<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended March 31, 2000
-----------------------------------------------------
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Transition Period from to
------------------------ ---------------------
Commission file 0-18298
number
-------------------------------------------------------------------
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 No.)
One East Wacker Drive, Chicago, Illinois 60601
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(312) 661-4600
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
69,014,961 shares of common stock, $0.10 par value, were outstanding as of March
31, 2000.
<PAGE>
UNITRIN, INC.
INDEX
Page
------
PART I. Financial Information.
Item 1. Financial Statements.
Condensed Consolidated Statements of 1
Income for the Three Months Ended
March 31, 2000 and 1999 (Unaudited).
Condensed Consolidated Balance Sheets as of 2
March 31, 2000 (Unaudited) and
December 31, 1999.
Condensed Consolidated Statements of Cash 3
Flows for the Three Months Ended
March 31, 2000 and 1999 (Unaudited).
Notes to the Condensed Consolidated 4-8
Financial Statements (Unaudited).
Item 2. Management's Discussion and Analysis of 9-12
Results of Operations and Financial Condition.
Item 3. Quantitative and Qualitative Disclosures About 12
Market Risk.
PART II. Other Information.
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K. 13
Signatures 14
<PAGE>
UNITRIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share amounts)
(Unaudited)
Three Months Ended
-------------------------------
March 31, March 31,
2000 1999
------------- -------------
Revenues:
Premiums $ 355.7 $ 324.2
Consumer Finance Revenues 33.5 29.1
Net Investment Income 53.9 49.8
Net Gains on Sales of Investments 36.5 24.3
------------- -------------
Total Revenues 479.6 427.4
------------- -------------
Expenses:
Insurance Claims and Policyholders' Benefits 251.7 209.5
Insurance Expenses 147.7 135.9
Consumer Finance Expenses 27.3 24.0
Interest and Other Expenses 5.0 4.0
------------- -------------
Total Expenses 431.7 373.4
------------- -------------
Income before Income Taxes and Equity
in Net Income of Investees 47.9 54.0
Income Tax Expense 17.0 18.1
------------- -------------
Income before Equity in Net Income of
Investees 30.9 35.9
Equity in Net Income of Investees 11.0 16.3
------------- -------------
Net Income $ 41.9 $ 52.2
============= =============
Net Income Per Share $ 0.60 $ 0.70
============= =============
Net Income Per Share Assuming Dilution $ 0.60 $ 0.70
============= =============
The Notes to the Condensed Consolidated Financial Statements are an integral
part of these financial statements.
1
<PAGE>
UNITRIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
March 31, December 31,
2000 1999
------------- ----------------
(Unaudited)
Assets:
Investments:
Fixed Maturities at Fair Value (Amortized
Cost: 2000 - $2,868.6; 1999 - $2,726.8) $ 2,798.8 $ 2,651.8
Equity Securities at Fair Value
(Cost: 2000 - $355.4; 1999 - $450.8) 527.6 512.6
Investees at Cost Plus Cumulative Undistributed
Earnings (Fair Value: 2000 - $890.7;
1999 - $957.5) 656.2 640.6
Other 305.0 291.8
------------- ----------------
Total Investments 4,287.6 4,096.8
------------- ----------------
Cash 24.1 24.1
Consumer Finance Receivables at Cost (Fair
Value: 2000 - $611.4; 1999 - $593.6) 613.1 595.0
Other Receivables 366.6 376.6
Deferred Policy Acquisition Costs 328.5 324.2
Other Assets 538.8 518.1
------------- ----------------
Total Assets $ 6,158.7 $ 5,934.8
============= ================
Liabilities and Shareholders' Equity:
Insurance Reserves:
Life and Health $ 2,107.4 $ 2,097.5
Property and Casualty 525.8 520.6
------------- ----------------
Total Insurance Reserves 2,633.2 2,618.1
------------- ----------------
Investment Certificates and Savings Accounts
at Cost (Fair Value: 2000 - $618.3;
1999 - $606.6) 620.1 608.8
Unearned Premiums 349.5 341.4
Accrued and Deferred Income Taxes 310.1 251.1
Notes Payable 210.4 116.8
Accrued Expenses and Other Liabilities 298.3 281.6
------------- ----------------
Total Liabilities 4,421.6 4,217.8
------------- ----------------
Shareholders' Equity:
Common Stock, $0.10 par value, 100 million
Shares Authorized; 69,014,961 and 70,992,897
Shares Issued and Outstanding at March 31,
2000 and December 31, 1999 6.9 7.1
Paid-in Capital 433.2 439.6
Retained Earnings 1,232.7 1,280.1
Accumulated Other Comprehensive Income (Loss) 64.3 (9.8)
------------- ----------------
Total Shareholders' Equity 1,737.1 1,717.0
------------- ----------------
Total Liabilities and Shareholders' Equity $ 6,158.7 $ 5,934.8
============= ================
The Notes to the Condensed Consolidated Financial Statements are an integral
part of these financial statements.
2
<PAGE>
UNITRIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Three Months Ended
-------------------------------
March 31, March 31,
2000 1999
------------- -------------
Operating Activities:
Net Income $ 41.9 $ 52.2
Adjustments to Reconcile Net Income to Net Cash
Provided (Used) by Operations:
Change in Deferred Policy Acquisition Costs (3.2) 0.2
Equity in Net Income of Investees
before Taxes (17.1) (25.1)
Amortization of Investments 5.0 5.7
(Increase) Decrease in Receivables 5.0 (43.7)
Increase in Insurance Reserves and Unearned
Premiums 27.6 1.4
Increase in Accrued and Deferred Income Taxes 19.1 24.5
Increase (Decrease) in Accrued Expenses and
Other Liabilities 14.9 (1.4)
Net Gains on Sales of Investments (36.5) (24.3)
Provision for Loan Losses 6.6 5.7
Other, Net (16.8) (2.2)
------------- -------------
Net Cash Provided (Used) by Operating
Activities 46.5 (7.0)
------------- -------------
Investing Activities:
Sales and Maturities of Fixed Maturities 298.4 100.8
Purchase of Fixed Maturities (450.0) (179.1)
Sales and Redemptions of Equity Securities 132.4 211.3
Purchases of Equity Securities - (2.1)
Disposition of Business, Net of Cash Disposed 4.3 -
Change in Consumer Finance Receivables (24.5) (16.1)
Change in Short-term Investments (13.0) 75.6
Other, Net (5.0) (5.8)
------------- -------------
Net Cash Provided (Used) by Investing
Activities (57.4) 184.6
------------- -------------
Financing Activities:
Change in Investment Certificates and Savings
Accounts 11.3 2.9
Change in Universal Life and Annuity Contracts 1.7 2.3
Notes Payable Proceeds 152.5 48.8
Notes Payable Payments (58.9) (113.9)
Cash Dividends Paid (26.3) (25.8)
Common Stock Repurchases (70.6) (94.8)
Other, Net 1.2 0.7
------------- -------------
Net Cash Provided (Used) by Financing
Activities 10.9 (179.8)
------------- -------------
Increase (Decrease) in Cash - (2.2)
Cash, Beginning of Year 24.1 8.6
------------- -------------
Cash, End of Period $ 24.1 $ 6.4
============= =============
The Notes to the Condensed Consolidated Financial Statements are an integral
part of these financial statements.
3
<PAGE>
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The unaudited Condensed Consolidated Financial Statements included herein have
been prepared by Unitrin, Inc. ("Unitrin" or the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission but do not
include all information and footnotes required by generally accepted accounting
principles ("GAAP"). In the opinion of the Company's management, the Condensed
Consolidated Financial Statements reflect all adjustments necessary for a fair
presentation. The preparation of interim financial statements relies heavily on
estimates. This factor and certain other factors, such as the seasonal nature of
some portions of the insurance business, as well as market conditions, call for
caution in drawing specific conclusions from interim results. The accompanying
Condensed Consolidated Financial Statements should be read in conjunction with
the Consolidated Financial Statements and related notes included in the
Company's Annual Report on Form 10-K, filed with the Commission for the year
ended December 31, 1999.
Note 2 - Divestitures of Businesses
On March 1, 2000, Unitrin's indirect subsidiary, Valley Insurance Company,
completed the previously announced sale of its subsidiary, Mountain Valley
Indemnity Company ("Mountain Valley"), to Motor Club of America for $7.5 million
in cash. No gain or loss was recorded in connection with the sale. The Company's
results in 2000 included Premiums of $3.3 million and a pre-tax Operating Loss
of $1.0 million attributable to Mountain Valley.
United Insurance Company of America ("United"), a subsidiary of the Company, and
Ceres Group, Inc. ("Ceres") are parties to an agreement providing for the sale
of United's subsidiary, The Pyramid Life Insurance Company ("Pyramid") to Ceres.
Under an amendment to the agreement executed on April 17, 2000, the parties
agreed that the consideration to be paid to United will consist of $7.5 million
worth of convertible voting preferred stock of Ceres plus $60 million in cash,
subject to an adjustment for a dividend to be paid by Pyramid immediately prior
to closing, and that the deadline for completion of the transaction will be
extended to June 30, 2000. The transaction is subject to regulatory approvals
and the satisfaction of other customary closing conditions.
Note 3 - Net Income Per Share
Net Income Per Share and Net Income Per Share Assuming Dilution determined in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share" for the three months ended March 31, 2000 and 1999 was as
follows:
Three Months Ended
------------------------
(Dollars and Shares in Millions, March 31, March 31,
Except Per Share Amounts) 2000 1999
- --------------------------------------------- ----------- -----------
Net Income $ 41.9 $ 52.2
Dilutive Effect on Net Income from
Investees' Equivalent Shares (0.1) (0.2)
----------- -----------
Net Income Assuming Dilution $ 41.8 $ 52.0
=========== ===========
Weighted Average Common Shares Outstanding 70.1 74.2
Dilutive Effect of Unitrin Stock Option Plans 0.1 0.3
----------- -----------
Weighted Average Common Shares and
Equivalent Shares Outstanding Assuming Dilution 70.2 74.5
=========== ===========
Net Income Per Share $ 0.60 $ 0.70
=========== ===========
Net Income Per Share Assuming Dilution $ 0.60 $ 0.70
=========== ===========
4
<PAGE>
Note 4 - Investment in Investees
Unitrin accounts for its Investments in Investees (Curtiss-Wright Corporation
("Curtiss-Wright"), Litton Industries, Inc. ("Litton") and UNOVA, Inc.
("UNOVA")) under the equity method of accounting using the most recent
publicly-available financial reports and other publicly-available information on
a two or three-month-delay basis depending on the investee being reported.
Based on the most recently available public information, Unitrin's voting
percentage in Litton common stock at March 31, 2000 was approximately 27.8% and
Unitrin's investment in Litton exceeded 10% of Unitrin's Shareholders' Equity.
The amounts included in Unitrin's financial statements for Litton represent
amounts reported by Litton for periods ending two months earlier. Accordingly,
amounts included in these financial statements represent the amounts reported by
Litton for the three month periods ended January 31, 2000 and 1999. Summarized
financial information reported by Litton for such periods was:
Three Months Ended
--------------------------
Jan. 31, Jan. 31,
(Dollars in Millions) 2000 1999
- -------------------------------------- ------------ ------------
Revenues $ 1,349.0 $ 1,130.9
============ ============
Cost of Sales $ 1,094.0 $ 884.4
============ ============
Income from Continuing Operations $ 36.8 $ 44.0
============ ============
Net Income $ 36.8 $ 44.0
============ ============
Equity in Net Income of Investees was $11.0 million and $16.3 million for the
three months ended March 31, 2000 and 1999, respectively. Equity in Net Income
of Investees for the three months ended March 31, 1999 included income of $3.4
million resulting from Unitrin's proportionate share of UNOVA's gain on sale of
its headquarters building.
Note 5 - Notes Payable
The Company has an unsecured revolving credit agreement with a group of banks,
which expires in September 2002 and provides for fixed and floating rate
advances for periods of up to 180 days at various interest rates. Effective
March 28, 2000, the Company's available borrowing capacity under the agreement
was increased to $440 million. The agreement contains various financial
covenants, including limits on total debt to total capitalization and minimum
risk-based capital ratios for the Company's direct insurance subsidiaries. The
proceeds from advances under the revolving credit agreement may be used for
general corporate purposes, including repurchases of the Company's common stock.
At March 31, 2000 and December 31, 1999, the Company had outstanding borrowings
under the revolving credit agreement of $205 million and $111 million at
weighted average interest rates of 6.31% and 6.26%, respectively. The Company
incurred interest expense under the revolving credit agreement of $2.6 million
and $1.7 million for the three months ended March 31, 2000 and 1999,
respectively.
5
<PAGE>
Note 6 - Other Comprehensive Income
Other Comprehensive Income related to the Company's Investments for the three
months ended March 31, 2000 and 1999 was:
Three Months Ended
--------------------------
March 31, March 31,
(Dollars in Millions) 2000 1999
- ---------------------------------------- ------------ ------------
Increase in Unrealized Gains, Net of
Reclassification Adjustment for Gains
Included in Net Income $ 115.6 $ 163.2
Equity in Other Comprehensive Income
(Loss) of Investees (1.5) -
Effect of Income Taxes (40.0) (57.2)
------------ ------------
Increase in Accumulated Other
Comprehensive Income $ 74.1 $ 106.0
============ ============
The Company's Investments in Investees are accounted for under the equity method
of accounting and, accordingly, changes in the fair value of the Company's
Investments in Investees are excluded from the determination of Total
Comprehensive Income and Other Comprehensive Income under SFAS No. 130. Total
Comprehensive Income for the three months ended March 31, 2000 and 1999 was
$116.0 million and $158.2 million, respectively.
6
<PAGE>
Note 7 - Business Segments
Segment Revenues and Operating Profit for the three months ended March 31, 2000
and 1999 were:
Three Months Ended
--------------------------
March 31, March 31,
(Dollars in Millions) 2000 1999
- ---------------------------------------- ------------ ------------
Revenues:
Property and Casualty Insurance:
Premiums $ 178.2 $ 146.3
Net Investment Income 13.5 10.6
------------ ------------
Total Property and Casualty Insurance 191.7 156.9
------------ ------------
Life and Health Insurance:
Premiums 177.5 177.9
Net Investment Income 43.7 40.6
------------ ------------
Total Life and Health Insurance 221.2 218.5
------------ ------------
Consumer Finance 33.5 29.1
------------ ------------
Unitrin Direct - -
------------ ------------
Total Segment Revenues 446.4 404.5
------------ ------------
Net Gains on Sales of Investments 36.5 24.3
Corporate and Other (3.3) (1.4)
------------ ------------
Total Revenues $ 479.6 $ 427.4
============ ============
Segment Operating Profit:
Property and Casualty Insurance $ (7.4) $ 11.9
Life and Health Insurance 19.9 16.5
Consumer Finance 6.2 5.0
Unitrin Direct (0.7) -
------------ ------------
Total Segment Operating Profit 18.0 33.4
------------ ------------
Net Gains on Sales of Investments 36.5 24.3
Corporate and Other, Net (6.6) (3.7)
------------ ------------
Income before Income Taxes and
Equity in Net Income of Investees $ 47.9 $ 54.0
============ ============
7
<PAGE>
Note 8--Legal Proceedings
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.
In October 1999, the Florida Department of Insurance filed and served a subpoena
upon the Company's subsidiary, United Insurance Company of America ("United"),
in connection with that Department's investigation into the sale and servicing
of industrial life insurance and small face amount life insurance policies in
the State of Florida. Subsequently, on December 15, 1999, a purported nationwide
class action lawsuit was filed against United in the United States District
Court for the Middle District of Florida (wilson, et al. v. United Insurance
Company of america), on behalf of "all African-American persons who have (or
have had at the time of the Policy's termination), an ownership interest in one
or more Industrial Life Insurance Policies issued, serviced, administered or
purchased from United...." Plaintiffs allege discrimination in premium rates in
violation of 42 U.S.C. Sec. 1981 in addition to various state law claims.
Unspecified compensatory and punitive damages are sought together with equitable
relief. United filed a motion to dismiss the lawsuit on march 14, 2000; the
Florida Department's investigation is continuing. The Company believes that
United has a number of meritorious defenses in these matters and, accordingly,
that resolution of these matters will not have a material adverse effect on the
Company's financial position. However, the Company cannot estimate the range of
possible loss, if any.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Property and Casualty Insurance
Three Months Ended
--------------------------
March 31, March 31,
(Dollars in Millions) 2000 1999
- ---------------------------------------- ------------ ------------
Personal Lines Premiums:
Automobile $ 90.0 $ 75.1
Homeowners 17.5 15.4
Other 3.0 2.6
Commercial Lines Premiums:
Property and Commercial Liability 32.0 23.3
Automobile 22.4 21.3
Other 13.3 8.6
------------ ------------
Total Premiums 178.2 146.3
------------ ------------
Net Investment Income 13.5 10.6
------------ ------------
Total Revenues $ 191.7 $ 156.9
============ ============
Operating Profit (Loss) $ (7.4) $ 11.9
============ ============
GAAP Incurred Loss Ratio (excluding
Storms) 70.0% 60.9%
GAAP Incurred Storm Ratio 10.1% 8.6%
Total GAAP Incurred Loss Ratio 80.1% 69.5%
GAAP Combined Ratio 111.7% 99.2%
Premiums in the Property and Casualty Insurance segment increased by $31.9
million for the three months ended March 31, 2000, compared to the same period
in 1999. Premiums increased by $40.0 million due to the June 17, 1999,
acquisition of the Valley Group, Inc. ("VGI"). Excluding the VGI acquisition,
premiums decreased by $8.1 million due primarily to lower volume in automobile
lines. Net Investment Income increased by $2.9 million for the three months
ended March 31, 2000 compared to the same period last year due primarily to
higher levels of investments. Operating Profit in the Property and Casualty
Insurance segment decreased by $19.3 million for the three months ended March
31, 2000, compared to the same period in 1999, due primarily to lower margins
resulting from inadequate pricing and higher severity and frequency of losses.
Storm losses, including losses from the March 28, 2000 tornadoes in Ft. Worth,
Texas, were $17.9 million for the three months ended March 31, 2000, an increase
of $5.3 million compared to the same period in 1999. The Company has either
implemented certain rate increases or, subject to regulatory approvals, is in
the process of implementing additional rate increases in consideration of recent
loss experience.
On March 1, 2000, Valley Insurance Company, a subsidiary of VGI, completed the
previously announced sale of its subsidiary, Mountain Valley Indemnity Company
("Mountain Valley"), to Motor Club of America for $7.5 million in cash. No gain
or loss was recorded in connection with the sale. Results for the Property and
Casualty Insurance segment in 2000 included Premiums of $3.3 million and a
pre-tax Operating Loss of $1.0 million attributable to Mountain Valley.
9
<PAGE>
Life and Health Insurance
Three Months Ended
--------------------------
March 31, March 31,
(Dollars in Millions) 2000 1999
- ---------------------------------------- ------------ ------------
Premiums:
Life $ 102.3 $ 103.2
Accident and Health 54.4 54.5
Property 20.8 20.2
------------ ------------
Total Premiums 177.5 177.9
Net Investment Income 43.7 40.6
------------ ------------
Total Revenues $ 221.2 $ 218.5
============ ============
Operating Profit $ 19.9 $ 16.5
============ ============
Premiums in the Life and Health Insurance segment decreased by $0.4 million for
the first quarter of 2000, compared to the first quarter of 1999. Net Investment
Income in the Life and Health Insurance segment increased by $3.1 million for
the first quarter of 2000, compared to the same period in 1999 due primarily to
higher levels of investments and higher yields on investments. Operating Profit
in the Life and Health Insurance segment increased by $3.4 million for the first
quarter of 2000, compared to the same period in 1999, due primarily to the
higher net investment income and lower expense related to Year 2000 remediation
projects, partially offset by $1.5 million of higher storm losses from certain
property insurance products marketed by the Life and Health Insurance segment's
employee-agents.
United Insurance Company of America ("United"), a subsidiary of the Company, and
Ceres Group, Inc. ("Ceres") are parties to an agreement providing for the sale
of United's subsidiary, The Pyramid Life Insurance Company ("Pyramid") to Ceres.
Under an amendment to the agreement executed on April 17, 2000, the parties
agreed that the consideration to be paid to United will consist of $7.5 million
worth of voting convertible preferred stock of Ceres plus $60 million in cash,
subject to an adjustment for a dividend to be paid by Pyramid immediately prior
to closing, and that the deadline for completion of the transaction will be
extended to June 30, 2000. The transaction is subject to regulatory approvals
and the satisfaction of other customary closing conditions.
10
<PAGE>
Consumer Finance
Three Months Ended
--------------------------
March 31, March 31,
(Dollars in Millions) 2000 1999
- ---------------------------------------- ------------ ------------
Interest, Loan Fees and Earned Discount $ 30.6 $ 26.9
Net Investment Income 1.6 1.3
Other 1.3 0.9
------------ ------------
Total Revenues $ 33.5 $ 29.1
============ ============
Operating Profit $ 6.2 $ 5.0
============ ============
Consumer Finance Loan Originations $ 115.1 $ 94.7
Percentage of Consumer Finance
Receivables Greater than Ninety
Days Past Due 1.4 % 1.8 %
Ratio of Reserve for Losses on
Consumer Finance Receivables to
Gross Consumer Finance Receivables 5.3 6.1
Weighted-Average Yield on Investment
Certificates and Savings Accounts 5.5 5.3
Revenues in the Consumer Finance segment increased by $4.4 million for the three
months ended March 31, 2000, compared to the same period in 1999, as a result of
a higher level of loans outstanding. Operating Profit in the Consumer Finance
segment increased by $1.2 million for the three months ended March 31, 2000,
compared to the same period in 1999, due primarily to the higher level of loans
outstanding. The Ratio of Reserve for Losses on Consumer Finance Receivables to
Gross Consumer Finance Receivables decreased from 6.1% at March 31, 1999 to 5.3%
at March 31, 2000 due primarily to an accelerated charge-off of a class of
certain higher risk loans.
Unitrin Direct
On January 3, 2000, the Company established a new business unit to market
personal automobile insurance through direct mail, radio and television
advertising and over the Internet. The business unit will utilize one of the
Company's existing insurance subsidiaries, to be renamed as "Unitrin Direct
Insurance Company" ("Unitrin Direct"), and will be managed and reported as a
separate business segment. During the first quarter of 2000, Unitrin Direct
incurred costs of $0.7 million related to its start-up. The Company anticipates
that Unitrin Direct will continue to incur various start-up costs devoted to
hiring employees, refining products and product rates as well as developing
advertising and marketing materials. Accordingly, it is expected that Unitrin
Direct will have an insignificant amount of revenue in 2000 relative to
expenses, and that it will produce operating losses for at least the next few
years.
Net Gains on Sales of Investments
Net Gains on Sales of Investments were $36.5 million for the three months ended
March 31, 2000, compared to $24.3 million for the same period in 1999. Net Gains
on Sales of Investments included pre-tax gains of $31.3 million and $24.5
resulting from sales of a portion of the Company's investment in Baker Hughes
common stock for the three months ended March 31, 2000 and 1999, respectively.
The Company cannot anticipate when or if similar investment gains or losses may
occur in the future.
Equity in Net Income of Investees
Equity in Net Income of Investees was income of $11.0 million and $16.3 million
for the three months ended March 31, 2000 and 1999, respectively. Equity in Net
Income of Investees for the three months ended March 31, 1999 included income of
$3.4 million resulting from Unitrin's proportionate share of UNOVA's gain on
sale of its headquarters building.
11
<PAGE>
Other Items
Corporate and Other Expense, Net increased by $2.9 million for the first quarter
of 2000, compared to the first quarter of 1999 due primarily to lower dividend
income from the Company's investment in Baker Hughes common stock. The Company
sold a portion of its Baker Hughes common stock holdings in 1999 and the first
quarter of 2000.
During the first three months of 2000, the Company repurchased 2,025,100 shares
of its common stock in open market transactions at an aggregate cost of $70.6
million. The repurchases were made with general corporate funds. At March 31,
2000, the Company had approximately 2.2 million shares remaining under the
existing repurchase authorization.
At March 31, 2000, the unused commitment under the Company's revolving credit
facility was $235 million. In addition, for the remainder of 2000, the Company's
subsidiaries would be able to pay approximately $179 million in dividends to the
Company without prior regulatory approval.
Accounting Changes
In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of
the Effective Date of FASB Statement No. 133" which deferred the effective date
of SFAS No. 133, "Accounting for Derivatives Instruments and for Hedging
Activities." SFAS No. 133 requires all derivatives to be recorded on the balance
sheet at fair value and establishes "special accounting" for the following three
different types of hedges: hedges of changes in the fair value of assets,
liabilities or firm commitments; hedges of the variable cash flows of forecasted
transactions; and hedges of foreign currency exposures of net investments in
foreign operations. Accordingly, SFAS No. 133 is effective for years beginning
after June 15, 2000, with earlier adoption permitted. The Company believes that
the effect of adoption of SFAS No. 133 will not be material.
On March 31, 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). This
Interpretation provides guidance for issues that have arisen in applying APB
Opinion No. 25, "Accounting for Stock Issued to Employees". The Company's
implementation of the provisions of FIN 44 had no impact.
Caution Regarding Forward-Looking Statements
Management's Discussion and Analysis of Results of Operations and Financial
Condition and the accompanying Condensed Consolidated Financial Statements
(including the notes thereto) contain forward-looking statements, which usually
include words such as "believe(s)," "goal(s)," "target(s)," "estimate(s),"
"anticipate(s)" and similar expressions. Readers are cautioned not to place
undue reliance on such statements, which speak only as of the date of this
Quarterly Report. Forward-looking statements are subject to risks and
uncertainties which could cause actual results to differ materially from those
contemplated in such statements. Such risks and uncertainties include, but are
not limited to, those described under this Item 2 above, changes in economic
factors (such as interest rates), changes in competitive conditions (including
availability of labor with required technical or other skills), the number and
severity of insurance claims (including those associated with catastrophe
losses), regulatory approval of certain insurance rates, governmental actions
(including new laws or regulations or court decisions interpreting existing laws
and regulations) and adverse judgments in litigation to which the Company or its
subsidiaries are parties. No assurances can be given that the results
contemplated in any forward-looking statements will be achieved. The Company
assumes no obligation to release publicly any revisions to any forward-looking
statements as a result of events or developments subsequent to the date of this
Quarterly Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information required by Item 305 of Regulation S-K has been omitted because
the sources and effects of changes in the information provided under Item 305 of
Regulation S-K from the end of the preceding year to the date of this Quarterly
Report on Form 10-Q are not material.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Information concerning pending legal proceedings is incorporated herein by
reference to Note 8 to the Condensed Consolidated Financial Statements
(Unaudited) in Part 1 of this Form 10-Q.
12
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
3.1 Certificate of Incorporation (Incorporated herein by reference to
Exhibit 3.1 to the Company's Registration Statement on Form 10 dated
February 15, 1990.)
3.2 Amended and Restated By-Laws (Incorporated herein by reference to
Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.)
4 Rights Agreement between the Company and First Chicago Trust Company
of New York, as rights agent, dated as of August 3, 1994
(Incorporated herein by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A dated August 3, 1994.)
10.1 Unitrin, Inc. 1990 Stock Option Plan as amended and restated
(Incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.)
10.2 Unitrin, Inc. 1997 Stock Option Plan as amended and restated
(Incorporated herein by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.)
10.3 Unitrin, Inc. 1995 Non-Employee Director Stock Option Plan as
amended and restated (Incorporated herein by reference to Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999.)
10.4 Unitrin, Inc. Pension Equalization Plan (Incorporated herein by
reference to Exhibit 10.4 to Company's Annual Report on Form 10-K
for the year ended December 31, 1994.)
10.5 Unitrin is a party to individual severance agreements (the form of
which is incorporated herein by reference to Exhibit 10.5 to the
Company's 1994 Annual Report on Form 10-K), with the following
executive officers:
Richard C. Vie (Chairman, President and Chief Executive
Officer)
David F. Bengston (Vice President)
James W. Burkett (Senior Vice President)
Eric J. Draut (Senior Vice President, Treasurer & Chief
Financial Officer)
Scott Renwick (General Counsel and Secretary)
Donald G. Southwell (Senior Vice President)
(Note: Each of the foregoing agreements is identical except that the
severance compensation multiple is 2.99 for Mr. Vie and 2.0 for the
other executive officers. The term of these agreements has been
extended by action of Unitrin's board of directors through January
1, 2001.)
10.6 Severance Compensation Plan After Change of Control (Incorporated
herein by reference to Exhibit 10.6 to the Company's 1994 Annual
Report on Form 10-K; the term of this plan has been extended by
Unitrin's board of directors through January 1, 2001.)
10.7 1998 Bonus Plan for Senior Executives (Incorporated herein by
reference to Exhibit A of the Company's Proxy Statement, dated April
9, 1998, in connection with the Company's annual meeting of
shareholders.)
10.8 Amended and Restated Credit Agreement, dated September 17, 1997
among Unitrin, Inc., the Lenders party thereto, and NationsBank of
Texas, N.A. as Administrative Agent (Incorporated herein by
reference to Exhibit 10.7 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997. Pursuant to the terms
of such agreement, the Company's borrowing capacity thereunder has
been increased to $440 million, effective March 28, 2000.)
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter ended
March 31, 2000.
13
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Unitrin, Inc.
Date: May 3, 2000 /s/ Richard C. Vie
---------------------------------------
Richard C. Vie
Chairman, President
and Chief Executive Officer
Date: May 3, 2000 /s/ Richard Roeske
---------------------------------------
Richard Roeske
Corporate Controller
(Principal Accounting Officer)
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 2,798,800
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 527,600
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 4,287,600
<CASH> 24,100
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 328,500
<TOTAL-ASSETS> 6,158,700
<POLICY-LOSSES> 2,633,200
<UNEARNED-PREMIUMS> 349,500
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 210,400
0
0
<COMMON> 6,900
<OTHER-SE> 1,730,200
<TOTAL-LIABILITY-AND-EQUITY> 6,158,700
355,700
<INVESTMENT-INCOME> 53,900
<INVESTMENT-GAINS> 36,500
<OTHER-INCOME> 33,500
<BENEFITS> 251,700
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 180,000<F1>
<INCOME-PRETAX> 47,900
<INCOME-TAX> 17,000
<INCOME-CONTINUING> 41,900<F2>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,900
<EPS-BASIC> 0.60
<EPS-DILUTED> 0.60
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>INCLUDES CONSUMER FINANCE EXPENSES OF $27.3 MILLION AND OTHER EXPENSES OF $5.0
MILLION.
<F2>INCLUDES EQUITY IN NET INCOME OF INVESTEES OF $11.0 MILLION.
</FN>
</TABLE>
