilution in accordance with SFAS No. 128 for the years ended December 31, 1999,
1998 and 1997 as follows:
<TABLE>
<CAPTION>
[Dollars and Shares in Millions, Except Per Share Amounts] 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $ 201.0 $ 510.8 $ 117.9
Dilutive Effect on Net Income from Investees' Equivalent Shares (0.5) (1.2) (1.0)
-------- -------- ---------
Net Income Assuming Dilution $ 200.5 $ 509.6 $ 116.9
======== ======== =========
Weighted-Average Common Shares Outstanding (NOTE 1) 72.8 78.0 74.9
Dilutive Effect of Unitrin Stock Option Plans 0.3 0.2 0.4
-------- -------- ---------
Weighted-Average Common Shares and
Equivalent Shares Outstanding Assuming Dilution 73.1 78.2 75.3
======== ======== =========
Net Income Per Share (Note 1) $ 2.76 $ 6.55 $ 1.58
======== ======== =========
Net Income Per Share Assuming Dilution (Note 1) $ 2.74 $ 6.51 $ 1.56
======== ======== =========
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Options outstanding at December 31, 1999, 1998 and 1997 to purchase 0.8 million,
1.0 million and 0.4 million shares, respectively, of Unitrin common stock were
excluded from the computation of Net Income Per Share Assuming Dilution in 1999,
1998 and 1997, respectively, because the exercise price exceeded the average
market price.
NOTE 13. INCOME FROM INVESTMENTS
Net Investment Income for the years ended December 31, 1999, 1998 and 1997 was:
<TABLE>
<CAPTION>
[Dollars in Millions] 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and Dividends on Fixed Maturities $ 161.4 $ 159.1 $ 147.2
Dividends on Equity Securities 19.6 13.4 16.5
Other 37.5 30.7 30.4
-------- -------- ---------
Investment Income 218.5 203.2 194.1
Investment Expenses 15.5 16.8 14.6
-------- -------- ---------
Net Investment Income $ 203.0 $ 186.4 $ 179.5
======== ======== =========
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The components of Net Gains on Sales of Investments for the years ended December
31, 1999, 1998 and 1997 were:
<TABLE>
<CAPTION>
[Dollars in Millions] 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed Maturities:
Gains $ 0.1 $ 4.1 $ 2.4
Losses (1.5) (0.4) (0.2)
Equity Securities:
Gains 113.0 61.4 0.4
Losses -- (0.7) (0.1)
Investee:
Gains -- 487.4 --
Other Investments:
Gains 2.3 5.6 1.1
Losses (0.2) -- --
-------- -------- ---------
Net Gains on Sales of Investments $ 113.7 $ 557.4 $ 3.6
======== ======== =========
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Net Gains on Sales of Investments in Equity Securities for the year ended
December 31, 1999 includes gains of $112.7 million resulting from sales of a
portion of the Company's investment in Baker Hughes common stock.
Net Gains on Sales of Investments in Equity Securities for the year ended
December 31, 1998 includes gains resulting primarily from the redemption of the
Company's investment in Navistar International Corporation $6.00 Cumulative
UNITRIN, INC. & SUBSIDIARIES 40.
F-17
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. INCOME FROM INVESTMENTS [continued]
Convertible Preferred Stock, Series G and the disposition of the Company's
investment in ITT Corporation ("ITT") common stock in connection with the
acquisition of ITT by Starwood Hotels & Resorts Worldwide, Inc.
In August 1998, the Company exchanged its investment in its investee,
Western Atlas, for common stock in Baker Hughes upon the acquisition of Western
Atlas by Baker Hughes in a merger transaction. Net Gains on Sales of Investments
in Investees for the year ended December 31, 1998 includes a gain of $487.4
million resulting from this transaction.
NOTE 14. INSURANCE EXPENSES
Insurance Expenses for the years ended December 31, 1999, 1998 and 1997 were:
<TABLE>
<CAPTION>
[Dollars in Millions] 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commissions $ 292.6 $ 245.1 $ 224.4
General Expenses 244.4 230.9 207.3
Taxes, Licenses and Fees 29.6 24.6 26.9
----------- ----------- ----------
Total Costs Incurred 566.6 500.6 458.6
----------- ----------- ----------
Policy Acquisition Costs:
Deferred (156.1) (142.2) (145.6)
Amortized 163.1 149.3 167.4
----------- ----------- ----------
Net Policy Acquisition Costs Amortized 7.0 7.1 21.8
----------- ----------- ----------
Insurance Expenses $ 573.6 $ 507.7 $ 480.4
=========== =========== ==========
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 15. INCOME TAXES
The tax effects of temporary differences that give rise to significant portions
of the Company's Net Deferred Tax Liability at December 31, 1999 and 1998 were:
<TABLE>
<CAPTION>
[Dollars in Millions] 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Insurance Reserves $ 52.0 $ 63.6
Unearned Premium Reserves 25.1 19.2
Tax Capitalization of Policy Acquisition Costs 62.8 59.1
Fixed Maturities 16.4 --
Reserve for Losses on Consumer Finance Receivables 10.7 11.2
Postretirement Benefits Other Than Pensions 29.8 28.1
Other 20.1 21.8
----------- ------------
Total Deferred Tax Assets 216.9 203.0
----------- ------------
Deferred Tax Liabilities:
Deferred Policy Acquisition Costs 110.9 115.4
Fixed Maturities -- 32.8
Equity Securities 134.7 221.6
Investments in Investees 181.5 160.5
Pension Asset 20.2 21.7
Other 6.4 3.5
----------- ------------
Total Deferred Tax Liability 453.7 555.5
----------- ------------
Net Deferred Tax Liability 236.8 352.5
Current Tax Liability 14.3 26.3
----------- ------------
Accrued and Deferred Income Taxes $ 251.1 $ 378.8
=========== ============
- ------------------------------------------------------------------------------------------------------
</TABLE>
41. UNITRIN, INC. & SUBSIDIARIES
F-18
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. INCOME TAXES [continued]
A deferred tax asset valuation allowance was not required at December 31, 1999
and 1998. Income taxes paid were $208.5 million, $54.6 million and $41.7 million
in 1999, 1998 and 1997, respectively.
The Company has not provided Federal income taxes on a portion of the
Company's life insurance subsidiaries' income earned prior to 1984 which is not
subject to Federal income taxes under certain circumstances. Federal income
taxes would be paid on the amount of such income, approximately $206 million, if
it is distributed to shareholders in the future or if it does not continue to
meet certain limitations.
Comprehensive Income Tax Expense included in the Consolidated Financial
Statements for the years ended December 31, 1999, 1998 and 1997 was:
<TABLE>
<CAPTION>
[Dollars in Millions] 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income Tax Expense $ 77.9 $ 238.6 $ 47.1
Equity in Net Income of Investees 21.1 32.7 12.7
Unrealized Appreciation (Depreciation) on Securities (11.4) (47.1) 13.1
Effect on Paid-in Capital from Exercise of Stock Options (4.2) (3.7) (8.0)
---------- ---------- ----------
Comprehensive Income Tax Expense $ 83.4 $ 220.5 $ 64.9
========== ========== ==========
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The components of Income Tax Expense for the years ended December 31, 1999, 1998
and 1997 were:
<TABLE>
<CAPTION>
[Dollars in Millions] 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current Tax Expense $ 205.0 $ 47.7 $ 52.6
Deferred Tax Expense (Benefit) (127.1) 190.9 (5.5)
---------- ---------- ----------
Income Tax Expense $ 77.9 $ 238.6 $ 47.1
========== ========== ==========
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Components of the effective income tax rate on pre-tax income for the years
ended December 31, 1999, 1998 and 1997 were:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory Federal Income Tax Rate 35.0% 35.0% 35.0%
Tax-exempt Income (2.7) (0.7) (3.6)
State Income Taxes 1.1 0.2 0.7
Amortization of Cost in Excess of Net
Assets of Purchased Businesses 0.6 0.2 1.6
Other, Net (1.1) -- --
---------- ---------- ----------
Effective Income Tax Rate 32.9% 34.7% 33.7%
========== ========== ==========
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
For the year ended December 31, 1999, the Company will file a consolidated
Federal income tax return with all of its subsidiaries except for Reliable and
its subsidiaries, and NationalCare and its subsidiaries.
For the year ended December 31, 1998, the Company filed a consolidated
Federal income tax return with all of its subsidiaries except for Reliable and
its subsidiaries, and NationalCare and its subsidiaries. For the year ended
December 31, 1997, the Company filed a consolidated Federal income tax return
with all of its subsidiaries.
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 intercompany dividends from the insurance
company subsidiaries to Unitrin, but excluding the apportionment factors of the
insurance company subsidiaries in determining the 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 1999.
UNITRIN, INC. & SUBSIDIARIES 42.
F-19
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company sponsors several defined benefit pension plans covering most of its
employees. Participation in certain plans requires employee contributions of 3
percent of pay, as defined, per year. Benefits for contributory plans are based
on compensation during plan participation and the number of years of
participation. Benefits for non-contributory plans are based on years of service
and final average pay, as defined. The Company funds the pension plans in
accordance with the requirements of the Employee Retirement Income Security Act
of 1974, as amended.
The Company sponsors several postretirement benefit plans that provide
medical and life insurance benefits to approximately 1,000 retired and 2,000
active employees. The Company is self-insured and the plans are not funded. The
medical plans generally provide for a limited number of years of medical
insurance benefits at retirement based upon the participant's attained age at
retirement and number of years of service until specified dates and are
generally contributory, with most contributions adjusted annually.
Postretirement life insurance benefits are generally contributory and generally
limited to $10,000 per participant.
Changes in Fair Value of Plan Assets and Changes in Projected Benefit
Obligations for the Years Ended December 31, 1999 and 1998 were:
<TABLE>
<CAPTION>
POSTRETIREMENT BENEFITS
PENSION BENEFITS OTHER THAN PENSIONS
---------------------------------------------------------
[Dollars in Millions] 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fair Value of Plan Assets at Beginning of Year $ 288.2 $ 174.3 $ -- $ --
Fair Value of Plan Assets of Acquired Business -- 104.5 -- --
Actual Return on Plan Assets 9.3 16.3 -- --
Contributions by the Company -- -- 5.2 4.1
Contributions by Plan Participants 1.2 1.6 0.8 0.6
Benefits Paid (12.4) (8.5) (6.0) (4.7)
--------- -------- ------- -------
Fair Value of Plan Assets at End of Year $ 286.3 $ 288.2 $ -- $ --
--------- -------- ------- -------
Projected Benefit Obligation at Beginning of Year $ 216.8 $ 115.9 $ 70.6 $ 67.5
Projected Benefit Obligations of Acquired Business -- 78.1 -- 5.6
Service Cost Benefits Earned During the Year 11.2 7.9 5.3 0.3
Interest Cost on Projected Benefit Obligation 14.2 10.9 5.0 4.3
Contributions by Plan Participants 1.2 1.6 0.8 0.6
Benefits Paid (12.4) (8.5) (6.0) (4.7)
Actuarial (Gains) Losses (16.9) 10.9 0.1 (3.0)
--------- -------- ------- -------
Projected Benefit Obligation at End of Year $ 214.1 $ 216.8 $ 75.8 $ 70.6
--------- -------- ------- -------
Plan Assets in Excess (Deficit) of Projected
Benefit Obligations $ 72.2 $ 71.4 $ (75.8) $ (70.6)
========= ======== ======= =======
Plan Assets in Excess (Deficit) of Projected
Benefit Obligations:
Amounts Recognized in the Balance Sheet:
Prepaid (Accrued) Benefit Cost $ 55.9 $ 61.3 $ (84.6) $ (80.3)
Amounts not Recognized in the Balance Sheet:
Unrecognized Net Actuarial Gain 14.0 6.5 8.8 9.7
Unrecognized Net Asset at Adoption,
Net of Amortization 2.3 3.6 -- --
--------- -------- ------- -------
Plan Assets in Excess (Deficit) of Projected
Benefit Obligations $ 72.2 $ 71.4 $ (75.8) $ (70.6)
========= ======== ======= =======
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The assumed health care cost trend rate used in measuring the Postretirement
Benefit Obligation at December 31, 1999 was 9.0 percent in 1999, gradually
declining to 5.0 percent in the year 2006 and remaining at that level
thereafter. The assumed health care cost trend rate used in measuring the
Postretirement Benefit Obligation at December 31, 1998 was 7.8 percent in 1998,
gradually declining to 5.0 percent in the year 2006 and remaining at that level
thereafter.
43. UNITRIN, INC. & SUBSIDIARIES
F-20
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
[CONTINUED]
A one percentage point increase in the assumed health care cost trend rate for
each year would increase the Postretirement Benefit Obligation at December 31,
1999 by approximately $6.7 million and 1999 postretirement expense by $0.7
million. A one percentage point decrease in the assumed health care cost trend
for each year would decrease the Postretirement Benefit Obligation at December
31, 1999 by approximately $5.9 million and 1999 Postretirement expense by
approximately $0.7 million.
The components of Pension Expense (Income) for the years ended December 31,
1999, 1998 and 1997 were:
<TABLE>
<CAPTION>
[Dollars in Millions] 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service Cost Benefits Earned During the Year $ 11.2 $ 7.9 $ 5.4
Interest Cost on Projected Benefit Obligation 14.2 10.9 7.4
Expected Return on Plan Assets (18.2) (15.0) (10.5)
Net Amortization and Deferral (1.8) (1.8) (1.9)
------------ ------------ -----------
Pension Expense $ 5.4 $ 2.0 $ 0.4
============ ============ ===========
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The components of Postretirement Benefits Other than Pensions Expense for the
years ended December 31, 1999, 1998 and 1997 were:
<TABLE>
<CAPTION>
[Dollars in Millions] 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service Cost Benefits Earned During the Year $ 5.3 $ 0.3 $ 0.1
Interest Cost on Projected Benefit Obligation 5.0 4.3 4.5
Net Amortization and Deferral 0.1 (0.8) (0.2)
------------ ------------ ------------
Postretirement Benefits Other than Pensions Expense $ 10.4 $ 3.8 $ 4.4
============ ============ ============
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The actuarial assumptions used to develop both the components of Pension Expense
(Income) and Postretirement Benefits Other than Pensions Expense for the years
ended December 31, 1999, 1998 and 1997 were:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount Rate 6.5% 7.0% 7.0%
Rate of Increase in Future Compensation Levels 4.0 4.0 4.0
Expected Long-term Rate of Return on Plan Assets 6.5 6.5 6.5
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company also sponsors several defined contribution benefit plans covering
most of its employees. The Company made contributions of $5.5 million, $2.1
million and $1.3 million in 1999, 1998 and 1997, respectively.
NOTE 17. BUSINESS SEGMENTS
The Company is engaged through its subsidiaries in the property and casualty
insurance, life and health insurance and consumer finance businesses. All of the
Company's revenues are derived from the United States. The accounting policies
of the segments are the same as those described in Note 2. Income taxes have not
been allocated to the respective segments. Capital expenditures for long-lived
assets by the operating segments were immaterial. In 1999, the Company revised
the management reporting of its segment results (see Note 2). Insurance provided
in the Property and Casualty Insurance segment consists of automobile,
homeowners, motorcycle, watercraft, fire, casualty, workers compensation and
other related lines. The Life and Health Insurance segment includes individual
life, accident, health and hospitalization insurance. The Company's Life and
Health Insurance employee-agents also market certain property and casualty
insurance products under common management. The Company includes the results of
those property and casualty insurance products in its Life and Health Insurance
segment. The Consumer Finance segment makes consumer loans primarily for the
purchase of used automobiles and offers savings accounts in the form of
investment certificates and savings accounts. It is the Company's management
practice to allocate certain corporate expenses to its operating units.
The Property and Casualty Insurance segment recorded amortization of Deferred
Policy Acquisition Costs ("DPAC") of $88.8 million, $98.8 million and $112.1
million for the years ended December 31, 1999, 1998 and 1997, respectively. The
Life and Health Insurance segment recorded amortization of DPAC of $74.2
million, $50.5 million and $55.3 million for the years ended December 31, 1999,
1998 and 1997, respectively.
UNITRIN, INC. & SUBSIDIARIES 44.
F-21
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. BUSINESS SEGMENTS [continued]
<TABLE>
<CAPTION>
Segment Revenues, Operating Profit and Assets for the years ended December 31, 1999, 1998 and 1997 were:
[Dollars in Millions] 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SEGMENT REVENUES
Property and Casualty Insurance $ 707.1 $ 691.8 $ 774.5
Life and Health Insurance 878.0 723.1 623.7
Consumer Finance 123.6 113.8 125.0
----------- ------------ -----------
Total Segment Revenues 1,708.7 1,528.7 1,523.2
----------- ------------ -----------
Net Gains on Sales of Investments 113.7 557.4 3.6
Corporate and Other (8.8) (0.2) 3.3
----------- ------------ -----------
Total Revenues $ 1,813.6 $ 2,085.9 $ 1,530.1
=========== ============ ===========
SEGMENT OPERATING PROFIT
Property and Casualty Insurance $ 20.2 $ 44.8 $ 63.1
Life and Health Insurance 97.4 71.1 62.6
Consumer Finance 24.1 20.1 13.9
----------- ------------ -----------
Total Segment Operating Profit 141.7 136.0 139.6
----------- ------------ -----------
Net Gains on Sales of Investments 113.7 557.4 3.6
Corporate and Other (18.4) (6.3) (3.4)
----------- ------------ -----------
Income before Income Taxes and Equity in
Net Income of Investees $ 237.0 $ 687.1 $ 139.8
=========== ============ ===========
SEGMENT ASSETS
Property and Casualty Insurance $ 1,562.7 $ 1,358.9 $ 1,025.9
Life and Health Insurance 3,524.3 3,585.7 2,515.2
Consumer Finance 715.0 642.0 657.3
Investees and Other 132.8 323.3 722.3
----------- ------------ -----------
Total Assets $ 5,934.8 $ 5,909.9 $ 4,920.7
=========== ============ ===========
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 18. REINSURANCE AND CONTINGENCIES
The Company's insurance subsidiaries utilize reinsurance arrangements to limit
their maximum loss, provide greater diversification of risk and minimize
exposures on larger risks. The ceding of insurance does not discharge the
primary liability of the original insurer, and accordingly the original insurer
remains contingently liable. Amounts recoverable from reinsurers are estimated
in a manner consistent with the insurance reserve liability and are included in
Other Receivables in the balance sheet.
Premiums on short-duration policies assumed were $96.1 million, $81.9
million and $95.4 million for the years ended December 31, 1999, 1998 and 1997,
respectively. Premiums on long-duration policies assumed were not material for
the years ended December 31, 1999, 1998 and 1997. Premiums ceded on
short-duration and long-duration policies were not material for the years ended
December 31, 1999, 1998 and 1997.
The Company and its subsidiaries are defendants in various legal actions
incidental to their businesses; some of these actions seek substantial punitive
damages that bear no apparent relationship to the actual damages alleged. 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 matters will not have a material
adverse effect on the Company's financial position.
45. UNITRIN, INC. & SUBSIDIARIES
F-22
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
[Dollars in Millions, Except Per Share Amounts] THREE MONTHS ENDED
-----------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Premiums and Consumer Finance Revenues $ 353.3 $ 358.1 $ 392.5 $ 393.0 $ 1,496.9
Net Investment Income 49.8 50.7 50.6 51.9 203.0
Net Gains on Sales of Investments 24.3 15.1 54.6 19.7 113.7
--------- --------- --------- ---------- -----------
Total Revenues $ 427.4 $ 423.9 $ 497.7 $ 464.6 $ 1,813.6
========= ========= ========= ========== ===========
Net Income:
From Operations $ 20.1 $ 15.0 $ 17.5 $ 33.5 $ 86.1
From Investees' Before
One-Time Charges 16.3 12.0 13.0 13.0 54.3
From Investees' One-Time Charges -- -- (13.9) 1.5 (12.4)
From Sales of Investments 15.8 9.5 35.1 12.6 73.0
--------- --------- --------- ---------- -----------
Total Net Income $ 52.2 $ 36.5 $ 51.7 $ 60.6 $ 201.0
========= ========= ========= ========== ===========
Net Income Per Share (A) $ 0.70 $ 0.50 $ 0.71 $ 0.84 $ 2.76
========= ========= ========= ========== ===========
Net Income Per Share
Assuming Dilution (A) $ 0.70 $ 0.50 $ 0.71 $ 0.84 $ 2.74
========= ========= ========= ========== ===========
Dividends Paid to Common Shareholders
(PER SHARE) $ 0.350 $ 0.350 $ 0.350 $ 0.350 $ 1.40
========= ========= ========= ========== ===========
Common Stock Market Prices:
High 37 47/64 41 42 3/8 39 42 3/8
Low 30 13/16 30 1/2 34 3/4 30 7/8 30 1/2
Close 31 1/4 41 34 3/4 37 5/8 37 5/8
1998 (NOTE 1)
Premiums and Consumer Finance Revenues $ 318.2 $ 321.2 $ 341.9 $ 360.8 $ 1,342.1
Net Investment Income 41.8 45.2 48.3 51.1 186.4
Net Gains on Sales of Investments 60.9 5.6 488.1 2.8 557.4
--------- --------- --------- ---------- -----------
Total Revenues $ 420.9 $ 372.0 $ 878.3 $ 414.7 $ 2,085.9
========= ========= ========= ========== ===========
Net Income:
From Operations $ 20.7 $ 15.5 $ 16.9 $ 32.4 $ 85.5
From Investees 15.2 16.4 18.2 12.5 62.3
From Sales of Investments 40.1 4.3 316.8 1.8 363.0
--------- --------- --------- ---------- -----------
Total Net Income $ 76.0 $ 36.2 $ 351.9 $ 46.7 $ 510.8
========= ========= ========= ========== ===========
Net Income Per Share (A) $ 1.01 $ 0.47 $ 4.36 $ 0.60 $ 6.55
========= ========= ========= ========== ===========
Net Income Per Share
Assuming Dilution (A) $ 1.00 $ 0.46 $ 4.34 $ 0.59 $ 6.51
========= ========= ========= ========== ===========
Dividends Paid to Common Shareholders
(PER SHARE) $ 0.325 $ 0.325 $ 0.325 $ 0.325 $ 1.30
========= ========= ========= ========== ===========
Common Stock Market Prices:
High 35 23/32 37 1/16 35 36 13/16 37 1/16
Low 28 7/8 33 1/16 27 25/32 29 3/4 27 25/32
Close 33 11/16 34 3/4 32 3/32 35 7/8 35 7/8
</TABLE>
(A) The cumulative sum of quarterly Net Income Per Share and Net Income Per
Share Assuming Dilution amounts does not equal Total Net Income Per Share and
Total Net Income Per Share Assuming Dilution for the year due to differences in
weighted average shares and equivalent shares outstanding for each of the
periods presented.
UNITRIN, INC. & SUBSIDIARIES 46.
F-23
<PAGE>
EXHIBIT 13.2
MANAGEMENT DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Exhibit 13.2 contains Unitrin, Inc.'s Management Discussion and
Analysis of Financial Condition and Results of Operations.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
PROPERTY AND CASUALTY INSURANCE
<TABLE>
<CAPTION>
----------------------------------------------
[Dollars in Millions] 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Personal Lines Premiums:
Automobile $ 339.2 $ 346.7 $ 394.9
Homeowners 67.4 67.9 73.7
Other 11.1 12.3 13.9
Commercial Lines Premiums:
Property and Commercial Liability 114.9 90.7 100.8
Automobile 85.7 91.9 99.9
Other 41.8 38.8 39.7
----------- ----------- ----------
Total Premiums 660.1 648.3 722.9
Net Investment Income 47.0 43.5 51.6
----------- ----------- ----------
Total Revenues $ 707.1 $ 691.8 $ 774.5
=========== =========== ==========
Operating Profit $ 20.2 $ 44.8 $ 63.1
=========== =========== ==========
GAAP Incurred Loss Ratio (excluding Storms) 65.3% 61.9% 64.8%
GAAP Incurred Storm Loss Ratio 7.8 8.4 5.0
Total GAAP Incurred Loss Ratio 73.1 70.3 69.8
GAAP Combined Ratio 104.0 99.8 98.4
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Premiums in the Property and Casualty Insurance segment increased by $11.8
million in 1999. Premiums increased $88.1 million due to the June 1999
acquisition of Valley Group, Inc. ("VGI") (See Note 3 to the Consolidated
Financial Statements). Excluding the VGI acquisition, Premiums decreased $76.3
million primarily due to lower volume of automobile and homeowner's insurance.
Net Investment Income in the Property and Casualty Insurance segment
increased by $3.5 million in 1999 due primarily to the acquisition of VGI.
Operating Profit decreased by $24.6 million in 1999 due primarily to the
effects of the lower premium, higher severity and frequency of losses and the
acquisition of VGI, partially offset by lower expense related to Year 2000
remediation projects. The GAAP Incurred Storm Loss Ratio decreased in 1999 due
primarily to the effects of premiums resulting from the acquisition of VGI.
On December 16, 1999, Valley Insurance Company ("Valley"), a subsidiary of
the Company and VGI, entered into an agreement with Motor Club of America
("Motor Club") for the sale of Valley's subsidiary, Mountain Valley Indemnity
Company ("Mountain Valley"), to Motor Club for $7.5 million in cash. The
transaction is subject to regulatory approval and other customary closing
conditions and is required to close by February 29, 2000, unless extended by
both parties. Results for the Property and Casualty Insurance segment in 1999
included Premiums of $8.7 million and an Operating Loss of $3.1 million
attributable to Mountain Valley.
Premiums in the Property and Casualty Insurance segment decreased by $74.6
million in 1998 due primarily to lower volume, principally the result of
management actions taken to reduce exposures on certain classes of business.
Net Investment Income in the Property and Casualty Insurance segment
decreased by $8.1 million in 1998 due primarily to lower yields on investments
and a lower level of investments.
Operating Profit in the Property and Casualty Insurance segment decreased
$18.3 million in 1998 due primarily to higher storm damage and the lower net
investment income.
LIFE AND HEALTH INSURANCE
<TABLE>
<CAPTION>
--------------------------------------------------
[Dollars in Millions] 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Life Insurance Premiums $ 412.6 $ 376.0 $ 330.9
Accident and Health Insurance Premiums 218.6 135.5 115.8
Property Insurance Premiums 82.0 68.5 52.4
--------- --------- ---------
Total Premiums 713.2 580.0 499.1
Net Investment Income 164.8 143.1 124.6
--------- --------- ---------
Total Revenues $ 878.0 $ 723.1 $ 623.7
========= ========= =========
Operating Profit $ 97.4 $ 71.1 $ 62.6
========= ========= =========
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
UNITRIN, INC. & SUBSIDIARIES 16.
M-1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
LIFE AND HEALTH INSURANCE [continued]
Premiums in the Life and Health Insurance segment increased by $133.2 million in
1999, due primarily to the inclusion of a full year of premiums resulting from
the June 1998 acquisition of The Reliable Life Insurance Company ("Reliable
Life") and the September 1998 acquisition of Reserve National Insurance Company
("Reserve National") and its parent NationalCare Insurance Company, partially
offset by lower other premium volume partially attributable to the Company's
exit from certain markets.
Net Investment Income in the Life and Health Insurance segment increased by
$21.7 million in 1999 due primarily to the acquisitions of Reliable Life and
Reserve National.
Operating Profit in the Life and Health Insurance segment increased by $26.3
million in 1999 due primarily to the acquisitions of Reliable Life and Reserve
National and income of $5.6 million resulting from a change in the Company's
actuarial estimate of life and health insurance reserves due to the conversion
to a new actuarial system (See Note 2 to the Consolidated Financial Statements).
On October 7, 1999, the United Insurance Company of America ("United"), a
subsidiary of the Company, entered into an agreement with Ceres Group, Inc.
("Ceres") for the sale of United's subsidiary, The Pyramid Life Insurance
Company ("Pyramid") to Ceres for $67.5 million in cash, subject to an adjustment
for a dividend to be paid by Pyramid immediately prior to closing. The
transaction is subject to regulatory approvals and the satisfaction of other
customary closing conditions and is required to close by February 15, 2000,
unless extended by both parties. Pyramid specializes in the sale of health
insurance products, including Medicare Supplement, targeted at the senior
markets. Pyramid's Premiums for the year ended December 31, 1999 were $63.6
million.
Premiums in the Life and Health Insurance segment increased by $80.9 million
in 1998 due primarily to premiums resulting from the acquisitions of Reliable
Life and Reserve National and its parent NationalCare Insurance Company,
partially offset by lower other premium volume partially attributable to the
Company's exit of certain markets.
Net Investment Income in the Life and Health Insurance segment increased by
$18.5 million in 1998 due primarily to the acquisitions of Reliable Life and
Reserve National.
Operating Profit in the Life and Health Insurance segment increased by $8.5
million in 1998 due primarily to the acquisitions of Reliable Life and Reserve
National, partially offset by lower amortization of gains deferred in 1997 and
1996 in connection with the cession of certain in-force life insurance policies.
CONSUMER FINANCE
<TABLE>
<CAPTION>
--------------------------------------------
[Dollars in Millions] 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest, Loan Fees and Earned Discounts $ 116.2 $ 106.3 $ 119.0
Net Investment Income 5.5 5.6 5.4
Other Revenues 1.9 1.9 0.6
--------- --------- ---------
Total Revenues 123.6 113.8 125.0
--------- --------- ---------
Provision for Losses on Consumer Finance Receivables 23.6 22.7 35.0
Interest Expense on Investment Certificates and Savings Accounts 30.5 30.0 34.8
General and Administrative Expenses 45.4 41.0 41.3
--------- --------- ---------
Operating Profit $ 24.1 $ 20.1 $ 13.9
========= ========= =========
Consumer Finance Loan Originations $ 408.9 $ 316.6 $ 317.4
Percentage of Consumer Finance Receivables
Greater than Ninety Days Past Due 1.7% 1.8% 2.5%
Ratio of Reserve for Losses on Consumer Finance Receivables
to Gross Consumer Finance Receivables 5.7 6.0 5.6
Weighted-Average Yield on Investment Certificates and Savings Accounts 5.6 5.3 4.9
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Consumer Finance Revenues increased by $9.8 million in 1999 due primarily to a
higher level of loans outstanding. Operating Profit in the Consumer Finance
segment increased by $4.0 million due primarily to the higher level of loans
outstanding and higher yields on loans, partially offset by higher interest
rates on deposits.
Consumer Finance Revenues decreased by $11.2 million in 1998 due primarily
to a lower level of loans outstanding. Operating Profit in the Consumer Finance
segment increased by $6.2 million principally due to lower provision for loan
losses.
17. UNITRIN, INC. & SUBSIDIARIES
M-2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
INVESTEES
Unitrin's investment portfolio at December 31, 1999 included equity securities
accounted for by the equity method of accounting ("investees"): Curtiss-Wright
Corporation ("Curtiss-Wright"), Litton Industries, Inc. ("Litton"), and UNOVA,
Inc. ("UNOVA"). Each of the investee companies is listed on the New York Stock
Exchange and is subject to the reporting requirements of the federal securities
laws. These securities are held for investment purposes as part of the
investment portfolios of Unitrin and its insurance subsidiaries. The fair value
of Unitrin's Investments in Investees was $957.5 million at December 31, 1999
compared to an asset carrying value of $640.6 million under the equity method of
accounting.
Unitrin accounts for its Investments in Investees under the equity method of
accounting in accordance with Accounting Principles Board Opinion No. 18 using
the most recent publicly-available financial reports (See Note 2 to the
Consolidated Financial Statements). The amounts included in Unitrin's financial
statements represent amounts reported by the investee companies for periods
ending two to three months earlier.
At December 31, 1999, Unitrin owned approximately 43.5% of Curtiss-Wright's
common stock. Curtiss-Wright stated in its 1998 annual report to shareholders
that it "is a diversified multi-national manufacturing and service concern that
designs, manufactures and overhauls precision components and systems and
provides highly engineered services to the aerospace, defense, automotive,
shipbuilding, oil, petrochemical, agricultural equipment, power generation,
railroad, metal working and fire & rescue industries."
At December 31, 1999, Unitrin owned approximately 27.8% of Litton's common
stock. Litton stated in its 1999 annual report to shareholders that "The
Company's businesses are reported in four business segments: Advanced
Electronics, Information Systems, Ship Systems (formerly Marine Engineering and
Production), and Electronic Components and Materials," that it provides
"advanced electronic and information systems and is a primary builder of large
surface combatant ships for the U.S. Navy," and that it is "a global supplier of
electronic components and materials for the telecommunications, industrial and
computer markets."
At December 31, 1999, Unitrin owned approximately 22.9% of UNOVA's common
stock. UNOVA stated in its December 31, 1998 annual report on Form 10-K that it
is "an industrial technologies company providing global customers with solutions
for improving their efficiency and productivity," that its industrial automation
systems business segment "includes integrated manufacturing systems, metal-
cutting and composite production systems, body welding and assembly systems,
precision grinding and abrasive operations and stand-alone machine tools,
primarily serving the worldwide automotive, off-road vehicle, diesel engine and
aerospace manufacturing industries," and that its automated data systems
business segment "comprises automated data collection, network and mobile
computing products and services, principally serving the industrial market."
Unitrin's Equity in Net Income of Investees was $41.9 million, $62.3 million
and $25.2 million in 1999, 1998 and 1997, respectively. Equity in Net Income of
Investees for 1999 included a loss of $14.4 million resulting from Unitrin's
proportionate share of Litton's charges primarily 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 1999 includes a gain of $2.0
million resulting from Unitrin's proportionate share of Curtiss-Wright's
recovery from an insurer for certain environmental remediation costs.
In August 1998, the Company exchanged its investment in its former investee,
Western Atlas Inc. ("Western Atlas"), for common stock in Baker Hughes
Incorporated ("Baker Hughes") upon the acquisition of Western Atlas by Baker
Hughes in a merger transaction. Prior to the merger of Western Atlas into Baker
Hughes, the Company owned approximately 23.1% of Western Atlas and accounted for
its investment in Western Atlas under the equity method of accounting.
Accordingly, Equity in Net Income of Investees for the year ended December 31,
1998 includes income of $15.3 million resulting from the Company's proportionate
share of Western Atlas' income earned prior to the merger. As a result of the
merger, the Company received approximately 11% of Baker Hughes common stock.
Since the Company owns less than 20% of Baker Hughes, the equity method does not
apply and, accordingly, the Company does not record a pro-rata share of Baker
Hughes' reported earnings in the Company's earnings. However, dividends received
from Baker Hughes are reflected in the Company's earnings. Accordingly, Net
Investment Income in 1999 and 1998 includes $10.9 million and $3.9 million for
dividends received from Baker Hughes.
Equity in Net Income of Investees in 1997 includes a loss of $33.6 million
primarily resulting from Unitrin's proportionate share of the write-off of in-
process research and development activities at certain investees.
Summarized financial and other information about Unitrin's Investments in
Investees can be found in Note 5 to the Consolidated Financial Statements.
UNITRIN, INC. & SUBSIDIARIES 18.
M-3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
INVESTMENT RESULTS
Net Investment Income was $203.0 million, $186.4 million and $179.5 million in
1999, 1998 and 1997, respectively.
Net Investment Income increased by $16.6 million in 1999 primarily due to
the inclusion of a full year of Net Investment Income from 1998 acquisitions of
Reliable Life and Reserve National and higher dividend income from the Company's
investment in Baker Hughes.
Net Investment Income increased by $6.9 million in 1998 primarily due to the
inclusion of Reliable Life and Reserve National investment income in 1998,
partially offset by lower investment income from the Company's investment in
Navistar International Corporation $6.00 Cumulative Convertible Preferred Stock,
Series G ("Navistar Preferred Stock") and lower yields on investments in fixed
maturities. Net investment income from the Company's investment in Navistar
Preferred Stock decreased by $4.9 million in 1998 due to the redemption of the
Company's investment.
Net Gains on Sales of Investments was $113.7 million in 1999, $557.4 million
in 1998 and $3.6 million in 1997. Net Gains on Sales of Investments in 1999
includes gains of $112.7 resulting from sales of a portion of the Company's
Investment in Baker Hughes. Net Gains from Sales of Investments in 1998 includes
a gain of $487.4 million resulting from the merger of Western Atlas into Baker
Hughes and gains on the sale and redemption of other equity securities (See Note
13 to the Consolidated Financial Statements). The Company cannot anticipate when
or if investment gains or losses may occur in the future.
The Company's investment strategy is based on current market conditions and
other factors which it reviews from time to time. The Company's consolidated
investment portfolio is concentrated in United States Government obligations,
investment-grade fixed maturities, Baker Hughes common stock and investments in
investees. The Company's investment in non-investment-grade fixed maturity
investments is insignificant.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to the rules and regulations of the U.S. Securities and Exchange
Commission (the "SEC"), the Company is required to provide the following
disclosures about Market Risk.
QUANTITATIVE INFORMATION ABOUT MARKET RISK
The Company's consolidated balance sheet includes four types of financial
instruments subject to the material market risk disclosures required by the SEC:
(1) Investments in Fixed Maturities, (2) Investments in Equity Securities, (3)
Consumer Finance Receivables and (4) Investment Certificates and Savings
Accounts. Investments in Fixed Maturities, Consumer Finance Receivables and
Investment Certificates and Savings Accounts are subject to material interest
rate risk. The Company's Investments in Equity Securities include common and
preferred stocks and, accordingly, are subject to material equity price risk and
interest rate risk, respectively.
For purposes of this disclosure, market risk sensitive financial instruments
are divided into two categories: financial instruments acquired for trading
purposes and financial instruments acquired for purposes other than trading. The
Company's market risk sensitive financial instruments are classified as held for
purposes other than trading. The Company has no holdings of derivatives.
The Company measures its sensitivity to market risk by evaluating the change
in its financial assets and liabilities relative to fluctuations in interest
rates and equity prices. The evaluation is made using instantaneous changes in
interest rates and equity prices on a static balance sheet to determine the
effect such changes would have on the Company's market value at risk and the
resulting pre-tax effect on Shareholders' Equity. The changes chosen reflect the
Company's view of adverse changes which are reasonably possible over a one-year
period. The selection of the changes chosen should not be construed as the
Company's prediction of future market events, but rather an illustration of the
impact of such events.
For the interest rate sensitivity analysis presented below, the Company
assumed an adverse and instantaneous increase of 100 basis points in market
interest rates for Investments in Fixed Maturities, Preferred Stock Equity
Securities and Consumer Finance Receivables from their levels at December 31,
1999 and 1998, respectively, and an adverse and instantaneous decrease of 100
basis points in market interest rates for Investment Certificates and Savings
Accounts from their levels at December 31, 1999 and 1998. All other variables
were held constant. The Company measured equity price sensitivity assuming an
adverse and instantaneous 10% decrease in the Standard & Poor's Stock Index (the
"S&P 500") from its level at December 31, 1999 and 1998, with all other
variables held constant. The Company's Investments in Common Stock Equity
Securities were correlated with the S&P 500 using the portfolio's weighted-
average beta of 0.97 and 0.99 at December 31, 1999 and 1998, respectively. The
portfolio's weighted-average beta was calculated using each security's beta for
the five-year periods ended December 31, 1999 and 1998, respectively, and
weighted on the fair value of such securities at December 31, 1999 and 1998,
respectively. Beta measures a stock's relative volatility in relation to the
rest of the stock market with the S&P 500 having a beta coefficient of 1.00.
19. UNITRIN, INC. & SUBSIDIARIES
M-4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK [CONTINUED]
The following table reflects the estimated adverse effects on the market value
of the Company's financial instruments using these assumptions.
<TABLE>
<CAPTION>
-------------------------------------------------------
PRO FORMA INCREASE (DECREASE)
- -----------------------------------------------------------------------------------------------------------------
INTEREST EQUITY TOTAL
FAIR RATE PRICE MARKET
December 31, 1999 VALUE RISK RISK RISK
- -----------------------------------------------------------------------------------------------------------------
[Dollars in Millions]
<S> <C> <C> <C> <C>
ASSETS
Investments in Fixed Maturities $ 2,651.8 $ (104.3) $ -- $ (104.3)
Investments in Equity Securities 512.6 (4.0) (40.8) (44.8)
Consumer Finance Receivables 593.6 (8.9) -- (8.9)
LIABILITIES
Investment Certificates and Savings Accounts $ 606.6 $ 3.4 $ -- $ 3.4
- -----------------------------------------------------------------------------------------------------------------
INTEREST EQUITY TOTAL
FAIR RATE PRICE MARKET
December 31, 1998 VALUE RISK RISK RISK
- -----------------------------------------------------------------------------------------------------------------
[Dollars in Millions]
ASSETS
Investments in Fixed Maturities $ 2,557.3 $ (66.3) $ -- $ (66.3)
Investments in Equity Securities 786.3 (4.4) (68.6) (73.0)
Consumer Finance Receivables 531.2 (6.7) -- (6.7)
LIABILITIES
Investment Certificates and Savings Accounts $ 544.2 $ 4.2 $ -- $ 4.2
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The market risk sensitivity analysis assumes that the composition of the
Company's interest rate sensitive assets and liabilities, including but not
limited to future contractual cash flows and credit quality, and equity price
sensitive assets existing at the beginning of the period remains constant over
the period being measured. It also assumes that a particular change in interest
rates is reflected uniformly across the yield curve regardless of the time to
maturity. Interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Also, any future
correlation, either in the near term or the long term, between the Company's
common stock equity securities portfolio and the S&P 500 may differ from the
historical correlation as represented by the weighted-average historical beta of
the common stock equity securities portfolio. Accordingly, the market risk
sensitivity analysis may not be indicative of, is not intended to provide, and
does not provide a precise forecast of the effect of changes of market rates on
the Company's income or Shareholders' Equity. Further, the computations do not
contemplate any actions the Company may undertake in response to changes in
interest rates or equity prices.
To the extent that any adverse 100 basis point change occurs in increments
over a period of time instead of instantaneously, the adverse impact on fair
values would be partially mitigated because some of the underlying financial
instruments would have matured. For example, proceeds from any maturing assets
could be reinvested and any new liabilities incurred at the then current
interest rates.
Qualitative Information About Market Risk
Market risk is a broad term related to economic losses due to adverse changes in
the fair value of a financial instrument and is inherent to all financial
instruments. SEC disclosure rules focus on only one element of market risk-
price risk. Price risk relates to changes in the level of prices due to changes
in interest rates, equity prices, foreign exchange rates or other factors that
relate to market volatility of the rate, index, or price underlying the
financial instrument. The Company's primary market risk exposures are to changes
in interest rates and certain exposures to changes in equity prices.
The Company manages its interest rate exposures with respect to Investments
in Fixed Maturities by investing primarily in investment-grade securities of
relatively short duration. The interest rate risks with respect to the fair
value of Consumer Finance Receivables should be partially offset by the impact
of interest rate movements on Investment Certificates and Savings Accounts which
are issued to fund its receivables.
UNITRIN, INC. & SUBSIDIARIES 20.
M-5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK [continued]
At December 31, 1999 and 1998, respectively, $326.8 million and $602.4 million
of the Company's Investments in Equity Securities, which exclude the Company's
Investments in Investees, were concentrated in one single issuer, Baker Hughes.
Baker Hughes stated in its 1998 Annual Report on Form 10-K that it "is engaged
in the oil field and process industry segments," and that in addition to these
industry segments, it "manufactures and sells other products and provides
services to industries not related to either the petroleum or continuous process
industries." Accordingly, the Company's Investments in Equity Securities are
sensitive to the cyclical nature of Baker Hughes's industry segments.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, there are approximately 4.2 million shares of the
Company's outstanding common stock that can be repurchased under the Company's
Board of Directors' outstanding repurchase authorizations. Common stock can be
repurchased in open market or in privately negotiated transactions from time to
time subject to market conditions and other factors. During 1999, the Company
repurchased and retired 5.5 million shares of its common stock in open market
transactions at an aggregate cost of $191.4 million. The Company has repurchased
and retired approximately 50.0 million shares of its common stock in open market
transactions at an aggregate cost of approximately $1.3 billion since 1990.
On February 2, 2000, the Company's Board of Directors increased the
Company's quarterly dividend from $0.35 per common share to $0.375 per common
share.
The Company has a $340.0 million unsecured revolving credit agreement with a
group of banks which expires in September 2002. Proceeds from advances under the
agreement may be used for general corporate purposes, including repurchases of
the Company's common stock. The weighted-average interest rate on the $111.0
million in advances outstanding under the agreement on December 31, 1999 was
6.26%. At December 31, 1999, the unused commitment under the Company's revolving
credit agreement was $229.0 million. In addition, the Company's subsidiaries in
2000 would be able to pay approximately $233 million in dividends to the Company
without prior regulatory approval.
The Company has no significant commitments for capital expenditures. The
Company's subsidiaries maintain levels of cash and liquid assets sufficient to
meet ongoing obligations to policyholders and claimants, as well as ordinary
operating expenses. The Company's reserves are set at levels expected to meet
contractual liabilities and provide a margin for adverse deviation. The Company
maintains adequate levels of liquidity and surplus capacity to manage the risks
inherent with any differences between the duration of its liabilities and
invested assets. At December 31, 1999, the Company had capacity to write
additional premiums relative to statutory capital and surplus requirements.
Litton and UNOVA do not presently pay dividends on their common stock. Cash
dividends received from Curtiss-Wright totaled $2.3 million, $2.3 million and
$2.2 million in 1999, 1998 and 1997, respectively. The Company cannot anticipate
when or if dividends will be paid by the investee companies in the future. The
Company's retained earnings at December 31, 1999 includes $378.0 million
representing the undistributed equity in net income of investees.
INTEREST AND OTHER EXPENSES
Interest and Other Expenses was $14.4 million, $13.7 million and $13.1 million
in 1999, 1998 and 1997, respectively. Interest Expense was $4.7 million, $4.9
million and $5.3 million in 1999, 1998 and 1997, respectively. Other corporate
expenses were $9.7 million, $8.8 million and $7.8 million in 1999, 1998 and
1997, respectively.
THE YEAR 2000 ISSUE
The Year 2000 issue (i.e., the ability of computer systems to accurately
identify and process dates beginning with the year 2000 and beyond) affects
virtually all companies and organizations. When the Company began to formalize
its Year 2000 readiness program several years ago, many of the Company's
computer systems were already Year 2000 compliant. However, certain of the
Company's computer systems used only two digits to identify a year in a date
field. For example, the year 2000 would be represented in these systems as "00,"
but in many cases might have been interpreted by the computer as "1900" rather
than "2000," thereby potentially resulting in processing errors.
The ability to process information in a timely and accurate manner is vital
to the Company's data-intensive insurance and consumer finance businesses. The
Company recognized for a number of years that the computer systems used by these
businesses had to be Year 2000 compliant by December 31, 1999 and, in some
instances, well in advance of that date. Accordingly, the Company initiated a
four-phase Year 2000 Compliance Project Plan. Prior to December 31, 1999, each
of the Company's three business segments had completed both its mission critical
projects and non-mission critical projects. For purposes of this Year 2000
discussion, the term "mission critical" refers to key business functions, such
as the processing of business transactions, regulatory compliance and archival
of important records, upon which the Company is materially dependent.
21. UNITRIN, INC. & SUBSIDIARIES
M-6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
THE YEAR 2000 ISSUE [continued]
The Company has not encountered any Year 2000 problems subsequent to December
31, 1999, associated with computer systems or non-information technology systems
(e.g., telephone systems, elevators, etc.) which are likely to pose any
foreseeable risks to the Company's operations.
The Company is not aware of any Year 2000 issues with key service providers,
including banks, brokers and investment custodians. The Company has no
representatives on the boards of directors of any of its investee companies
(Curtiss-Wright, Litton and UNOVA; the "Investees") or Baker Hughes and does not
otherwise participate in the management of the Investees or Baker Hughes.
Accordingly, the Company does not possess any non-public information concerning,
assumes no responsibility for, and has no contingency plans for Year 2000
compliance by the Investees or Baker Hughes.
Incremental expense recognized directly related to rewriting and testing
existing applications or converting to new Year 2000 compliant applications
totaled $3.2 million, $10.4 million and $8.5 million for the years ended
December 31, 1999, 1998 and 1997, respectively. Total incremental expense
recognized since inception of the Company's Year 2000 program directly related
to rewriting and testing existing applications or converting to new Year 2000
compliant applications totaled $26.9 million. In addition to the above
incremental expenses, upon completion of the Company's Year 2000 program, the
Company made capital expenditures, which will be expensed over the useful lives
of the assets to which they relate, totaling approximately $16.0 million to
replace existing hardware or software.
NOTE: The foregoing discussion on Year 2000 issues shall be considered "Year
2000 Readiness Disclosure" for purposes of the Year 2000 Information and
Readiness Disclosure Act.
ACCOUNTING CHANGES
Effective January 1, 1999, the Company prospectively adopted Statement of
Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP No. 98-1 requires the Company to
capitalize qualifying computer software costs incurred during the application
development stage. The Company capitalized $5.9 million of qualifying computer
software costs in 1999.
In 1999, the Company revised the management reporting of its segment results
to no longer include dividend income received from its investment in Baker
Hughes in the Company's operating segments. While the Company continues to
report the investment in Baker Hughes in its Operating Segment Assets, the
Company considers the management of its investment in Baker Hughes to be a
corporate responsibility rather than an operating segment responsibility. Prior
period amounts have been reclassified to conform to the revised reporting. This
change had no effect on Net Income.
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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,
"Accounting for Derivative 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.
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.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Results of Operations and Financial
Condition and the accompanying 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),"
"forecast(s)" and similar expressions. Readers are cautioned not to place undue
reliance on such statements, which speak only as of the date of this Annual
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 in this Management's Discussion and Analysis of Results of Operations
and Financial Condition, 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), 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
Annual Report.
UNITRIN, INC. & SUBSIDIARIES 22.
M-7
<PAGE>
EXHIBIT 13.3
FINANCIAL HIGHLIGHTS
This Exhibit 13.3 contains selected financial highlights of Unitrin, Inc.
and Subsidiaries for the five-year period ended December 31, 1999.
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
-------------------------------------------------------------------
[Dollars in Millions, Except Per Share Amounts*] 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR
Premiums and Consumer
Finance Revenues $ 1,496.9 $ 1,342.1 $ 1,347.0 $ 1,340.7 $ 1,205.6
Net Investment Income 203.0 186.4 179.5 179.0 186.6
Net Gains on Sales of Investments 113.7 557.4 3.6 3.4 55.2
--------- ---------- ---------- ---------- -----------
Total Revenues $ 1,813.6 $ 2,085.9 $ 1,530.1 $ 1,523.1 $ 1,447.4
========= ========== ========== ========== ===========
Net Income:
From Operations $ 86.1 $ 85.5 $ 90.3 $ 79.7 $ 69.4
From Investees Before
One-Time Items 54.3 62.3 58.8 50.6 45.1
From Investees' One-Time Items (12.4) -- (33.6) -- --
From Sales of Investments 73.0 363.0 2.4 2.2 36.1
--------- ---------- ---------- ---------- -----------
Total Net Income $ 201.0 $ 510.8 $ 117.9 $ 132.5 $ 150.6
========= ========== ========== ========== ===========
Net Income Per Share:
From Operations $ 1.18 $ 1.09 $ 1.21 $ 1.06 $ 0.86
From Investees Before
One-Time Items 0.75 0.80 0.79 0.67 0.56
From Investees' One-Time Items (0.17) -- (0.45) -- --
From Sales of Investments 1.00 4.66 0.03 0.03 0.44
--------- ---------- ---------- ---------- -----------
Total Net Income Per Share $ 2.76 $ 6.55 $ 1.58 $ 1.76 $ 1.86
========= ========== ========== ========== ===========
Total Net Income Per Share
Assuming Dilution $ 2.74 $ 6.51 $ 1.56 $ 1.74 $ 1.84
========= ========== ========== ========== ===========
Repurchases of
Unitrin Common Stock $ 191.4 $ 232.9 $ 20.7 $ 61.1 $ 416.0
Dividends Paid to Common
Shareholders $ 101.7 $ 100.7 $ 89.9 $ 83.0 $ 80.7
Dividends Paid to Common
Shareholders (per share) $ 1.40 $ 1.30 $ 1.20 $ 1.10 $ 1.00
AT YEAR END
Number of Associates Employed 7,787 7,631 6,866 7,401 7,629
Investments $ 4,096.8 $ 4,304.2 $ 3,448.5 $ 3,291.4 $ 3,409.7
Total Assets 5,934.8 5,909.9 4,920.7 4,871.1 4,818.7
Insurance Reserves 2,618.1 2,526.7 2,036.0 2,053.8 2,007.3
Shareholders' Equity 1,717.0 1,822.4 1,533.0 1,480.3 1,524.5
Shares of Unitrin Common Stock
Outstanding (in millions of shares) 71.0 76.0 75.2 74.7 77.0
Book Value Per Share $ 24.19 $ 23.99 $ 20.39 $ 19.82 $ 19.80
Fair Value Per Share of
Investments in Investees
in Excess of Carrying Value 2.90 5.48 11.45 8.18 6.12
--------- ---------- ---------- ---------- -----------
Adjusted Book Value Per Share $ 27.09 $ 29.47 $ 31.84 $ 28.00 $ 25.92
========= ========== ========== ========== ===========
</TABLE>
*Prior year amounts restated retroactively for a 2-for-1 stock split paid in the
form of a dividend distribution on March 26, 1999.
1. UNITRIN, INC. & SUBSIDIARIES
H-1
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF UNITRIN, INC.
-----------------------------
Subsidiaries of Unitrin, Inc., with their states of incorporation in
parentheses, are as follows:
1. Alpha Property & Casualty Insurance Company (Wisconsin)
2. Charter General Agency, Inc. (Texas)
3. Charter Group, Inc. (Texas)
4. Charter Indemnity Company (Texas)
5. Clayton Reinsurance Ltd. (Bermuda)
6. Clayton Reinsurance Ltd. (Missouri)
7. Family Security Funerals Company (Texas)
8. Financial Indemnity Company (California)
9. Fireside Mortgage Loans (California)
10. Fireside Securities Corporation (California)
11. Fireside Thrift Co. (California)
12. Milwaukee Casualty Insurance Co. (Wisconsin)
13. Milwaukee Insurance Group, Inc. (Wisconsin)
14. Milwaukee Safeguard Insurance Company (Wisconsin)
15. Mountain Valley Indemnity Company (New Hampshire)
16. NationalCare Insurance Company (Oklahoma)
17. NCM Management Corporation (Delaware)
18. The Pyramid Life Insurance Company (Kansas)
19. The Reliable Life Insurance Company (Missouri)
20. The Reliable Life Insurance Company of Texas (Texas)
21. Reserve National Insurance Company (Oklahoma)
22. Security National Insurance Company (Texas)
23. Southern States Finance Corporation (Louisiana)
24. Southern States General Agency, Inc. (Louisiana)
25. Trinity Lloyd's Corporation (Texas)
26. Trinity Universal Insurance Company (Texas)
27. Trinity Universal Insurance Company of Kansas, Inc. (Kansas)
28. Union Automobile Indemnity Company (Illinois)
29. Union National Fire Insurance Company (Louisiana)
30. Union National Life Insurance Company (Louisiana)
31. United Casualty Insurance Company of America (Pennsylvania)
32. United Insurance Company of America (Illinois)
33. United Lloyd's Corporation (Texas)
34. Unitrin Services Company (Illinois)
35. Valley Group, Inc. (Oregon)
36. Valley Insurance Company (California)
37. Valley Pacific, Inc. (Oregon)
38. Valley Property & Casualty Insurance Company (Oregon)
19
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Unitrin, Inc.:
Under date of January 24, 2000, we reported on the consolidated balance sheets
of Unitrin, Inc. and subsidiaries as of December 31, 1999 and 1998 and the
related consolidated statements of income, cash flows and shareholders' equity
and comprehensive income for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements and our report
thereon are incorporated by reference in the December 31, 1999 Annual Report on
Form 10-K of Unitrin, Inc. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related supplementary
financial statement schedules as listed in Item 14 of such Annual Report on Form
10-K. These supplementary financial statement schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these supplementary financial statement schedules based on our audits.
In our opinion, such supplementary financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
Chicago, Illinois
January 24, 2000
20
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of Unitrin, Inc.:
We consent to incorporation by reference in Registration Statements 33-58300,
33-47530, 333-4530, 333-38981 and 333-86935 of Unitrin, Inc., on Form S-8, of
our reports dated January 24, 2000, relating to the consolidated balance sheets
of Unitrin, Inc. and subsidiaries as of December 31, 1999 and 1998 and the
related consolidated statements of income, cash flows and shareholders' equity
and comprehensive income and related financial statement schedules for each of
the years in the three-year period ended December 31, 1999, which reports appear
or are incorporated by reference in the December 31, 1999 Annual Report on Form
10-K of Unitrin, Inc.
/s/ KPMG LLP
Chicago, Illinois
February 2, 2000
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND> This schedule contains summary financial information extracted from
the Consolidated Financial Statements and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<DEBT-HELD-FOR-SALE> 2,651,800 2,557,300
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 512,600 786,300
<MORTGAGE> 0 0
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 4,096,800 4,304,200
<CASH> 24,100 8,600
<RECOVER-REINSURE> 0 0
<DEFERRED-ACQUISITION> 324,200 332,000
<TOTAL-ASSETS> 5,934,800 5,909,900
<POLICY-LOSSES> 2,618,100 2,526,700
<UNEARNED-PREMIUMS> 341,400 263,200
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 116,800 116,200
0 0
0 0
<COMMON> 7,100 7,600
<OTHER-SE> 1,709,900 1,814,800
<TOTAL-LIABILITY-AND-EQUITY> 5,934,800 5,909,900
1,373,300 1,228,300
<INVESTMENT-INCOME> 203,000 186,400
<INVESTMENT-GAINS> 113,700 557,400
<OTHER-INCOME> 123,600 113,800
<BENEFITS> 889,100 781,800
<UNDERWRITING-AMORTIZATION> 0 0
<UNDERWRITING-OTHER> 687,500<F1> 617,000<F3>
<INCOME-PRETAX> 237,000 687,100
<INCOME-TAX> 77,900 238,600
<INCOME-CONTINUING> 201,000<F2> 510,800<F4>
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 201,000 510,800
<EPS-BASIC> 2.76 6.55
<EPS-DILUTED> 2.74 6.51
<RESERVE-OPEN> 508,900<F5> 448,800
<PROVISION-CURRENT> 525,400 497,900
<PROVISION-PRIOR> (12,100) (16,800)
<PAYMENTS-CURRENT> 343,900 326,300
<PAYMENTS-PRIOR> 191,100 171,200
<RESERVE-CLOSE> 487,200 432,400
<CUMULATIVE-DEFICIENCY> 0 0
<FN>
<F1>1999 Includes Consumer Finance Expenses of $99.5 million and Other Expenses
of $14.4 million
<F2>1999 Includes Equity in Net Income of Investees of $41.9 million
<F3>1998 Includes Consumer Finance Expenses of $95.6 million and Other Expenses
of $13.7 million
<F4>1998 Includes Equity in Net Income of Investees of $62.3 million
<F5>1999 Includes Acquired Reserves of $76.5 million.
</FN>
</TABLE>
