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, 1998
----------------------------------------------------
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
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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
---------- ----------
39,625,613 shares of common stock, $0.10 par value, were outstanding as of
September 30, 1998.
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, 1998 and 1997 (Unaudited).
Condensed Consolidated Balance Sheets as of 2
September 30, 1998 (Unaudited) and
December 31, 1997.
Condensed Consolidated Statements of Cash 3
Flows for the Nine Months Ended
September 30, 1998 and 1997 (Unaudited).
Notes to the Condensed Consolidated 4-8
Financial Statements (Unaudited).
Item 2. Management's Discussion and Analysis of 9-13
Results of Operations and Financial Condition.
PART II. Other Information.
Item 1. Legal Proceedings. 14
Item 6. Exhibits and Reports on Form 8-K. 14
Signatures 15
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,
1998 1997 1998 1997
--------- --------- --------- ---------
Revenues:
Premiums $ 896.5 $ 924.2 $313.5 $307.3
Consumer Finance Revenues 84.8 95.2 28.4 31.4
Net Investment Income 135.3 132.6 48.3 43.8
Net Gains on Sales of Investments 554.6 3.2 488.1 0.1
-------- -------- ------ ------
Total Revenues 1,671.2 1,155.2 878.3 382.6
-------- -------- ------ ------
Expenses:
Insurance Claims and Policyholders' Benefits 580.7 600.2 202.1 201.8
Insurance Expenses 374.6 362.6 134.8 117.1
Consumer Finance Expenses 71.1 89.9 24.2 27.3
Interest and Other Expenses 9.0 9.3 3.4 2.9
-------- -------- ------ ------
Total Expenses 1,035.4 1,062.0 364.5 349.1
-------- -------- ------ ------
Income before Income Taxes and Equity
in Net Income of Investees 635.8 93.2 513.8 33.5
Income Tax Expense 221.5 31.8 180.1 12.3
-------- -------- ------ ------
Income before Equity in Net Income of Investees 414.3 61.4 333.7 21.2
Equity in Net Income of Investees 49.8 10.5 18.2 15.8
-------- -------- ------ ------
Net Income $ 464.1 $ 71.9 $351.9 $ 37.0
======== ======== ====== ======
Net Income Per Share $ 11.92 $ 1.92 $ 8.72 $ 0.99
======== ======== ====== ======
Net Income Per Share Assuming Dilution $ 11.85 $ 1.89 $ 8.69 $ 0.97
======== ======== ====== ======
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,
1998 1997
------------- ------------
(Unaudited)
Assets:
Investments:
Fixed Maturities at Fair Value (Amortized
Cost: 1998 - $2,697.3; 1997 - $2,274.4) $2,789.8 $2,315.4
Equity Securities at Fair Value
(Cost: 1998 - $831.0; 1997 - $131.0) 893.4 245.7
Investees at Cost Plus Cumulative Undistributed Earnings
(Fair Value: 1998 - $1,144.6; 1997 - $2,031.7) 563.4 705.8
Other 239.0 181.6
-------- --------
Total Investments 4,485.6 3,448.5
-------- --------
Cash 10.6 14.5
Consumer Finance Receivables 524.5 543.6
Other Receivables 301.0 335.4
Deferred Policy Acquisition Costs 340.5 237.1
Other Assets 476.9 341.6
-------- --------
Total Assets $6,139.1 $4,920.7
======== ========
Liabilities and Shareholders' Equity:
Insurance Reserves:
Life and Health $1,995.7 $1,567.5
Property and Casualty 463.0 468.5
-------- --------
Total Insurance Reserves 2,458.7 2,036.0
-------- --------
Investment Certificates 529.8 566.4
Accrued and Deferred Income Taxes 435.1 187.8
Notes Payable 185.4 81.1
Accrued Expenses and Other Liabilities 526.1 516.4
-------- --------
Total Liabilities 4,135.1 3,387.7
-------- --------
Shareholders' Equity:
Common Stock, $0.10 par value, 100 million Shares Authorized;
39,625,613 and 37,584,928 Shares Issued and Outstanding at
September 30, 1998 and December 31, 1997 4.0 3.8
Paid-in Capital 430.8 217.8
Retained Earnings 1,468.6 1,209.7
Accumulated Other Comprehensive Income 100.6 101.7
-------- --------
Total Shareholders' Equity 2,004.0 1,533.0
-------- --------
Total Liabilities and Shareholders' Equity $6,139.1 $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)
Nine Months Ended
------------------------------
September 30, September 30,
1998 1997
------------- -------------
Operating Activities:
Net Income $ 464.1 $ 71.9
Adjustments to Reconcile Net Income to Net Cash
Provided by Operations:
Change in Deferred Policy Acquisition Costs 9.1 13.4
Equity in Net Income of Investees before Taxes (76.2) (15.7)
Cash Dividends from Investee 1.1 1.1
Amortization of Investments 17.5 17.1
Increase in Insurance Reserves and Unearned Premiums 1.1 19.1
Increase in Accrued and Deferred Income Taxes 205.3 4.7
Decrease in Accrued Expenses and Other Liabilities (6.5) (20.5)
Net Gains on Sales of Investments (554.6) (3.2)
Provision for Loan Losses 16.7 28.5
Other, Net 32.5 9.0
-------- --------
Net Cash Provided by Operating Activities 110.1 125.4
-------- --------
Investing Activities:
Sales and Maturities of Fixed Maturities 498.5 313.6
Purchases of Fixed Maturities (464.7) (426.0)
Sales and Redemptions of Equity Securities 90.8 38.2
Purchases of Equity Securities (17.9) (12.2)
Acquisition of Reserve National (98.5) -
Change in Consumer Finance Receivables 4.2 3.2
Change in Short-term Investments 13.7 5.7
Other, Net (17.6) (27.2)
-------- --------
Net Cash Provided (Used) by Investing Activities 8.5 (104.7)
-------- --------
Financing Activities:
Change in Investment Certificates (36.6) 15.8
Changes in Universal Life and Annuity Accounts 7.7 8.5
Notes Payable Proceeds 367.9 380.0
Notes Payable Payments (274.4) (345.5)
Cash Dividends Paid (75.1) (67.3)
Common Stock Repurchases (115.4) (20.7)
Other, Net 3.4 9.2
-------- --------
Net Cash Used by Financing Activities (122.5) (20.0)
-------- --------
Increase (Decrease) in Cash (3.9) 0.7
Cash, Beginning of Year 14.5 17.0
-------- --------
Cash, End of Period $ 10.6 $ 17.7
======== ========
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.
Certain 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 Businesses
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 Businesses (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
=======
On September 30, 1998, United Insurance Company of America, a subsidiary of the
Company, completed its acquisition of NationalCare Insurance Company
("NationalCare") and its wholly-owned subsidiary, Reserve National Insurance
Company ("Reserve National"), in a cash transaction for $98.5 million. 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 has been 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. The Company has
not yet allocated the purchase price to the net assets acquired. Accordingly,
the entire purchase price has been reflected in Other Assets in the Condensed
Consolidated Balance Sheet at September 30, 1998.
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 nine and three months
ended September 30, 1998 and 1997 was as follows:
Nine Months Ended Three Months Ended
------------------------------- --------------------------------
(Dollars and Shares in Millions, September 30, September 30, September 30, September 30,
Except Per Share Amounts) 1998 1997 1998 1997
- --------------------------------------------- ------------- ------------- -------------- -------------
Net Income $464.1 $71.9 $351.9 $37.0
Dilutive Effect on Net Income from
Investees' Equivalent Shares (1.0) (0.7) (0.3) (0.3)
----------- ------------- -------------- -------------
Net Income Assuming Dilution $463.1 $71.2 $351.6 $36.7
=========== ============= ============== =============
Weighted Average Common Shares Outstanding 38.9 37.4 40.4 37.5
Dilutive Effect of Unitrin Stock Option Plans 0.2 0.2 0.1 0.2
----------- ------------- -------------- -------------
Weighted Average Common Shares and
Equivalent Shares Outstanding Assuming Dilution 39.1 37.6 40.5 37.7
=========== ============= ============== =============
Net Income Per Share $11.92 $1.92 $ 8.72 $0.99
=========== ============= ============== =============
Net Income Per Share Assuming Dilution $11.85 $1.89 $ 8.69 $0.97
=========== ============= ============== =============
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 December 31, 1997. 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 nine and three month periods ended July 31, 1998 and 1997.
Summarized financial information reported by Litton for such periods was:
Nine Months Ended Three Months Ended
------------------ ------------------
July 31, July 31, July 31, July 31,
(Dollars in Millions) 1998 1997 1998 1997
- --------------------------------------- -------- -------- -------- --------
Revenues $3,360.9 $3,126.7 $1,244.0 $1,070.6
======== ======== ======== ========
Cost of Sales $2,590.5 $2,441.7 $ 964.1 $ 826.7
======== ======== ======== ========
Income from Continuing Operations $ 137.9 $ 122.2 $ 50.5 $ 44.0
======== ======== ======== ========
Net Income $ 137.9 $ 122.2 $ 50.5 $ 44.0
======== ======== ======== ========
Based on the most recently available public information, Unitrin's voting
percentage in Litton common stock at September 30, 1998 was 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 ended
June 30, 1998 and 1997. Summarized financial information reported by Western
Atlas for such periods was:
Nine Months Ended Three Months Ended
------------------- -------------------
June 30, June 30, June 30, June 30,
(Dollars in Millions) 1998 1997 1998 1997
- ---------------------------------- -------- -------- -------- --------
Revenues $1,476.9 $1,182.5 $546.7 $ 418.5
======== ======== ====== =======
Costs and Expenses $1,233.9 $1,037.8 $471.2 $ 371.0
======== ======== ====== =======
Income from Continuing Operations $ 101.7 $ 51.5 $ 36.3 $ 16.6
======== ======== ====== =======
Net Income $ 104.5 $ (102.6) $ 36.3 $(170.0)
======== ======== ====== =======
6
Note 5 - Investment in Investees (Continued)
In August 1998, the Company exchanged its investment in its investee, Western
Atlas, for common stock in Baker Hughes Incorporated ("Baker Hughes") upon the
acquisition of Western Atlas by Baker Hughes in a merger transaction. Revenues
for the nine and three months ended September 30, 1998 include an accounting
gain of $487.4 million resulting from the merger of Western Atlas into Baker
Hughes.
Prior to the merger of Western Atlas into Baker Hughes, the Company owned
approximately 23.1% of Western Atlas and accounted for its investment in Western
Atlas under the equity method of accounting. Accordingly, Equity in Net Income
of Investees for the nine and three months ended September 30, 1998 includes the
Company's proportionate share of Western Atlas' income earned prior to the
merger. As a result of the merger, the Company owns approximately 11% of Baker
Hughes common stock. Since the Company owns less than 20% of Baker Hughes, the
equity method does not apply and, accordingly, the Company does not record a
pro-rata share of Baker Hughes' reported earnings in the Company's earnings.
The Company's equity in the net income of Western Atlas for the nine months
ended September 30, 1997 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.
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 judgement 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 nine and three months ended September
30, 1998 and 1997 was:
Nine Months Ended Three Months Ended
----------------------------- -----------------------
Sept. 30, Sept. 30, Sept. 30, Sept 30,
(Dollars in Millions) 1998 1997 1998 1997
- ---------------------------------------------------------------- ------------ ---------- --------- --------
Increase (Decrease) in Unrealized Gains, Net of
Reclassification Adjustment for Gains Included in Net Income $(0.8) $20.2 $ 54.8 $23.1
Effect of Income Taxes (0.3) (7.2) (19.3) (8.2)
----- ----- ------ -----
Increase (Decrease) in Accumulated Other Comprehensive Income $(1.1) $13.0 $ 35.5 $14.9
===== ===== ====== =====
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 nine months ended September 30, 1998 and 1997 was
$463.0 million and $84.9 million, respectively. Total Comprehensive Income for
the three months ended September 30, 1998 and 1997 was $387.4 million and $51.9
million, respectively.
7
Note 8 -- Business Segments
Segment Revenues and Operating Profit for the nine and three months ended
September 30, 1998 and 1997 were:
Nine Months Ended Three Months Ended
------------------------------------ -------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept 30,
(Dollars in Millions) 1998 1997 1998 1997
- ---------------------------------------------------- --------------- ---------------- ------------- -------------
Revenues:
Property and Casualty Insurance:
Premiums $ 495.4 $ 544.8 $158.7 $182.4
Net Investment Income 33.0 37.2 10.9 12.2
--------------- ---------------- ------------- -------------
Total Property and Casualty Insurance 528.4 582.0 169.6 194.6
--------------- ---------------- ------------- -------------
Life and Health Insurance:
Premiums 401.1 379.4 154.8 124.9
Net Investment Income 103.3 93.6 38.4 30.7
--------------- ---------------- ------------- -------------
Total Life and Health Insurance 504.4 473.0 193.2 155.6
--------------- ---------------- ------------- -------------
Consumer Finance 84.8 95.2 28.4 31.4
--------------- ---------------- ------------- -------------
Total Segment Revenues 1,117.6 1,150.2 391.2 381.6
--------------- ---------------- ------------- -------------
Net Gains on Sales of Investments 554.6 3.2 488.1 0.1
Other (1.0) 1.8 (1.0) 0.9
--------------- ---------------- ------------- -------------
Total Revenues $1,671.2 $1,155.2 $878.3 $382.6
=============== ================ ============= =============
Income before Income Taxes and
Equity in Net Income of Investees:
Property and Casualty Insurance $ 26.1 $ 39.0 $ 3.3 $ 10.0
Life and Health Insurance 43.6 43.8 20.2 18.7
Consumer Finance 15.5 9.7 4.5 5.5
--------------- ---------------- ------------- -------------
Total Segment Operating Profit 85.2 92.5 28.0 34.2
--------------- ---------------- ------------- -------------
Net Gains on Sales of Investments 554.6 3.2 488.1 0.1
Other, Net (4.0) (2.5) (2.3) (0.8)
--------------- ---------------- ------------- -------------
Income before Income Taxes and
Equity in Net Income of Investees $ 635.8 $ 93.2 $513.8 $ 33.5
=============== ================ ============= =============
8
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Property and Casualty Insurance
Nine Months Ended Three Months Ended
------------------------------- --------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Dollars in Millions) 1998 1997 1998 1997
- ------------------------------------ ------------- ------------- ------------- --------------
Premiums $ 495.4 $ 544.8 $ 158.7 $ 182.4
Net Investment Income 33.0 37.2 10.9 12.2
------------- ------------- ------------- --------------
Total Revenues $ 528.4 $ 582.0 $ 169.6 $ 194.6
============= ============= ============= ==============
Operating Profit $ 26.1 $ 39.0 $ 3.3 $ 10.0
============= ============= ============= ==============
Premiums in the Property and Casualty Insurance segment decreased by $49.4
million and $23.7 million, respectively, for the nine and three months ended
September 30, 1998, compared to the same periods in 1997 due primarily to lower
volume, principally the result of the planned cancellation of certain agencies.
The Company anticipates that Premiums in the Property and Casualty Insurance
segment will continue to decrease as a result of the planned cancellation of
certain agencies. Operating Profit in the Property and Casualty Insurance
segment decreased by $12.9 million and $6.7 million, respectively. Losses
directly attributable to storms increased by $13.2 million and $5.1 million,
respectively.
Life and Health Insurance
Nine Months Ended Three Months Ended
------------------------------- --------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Dollars in Millions) 1998 1997 1998 1997
- ------------------------------------ ------------- ------------- ------------- --------------
Premiums $ 401.1 $ 379.4 $ 154.8 $ 124.9
Net Investment Income 103.3 93.6 38.4 30.7
------------- ------------- ------------- --------------
Total Revenues $ 504.4 $ 473.0 $ 193.2 $ 155.6
============= ============= ============= ==============
Operating Profit $ 43.6 $ 43.8 $ 20.2 $ 18.7
============= ============= ============= ==============
Premiums in the Life and Health Insurance segment increased by $21.7 million and
$29.9 million, respectively, for the nine and three months ended September 30,
1998, compared to the same periods in 1997 due primarily to premiums resulting
from the acquisition of The Reliable Life Insurance Company ("Reliable") -- See
Note 3 Acquisition of Businesses, partially offset by lower volume. Operating
Profit in the Life and Health Insurance segment decreased by $0.2 million for
the nine months ended September 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 $1.5 million for the three months ended September
30, 1998, compared to the same period in 1997 due primarily to the Reliable
acquisition.
On September 30, 1998, United Insurance Company of America, a subsidiary of the
Company, completed its acquisition of NationalCare Insurance Company
("NationalCare") and its wholly-owned subsidiary, Reserve National Insurance
Company ("Reserve National"), in a cash transaction for $98.5 million.
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 has been 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. The Company has not yet allocated the purchase price to the net
assets acquired. Accordingly, the entire purchase price has been reflected in
Other Assets in the Condensed Consolidated Balance Sheet at September 30, 1998.
9
Consumer Finance
Nine Months Ended Three Months Ended
------------------------------- --------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Dollars in Millions) 1998 1997 1998 1997
- ------------------------------------ ------------- ------------- ------------- --------------
Revenues $ 84.8 $ 95.2 $ 28.4 $ 31.4
============= ============= ============= ==============
Operating Profit $ 15.5 $ 9.7 $ 4.5 $ 5.5
============= ============= ============= ==============
Revenues in the Consumer Finance segment decreased by $10.4 million and $3.0
million, respectively, for the nine and three months ended September 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 $5.8
million for the nine months ended September 30, 1998, compared to same period in
1997 due primarily to lower provision for loan losses. Operating Profit in the
Consumer Finance segment decreased by $1.0 million for the three months ended
September 30, 1998, compared to the same period in 1997 due primarily to the
lower level of loans outstanding.
Net Gains on Sales of Investments
Net Gains on Sales of Investments were $554.6 million and $488.1 million,
respectively, for the nine and three months ended September 30, 1998, compared
to $3.2 million and $0.1 million, respectively, for the same periods in 1997.
Net Gains on Sales of Investments for the third quarter of 1998 includes an
accounting gain of $487.4 million as a result of the Company's exchange of its
investment in its investee, Western Atlas Inc. ("Western Atlas"), for common
stock in Baker Hughes Incorporated ("Baker Hughes") upon the acquisition of
Western Atlas by Baker Hughes in a merger transaction -- See Note 5 Investment
in Investees. Net Gains on Sales of Investments for the nine months ended
September 30, 1998 also includes gains primarily resulting from 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 in many cases might 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 the end of 1998 in the case of certain property and
casualty insurance policies with one-year terms expiring on or after January 1,
2000). To meet this challenge, the Company and its subsidiaries have instituted
a four-phase Year 2000 program:
1) Assessment -- Identifying all hardware, software and key service
providers posing a Year 2000 exposure and the prioritizing of related
Year 2000 projects;
2) Remediation and Conversion -- Procuring replacement Year 2000
compliant hardware or software (including improvements in
functionality in addition to being Year 2000 compliant) or modifying
existing software to be Year 2000 compliant;
3) Validation -- Testing and certification, including review of
documented remediation work and test results by technical project
teams and key users, of all such critical hardware and software;
4) Production -- Installing and placing into production all such critical
new or remediated hardware and software.
Each of the Company's business segments is responsible for developing and
implementing detailed project plans to address its Year 2000 exposure. Each
business segment's progress is monitored and reviewed by the Company's Year 2000
Certification Team. The Company's Year 2000 Certification Team is comprised of
senior members of the Company Information Systems Audit Group and Data Systems
Group and reports to the Company's senior management and Board of Directors on a
regular basis. In addition, the Company's insurance subsidiaries are subject to
oversight by state insurance regulatory bodies and its consumer finance
subsidiary is subject to oversight by the FDIC.
10
Year 2000 (Continued)
Each of the Company's business segments has completed the Assessment Phase and
is in varying stages of completion for the remaining phases. The Company's
Property and Casualty Insurance segment has substantially completed all four
phases for its mission critical projects and has completed all four phases for
50% of its non-mission critical projects. For purposes of this Year 2000
discussion, the term "mission critical" refers to key business functions, such
as the processing of business transactions, regulatory compliance and archival
of important records, upon which the Company is materially dependent.
The Company's Life and Health Insurance segment has completed all four phases
for 45% of its mission critical projects and all four phases for 50% of its non-
mission critical projects. Approximately 55% of the Company's Life and Health
Insurance segment's mission critical projects are in the Remediation and
Conversion Phase. The Company's Life and Health Insurance segment is comprised
primarily of three separate business units operating in different geographical
regions and offering similar insurance policies using employee-agents. Each
business unit has its unique set of mission critical applications which it uses
to process transactions. Should one or two of these business units not achieve
Year 2000 compliance, the Company contingently plans to transfer the processing
of that business unit's transactions to another of the Company's Life and Health
Insurance segment's business units and process transactions manually until the
transfer is complete.
The Company's Consumer Finance segment outsources its mission critical data
processing to Fiserv, Inc. ("Fiserv"). As a provider of third party data
processing services to the banking and financial services industry, Fiserv and
the data processing services it provides are subject to limited oversight by the
FDIC. By the end of the first quarter of 1999, the Company's Consumer Finance
segment is scheduled to migrate from its current Fiserv system to another system
that Fiserv is modifying to be Year 2000 compliant. Should the migration of the
Company's Consumer Finance segment be unsuccessful, the Company contingently
intends to off-load all customer loan and deposit records prior to January 1,
2000 and process customer loans and deposits manually on ledger cards maintained
at its 36 branch offices.
The Company has not identified any Year 2000 problems associated with non-
information technology systems (e.g. telephone systems, elevators, etc.) that
have not either been remediated or replaced, or scheduled to be remediated or
replaced prior to January 1, 2000, or which are likely to pose any material
risks to the Company's operations.
The Company is also reviewing the Year 2000 issue with key service providers,
including banks, brokers and investment custodians, and continually updating its
risk assessment, readiness evaluation, action plans and contingency plans
related to these service providers. In addition the Company is reviewing the
Year 2000 issue as it relates to its investee companies (Curtiss-Wright, Litton
and UNOVA; the "Investees") as well as its significant investment in Baker
Hughes by reviewing public disclosures concerning Year 2000 readiness made by
such companies. The Company has no representatives on any of the Investees' or
Baker Hughes' boards of directors and does not otherwise participate in the
management of the Investees or Baker Hughes. Accordingly, the Company does not
possess any non-public information concerning, assumes no responsibility for,
and has no contingency plans for, Year 2000 compliance by the Investees or Baker
Hughes.
The goal of the Company is for its Property and Casualty Insurance segment to be
substantially Year 2000 compliant by December 31, 1998, for its Consumer Finance
segment to be substantially Year 2000 compliant by March 31, 1999, and for its
Life and Health Insurance segment to be substantially Year 2000 compliant by
June 30, 1999. However, there can be no assurances that this goal will be met.
If one or more of the Company's business segments, key service providers or
investee companies fails to make its computer systems Year 2000 compliant by the
necessary dates, notwithstanding contingency plans currently contemplated, such
failure could materially adversely affect the Company's operations and financial
results.
Each of the Company's three business segments depends heavily on its computer
systems to manage its operations. The Company believes that the most reasonably
likely worst case scenario would consist of a combination of Year 2000 failures,
including but not limited to the failures discussed above, in the Company's
mission critical systems, coupled with Year 2000 failures at one or more of the
Investees or Baker Hughes. In such a scenario, the Company might be forced to
rely on the manual processing of transactions, or, if feasible, to shift
processing to other Company systems or third party data processing vendors,
which in either case would likely have a material adverse effect on costs and
produce an increased probability of errors and potential legal exposures
resulting from such errors. Such a scenario could also result in the loss of
revenues, the extent of which is not estimable. In addition, Year 2000 failures
at one or more Investees or Baker Hughes could materially affect their earnings,
and therefore adversely affect the earnings of the Company and the Company's
carrying value of its investment in these companies.
11
Year 2000 (Continued)
Incremental expense recognized directly related to rewriting and testing
existing applications or converting to new Year 2000 compliant applications
totaled $8.2 million and $5.0 million for the nine months ended September 30,
1998 and 1997, respectively. Total incremental expense recognized since
inception of the Company's Year 2000 program directly related to rewriting and
testing existing applications or converting to new Year 2000 compliant
applications totaled $21.5 million through September 30, 1998. The Company
estimates that the incremental expense necessary to complete its Year 2000
program and directly related to rewriting and testing existing applications or
converting to new Year 2000 compliant applications will be approximately $6.6
million. In addition to the above incremental expenses, upon completion of the
Company's Year 2000 program, the Company estimates that it will have made
capital expenditures, which will be expensed over the useful lives of the assets
to which they relate, totaling approximately $16 million to replace existing
hardware or software.
NOTE: The foregoing discussion on Year 2000 issues shall be considered "Year
2000 Readiness Disclosure" for purposes of the Year 2000 Information and
Readiness Disclosure Act.
Equity in Net Income of Investees
Equity in Net Income of Investees was income of $49.8 million and $18.2 million,
respectively, for the nine and three months ended September 30, 1998, compared
to income of $10.5 million and $15.8 million, respectively, for the same periods
in 1997. The Company's Equity in Net Income of Investees for the nine months
ended September 30, 1997 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.
In August 1998, the Company exchanged its investment in its investee, Western
Atlas, for common stock in Baker Hughes upon the acquisition of Western Atlas by
Baker Hughes in a merger transaction. Prior to the merger of Western Atlas into
Baker Hughes, the Company owned approximately 23.1% of Western Atlas and
accounted for its investment in Western Atlas under the equity method of
accounting. Accordingly, Equity in Net Income of Investees for the nine and
three months ended September 30, 1998 includes the Company's proportionate share
of Western Atlas' income earned prior to the merger. As a result of the merger,
the Company owns approximately 11% of Baker Hughes common stock. Since the
Company owns less than 20% of Baker Hughes, the equity method does not apply
and, accordingly, the Company does not record a pro-rata share of Baker Hughes'
reported earnings in the Company's earnings. However, dividends, when paid by
Baker Hughes, will be reflected in the Company's earnings. As a result of this
change, the Company estimates that its annual net income would decrease by
approximately $6.1 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 at its current rate.
Other Items
Other, Net Income (Expense) decreased by $1.5 million for both the nine and
three months ended September 30, 1998, compared to the same periods 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 nine months of 1998, the Company repurchased 1,792,300 shares
of its common stock in open market transactions at an aggregate cost of $115.4
million. The repurchases were made with general corporate funds. At September
30, 1998, the Company had approximately one million shares remaining under the
existing Board of Directors repurchase authorizations. On October 28, 1998, the
Company's Board of Directors increased the Company's repurchase authorization by
an additional three million shares. Immediately prior to the additional
authorization, the Company had approximately 750 thousand shares remaining under
the existing Board of Directors repurchase authorizations.
At September 30, 1998, the unused commitment under the Company's revolving
credit facility was $161.0 million. In addition, for the remainder of 1998, the
Company's subsidiaries would be able to pay approximately $244.6 million in
dividends to the Company without prior regulatory approval.
12
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.
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)," "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), 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.
13
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 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.)
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
September 30, 1998.
14
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 9, 1998 /s/ Richard C. Vie
--------------------------------------------
Richard C. Vie
President and Chief Executive Officer
Date: November 9, 1998 /s/ Richard Roeske
--------------------------------------------
Richard Roeske
Corporate Controller
(Principal Accounting Officer)
15