FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 1997
----------------------------------------------------
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.
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(Exact name of registrant as specified in its charter)
Delaware 95-4255452
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One East Wacker Drive, Chicago, Illinois 60601
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(Address of principal executive offices) (Zip Code)
(312) 661-4600
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(Registrant's telephone number, including area code)
Not Applicable
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(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 ____
---
37,538,097 shares of common stock, $0.10 par value, were outstanding as of
October 31, 1997.
UNITRIN, INC.
INDEX
Page
----------
PART I. Financial Information.
Item 1. Financial Statements.
Condensed Consolidated Statements of 1
Income for the Nine and Three Months Ended
September 30, 1997 and 1996 (Unaudited).
Condensed Consolidated Balance Sheets as of 2
September 30, 1997 (Unaudited) and
December 31, 1996.
Condensed Consolidated Statements of Cash 3
Flows for the Nine Months Ended
September 30, 1997 and 1996 (Unaudited).
Notes to the Condensed Consolidated 4-7
Financial Statements (Unaudited).
Item 2. Management's Discussion and Analysis of 8-11
Results of Operations and Financial Condition.
PART II. Other Information.
Item 1. Legal Proceedings. 12
Item 6. Exhibits and Reports on Form 8-K. 12-13
Signatures 14
UNITRIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share amounts)
(Unaudited)
Nine Months Ended Three Months Ended
------------------------------ ------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
-------------- -------------- ------------- -------------
Revenues:
Premiums $ 924.2 $ 917.2 $ 307.3 $ 304.1
Consumer Finance Revenues 95.2 89.2 31.4 30.3
Net Investment Income 132.6 133.5 43.8 44.0
Net Gains on Sales of Investments 3.2 1.6 0.1 0.4
------------ ----------- ------------ -----------
Total Revenues 1,155.2 1,141.5 382.6 378.8
------------ ----------- ------------ -----------
Expenses:
Insurance Claims and Policyholders' Benefits 600.2 603.3 201.8 191.4
Insurance Expenses 362.6 368.4 117.1 121.0
Consumer Finance Expenses 89.9 73.1 27.3 24.9
Interest and Other Expense 9.3 11.7 2.9 4.4
------------ ----------- ------------ -----------
Total Expenses 1,062.0 1,056.5 349.1 341.7
------------ ----------- ------------ -----------
Income before Income Taxes and Equity
in Net Income of Investees 93.2 85.0 33.5 37.1
Income Tax Expense 31.8 28.5 12.3 12.7
------------ ----------- ------------ -----------
Income before Equity in Net Income of Investees 61.4 56.5 21.2 24.4
Equity in Net Income of Investees 10.5 36.5 15.8 13.7
------------ ----------- ------------ -----------
Net Income $ 71.9 $ 93.0 $ 37.0 $ 38.1
============ =========== ============ ===========
Net Income Per Share - Note 5 $ 1.92 $ 2.46 $ 0.99 $ 1.02
============ =========== ============ ===========
The Notes to the Condensed Consolidated Financial Statements are an integral
part of these financial statements.
1
UNITRIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
Assets:
Investments:
Fixed Maturities at Fair Value (Amortized
Cost: 1997 - $2,278.2; 1996 - $2,176.4) $ 2,311.5 $ 2,207.4
Equity Securities at Fair Value
(Cost: 1997 - $144.4; 1996 - $172.0) 250.0 259.7
Investees at Cost Plus Cumulative Undistributed Earnings
(Fair Value: 1997 - $1,971.7; 1996 - $1,610.3) 684.7 670.1
Other 194.9 154.2
---------- ----------
Total Investments 3,441.1 3,291.4
---------- ----------
Cash 17.7 17.0
Consumer Finance Receivables 573.2 608.6
Receivables 335.3 376.1
Other Assets 591.4 578.0
---------- ----------
Total Assets $ 4,958.7 $ 4,871.1
========== ==========
Liabilities and Shareholders' Equity:
Insurance Reserves:
Life and Health $ 1,568.1 $ 1,599.0
Property and Casualty 466.7 454.8
---------- ----------
Total Insurance Reserves 2,034.8 2,053.8
---------- ----------
Investment Certificates 605.7 589.9
Notes Payable 94.3 59.9
Accrued Expenses and Other Liabilities 725.2 687.2
---------- ----------
Total Liabilities 3,460.0 3,390.8
---------- ----------
Shareholders' Equity:
Common Stock, $0.10 par value, 100 million Shares Authorized;
37,529,738 and 37,340,894 Shares Outstanding at
September 30, 1997 and December 31, 1996 3.8 3.7
Additional Paid-in Capital 200.1 133.0
Retained Earnings 1,204.0 1,265.8
Net Unrealized Appreciation on Securities 90.8 77.8
---------- ----------
Total Shareholders' Equity 1,498.7 1,480.3
---------- ----------
Total Liabilities and Shareholders' Equity $ 4,958.7 $ 4,871.1
========== ==========
The Notes to the Condensed Consolidated Financial Statements are an integral
part of these financial statements.
2
UNITRIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Nine Months Ended
----------------------------------
Sept. 30 Sept. 30
1997 1996
-------------- --------------
Operating Activities:
Net Income $ 71.9 $ 93.0
Adjustments to Reconcile Net Income to Net Cash
Provided by Operations:
Change in Deferred Policy Acquisition Costs 13.4 11.0
Equity in Net Income of Investees before Taxes (15.7) (55.8)
Cash Dividends from Investee 1.1 1.1
Amortization of Fixed Maturities 17.1 18.7
Increase in Insurance Reserves and Unearned Premiums 19.1 17.9
Increase (Decrease) in Accrued Expenses and Other Liabilities (15.8) 19.8
Net Gains on Sales of Investments (3.2) (1.6)
Provision for Loan Losses 28.5 19.6
Other, Net 9.0 10.5
-------------- --------------
Net Cash Provided by Operating Activities 125.4 134.2
-------------- --------------
Investing Activities:
Sales and Maturities of Fixed Maturities 313.6 180.0
Purchases of Fixed Maturities (426.0) (74.7)
Sales and Redemptions of Equity Securities 38.2 6.7
Purchases of Equity Securities (12.2) (74.1)
Change in Consumer Finance Receivables 3.2 (68.6)
Change in Short-term Investments 5.7 20.9
Other, Net (27.2) (12.0)
-------------- --------------
Net Cash (Used) by Investing Activities (104.7) (21.8)
-------------- --------------
Financing Activities:
Change in Investment Certificates 15.8 52.6
Universal Life and Annuity Account Payments to Reinsurer - (79.6)
Other Changes in Universal Life and Annuity Accounts 8.5 10.1
Notes Payable Proceeds 380.0 122.0
Notes Payable Payments (345.5) (93.5)
Cash Dividens Paid (67.3) (62.5)
Common Stock Repurchases (20.7) (60.6)
Other, Net 9.2 1.8
-------------- --------------
Net Cash (Used) by Financing Activities (20.0) (109.7)
-------------- --------------
Increase in Cash 0.7 2.7
Cash, Beginning of Year 17.0 9.1
-------------- --------------
Cash, End of Period $ 17.7 $ 11.8
============== ==============
The Notes to the Condensed Consolidated Financial Statements are an integral
part of these financial statements.
3
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 the Company pursuant to the rules and regulations of the
Securities and Exchange Commission (the "Commission") but do not include all
information and footnotes required by generally accepted accounting principles.
In the opinion of 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, as amended, filed with the Commission for the year
ended December 31, 1996.
NOTE 2 -- ACQUISITION OF THE RELIABLE LIFE INSURANCE COMPANY
On June 20, 1997, the Company and The Reliable Life Insurance Company
("Reliable") entered into a definitive agreement providing for the acquisition
of Reliable by the Company. Each holder of Reliable Class A common stock will
be entitled to receive 2.235 shares of Unitrin common stock or, at such holder's
election, $119 in cash, provided that no less than 81% of the Reliable Class A
common stock will be exchanged for Unitrin common stock. The acquisition
agreement provides that all outstanding Reliable Class B common shares will be
converted into Reliable Class A shares prior to closing. Reliable will then
have approximately 1,682,400 Class A shares outstanding, which will be acquired
in the acquisition. The transaction is intended to be a tax-free
reorganization. The transaction is subject to approval by the Missouri
Insurance Department and Reliable's shareholders and other customary closing
conditions. Reliable has set November 25, 1997 as the date for a special
meeting of its shareholders of record as of November 4, 1997 to vote on the
transaction. On October 31, 1997, the Missouri Insurance Department held a
hearing to consider approval of the transaction. Under Missouri law, the
Insurance Department is required to issue its order approving or disapproving
the transaction within 30 days of the date on which the hearing record
(including post-hearing briefs) is complete. The hearing record is expected to
be complete on or about November 12, 1997. If approval of the transaction is
not obtained from the Insurance Department on or prior to November 30, 1997,
then either the Company or Reliable may terminate the acquisition agreement.
The acquisition will be accounted for by the purchase method and, accordingly,
the operations of Reliable will be included in the Company's financial
statements from the date of acquisition.
4
NOTE 3 - INVESTMENT IN INVESTEES
Unitrin accounts for its Investments in Investees under the equity method of
accounting using the most recent publicly-available financial reports.
Summarized financial information for Litton Industries, Inc, ("Litton") and
Western Atlas Inc. ("Western Atlas") is presented below.
The amounts included in Unitrin's financial statements for Litton represent
amounts reported by Litton for periods ending two months earlier. Accordingly,
amounts included in these financial statements represent the amounts reported
by Litton for the nine and three month periods ending July 31, 1997 and 1996.
Summarized financial information reported by Litton for such periods was:
Nine Months Ending Three Months Ending
July 31, July 31
------------------------ ------------------------
[Dollars in Millions] 1997 1996 1997 1996
--------------------------------- --------- --------- --------- ----------
Revenues $ 3,127 $ 2,776 $ 1,071 $ 1,032
========= ========= ========= ==========
Cost of Sales $ 2,440 $ 2,143 $ 825 $ 786
========= ========= ========= ==========
Income from Continuing Operations $ 122 $ 114 $ 44 $ 42
========= ========= ========= ==========
Net Income $ 122 $ 114 $ 44 $ 42
========= ========= ========= ==========
Based on the most recently available public information, Unitrin's voting
percentage in Litton common stock at September 30, 1997 is approximately 27.5%.
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 these financial statements represent
the amounts reported by Western Atlas for the nine and three month periods
ending June 30, 1997 and 1996. Summarized financial information reported by
Western Atlas for such periods was:
Nine Months Ending Three Months Ending
June 30, June 30,
------------------------ -------------------------
[Dollars in Millions] 1997 1996 1997 1996
--------------------------------- --------- --------- --------- ----------
Revenues $ 1,857 $ 1,496 $ 419 $ 362
========= ========= ========= ==========
Cost of Sales $ 1,298 $ 1,032 $ 287 $ 247
========= ========= ========= ==========
Income from Continuing Operations $ 85 $ 68 $ 17 $ 18
========= ========= ========= ==========
Net Income $ (102) $ 80 $ (170) $ 30
========= ========= ========= ==========
The Company's equity in the net income of Western Atlas for the nine months
ended September 30, 1997 also includes an after-tax charge of $31.0 million
related to Unitrin's share of Western Atlas' charge for the write-off of
in-process research and development activities at certain recently acquired
Western Atlas' subsidiaries and an after-tax charge of $0.8 million for
Unitrin's share of expenses related to the spin-off of Western Atlas' industrial
automation segment.
On October 31, 1997, Western Atlas completed the distribution of all of the
common stock of UNOVA, Inc, ("UNOVA") to Western Atlas' shareholders in the form
of a tax-free dividend. Unitrin's voting percentage in UNOVA common stock is
approximately 23.5% and accordingly Unitrin will account for its investment in
UNOVA using the equity method of accounting. Unitrin's voting percentage in
Western Atlas common stock remains at approximately 23.5%.
5
NOTE 4 -- NOTES PAYABLE
On September 17, 1997, the Company entered into a $340 million unsecured
revolving credit agreement with a group of banks which expires in September 2002
and provides for fixed and floating rate advances for periods up to 180 days at
various interest rates. The agreement contains various financial covenants,
including limits on total debt to total capitalization and minimum risk-based
capital ratios for the Company's direct insurance subsidiaries. The proceeds
from advances under the agreement may be used for general corporate purposes,
including repurchases of the Company's common stock.
NOTE 5 - SHAREHOLDERS' EQUITY
During the nine months ended September 30, 1997, the Company repurchased 395,500
shares of its common stock in open market transactions at an aggregate cost of
$20.7 million, bringing the total number of common shares repurchased since
August 1994 to 15,159,133 at a total cost of $743.1 million. Common Stock,
Additional Paid-in Capital and Retained Earnings have been reduced on a pro rata
basis for the cost of the repurchased shares.
On May 14, 1997, the Company's shareholders approved the Unitrin, Inc. 1997
Stock Option Plan (the "1997 Option Plan") covering an aggregate of 2,000,000
shares of Unitrin common stock. Under the 1997 Option Plan, options to purchase
shares of Unitrin common stock may be granted to key employees (including
employee directors) and other key persons providing services to the Company and
its subsidiaries or its affiliates ("Participants"). 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. The Stock
Option Committee also administers the 1997 Option Plan and 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. The 1997 Option Plan also provides that any option holder who
delivers previously owned shares of the Company's common stock to pay the
exercise price of an option and/or related withholding taxes shall be granted a
restorative option for the number of shares so delivered.
On May 14, 1997, the Stock Option Committee of the Board of Directors granted
non-qualified stock options under the Company's 1990 Stock Option Plan and 1997
Option Plan covering 400,000 and 31,500 shares, respectively, at an exercise
price of $53.75 per common share which equaled the fair market value of such
shares on the date of grant. The options are exercisable in four annual
installments beginning six months from the date of grant and expire five years
from the date of grant. 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 likewise
vest in four annual installments beginning six months after their respective
dates of grant. As of September 30, 1997, options for 1,913,124 common shares
were outstanding and options covering 44,550 common shares were available for
future grant under the 1990 Stock Option Plan. As of September 30, 1997, options
for 28,500 common shares were outstanding and options covering 1,971,500 common
shares were available for future grant under the 1997 Stock Option Plan.
Under the Company's 1995 Non-Employee Director Stock Option Plan (the "Director
Plan"), on May 14, 1997, two of the Company's directors were eligible to receive
and did receive options to purchase 2,000 shares of the Company's common stock
at an exercise price of $53.75 per common share which equaled the fair market
value of the shares on the date of grant. As of September 30, 1997, options for
12,000 common shares were outstanding under the Director Plan.
Net Income Per Share was computed using 37,432,565 and 37,865,186 weighted
average shares for the nine months ended September 30, 1997 and 1996,
respectively. Net Income Per Share was computed using 37,466,921 and 37,338,213
weighted average shares for the three months ended September 30, 1997 and 1996,
respectively. Common stock equivalents of approximately 213,000 were excluded
from the computation of primary net income per share and common stock
equivalents of approximately 339,000 were excluded from the computation of fully
diluted net income per share for the nine months ended September 30, 1997
because the effect of dilution of net income per share was less than 3 percent.
Common stock equivalents of approximately 270,000 were excluded from the
computation of primary net income per share and common stock equivalents of
approximately 339,000 were excluded from the computation of fully diluted net
income per share for the three months ended September 30, 1997 because the
effect of dilution of net income per share was less than 3 percent. Common stock
equivalents of approximately 265,000 were excluded from the computation of
primary net income per share and common stock equivalents of approximately
298,000 were excluded from the computation of fully diluted net income per share
for the nine months ended September 30, 1996 because the effect of dilution of
net income per share was less than 3 percent. Common stock equivalents of
approximately 264,000 were excluded from the computation of primary net income
per share and common stock equivalents of approximately 298,000 were excluded
from the computation of fully diluted net income per share for the three months
ended September 30, 1996 because the effect of dilution of net income per share
was less than 3 percent.
6
NOTE 6 - REINSURANCE
Effective May 31, 1996 and January 1, 1997, United Insurance Company of America
("United"), one of the Company's Life and Health Insurance subsidiaries, entered
into reinsurance agreements to cede certain life insurance policies to third
parties. Life insurance reserves related to these blocks of business were
approximately $82 million at September 30, 1997. At September 30, 1997 the
Company had not been relieved of its primary obligation to these policyholders.
In accordance with the provisions of SFAS No. 113, "Accounting and Reporting for
Reinsurance of Short Duration and Long Duration Contracts," the Company
therefore continues to include the life insurance reserves related to these
blocks of business on its balance sheet along with a corresponding amount
classified as Other Receivables.
NOTE 7 - 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.
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 there are meritorious defenses to these legal actions and
are defending them vigorously. The Company believes that resolution of these
matters will not have a material adverse effect on the Company's financial
position.
In connection with one action, Ronnie Dale Bleeker v. Trinity Universal
Insurance Company ("Trinity"), et al., the District Court of Hildalgo County,
Texas, on February 9, 1995 entered a judgment in the amount of $77.0 million,
including attorney's fees of $38.5 million, against Trinity, one of the
Company's subsidiaries. The case involves an accident in which Ronnie Bleeker, a
former insured of Trinity under a $40 thousand automobile insurance policy,
while driving his truck struck another truck parked alongside a road, killing
one person and injuring several others. Suit was filed against Bleeker by the
injured parties (the "Claim Case"). In 1993, the plaintiffs in the Claim Case
were awarded damages in excess of $9 million. In 1994, these plaintiffs, acting
as assignees of a purported claim by Bleeker against Trinity, filed suit against
Trinity (the "Bad Faith Case") alleging that negligent claim handling by Trinity
led to the large verdict against Bleeker in the Claim Case. The Bad Faith Case
was tried in 1995 and resulted in the judgment against Trinity described above.
Trinity appealed the judgment to the Thirteenth Court of Appeals in Corpus
Christi, Texas. On February 27, 1997, the court of appeals issued its decision
affirming in part and reversing and remanding in part the judgment of the trial
court. The result is that the judgment has been reduced to $12.8 million plus
interest, and the case has been remanded for a new trial on the plaintiffs'
claim of unconscionability. Trinity has filed an application for writ of error
in the Supreme Court of Texas. The Company continues to believe that Trinity has
a number of meritorious defenses. The Company believes that resolution of this
action will not have a material adverse effect on the Company's financial
position.
NOTE 8 - SUPPLEMENTAL CASH FLOW INFORMATION
Significant non-cash activity related to the Company's investments in Fixed
Maturities and Equity Securities for the nine months ended September 30, 1997
were:
(Dollars in Millions)
Increase in Unrealized Appreciation on Securities $ 20.2
Effect of Income Taxes (7.1)
--------
Increase in Net Unrealized Appreciation on Securities $ 13.1
--------
7
ITEMS 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
UNITRIN, INC. AND SUBSIDIARIES
SUMMARIZED FINANCIAL INFORMATION
(Dollars in millions)
Nine Months Ended Three Months Ended
------------------------ -----------------------
Sept. 30 Sept. 30 Sept. 30 Sept. 30
1997 1996 1997 1996
------------- ---------- --------- -----------
Revenues:
Property and Casualty Insurance:
Premiums $ 584.7 $ 546.7 $ 195.7 $ 184.6
Net Investment Income 40.9 37.2 13.5 12.3
-------- -------- -------- --------
Total Property and Casualty Insurance 625.6 583.9 209.2 196.9
-------- -------- -------- --------
Life and Health Insurance:
Premiums 339.5 370.5 111.6 119.5
Net Investment Income 89.9 93.1 29.4 30.5
-------- -------- -------- --------
Total Life and Health Insurance 429.4 463.6 141.0 150.0
-------- -------- -------- --------
Consumer Finance 95.2 89.2 31.4 30.3
-------- -------- -------- --------
Total Segment Revenues 1,150.2 1,136.7 381.6 377.2
-------- -------- -------- --------
Net Gains on Sales of Investments 3.2 1.6 0.1 0.4
Other 1.8 3.2 0.9 1.2
-------- -------- -------- --------
Total Revenues $1,155.2 $1,141.5 $ 382.6 $ 378.8
======== ======== ======== ========
Income before Income Taxes and
Equity in Net Income of Investees:
Property and Casualty Insurance $ 54.6 $ 44.9 $ 15.4 $ 22.8
Life and Health Insurance 34.3 28.9 15.3 11.2
Consumer Finance 9.7 20.1 5.5 6.9
-------- -------- -------- --------
Total Segment Operating Profit 98.6 93.9 36.2 40.9
-------- -------- -------- --------
Net Gains on Sales of Investments 3.2 1.6 0.1 0.4
Net Corporate and Other Expenses (8.6) (10.5) (2.8) (4.2)
-------- -------- -------- --------
Income before Income Taxes and
Equity in Net Income of Investees $ 93.2 $ 85.0 $ 33.5 $ 37.1
======== ======== ======== ========
8
PROPERTY AND CASUALTY INSURANCE
Premiums in the Property and Casualty Insurance segment increased by $11.1
million and $38.0 million, respectively, for the three and nine months ended
September 30, 1997, compared to the same periods in 1996, due primarily to the
January 1997 acquisition of Union Automobile Indemnity Company ("Union Auto")
(see below) and due to higher volume of automobile insurance. Net Investment
Income in the Property and Casualty Insurance segment increased $1.2 million and
$3.7 million, respectively, for the three and nine months ended September 30,
1997, partially due to the acquisition of Union Auto. Operating Profit in the
Property and Casualty Insurance segment decreased by $7.4 million for the three
months ended September 30, 1997 due primarily to unfavorable loss experience in
commercial automobile insurance. Operating Profit increased by $9.7 million for
the nine months ended September 30, 1997 due primarily to lower storm and other
weather-related damage and improved loss experience in automobile insurance.
In January 1997, the Company completed its acquisition of Union Auto for
approximately $18.6 million in Unitrin, Inc. common stock valued in accordance
with EITF No. 95-19, "Determination of the Measurement Date for the Market Price
of Securities Issued In A Purchased Business Combination." The acquisition has
been accounted for by the purchase method and, accordingly, the operations of
Union Auto are included in the Company's financial statements from the date of
acquisition. The Company anticipates that premiums in the Property and Casualty
Insurance segment will increase by approximately $35 million in 1997 as a result
of the acquisition.
LIFE AND HEALTH INSURANCE
Premiums in the Life and Health Insurance segment decreased by $7.9 million and
$31.0 million, respectively, for the three and nine months ended September 30,
1997, compared to the same periods in 1996. Accident and Health Insurance
premiums decreased by $2.8 million and $10.2 million, respectively, due
primarily to lower volume. Life Insurance premiums decreased by $5.1 million and
$20.8 million, respectively, due primarily to the ceding of certain life
insurance policies to third parties (see below) and lower volume. Net Investment
Income in the Life and Health Insurance segment decreased by $1.1 million and
$3.2 million, respectively, due primarily to a lower level of investments as a
result of ceding certain life insurance policies to third parties. Operating
Profit in the Life and Health Insurance segment increased by $4.1 million for
the three month period ended September 30, 1997 due primarily to lower
underwriting expenses. Operating Profit in the Life and Health Insurance
segment increased by $5.4 million for the nine months ended September 30, 1997
due primarily to improved mortality experience, partially offset by higher
underwriting expenses as a percentage of premium.
Effective May 31, 1996 and January 1, 1997, United Insurance Company of America
("United"), one of the Company's Life and Health Insurance subsidiaries, entered
into reinsurance agreements to cede certain life insurance policies to third
parties. Life insurance reserves related to these blocks of business were
approximately $82 million at September 30, 1997. At September 30, 1997 the
Company had not been relieved of its primary obligation to these policyholders.
In accordance with the provisions of SFAS No. 113, "Accounting and Reporting for
Reinsurance of Short Duration and Long Duration Contracts," the Company
therefore continues to include the life insurance reserves related to these
blocks of business on its balance sheet along with a corresponding amount
classified as Other Receivables. As a result of these reinsurance transactions,
the Company expects that Premiums and Net Investment Income recorded in the Life
and Health Insurance segment for 1997 will decrease by approximately $17 million
and $4 million, respectively, compared to the prior year reflecting the full
year impact of the transactions.
CONSUMER FINANCE
Revenues in the Consumer Finance segment increased by $1.1 million and $6.0
million, respectively, for the three and nine months ended September 30, 1997,
compared to the same periods in 1996, due primarily to a higher level of loans
outstanding and a higher level of investments. Operating Profit in the Consumer
Finance segment decreased by $1.4 million and $10.4 million, respectively, due
primarily to higher provisions for loan losses.
NET CORPORATE EXPENSE
Net Corporate and Other Expenses were $2.8 million and $8.6 million,
respectively, for the three and nine months ended September 30, 1997, compared
to $4.2 million and $10.5 million, respectively, for the same periods in 1996.
Corporate Expense is recorded net of Corporate investment income.
9
EQUITY IN NET INCOME OF INVESTEES
Equity in Net Income of Investees was income of $15.8 million and $10.5 million,
respectively, for the three and nine months ended September 30, 1997, compared
to income of $13.7 million and $36.5 million, respectively, for the same periods
in 1996. Equity in Net Income of Investees for the nine months ended September
30, 1997 includes an after-tax charge of $31.0 million related to Unitrin's
share of Western Atlas' charge for the write-off of in-process research and
development activities at certain recently acquired Western Atlas' subsidiaries
and an after-tax charge of $0.8 million for Unitrin's share of expenses related
to the spin-off of Western Atlas' industrial automation segment.
On October 31, 1997, Western Atlas completed the distribution of all of the
common stock of UNOVA, Inc. ("UNOVA") to Western Atlas's shareholders in the
form of a tax-free dividend. Unitrin's voting percentage in UNOVA common stock
is approximately 23.5%, and accordingly Unitrin will account for its investment
in UNOVA using the equity method of accounting. Unitrin's voting percentage in
Western Atlas common stock remains at approximately 23.5%.
OTHER ITEMS
During the first nine months of 1997, the Company repurchased 395,500 shares of
its common stock in open market transactions at an aggregate cost of $20.7
million. The repurchases were made with general corporate funds. At September
30, 1997, the unused commitment under the Company's amended and restated
revolving credit agreement (see Note 4) was $252 million. In addition, for the
remainder of 1997, the Company's subsidiaries would be able to pay approximately
$53 million in dividends to the Company without prior regulatory approval.
On June 20, 1997, the Company and The Reliable Life Insurance Company
("Reliable") entered into a definitive agreement providing for the acquisition
of Reliable by the Company. Each holder of Reliable Class A common stock will
be entitled to receive 2.235 shares of Unitrin common stock or, at such holder's
election, $119 in cash, provided that no less than 81% of the Reliable Class A
common stock will be exchanged for Unitrin common stock. The acquisition
agreement provides that all outstanding Reliable Class B common shares will be
converted into Reliable Class A shares prior to closing. Reliable will then
have approximately 1,682,400 Class A shares outstanding, which will be acquired
in the acquisition. The transaction is intended to be a tax-free
reorganization. The transaction is subject to approval by the Missouri
Insurance Department and Reliable's shareholders and other customary closing
conditions. Reliable has set November 25, 1997 as the date for a special
meeting of its shareholders of record as of November 4, 1997 to vote on the
transaction. On October 31, 1997, the Missouri Insurance Department held a
hearing to consider approval of the transaction. Under Missouri law, the
Insurance Department is required to issue its order approving or disapproving
the transaction within 30 days of the date on which the hearing record
(including post-hearing briefs) is complete. The hearing record is expected to
be complete on or about November 12, 1997. If approval of the transaction is
not obtained from the Insurance Department on or prior to November 30, 1997,
then either the Company or Reliable may terminate the acquisition agreement.
The acquisition will be accounted for by the purchase method and, accordingly,
the operations of Reliable will be included in the Company's financial
statements from the date of acquisition.
ACCOUNTING CHANGES
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." Under SFAS No. 128 the dual presentation of basic and diluted Earnings
Per Share ("EPS") is required on the face of the income statement (for financial
statements issued after December 15, 1997) for all entities with complex capital
structures. In addition, SFAS No. 128 requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. The adoption of SFAS No. 128 is not anticipated to
have a significant effect on the Company's calculation of Net Income Per Share.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure." SFAS No. 129 establishes standards for disclosing
information about an entity's capital structure. SFAS No. 129 contains no change
in disclosure requirements for entities that were previously subject to the
requirements of Accounting Principles Board Opinions Nos. 10 and 15 and SFAS No.
47 and as such the Company does not anticipate that adoption of SFAS No. 129
will have any effect on the Company's reporting.
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ACCOUNTING CHANGES (CONTINUED)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
Under SFAS No. 130, enterprises that provide a full set of financial statements
that report financial position, results of operations and cash flows should also
include a Statement of Comprehensive Income for fiscal years beginning after
December 15, 1997, with earlier adoption permitted. The Company intends to
adopt SFAS No. 130 in 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Under SFAS No. 131, public business
enterprises are required to provide disclosures about operating segments using
the "management approach" for fiscal years beginning after December 15, 1997,
with earlier adoption permitted. The Company has not yet determined what its
operating segments will be under SFAS No. 131 nor has the Company determined
when it will adopt SFAS No. 131.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information concerning pending legal proceedings is incorporated herein by
reference to Note 7 to the Condensed Consolidated Financial Statements
(Unaudited) in Part I of this Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
2.1 Agreement and Plan of Reorganization Among Unitrin, Inc., Unitrin
Acquisition Corporation and The Reliable Life Insurance Company
dated June 20, 1997, as amended. (Incorporated herein by reference
to Appendix A to the Company's Amendment No. 3 to Form S-4 filed on
November 6, 1997)
3.1 Certificate of Incorporation (Incorporated herein by reference to
Exhibit 3.1 to Unitrin's Registration Statement on Form 10 dated
February 15, 1990.)
3.2 Amended and Restated By-Laws
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
Annual Report on Form 10-K for the year ended December 31, 1995.)
10.2 Unitrin, Inc. 1995 Non-Employee Director Stock Option Plan
(Incorporated herein by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1995.)
10.3 Unitrin, Inc. 1997 Stock Option Plan (Incorporated herein by
reference to Exhibit A of the Company's Proxy Statement, dated
April 9, 1997, in connection with Unitrin's annual meeting of
shareholders.)
10.4 Unitrin, Inc. Pension Equalization Plan (Incorporated herein by
reference to Exhibit 10.4 to Unitrin'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 following
executive officers:
Jerrold V. Jerome (Chairman)
Richard C. Vie (President and Chief Executive Officer)
David F. Bengston (Vice President)
James W. Burkett (Vice President)
Thomas H. Maloney (Vice President & General Counsel)
Eric J. Draut (Vice President, Treasurer & Chief Financial
Officer)
Scott Renwick (Secretary)
(Note: Each of the foregoing agreements is identical except that
the severance compensation multiple is 2.99 for Messrs. Jerome and
Vie and 2.0 for the other executive officers. The term of these
agreements has been extended by action of Unitrin's board of
directors through December 31, 1998.)
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
(a) Exhibits (continued).
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 December 31, 1998.)
10.7 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.
10.8 Tax Allocation Agreement by and among the Company and its
Subsidiaries and Teledyne, Inc. (Incorporated herein by reference
to Amendment No. 1, dated April 5, 1990, on Form 8 to the Company's
Registration Statement on Form 10.)
10.9 Description of Bonus Plan for Senior Executives
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter ended
September 30, 1997.
[This Space Left Blank Intentionally]
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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: November 13, 1997 /s/ Richard C. Vie
----------------------------------------
Richard C. Vie
President and Chief Executive Officer
Date: November 13, 1997 /s/ Eric J. Draut
----------------------------------------
Eric J. Draut
Vice President, Treasurer and Chief
Financial Officer
(Principal Accounting Officer)
14