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, 1999
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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
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72,367,783 shares of common stock, $0.10 par value, were outstanding as of
June 30, 1999.
UNITRIN, INC.
INDEX
Page
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PART I. Financial Information.
Item 1. Financial Statements.
Condensed Consolidated Statements of Income for the Six 1
and Three Months Ended June 30, 1999 and 1998 (Unaudited).
Condensed Consolidated Balance Sheets as of June 30, 1999 2
(Unaudited) and December 31, 1998.
Condensed Consolidated Statements of Cash Flows for the 3
Six Months Ended June 30, 1999 and 1998 (Unaudited).
Notes to the Condensed Consolidated Financial 4-8
Statements (Unaudited).
Item 2. Management's Discussion and Analysis of Results of 9-13
Operations and Financial Condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 13
PART II. Other Information.
Item 4. Submission of Matters to a Vote of Securities Holders. 13
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)
Six Months Ended Three Months Ended
-------------------- --------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
Revenues:
Premiums $652.2 $583.0 $328.0 $293.1
Consumer Finance Revenues 59.2 56.4 30.1 28.1
Net Investment Income 100.5 87.0 50.7 45.2
Net Gains on Sales of Investments 39.4 66.5 15.1 5.6
------ ------ ------ ------
Total Revenues 851.3 792.9 423.9 372.0
------ ------ ------ ------
Expenses:
Insurance Claims and Policyholders' Benefits 428.1 378.6 218.6 194.9
Insurance Expenses 276.0 239.8 140.1 121.3
Consumer Finance Expenses 48.7 46.9 24.7 23.5
Interest and Other Expenses 7.1 5.6 3.1 2.8
------ ------ ------ ------
Total Expenses 759.9 670.9 386.5 342.5
------ ------ ------ ------
Income before Income Taxes and Equity
in Net Income of Investees 91.4 122.0 37.4 29.5
Income Tax Expense 31.0 41.4 12.9 9.7
------ ------ ------ ------
Income before Equity in Net Income of Investees 60.4 80.6 24.5 19.8
Equity in Net Income of Investees 28.3 31.6 12.0 16.4
------ ------ ------ ------
Net Income $ 88.7 $112.2 $ 36.5 $ 36.2
====== ====== ====== ======
Net Income Per Share $ 1.21 $ 1.47 $ 0.50 $ 0.47
====== ====== ====== ======
Net Income Per Share Assuming Dilution $ 1.20 $ 1.45 $ 0.50 $ 0.46
====== ====== ====== ======
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,
1999 1998
--------- ------------
(Unaudited)
Assets:
Investments:
Fixed Maturities at Fair Value (Amortized
Cost: 1999 - $2,549.3; 1998 - $2,492.5) $2,539.1 $2,557.3
Equity Securities at Fair Value
(Cost: 1999 - $581.4; 1998 - $831.2) 933.6 786.3
Investees at Cost Plus Cumulative Undistributed Earnings
(Fair Value: 1999 - $1,285.0; 1998 - $1,223.2) 622.0 581.2
Other 280.2 379.4
-------- --------
Total Investments 4,374.9 4,304.2
-------- --------
Cash 11.3 8.6
Consumer Finance Receivables 559.9 532.0
Other Receivables 277.7 290.8
Deferred Policy Acquisition Costs 310.9 332.0
Other Assets 581.6 442.3
-------- --------
Total Assets $6,116.3 $5,909.9
======== ========
Liabilities and Shareholders' Equity:
Insurance Reserves:
Life and Health $2,084.4 $2,079.0
Property and Casualty 428.7 447.7
-------- --------
Total Insurance Reserves 2,513.1 2,526.7
-------- --------
Investment Certificates 577.2 544.6
Unearned Premiums 261.4 263.2
Accrued and Deferred Income Taxes 440.6 378.8
Notes Payable 128.8 116.2
Accrued Expenses and Other Liabilities 253.0 258.0
-------- --------
Total Liabilities 4,174.1 4,087.5
-------- --------
Shareholders' Equity:
Common Stock, $0.10 par value, 100 million Shares Authorized;
72,367,783 and 75,977,750 Shares Issued and Outstanding at
June 30, 1999 and December 31, 1998 7.3 7.6
Paid-in Capital 427.1 428.2
Retained Earnings 1,287.2 1,373.4
Accumulated Other Comprehensive Income 220.6 13.2
-------- --------
Total Shareholders' Equity 1,942.2 1,822.4
-------- --------
Total Liabilities and Shareholders' Equity $6,116.3 $5,909.9
======== ========
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,
1999 1998
-------- --------
Operating Activities:
Net Income $ 88.7 $ 112.2
Adjustments to Reconcile Net Income to Net Cash
Provided (Used) by Operations:
Change in Deferred Policy Acquisition Costs 6.6 8.4
Equity in Net Income of Investees before Taxes (43.4) (48.7)
Cash Dividends from Investee 0.6 0.6
Amortization of Investments 11.5 11.4
Increase (Decrease) in Insurance Reserves and Unearned
Premiums 7.1 (4.2)
Increase (Decrease) in Accrued and Deferred Income
Taxes (50.8) 23.1
Increase (Decrease) in Accrued Expenses and Other
Liabilities (11.9) (14.5)
Net Gains on Sales of Investments (39.4) (66.5)
Provision for Loan Losses 11.7 10.6
Other, Net 15.5 23.8
------ ------
Net Cash Provided (Used) by Operating Activities (3.8) 56.2
------ ------
Investing Activities:
Sales and Maturities of Fixed Maturities 182.1 360.4
Purchases of Fixed Maturities (250.2) (391.3)
Sales and Redemptions of Equity Securities 292.3 83.0
Purchases of Equity Securities (2.4) (13.9)
Acquisition of Business (139.0) -
Change in Consumer Finance Receivables (39.9) 18.2
Change in Short-term Investments 100.8 0.5
Other, Net (12.0) (5.0)
------- ------
Net Cash Provided by Investing Activities 131.7 51.9
------- ------
Financing Activities:
Change in Investment Certificates 32.6 (38.5)
Changes in Universal Life and Annuity Accounts 4.5 4.9
Notes Payable Proceeds 171.8 168.5
Notes Payable Payments (159.2) (177.9)
Cash Dividends Paid (51.2) (48.9)
Common Stock Repurchases (127.0) (15.0)
Other, Net 3.3 2.8
------- -------
Net Cash Used by Financing Activities (125.2) (104.1)
------- -------
Increase (Decrease) in Cash 2.7 4.0
Cash, Beginning of Year 8.6 14.5
------- -------
Cash, End of Period $ 11.3 $ 18.5
======= =======
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 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, 1998.
On February 12, 1999, the Company's Board of Directors authorized a 2-for-1
stock split payable on March 26, 1999 in the form of a dividend distribution of
one share of common stock for each share of common stock outstanding on March 5,
1999, the record date for the dividend. Accordingly, prior year share and per
share amounts have been restated retroactively as if the distribution had
occurred prior to the periods presented.
Note 2 - Accounting Changes
Effective January 1, 1999, the Company prospectively adopted Statement of
Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP No. 98-1 requires the Company to
capitalize qualifying computer software costs incurred during the application
development stage. During the first six months of 1999, the Company capitalized
$3.5 million of qualifying computer software costs.
In the second quarter of 1999, the Company revised the management reporting of
its segment results to no longer include dividend income received from its
investment in Baker Hughes Incorporated ("Baker Hughes") in the Company's
operating segments. The Company considers the management of its investment in
Baker Hughes to be a corporate responsibility rather than an operating segment
responsibility. Prior period amounts have been reclassified to conform to the
revised reporting. This change had no effect on Net Income.
Note 3 - Acquisition of Businesses
On June 17, 1999, Trinity Universal Insurance Company, a subsidiary of the
Company, completed the acquisition of Valley Group, Inc. ( "Valley Group") and
its principal subsidiaries (Valley Insurance Company, Charter Indemnity Company
and White Mountains Insurance Company) in a cash transaction. Excluding certain
transaction costs, the estimated purchase price, which is subject to a post-
closing adjustment, was approximately $139 million. For the year ended December
31, 1998, Valley Group had consolidated annual premium revenues of approximately
$160 million. Immediately prior to the closing, Valley Group had a net book
value of approximately $45 million. The acquisition has been accounted for by
the purchase method and, accordingly, Valley Group's operations are included in
the Company's financial statements from the date of acquisition. Since the date
of closing, the Company has not had sufficient time to perform a comprehensive
allocation of 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 June 30, 1999.
On September 30, 1998, United Insurance Company of America, a subsidiary of the
Company, completed the acquisition of NationalCare Insurance Company
("NationalCare") and its wholly-owned subsidiary, Reserve National Insurance
Company ("Reserve National"), in a cash transaction for $98.5 million. The
acquisition has been accounted for by the purchase method and, accordingly,
NationalCare and Reserve National's operations are included in the Company's
financial statements from the date of acquisition.
4
Note 3 - Acquisition of Businesses (Continued)
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 for a total purchase price of
$198.4 million. 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. In the second quarter of
1999, the Company completed the allocation of the purchase price to the assets
and liabilities acquired. Based on the Company's final 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
Other Receivables 14.7
Insurance In Force Acquired 78.0
Cost in Excess of Net Assets Acquired 32.3
Other Assets 34.7
Life and Health Insurance Reserves (425.0)
Unearned Premiums (1.7)
Accrued and Deferred Income Taxes (26.4)
Notes Payable (10.8)
Accrued Expenses and Other Liabilities (36.4)
-------
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 Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share" for the six and three months ended June 30, 1999 and 1998
was as follows:
Six Months Ended Three Months Ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
(Dollars and Shares in Millions, Except Per Share Amounts) 1999 1998 1999 1998
- ---------------------------------------------------------- --------- --------- --------- ---------
Net Income $ 88.7 $ 112.2 $ 36.5 $ 36.2
Dilutive Effect on Net Income from Investees' Equivalent
Shares (0.4) (0.7) (0.2) (0.3)
-------- -------- -------- --------
Net Income Assuming Dilution $ 88.3 $ 111.5 $ 36.3 $ 35.9
======== ======== ======== ========
Weighted Average Common Shares Outstanding 73.5 76.4 72.7 77.7
Dilutive Effect of Unitrin Stock Option Plans 0.2 0.4 0.3 0.4
-------- -------- -------- --------
Weighted Average Common Shares and Equivalent Shares
Outstanding Assuming Dilution 73.7 76.8 73.0 78.1
======== ======== ======== ========
Net Income Per Share $ 1.21 $ 1.47 $ 0.50 $ 0.47
======== ======== ======== ========
Net Income Per Share Assuming Dilution $ 1.20 $ 1.45 $ 0.50 $ 0.46
======== ======== ======== ========
5
Note 5 - Investment in Investees
Unitrin accounts for its Investments in Investees (Curtiss-Wright Corporation
("Curtiss-Wright"), Litton Industries, Inc. ("Litton") and UNOVA, Inc.) under
the equity method of accounting using the most recent publicly-available
financial reports and other publicly-available information. Based on the most
recently available public information, Unitrin's voting percentage in Litton
common stock at June 30, 1999 was approximately 27.9% and the Company's
investment in Litton exceeded 10% of the Company's Shareholders' Equity. The
amounts included in Unitrin's financial statements for Litton represent amounts
reported by Litton for periods ending two months earlier. Accordingly, amounts
included in these financial statements represent the amounts reported by Litton
for the six and three month periods ended April 30, 1999 and 1998. 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) 1999 1998 1999 1998
- --------------------------------- --------- --------- --------- ---------
Revenues $2,386.4 $2,116.9 $1,255.5 $1,143.0
======== ======== ======== ========
Cost of Sales $1,852.0 $1,626.4 $ 967.6 $ 885.2
======== ======== ======== ========
Income from Continuing Operations $ 94.9 $ 87.4 $ 50.9 $ 46.8
======== ======== ======== ========
Net Income $ 94.9 $ 87.4 $ 50.9 $ 46.8
======== ======== ======== ========
Equity in Net Income of Investees was $28.3 million and $12.0 million for the
six and three months ended June 30, 1999, respectively, compared to $31.6
million and $16.4 million for the six and three months ended June 30, 1998,
respectively. Equity in Net Income of Investees for the six months ended June
30, 1999 included income of $3.4 million resulting from Unitrin's proportionate
share of UNOVA's gain on sale of its headquarters building. Equity in Net Income
of Investees for the six and three months ended June 30, 1998 included income of
$9.9 million and $5.0 million, respectively, resulting from the Company's
investment in Western Atlas Inc. ("Western Atlas"). In August 1998, the Company
exchanged its investment in Western Atlas for common stock in Baker Hughes upon
the acquisition of Western Atlas by Baker Hughes in a merger transaction. As a
result of the merger, Unitrin owns less than 20% of Baker Hughes and the equity
method no longer applies.
On August 2, 1999, Litton announced that its "fiscal year 1999 results will be
reduced by special fourth-quarter charges totaling $116.8 million pretax or
$77.4 million after tax." Accordingly, in the third quarter of 1999, Unitrin
will reflect one-time after-tax charges totaling $13.9 million, or approximately
$0.19 per common share, related to Unitrin's proportionate share of Litton's
announced charges for the costs to exit its mainframe outsourcing and
professional services businesses, the consolidation of certain manufacturing
facilities and the effect of its voluntary settlement agreement with the United
States Attorney's office relating to foreign sales consultants.
On August 5, 1999, Curtiss-Wright announced its net third quarter 1999 earnings
will be increased by a $7.2 million "settlement of litigation against an
insurance carrier to recover environmental remediation costs." Unitrin accounts
for its investment in Curtiss-Wright on a three-month-delay basis. Accordingly,
in the fourth quarter of 1999, Unitrin will reflect a one-time after-tax gain
totaling $2.0 million, or approximately $0.03 per common share, related to
Unitrin's proportionate share of Curtiss-Wright's announced settlement.
6
Note 6 - Other Comprehensive Income
Other Comprehensive Income related to the Company's investments in Fixed
Maturities and Equity Securities for the six and three months ended June 30,
1999 and 1998 was:
Six Months Ended Three Months Ended
-------------------- --------------------
June 30, June 30, June 30, June 30,
(Dollars in Millions) 1999 1998 1999 1998
- ---------------------------------------------------------------- -------- -------- -------- --------
Increase (Decrease) in Unrealized Gains, Net of Reclassification
Adjustment for Gains Included in Net Income $ 322.0 $(55.6) $158.8 $10.8
Other Increase (Decrease) (2.0) - (2.0) -
Effect of Income Taxes (112.6) 19.0 (55.4) (3.7)
------- ------ ------ -----
Increase (Decrease) in Accumulated Other Comprehensive Income $ 207.4 $(36.6) $101.4 $ 7.1
======= ====== ====== =====
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, 1999 and 1998 was $296.1
million and $75.6 million, respectively. Total Comprehensive Income for the
three months ended June 30, 1999 and 1998 was $137.9 million and $43.3 million,
respectively.
7
Note 7 - Business Segments
Segment Revenues and Operating Profit for the six and three months ended June
30, 1999 and 1998 were:
Six Months Ended Three Months Ended
-------------------- --------------------
June 30, June 30, June 30, June 30,
(Dollars in Millions) 1999 1998 1999 1998
- ----------------------------------------- -------- -------- -------- --------
Revenues:
Property and Casualty Insurance:
Premiums $296.8 $336.7 $150.5 $165.8
Net Investment Income 22.4 22.1 11.8 11.0
------ ------ ------ ------
Total Property and Casualty Insurance 319.2 358.8 162.3 176.8
------ ------ ------ ------
Life and Health Insurance:
Premiums 355.4 246.3 177.5 127.3
Net Investment Income 81.5 64.9 40.9 34.4
------ ------ ------ ------
Total Life and Health Insurance 436.9 311.2 218.4 161.7
------ ------ ------ ------
Consumer Finance 59.2 56.4 30.1 28.1
------ ------ ------ ------
Total Segment Revenues 815.3 726.4 410.8 366.6
------ ------ ------ ------
Net Gains on Sales of Investments 39.4 66.5 15.1 5.6
Other (3.4) - (2.0) (0.2)
------ ------ ------ ------
Total Revenues $851.3 $792.9 $423.9 $372.0
====== ====== ====== ======
Income before Income Taxes and Equity in
Net Income of Investees:
Property and Casualty Insurance $ 13.6 $ 22.8 $ 1.7 $ 4.0
Life and Health Insurance 35.2 23.4 18.7 15.9
Consumer Finance 10.6 11.0 5.6 5.1
------ ------ ------ ------
Total Segment Operating Profit 59.4 57.2 26.0 25.0
------ ------ ------ ------
Net Gains on Sales of Investments 39.4 66.5 15.1 5.6
Other Income, Net (7.4) (1.7) (3.7) (1.1)
------ ------ ------ ------
Income before Income Taxes and
Equity in Net Income of Investees $ 91.4 $122.0 $ 37.4 $ 29.5
====== ====== ====== ======
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) 1999 1998 1999 1998
- --------------------------------- --------- --------- --------- ---------
Premiums $ 296.8 $ 336.7 $ 150.5 $ 165.8
Net Investment Income 22.4 22.1 11.8 11.0
-------- -------- -------- --------
Total Revenues $ 319.2 $ 358.8 $ 162.3 $ 176.8
======== ======== ======== ========
Operating Profit $ 13.6 $ 22.8 $ 1.7 $ 4.0
======== ======== ======== ========
Premiums in the Property and Casualty Insurance segment decreased by $39.9
million and $15.3 million for the six and three months ended June 30, 1999,
respectively, compared to the same periods in 1998 due primarily to lower
volume, partially offset by $6.4 million of premiums resulting from the
acquisition of Valley Group. - See Note 3 Acquisition of Businesses. Operating
Profit in the Property and Casualty Insurance segment decreased by $9.2 million
for the six months ended June 30, 1999, compared to the same period in 1998 due
primarily to higher storm damage and the effects of lower premium, partially
offset by the effects of reduced exposure on certain classes of business and
lower expense related to Year 2000 remediation projects. Operating Profit in
the Property and Casualty Insurance segment decreased by $2.3 million for the
three months ended June 30, 1999, compared to the same period in 1998 due
primarily to the effects of lower premium, partially offset by the effects of
reduced exposure on certain classes of business and lower expense related to
Year 2000 remediation projects.
Life and Health Insurance
Six Months Ended Three Months Ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
(Dollars in Millions) 1999 1998 1999 1998
- --------------------------------- --------- --------- --------- ---------
Premiums $ 355.4 $ 246.3 $ 177.5 $ 127.3
Net Investment Income 81.5 64.9 40.9 34.4
-------- -------- -------- --------
Total Revenues $ 436.9 $ 311.2 $ 218.4 $ 161.7
======== ======== ======== ========
Operating Profit $ 35.2 $ 23.4 $ 18.7 $ 15.9
======== ======== ======== ========
Premiums in the Life and Health Insurance segment increased by $109.1 million
and $50.2 million for the six and three months ended June 30, 1999,
respectively, compared to the same periods in 1998 due primarily to premiums
resulting from the June 1998 acquisition of Reliable and the September 1998
acquisition of Reserve National and its parent NationalCare - See Note 3
Acquisition of Businesses. Operating Profit in the Life and Health Insurance
segment increased by $11.8 million and $2.8 million for the six and three months
ended June 30, 1999, respectively, due primarily to the acquisitions of Reliable
Life and Reserve National.
9
Consumer Finance
Six Months Ended Three Months Ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
(Dollars in Millions) 1999 1998 1999 1998
- --------------------------------- --------- --------- --------- ---------
Revenues $ 59.2 $ 56.4 $ 30.1 $ 28.1
======== ======== ======== ========
Operating Profit $ 10.6 $ 11.0 $ 5.6 $ 5.1
======== ======== ======== ========
Revenues in the Consumer Finance segment increased by $2.8 million and $2.0
million for the six and three months ended June 30, 1999, respectively, compared
to the same periods in 1998 as a result of a higher level of loans outstanding.
Operating Profit in the Consumer Finance segment decreased by $0.4 million for
the six months ended June 30, 1999 compared to the same period in 1998 due
primarily to higher operating expenses partially the result of conversion costs
associated with Year 2000. Operating Profit in the Consumer Finance segment
increased by $0.5 million for the three months ended June 30, 1999 compared to
the same period in 1998 due primarily to the higher level of loans outstanding.
Net Gains on Sales of Investments
Net Gains on Sales of Investments were $39.4 million and $15.1 million,
respectively, for the six and three months ended June 30, 1999, compared to
$66.5 million and $5.6 million, respectively, for the same periods in 1998. Net
Gains on Sales of Investments for the six and three months ended June 30, 1999
included pre-tax gains of $40.1 million and $15.6 million, respectively,
resulting from sales of a portion of the Company's investment in Baker Hughes
common stock. The first quarter of 1998 included gains primarily resulting from
the disposition of the Company's investment in ITT Corporation ("ITT") common
stock in connection with the acquisition of ITT by Starwood Hotels & Resorts
Worldwide, Inc. and the redemption of the Company's investment in Navistar
International Corporation $6.00 Cumulative Convertible Preferred Stock, Series
G. Net Gains on Sales of Investments for the second quarter of 1998 included
the sale of certain investment real estate. The Company cannot anticipate when
or if similar investment gains or losses may occur in the future.
Equity in Net Income of Investees
Equity in Net Income of Investees was $28.3 million and $12.0 million,
respectively for the six and three months ended June 30, 1999, respectively,
compared to $31.6 million and $16.4 million, respectively, for the same periods
in 1998. Equity in Net Income of Investees for the six months ended June 30,
1999 included income of $3.4 million resulting from Unitrin's proportionate
share of UNOVA's gain on sale of its headquarters building. Equity in Net
Income of Investees for the six and three months ended June 30, 1998 included
income of $9.9 million and $5.0 million, respectively, resulting from the
Company's investment in Western Atlas. In August 1998, the Company exchanged
its investment in Western Atlas for common stock in Baker Hughes upon the
acquisition of Western Atlas by Baker Hughes in a merger transaction. As a
result of the merger, Unitrin owns less than 20% of Baker Hughes and the equity
method no longer applies.
On August 2, 1999, Litton announced that its "fiscal year 1999 results will be
reduced by special fourth-quarter charges totaling $116.8 million pretax or
$77.4 million after tax." Accordingly, in the third quarter of 1999, Unitrin
will reflect one-time after-tax charges totaling $13.9 million, or approximately
$0.19 per common share, related to Unitrin's proportionate share of Litton's
announced charges for the costs to exit its mainframe outsourcing and
professional services businesses, the consolidation of certain manufacturing
facilities and the effect of its voluntary settlement agreement with the United
States Attorney's office relating to foreign sales consultants.
On August 5, 1999, Curtiss-Wright announced its net third quarter 1999 earnings
will be increased by a $7.2 million "settlement of litigation against an
insurance carrier to recover environmental remediation costs." Unitrin accounts
for its investment in Curtiss-Wright on a three-month-delay basis. Accordingly,
in the fourth quarter of 1999, Unitrin will reflect a one-time after-tax gain
totaling $2.0 million, or approximately $0.03 per common share, related to
Unitrin's proportionate share of Curtiss-Wright's announced settlement.
Other Items
Other Income, Net decreased by $5.7 million and $2.6 million for the six and
three months ended June 30, 1999, respectively, compared to same periods in 1998
due primarily to higher net corporate interest expense.
During the first six months of 1999, the Company repurchased 3,741,280 shares of
its common stock (adjusted for the Company's 2-for-1 stock split) in open market
transactions at an aggregate cost of $127.0 million. The repurchases were made
with general corporate funds. At June 30, 1999, the Company had approximately
5.9 million shares remaining under the existing Board of Directors repurchase
authorizations.
10
Other Items (continued)
At June 30, 1999, the unused commitment under the Company's revolving credit
facility was $217.0 million. In addition, for the remainder of 1999, the
Company's subsidiaries would be able to pay approximately $622.8 million in
dividends to the Company without prior regulatory approval.
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. Most 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. 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.
On June 17, 1999, the Company completed the acquisition of Valley Group. Prior
to the acquisition, Valley Group had implemented a Year 2000 program. The
Company's goal is to complete an evaluation of Valley Group's Year 2000 program
by September 30, 1999. Excluding Valley Group, each of the Company's three
business segments has substantially completed all four phases for both its
mission critical projects and non-mission critical projects. For purposes of
this Year 2000 discussion, the term "mission critical" refers to key business
functions, such as the processing of business transactions, regulatory
compliance and archival of important records, upon which the Company is
materially dependent.
Valley Group is comprised primarily of three separate business units operating
in different geographical regions and offering property and casualty insurance
policies using independent agents. Each business unit has its unique set of
mission critical applications and service providers 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 Property and Casualty Insurance
segment's business units and process transactions manually until the transfer is
complete.
The 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 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. In March of 1999, the Consumer Finance segment migrated from its former
Fiserv system to another system that Fiserv has represented to be Year 2000
compliant.
11
Year 2000 - continued
The Consumer Finance segment has reviewed Fiserv's Year 2000 testing
documentation, the reports of an independent auditing concern engaged to review
Fiserv's Year 2000 testing and the reports of certain regulatory agencies,
including the FDIC, covering Fiserv's Year 2000 program. In addition to these
reviews and tests, the Consumer Finance segment has developed a contingency plan
to off-load all customer loan and deposit records prior to January 1, 2000 and
process customer loans and deposits manually at its branch offices in the event
of a Year 2000 failure.
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.
If one or more of the Company's business segments, key service providers,
investee companies or Baker Hughes 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.
Incremental expense recognized directly related to rewriting and testing
existing applications or converting to new Year 2000 compliant applications
totaled $2.6 million and $4.7 million for the six months ended June 30, 1999 and
1998, respectively. Total incremental expense recognized since inception of the
Company's Year 2000 program directly related to rewriting and testing existing
applications or converting to new Year 2000 compliant applications totaled $26.3
million through June 30, 1999. 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 $0.3 million for the remainder of
1999. 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.
Accounting Changes
Effective January 1, 1999, the Company prospectively adopted SOP No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP No. 98-1 requires the Company to capitalize qualifying
computer software costs incurred during the application development stage.
During the first six months of 1999, the Company capitalized $3.5 million of
qualifying computer software costs.
In the second quarter of 1999, the Company revised the management reporting of
its segment results to no longer include dividend income received from its
investment in Baker Hughes in the Company's operating segments. The Company
considers the management of its investment in Baker Hughes to be a corporate
responsibility rather than an operating segment responsibility. Prior period
amounts have been reclassified to conform to the revised reporting. This change
had no effect on Net Income.
12
Accounting Changes - continued
In June 1999, the Financial Accounting Standards Board issued SFAS No.137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133" which deferred the effective date of
SFAS No. 133, "Accounting for Derivatives Instruments and for Hedging
Activities." SFAS No. 133 requires all derivatives to be recorded on the balance
sheet at fair value and establishes "special accounting" for the following three
different types of hedges: hedges of changes in the fair value of assets,
liabilities or firm commitments; hedges of the variable cash flows of forecasted
transactions; and hedges of foreign currency exposures of net investments in
foreign operations. Accordingly, SFAS No. 133 is effective for years beginning
after June 15, 2000, with earlier adoption permitted. The Company believes that
the effect of adoption of SFAS No. 133 will not be material.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information required by Item 305 of Regulation S-K has been omitted because
the sources and effects of changes in the information provided under Item 305 of
Regulation S-K from the end of the preceding year to the date of this Quarterly
Report on Form 10-Q are not material.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of Unitrin, Inc. was held on May 5, 1999 for
the purpose of electing eight directors.
The final tabulation for each of the eight nominees for director is as follows:
Votes Votes
Nominee For Withheld
------------------------ ---------- --------
James E. Annable 31,256,945 159,482
Reuben L. Hedlund 31,256,544 159,883
Jerrold V. Jerome 31,237,725 178,702
William E. Johnston, Jr. 31,258,015 158,412
George A. Roberts 31,251,770 164,657
Fayez S. Sarofim 30,453,231 963,196
Henry E. Singleton 30,453,073 963,354
Richard C. Vie 31,238,916 177,511
13
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
3.1 Certificate of Incorporation (Incorporated herein by reference to
Exhibit 3.1 to the Company's Registration Statement on Form 10 dated
February 15, 1990.)
3.2 Amended and Restated By-Laws (Incorporated herein by reference to
Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.)
4 Rights Agreement between the Company and First Chicago Trust Company
of New York, as rights agent, dated as of August 3, 1994
(Incorporated herein by reference to Exhibit 1 to the Company's
Registration Statement on Form 8-A dated August 3, 1994.)
10.1 Unitrin, Inc. 1990 Stock Option Plan as amended and restated
10.2 Unitrin, Inc. 1997 Stock Option Plan as amended and restated
10.3 Unitrin, Inc. 1995 Non-Employee Director Stock Option Plan as amended
and restated
10.4 Unitrin, Inc. Pension Equalization Plan (Incorporated herein by
reference to Exhibit 10.4 to Company's Annual Report on Form 10-K for
the year ended December 31, 1994.)
10.5 Unitrin is a party to individual severance agreements (the form of
which is incorporated herein by reference to Exhibit 10.5 to the
Company's 1994 Annual Report on Form 10-K), with following executive
officers:
Richard C. Vie (Chairman, President and Chief Executive Officer)
David F. Bengston (Vice President)
James W. Burkett (Senior Vice President)
Eric J. Draut (Senior Vice President, Treasurer & Chief Financial
Officer)
Scott Renwick (General Counsel and Secretary)
Donald G. Southwell (Senior Vice President)
(Note: Each of the foregoing agreements is identical except that the
severance compensation multiple is 2.99 for Mr. Vie and 2.0 for the
other executive officers. The term of these agreements has been
extended by action of Unitrin's board of directors through
January 1, 2000.)
10.6 Severance Compensation Plan After Change of Control (Incorporated
herein by reference to Exhibit 10.6 to the Company's 1994 Annual
Report on Form 10-K; the term of this plan has been extended by
Unitrin's board of directors through January 1, 2000.)
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 Company's annual meeting of
shareholders.)
10.8 Amended and Restated Credit Agreement, dated September 17, 1997 among
Unitrin, Inc., the Lenders party thereto, and NationsBank of Texas,
N.A. as Administrative Agent (Incorporated herein by reference to
Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.)
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, 1999.
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: August 10, 1999 /s/ Richard C. Vie
------------------------------
Richard C. Vie
Chairman, President
and Chief Executive Officer
Date: August 10, 1999 /s/ Richard Roeske
------------------------------
Richard Roeske
Corporate Controller
(Principal Accounting Officer)
15