FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended June 30, 1998
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OR
[_] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Transition Period from to
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Commission file number 0-18298
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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
--- ---
41,184,280 shares of common stock, $0.10 par value, were outstanding as of June
30, 1998.
UNITRIN, INC.
INDEX
Page
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PART I. Financial Information.
Item 1. Financial Statements.
Condensed Consolidated Statements of 1
Income for the Six and Three Months Ended
June 30, 1998 and 1997 (Unaudited).
Condensed Consolidated Balance Sheets as of 2
June 30, 1998 (Unaudited) and
December 31, 1997.
Condensed Consolidated Statements of Cash 3
Flows for the Six Months Ended
June 30, 1998 and 1997 (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.
PART II. Other Information.
13
Item 1. Legal Proceedings.
Item 4. Submission of Matters to a Vote of Securities Holders 13
Item 6. Exhibits and Reports on Form 8-K. 13-14
Signatures 15
UNITRIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share amounts)
(Unaudited)
Six Months Ended Three Months Ended
------------------------------ ------------------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
Revenues:
Premiums $ 583.0 $ 616.9 $ 293.1 $ 309.9
Consumer Finance Revenues 56.4 63.8 28.1 32.4
Net Investment Income 87.0 88.8 45.2 46.4
Net Gains on Sales of Investments 66.5 3.1 5.6 1.8
------------- ------------- ------------- -------------
Total Revenues 792.9 772.6 372.0 390.5
------------- ------------- ------------- -------------
Expenses:
Insurance Claims and Policyholders' Benefits 378.6 398.4 194.9 203.4
Insurance Expenses 239.8 245.5 121.3 122.8
Consumer Finance Expenses 46.9 62.6 23.5 32.8
Interest and Other Expenses 5.6 6.4 2.8 3.3
------------- ------------- ------------- -------------
Total Expenses 670.9 712.9 342.5 362.3
------------- ------------- ------------- -------------
Income before Income Taxes and Equity
in Net Income of Investees 122.0 59.7 29.5 28.2
Income Tax Expense 41.4 19.5 9.7 8.9
------------- ------------- ------------- -------------
Income before Equity in Net Income of Investees 80.6 40.2 19.8 19.3
Equity in Net Income of Investees 31.6 (5.3) 16.4 (18.1)
------------- ------------- ------------- -------------
Net Income $ 112.2 $ 34.9 $ 36.2 $ 1.2
============= ============= ============= =============
Net Income Per Share $ 2.94 $ 0.93 $ 0.93 $ 0.03
============= ============= ============= =============
Net Income Per Share Assuming Dilution $ 2.90 $ 0.92 $ 0.92 $ 0.03
============= ============= ============= =============
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)
June 30, December 31,
1998 1997
----------- ------------
(Unaudited)
Assets:
Investments:
Fixed Maturities at Fair Value (Amortized Cost: 1998 -
$2,766.8; 1997 - $2,274.4) $ 2,809.6 $ 2,315.4
Equity Securities at Fair Value (Cost: 1998 - $130.2;
1997 - $131.0) 187.5 245.7
Investees at Cost Plus Cumulative Undistributed Earnings
(Fair Value: 1998 - $2,265.8; 1997 - $2,031.7) 753.9 705.8
Other 241.5 181.6
--------- ---------
Total Investments 3,992.5 3,448.5
--------- ---------
Cash 18.5 14.5
Consumer Finance Receivables 516.3 543.6
Receivables 306.8 335.4
Other Assets 727.6 578.7
--------- ---------
Total Assets $ 5,561.7 $ 4,920.7
========= =========
Liabilities and Shareholders' Equity:
Insurance Reserves:
Life and Health $ 1,986.7 $ 1,567.5
Property and Casualty 463.0 468.5
--------- ---------
Total Insurance Reserves 2,449.7 2,036.0
--------- ---------
Investment Certificates 527.9 566.4
Notes Payable 82.5 81.1
Accrued Expenses and Other Liabilities 758.8 704.2
--------- ---------
Total Liabilities 3,818.9 3,387.7
--------- ---------
Shareholders' Equity:
Common Stock, $0.10 par value, 100 million Shares
Authorized; 41,184,280 and 37,584,928 Shares Issued
and Outstanding at June 30, 1998 and December 31, 1997 4.1 3.8
Paid-in Capital 445.3 217.8
Retained Earnings 1,228.3 1,209.7
Accumulated Other Comprehensive Income 65.1 101.7
--------- ---------
Total Shareholders' Equity 1,742.8 1,533.0
--------- ---------
Total Liabilities and Shareholders' Equity $ 5,561.7 $ 4,920.7
========= =========
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)
Six Months Ended
--------------------
June 30, June 30,
1998 1997
-------- --------
Operating Activities:
Net Income $ 112.2 $ 34.9
Adjustments to Reconcile Net Income to Net Cash Provided by Operations:
Change in Deferred Policy Acquisition Costs 8.4 6.8
Equity in Net (Income) Loss of Investees before Taxes (48.7) 8.4
Cash Dividends from Investee 0.6 0.5
Amortization of Fixed Maturities 11.4 11.3
Increase (Decrease) in Insurance Reserves and Unearned Premiums (4.2) 11.1
Increase (Decrease) in Accrued Expenses and Other Liabilities 8.6 (12.7)
Net Gains on Sales of Investments (66.5) (3.1)
Provision for Loan Losses 10.6 20.6
Other, Net 23.8 5.6
-------- --------
Net Cash Provided by Operating Activities 56.2 83.4
-------- --------
Investing Activities:
Sales and Maturities of Fixed Maturities 360.4 166.2
Purchases of Fixed Maturities (391.3) (261.9)
Sales and Redemptions of Equity Securities 83.0 14.8
Purchases of Equity Securities (13.9) (9.1)
Change in Consumer Finance Receivables 18.2 (19.9)
Change in Short-term Investments 0.5 6.9
Other, Net (5.0) (14.6)
-------- --------
Net Cash Provided (Used) by Investing Activities 51.9 (117.6)
-------- --------
Financing Activities:
Change in Investment Certificates (38.5) 47.8
Changes in Universal Life and Annuity Accounts 4.9 5.7
Notes Payable Proceeds 168.5 97.0
Notes Payable Payments (177.9) (53.4)
Cash Dividends Paid (48.9) (44.8)
Common Stock Repurchases (15.0) (20.7)
Other, Net 2.8 4.6
-------- --------
Net Cash Provided (Used) by Financing Activities (104.1) 36.2
-------- --------
Increase in Cash 4.0 2.0
Cash, Beginning of Year 14.5 17.0
-------- --------
Cash, End of Period $ 18.5 $ 19.0
======== ========
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 filed with the Commission for the year ended December
31, 1997. Prior year amounts have been reclassified to conform to the current
year's presentation.
Note 2 - Summary of Accounting Policies
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("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. Under SFAS No. 130, enterprises that provide
interim financial statements to shareholders should disclose total comprehensive
income. See Note 7 - Other Comprehensive Income and Supplemental Cash Flow
Information.
Effective January 1, 1998, the Company adopted 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." The Company's Life and Health
Insurance employee-agents also market certain property and casualty insurance
products under common management. Accordingly, the Company now includes the
results of those property casualty insurance products in its Life and Health
Insurance segment. Those products represent approximately 10 percent of
premiums in the Life and Health Insurance segment. It is the Company's
management practice to allocate certain corporate expenses to its operating
units. Consistent with that practice, the Company now includes those expenses
in the results of its operating segments.
Note 3 - Acquisition of The Reliable Life Insurance Company
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 3.8
million shares of Unitrin common stock and cash. The purchase price determined
in accordance with EITF No. 95-19, "Determination of the Measurement Date for
the Market Price of Securities Issued In a Purchased Business Combination," was:
(Dollars in Millions)
------------------------------------
Value of Unitrin Common Stock Issued $197.7
Cash and Other Transaction Costs 0.7
------
Purchase Price $198.4
======
4
Note 3 - Acquisition of The Reliable Life Insurance Company (Continued)
The acquisition has been accounted for by the purchase method and, accordingly,
the operations of Reliable are included in the Company's financial statements
from the date of acquisition. Based on the Company's preliminary allocation of
the purchase price, assets acquired and liabilities assumed in connection with
the acquisition of Reliable were:
(Dollars in Millions)
-------------------------------------
Investments $ 537.8
Cash 1.2
Receivables 14.3
Deferred Policy Acquisition Costs 112.5
Cost in Excess of Net Assets Acquired 10.6
Other Assets 34.8
Life and Health Insurance Reserves (415.8)
Notes Payable (10.8)
Accrued Expenses and Other Liabilities (86.2)
-------
Total Purchase Price $ 198.4
=======
Note 4 - Net Income Per Share
Net Income Per Share and Net Income Per Share Assuming Dilution determined in
accordance with SFAS No. 128, "Earnings Per Share" for the six and three months
ended June 30, 1998 and 1997 was as follows:
Six Months Three Months
Ended Ended
------------------------------ ------------------------------
June 30, June 30, June 30, June 30,
(Dollars and Shares in Millions, Except Per Share Amounts) 1998 1997 1998 1997
- ---------------------------------------------------------- -------------- -------------- -------------- --------------
Net Income $ 112.2 $ 34.9 $ 36.2 $ 1.2
Dilutive Effect on Net Income from
Investees' Equivalent Shares (0.7) (0.4) (0.3) (0.1)
-------------- -------------- -------------- --------------
Net Income Assuming Dilution $ 111.5 $ 34.5 $ 35.9 $ 1.1
============== ============== ============== ==============
Weighted Average Common Shares Outstanding 38.2 37.4 38.8 37.4
Dilutive Effect of Unitrin Stock Option Plans 0.2 0.2 0.2 0.2
-------------- -------------- -------------- --------------
Weighted Average Common Shares and
Equivalent Shares Outstanding Assuming Dilution 38.4 37.6 39.0 37.6
============== ============== ============== ==============
Net Income Per Share $ 2.94 $ 0.93 $ 0.93 $ 0.03
============== ============== ============== ==============
Net Income Per Share Assuming Dilution $ 2.90 $ 0.92 $ 0.92 $ 0.03
============== ============== ============== ==============
5
Note 5 - Investment in Investees
Unitrin accounts for its Investments in Investees (Curtiss-Wright Corporation,
Litton Industries, Inc. ("Litton"), UNOVA, Inc., and Western Atlas Inc.
("Western Atlas")) under the equity method of accounting using the most recent
publicly-available financial reports and other publicly-available information.
The Company's investments in Litton and Western Atlas exceeded 10% of
Shareholders' Equity at June 30, 1998. Summarized financial information for
Litton and 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 six and three month periods ended April 30, 1998 and 1997.
Summarized financial information reported by Litton for such periods was:
Six Months Ended Three Months Ended
---------------------------------- -------------------------------------
April 30, April 30, April 30, April 30,
(Dollars in Millions) 1998 1997 1998 1997
- --------------------------------------- ---------------- -------------- --------------- -----------------
Revenues $ 2,116.9 $ 2,056.1 $ 1,143.0 $ 1,095.6
================ ============== =============== =================
Cost of Sales $ 1,626.4 $ 1,615.0 $ 885.1 $ 864.6
================ ============== =============== =================
Income from Continuing Operations $ 87.4 $ 78.2 $ 46.8 $ 42.0
================ ============== =============== =================
Net Income $ 87.4 $ 78.2 $ 46.8 $ 42.0
================ ============== ================ =================
Based on the most recently available public information, Unitrin's voting
percentage in Litton common stock at June 30, 1998 was approximately 27.4%.
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 six and three month periods ended
March 31, 1998 and 1997. Summarized financial information reported by Western
Atlas for such periods was:
Six Months Ended Three Months Ended
---------------------------------- -------------------------------
March 31, March 31, March 31, March 31,
(Dollars in Millions) 1998 1997 1998 1997
- --------------------------------------- ---------------- -------------- ------------- --------------
Revenues $ 930.2 $ 764.0 $ 490.7 $ 379.9
================ ============== ============= ==============
Costs and Expenses $ 762.7 $ 666.8 $ 423.8 $ 345.0
================ ============== ============= ==============
Income from Continuing Operations $ 65.4 $ 34.9 $ 33.6 $ 16.1
================ ============== ============= ==============
Net Income $ 68.2 $ 67.4 $ 33.6 $ 30.8
================ ============== ============= ==============
Based on the most recently available public information, Unitrin's voting
percentage in Western Atlas common stock at June 30, 1998 was approximately
23.1%.
The Company's equity in the net income of Western Atlas for the six and three
months ended June 30, 1997 also includes an after-tax charge of $31.8 million
related primarily to Unitrin's proportionate share of Western Atlas' announced
charge for the write-off of in-process research and development activities.
Western Atlas' announced charges are reflected in the summarized financial
information for Western Atlas' nine and three month periods ending June 30,
1997.
6
Note 6 - 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 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
Cristi, Texas. On February 27, 1997, the court of appeals affirmed in part and
reversed in part the judgment of the trial court, reducing the judgment to $12.8
million plus interest, and remanding the case for a new trial on the plaintiffs'
claim of unconscionability. Trinity filed an application for writ of error in
the Supreme Court of Texas. On April 14, 1998, the Supreme Court of Texas
unanimously ruled in Trinity's favor and rendered a judgment that the
plaintiffs "take nothing." The Court's decision also eliminated the plaintiffs'
unconscionability claim. On June 5, 1998, the plaintiffs' request for re-hearing
was denied by the Supreme Court of Texas.
Note 7 - Other Comprehensive Income and Supplemental Cash Flow Information
Other Comprehensive Income related to the Company's investments in Fixed
Maturities and Equity Securities for the six months ended June 30, 1998 and 1997
was:
Six Months Ended Three Months Ended
------------------------- -------------------
June 30, June 30, June 30, June 30,
(Dollars in Millions) 1998 1997 1998 1997
- --------------------------------------------------------------------------- -------- -------- -------- --------
Increase (Decrease) in Unrealized Gains, Net of
Reclassification Adjustment for Gains Included in Net Income $(55.6) $(2.9) $10.8 $24.0
Effect of Income Taxes 19.0 1.0 (3.7) (8.5)
------ ----- ----- -----
Increase (Decrease) in Accumulated Other Comprehensive Income $(36.6) $(1.9) $ 7.1 $15.5
====== ===== ===== =====
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 six months ended June 30, 1998 and 1997 was $75.6
million and $33.0 million, respectively. Total Comprehensive Income for the
three months ended June 30, 1998 and 1997 was $43.3 million and $16.7 million,
respectively.
7
Note 8 - Business Segments
Segment Revenues and Operating Profit for the six and three months ended June
30, 1998 and 1997 were:
Six Months Ended Three Months Ended
--------------------------- -------------------------
June 30, June 30, June 30, June 30,
(Dollars in Millions) 1998 1997 1998 1997
- ---------------------------------------------------- --------- -------- -------- --------
Revenues:
Property and Casualty Insurance:
Premiums $336.7 $362.4 $165.8 $182.5
Net Investment Income 22.1 25.0 11.0 12.3
------ ------ ------ ------
Total Property and Casualty Insurance 358.8 387.4 176.8 194.8
------ ------ ------ ------
Life and Health Insurance:
Premiums 246.3 254.5 127.3 127.4
Net Investment Income 64.9 62.9 34.4 31.9
------ ------ ------ ------
Total Life and Health Insurance 311.2 317.4 161.7 159.3
------ ------ ------ ------
Consumer Finance 56.4 63.8 28.1 32.4
------ ------ ------ ------
Total Segment Revenues 726.4 768.6 366.6 386.5
------ ------ ------ ------
Net Gains on Sales of Investments 66.5 3.1 5.6 1.8
Other - 0.9 (0.2) 2.2
------ ------ ------ ------
Total Revenues $792.9 $772.6 $372.0 $390.5
====== ====== ====== ======
Income before Income Taxes and
Equity in Net Income of Investees:
Property and Casualty Insurance $ 22.8 $ 29.0 $ 4.0 $ 10.5
Life and Health Insurance 23.4 25.1 15.9 14.3
Consumer Finance 11.0 4.2 5.1 1.0
------ ------ ------ ------
Total Segment Operating Profit 57.2 58.3 25.0 25.8
------ ------ ------ ------
Net Gains on Sales of Investments 66.5 3.1 5.6 1.8
Other, Net Income (Expense) (1.7) (1.7) (1.1) 0.6
------ ------ ------ ------
Income before Income Taxes and
Equity in Net Income of Investees $122.0 $ 59.7 $ 29.5 $ 28.2
====== ====== ====== ======
8
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Property and Casualty Insurance
Six Months Ended Three Months Ended
-------------------- --------------------
June 30, June 30, June 30, June 30,
(Dollars in Millions) 1998 1997 1998 1997
- ------------------------------------ ------- -------- -------- --------
Premiums $336.7 $362.4 $165.8 $182.5
Net Investment Income 22.1 25.0 11.0 12.3
------ ------ ------ ------
Total Revenues $358.8 $387.4 $176.8 $194.8
====== ====== ====== ======
Operating Profit $ 22.8 $ 29.0 $ 4.0 $ 10.5
====== ====== ====== ======
Premiums in the Property and Casualty Insurance segment decreased by $25.7
million and $16.7 million, respectively, for the six and three months ended June
30, 1998, compared to the same periods in 1997 due primarily to lower volume of
automobile insurance. The Company anticipates that Premiums in the Property and
Casualty Insurance segment will continue to decrease for the remaining six
months of 1998, compared to the same period in 1997. Net Investment Income in
the Property and Casualty Insurance segment decreased $2.9 million and $1.3
million, respectively, due to lower yields on investments and a lower level of
investments. Operating Profit in the Property and Casualty Insurance segment
decreased by $6.2 million and $6.5 million, respectively. Losses directly
attributable to storms increased by $8.1 million and $3.9 million, respectively.
Life and Health Insurance
Six Months Ended Three Months Ended
-------------------- --------------------
June 30, June 30, June 30, June 30,
(Dollars in Millions) 1998 1997 1998 1997
- ------------------------------------ ------- -------- -------- --------
Premiums $246.3 $254.5 $127.3 $127.4
Net Investment Income 64.9 62.9 34.4 31.9
------ ------ ------ ------
Total Revenues $311.2 $317.4 $161.7 $159.3
====== ====== ====== ======
Operating Profit $ 23.4 $ 25.1 $ 15.9 $ 14.3
====== ====== ====== ======
Premiums in the Life and Health Insurance segment decreased by $8.2 million and
$0.1 million, respectively, for the six and three months ended June 30, 1998,
compared to the same periods in 1997 due primarily to lower volume, partially
offset by premiums of $9.4 million resulting from the acquisition of The
Reliable Life Insurance Company ("Reliable") See Note 3 Acquisition of The
Reliable Life Insurance Company. Operating Profit in the Life and Health
Insurance segment decreased by $1.7 million for the six months ended June 30,
1998, compared to the same period in 1997 due primarily to costs associated with
the elimination of certain management and administrative positions and lower
amortization of gains deferred on the ceding of certain in-force business,
partially offset by Operating Profit resulting from the acquisition of Reliable.
Operating Profit in the Life and Health Insurance segment increased by $1.6
million for the three months ended June 30, 1998, compared to the same period in
1997 due primarily to the Reliable acquisition.
On July 13, 1998, the Company announced that its subsidiary, United Insurance
Company of America, had entered into an agreement to acquire NationalCare
Insurance Company ("NationalCare") and its wholly-owned subsidiary, Reserve
National Insurance Company ("Reserve National"), in a cash transaction.
NationalCare and Reserve National specialize in the sale of limited benefit
accident and health insurance products to persons primarily in rural areas. For
the year ended December 31,1997, NationalCare and Reserve National had statutory
premium revenues of approximately $115 million and assets of approximately $125
million. The acquisition is subject to various regulatory approvals and to
approval by the shareholders of NationalCare, which is privately held. The
acquisition is expected to close at or about the end of the third quarter. The
acquisition will be accounted for by the purchase method and, accordingly,
NationalCare and Reserve National's operations will be included in the Company's
financial statements from the date of acquisition.
9
Consumer Finance
Six Months Ended Three Months Ended
---------------------------------- -----------------------------
June 30, June 30, June 30, June 30,
(Dollars in Millions) 1998 1997 1998 1997
- ------------------------------------ ------- -------- -------- --------
Revenues $56.4 $63.8 $28.1 $32.4
===== ===== ===== =====
Operating Profit $11.0 $ 4.2 $ 5.1 $ 1.0
===== ===== ===== =====
Revenues in the Consumer Finance segment decreased by $7.4 million and $4.3
million, respectively, for the six and three months ended June 30, 1998,
compared to the same periods in 1997, as a result of a lower level of loans
outstanding. Operating Profit in the Consumer Finance segment increased by $6.8
million and $4.1 million, respectively, due primarily to lower provision for
loan losses.
Net Gains on Sales of Investments
Net Gains on Sales of Investments were $66.5 million and $5.6 million,
respectively, for the six and three months ended June 30, 1998, compared to $3.1
million and $1.8 million, respectively, for the same periods in 1997. Net Gains
on Sales of Investments for the second quarter of 1998 included the sale of
certain investment real estate. Net Gains on Sales of Investments increased for
the first quarter of 1998 due primarily to the redemption of the Company's
investment in Navistar International Corporation ("Navistar") $6.00 Cumulative
Convertible Preferred Stock, Series G and the disposition of the Company's
investment in ITT Corporation ("ITT") common stock. The Company cannot
anticipate when or if similar investment gains or losses may occur in the
future.
Year 2000
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. Some of the Company's computer systems are already
Year 2000 compliant. However, certain of the Company's computer systems use 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 would in many cases be 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 recognizes that the computer systems used by these businesses must be
Year 2000 compliant by December 31, 1999 and, in some instances, well in advance
of that date (e.g., by January 1999 in the case of certain property and casualty
insurance policies with one-year terms expiring on or after January 1, 2000).
The Company is taking steps it deems appropriate to meet this challenge,
including rewriting existing computer applications to be Year 2000 compliant and
replacing other existing computer applications with new applications that
improve functionality in addition to being Year 2000 compliant. The Company is
also reviewing the Year 2000 issue with key service providers. The goal of the
Company and its operating companies is to be substantially "Year 2000" compliant
by March 31, 1999, although there can be no assurances that this goal will be
met. If one or more of the Company's operating companies, key service providers
or investee companies fails to make its computer systems Year 2000 compliant by
the necessary dates, such failure could adversely affect the Company's
operations and financial results.
Expense recognized directly related to rewriting existing applications or
replacing existing applications with new Year 2000 compliant applications
totaled $4.7 million and $3.0 million for the six months ended June 30, 1998 and
1997, respectively. Expense recognized directly related to rewriting existing
applications or replacing existing applications with new Year 2000 compliant
applications totaled $2.3 million and $1.9 million for the three months ended
June 30, 1998 and 1997, respectively.
Equity in Net Income of Investees
Equity in Net Income of Investees was income of $31.6 million and $16.4 million,
respectively, for the six and three months ended June 30, 1998, compared to a
loss of $5.3 million and $18.1 million, respectively, for the same periods in
1997. Equity in Net Income of Investees for the six and three months ended June
30, 1997 includes an after-tax charge of $31.8 million primarily related to
Unitrin's proportionate share of an investee's announced charge for the write-
off of in-process research and development activities.
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Equity in Net Income of Investees (Continued)
Baker Hughes Incorporated ("Baker Hughes") and Western Atlas are parties to a
merger agreement whereby, based on the price of Baker Hughes common stock, Baker
Hughes would issue between approximately 2.3 shares and 2.7 shares of Baker
Hughes common stock in exchange for each share of Western Atlas common stock
outstanding. If the announced merger is completed based on current merger terms
and market conditions, the Company expects to recognize an after-tax accounting
gain in the range of $400 million to $500 million, or $10 per common share to
$12 per common share. The amount of the gain is dependent on the number of
shares of Baker Hughes common stock ultimately issued to Western Atlas
shareholders in the transaction, as well as the price of Baker Hughes common
stock at the closing date. The Company owns approximately 12.7 million shares of
Western Atlas common stock. It is expected that the transaction will be tax-free
to the Company.
The Company currently owns approximately 23.1% of Western Atlas' outstanding
common stock and, accordingly accounts for its investment in Western Atlas under
the equity method of accounting. If the Baker Hughes-Western Atlas merger is
completed, the Company's ownership percentage of the newly combined company
would decrease to the range of 10% to 11% and the Company would no longer apply
the equity method of accounting. As a result of this change, the Company expects
that its annual net income would decrease by approximately $6.5 million based
upon Western Atlas' net income from continuing operations for the trailing
twelve-month period ended June 30, 1998 and assuming that Baker Hughes continues
to pay dividends after the merger at its current rate.
Other Items
Other, Net Income (Expense) decreased by $1.7 million for the three months ended
June 30, 1998, compared to the same period in 1997, due primarily to lower
corporate investment income resulting from the redemption of the Company's
investment in Navistar, partially offset by lower interest expense.
During the first six months of 1998, the Company repurchased 219,000 shares of
its common stock in open market transactions at an aggregate cost of $15.0
million. The repurchases were made with general corporate funds. At June 30,
1998, the Company had approximately 2.6 million shares remaining under the
existing Board of Directors repurchase authorizations.
At June 30, 1998, the unused commitment under the Company's revolving credit
facility was $264.0 million. In addition, for the remainder of 1998, the
Company's subsidiaries would be able to pay approximately $247.3 million in
dividends to the Company without prior regulatory approval.
Accounting Changes
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("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. Under SFAS No. 130, enterprises that provide
interim financial statements to shareholders should disclose total comprehensive
income. See Note 7 - Other Comprehensive Income and Supplemental Cash Flow
Information.
Effective January 1, 1998, the Company adopted 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." The Company's Life and Health
Insurance employee-agents also market certain property and casualty insurance
products under common management. Accordingly, the Company now includes the
results of those property casualty insurance products in its Life and Health
Insurance segment. Those products represent approximately 10 percent of premiums
in the Life and Health Insurance segment. It is the Company's management
practice to allocate certain corporate expenses to its operating units.
Consistent with that practice, the Company now includes those expenses in the
results of its operating segments.
In February 1998, the Financial Accounting Standards Board issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS
No. 132 supersedes the disclosure requirements of SFAS No. 87, "Employers'
Accounting for Pensions," SFAS No. 88, "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and Termination Benefits," and
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." SFAS No. 132 is effective for fiscal years beginning after December
15, 1997. SFAS No. 132 does not address measurement or recognition and,
accordingly, has no effect on the Company's financial position or results of
operation.
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Accounting Changes (Continued)
In June 1998, the Financial Accounting Standards Board issued 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.
SFAS No. 133 is effective for years beginning after June 15, 1999, with earlier
adoption permitted. The Company believes that the effect of adoption of SFAS No.
133 will not be material.
In March 1998, the American Institute of Certified Public Accountants issued SOP
No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." SOP 98-1 requires companies to capitalize qualifying computer
software costs incurred during the application development stage. SOP No. 98-1
is effective for fiscal years beginning after December 31, 1998, with earlier
adoption permitted. The Company intends to adopt SOP No. 98-1 in 1999. The
Company has not determined the effect of adoption.
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)," "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), 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.
12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Information concerning pending legal proceedings is incorporated herein by
reference to Note 6 to the Condensed Consolidated Financial Statements
(Unaudited) in Part I of this Form 10-Q.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of Unitrin, Inc. was held on May 13, 1998 for
the purpose of electing eight directors and to consider and act upon a proposal
to approve the Unitrin, Inc. 1998 Bonus Plan for Senior Executives (the "Plan").
The final tabulation for each of the eight nominees for director is as follows:
Votes Votes
Nominee For Withheld
- -------------------------------- ---------------- ----------------
James E. Annable 33,447,708 395,816
Reuben L. Hedlund 33,450,967 392,557
Jerrold V. Jerome 33,443,663 399,861
William E. Johnston, Jr. 33,214,348 629,176
George A. Roberts 33,424,155 419,369
Fayez S. Sarofim 33,444,688 398,836
Henry E. Singleton 32,100,502 1,743,022
Richard C. Vie 33,445,022 398,502
Shareholders approved the Plan by the following votes: 31,450,094 votes for
approval, 1,756,800 votes against, and 636,630 votes abstained.
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 Unitrin'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
Annual Report on Form 10-K for the year ended December 31, 1995.)
10.2 Unitrin, Inc. 1997 Stock Option Plan (Incorporated herein by
reference to Exhibit A if the Company's Proxy Statement, dated April
9, 1997, in connection with Unitrin's annual meeting of
shareholders.)
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 September 30,
1995.)
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.)
13
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)
Donald G. Southwell (Vice President)
(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.)
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 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 Unitrin'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 10.9 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.)
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the quarter ended
June 30, 1998.
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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: August 3, 1998 /s/ Richard C. Vie
-------------------------------------
Richard C. Vie
President and Chief Executive Officer
Date: August 3, 1998 /s/ Richard Roeske
-------------------------------------
Richard Roeske
Corporate Controller
(Principal Accounting Officer)
15