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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, 2002
---------------------------------------------------
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 number 0-18298
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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
---------- ----------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
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67,677,478 shares of common stock, $0.10 par value, were outstanding as of
September 30, 2002.
UNITRIN, INC.
INDEX
Page
-----
PART I. Financial Information.
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the Nine and Three Months Ended
September 30, 2002 and 2001 (Unaudited). 1
Condensed Consolidated Balance Sheets as of September 30, 2002 (Unaudited) and
December 31, 2001. 2
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 2002 and 2001 (Unaudited). 3
Notes to the Condensed Consolidated Financial Statements (Unaudited). 4-17
Item 2. Management's Discussion and Analysis of Results of Operations and Financial
Condition. 18-29
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 29-31
Item 4. Controls and Procedures. 32
PART II. Other Information.
Item 1. Legal Proceedings. 33
Item 6. Exhibits and Reports on Form 8-K. 33-35
Signatures 36
Certifications 37-38
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,
2002 2001 2002 2001
---------- --------- --------- ---------
Revenues:
Premiums $1,325.5 $1,155.5 $486.6 $403.7
Consumer Finance Revenues 126.0 119.0 44.1 40.7
Net Investment Income 165.9 175.4 53.9 60.9
Other Income 25.0 6.7 21.2 2.1
Net Gains (Losses) on Sales of Investments (13.8) 563.8 (12.5) 1.2
-------- -------- ------ ------
Total Revenues 1,628.6 2,020.4 593.3 508.6
-------- -------- ------ ------
Expenses:
Insurance Claims and Policyholders' Benefits 1,009.0 865.9 391.1 298.8
Insurance Expenses 517.2 461.3 199.4 156.2
Consumer Finance Expenses 98.7 96.4 33.0 31.4
Interest and Other Expenses 18.0 15.4 8.0 7.1
-------- -------- ------ ------
Total Expenses 1,642.9 1,439.0 631.5 493.5
-------- -------- ------ ------
Income (Loss) before Income Taxes and Equity
in Net Income (Loss) of Investees (14.3) 581.4 (38.2) 15.1
Income Tax (Benefit) Expense (11.5) 204.6 (16.7) 4.1
-------- -------- ------ ------
Income (Loss) before Equity in Net
Income (Loss) of Investees (2.8) 376.8 (21.5) 11.0
Equity in Net Income (Loss) of Investees (1.7) 16.2 3.4 9.1
-------- -------- ------ ------
Net Income (Loss) $ (4.5) $ 393.0 $(18.1) $ 20.1
======== ======== ====== ======
Net Income (Loss) Per Share $ (0.07) $ 5.82 $(0.27) $ 0.30
======== ======== ====== ======
Net Income (Loss) Per Share Assuming Dilution $ (0.07) $ 5.78 $(0.27) $ 0.30
======== ======== ====== ======
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, except per share amounts)
September 30, December 31,
2002 2001
-------------- -------------
(Unaudited)
Assets:
Investments:
Fixed Maturities at Fair Value (Amortized
Cost: 2002 - $2,712.6; 2001 - $2,876.2) $ 2,852.5 $ 2,926.4
Northrop Grumman Corporation Preferred Stock
(Cost: 2002 - $177.5; 2001 - $177.5) 251.3 220.1
Northrop Grumman Corporation Common Stock
(Cost: 2002 - $661.5; 2001 - $661.5) 950.8 772.7
Other Equity Securities at Fair Value
(Cost: 2002 - $353.3; 2001 - $300.3) 380.7 394.6
Investee at Cost Plus Cumulative Undistributed Earnings
(Fair Value: 2002 - $62.3; 2001 - $73.4) 64.9 65.4
Short-term Investments at Cost which Approximates Fair Value 684.6 504.8
Other 264.5 243.5
---------- ----------
Total Investments 5,449.3 5,127.5
---------- ----------
Cash 7.3 27.9
Consumer Finance Receivables at Cost (Fair
Value: 2002 - $796.3; 2001 - $720.1) 797.4 723.1
Other Receivables 697.0 457.9
Deferred Policy Acquisition Costs 374.6 328.5
Goodwill 344.7 344.7
Other Assets 153.9 124.1
---------- ----------
Total Assets $ 7,824.2 $ 7,133.7
========== ==========
Liabilities and Shareholders' Equity:
Insurance Reserves:
Life and Health $ 2,209.9 $ 2,157.5
Property and Casualty 866.2 700.1
---------- ----------
Total Insurance Reserves 3,076.1 2,857.6
---------- ----------
Investment Certificates and Savings Accounts at Cost
(Fair Value: 2002 - $820.0; 2001 - $753.7) 816.7 747.5
Unearned Premiums 661.2 416.4
Accrued and Deferred Income Taxes 447.0 384.2
Notes Payable 296.9 254.8
Accrued Expenses and Other Liabilities 543.7 556.4
---------- ----------
Total Liabilities 5,841.6 5,216.9
---------- ----------
Shareholders' Equity:
Common Stock, $0.10 par value, 100 million Shares Authorized; 67,677,478 and
67,547,104 Shares Issued and Outstanding at
September 30, 2002 and December 31, 2001 6.8 6.7
Paid-in Capital 513.5 488.8
Retained Earnings 1,120.0 1,231.0
Accumulated Other Comprehensive Income 342.3 190.3
---------- ----------
Total Shareholders' Equity 1,982.6 1,916.8
---------- ----------
Total Liabilities and Shareholders' Equity $ 7,824.2 $ 7,133.7
========== ==========
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,
2002 2001
------------- -------------
Operating Activities:
Net Income (Loss) $ (4.5) $ 393.0
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided (Used) by Operations:
Change in Deferred Policy Acquisition Costs (44.2) (6.6)
Equity in Net (Income) Loss of Investees before Taxes 2.6 (24.6)
Cash Dividends from Investees - 1.1
Amortization of Investments 5.5 0.3
Increase in Receivables (212.5) (34.8)
Increase in Insurance Reserves and Unearned Premiums 396.3 141.0
Increase (Decrease) in Accrued and Deferred Income Taxes (16.8) 174.5
Increase in Accrued Expenses and Other Liabilities 62.8 40.9
Net (Gains) Losses on Sales of Investments 13.8 (563.8)
Provision for Loan Losses 29.2 22.2
Other, Net 10.0 21.1
-------- -------
Net Cash Provided by Operating Activities 242.2 164.3
-------- -------
Investing Activities:
Sales and Maturities of Fixed Maturities 1,152.8 837.3
Purchases of Fixed Maturities (991.7) (688.3)
Sales and Redemptions of Equity Securities 6.7 8.8
Purchases of Equity Securities (75.1) (91.0)
Sale of Investee - 171.8
Change in Short-term Investments (128.9) (543.3)
Acquisition and Improvements of Investment Real Estate (12.2) (2.8)
Sales of Investment Real Estate 13.7 -
Change in Other Investments (19.1) 1.0
Acquisition of Business (42.3) -
Change in Consumer Finance Receivables (103.1) (70.6)
Acquisition of Capital Assets (19.5) (10.5)
Disposition of Capital Assets 0.3 11.2
-------- -------
Net Cash (Used) by Investing Activities (218.4) (376.4)
-------- -------
Financing Activities:
Change in Investment Certificates and Savings Accounts 69.2 46.0
Change in Universal Life and Annuity Contracts 4.6 5.1
Change in Liability for Funds Held for Securities on Loan (77.5) 234.2
Notes Payable Proceeds 854.8 499.0
Notes Payable Payments (812.8) (471.0)
Cash Dividends Paid (84.3) (81.1)
Common Stock Repurchases (7.0) (26.0)
Other, Net 8.6 10.1
-------- -------
Net Cash Provided (Used) by Financing Activities (44.4) 216.3
-------- -------
Increase (Decrease) in Cash (20.6) 4.2
Cash, Beginning of Year 27.9 23.3
-------- -------
Cash, End of Period $ 7.3 $ 27.5
======== =======
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 Unitrin, Inc. ("Unitrin" or the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission (the "SEC") but
do not include all information and footnotes required by accounting principles
generally accepted in the United States of America ("GAAP"). In the opinion of
the Company's management, the unaudited Condensed Consolidated Financial
Statements reflect all adjustments necessary for a fair presentation. Certain
prior amounts have been reclassified to conform to the current 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 unaudited
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 SEC for the year ended
December 31, 2001.
Accounting Changes
- ------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations."
SFAS No. 141 requires that all business combinations be accounted for under the
purchase method of accounting. SFAS No. 141 also changes the criteria for the
separate recognition of intangible assets acquired in a business combination.
SFAS No. 141 is effective for all business combinations initiated after June 30,
2001.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses accounting and reporting for intangible assets
acquired, except for those acquired in a business combination. SFAS No. 142
presumes that goodwill and certain intangible assets have indefinite useful
lives. Accordingly, goodwill and certain intangible assets will not be amortized
but rather will be tested at least annually for impairment. SFAS No. 142 also
addresses accounting and reporting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. On January 1, 2002, the Company adopted SFAS
No. 142. During the first quarter of 2002, the Company tested Goodwill on the
date of adoption for impairment and determined that Goodwill was recoverable
under the provisions of SFAS No. 142. The pro forma effects as if the Company
had applied the provisions of SFAS No. 142 to the periods prior to the date of
adoption that are presented in these financial statements were:
Nine Months Three Months
Ended Ended
September 30, September 30,
(Dollars in Millions, Except Per Share Amounts) 2001 2001
- ------------------------------------------------ ------------- --------------
Net Income as Reported $393.0 $20.1
Amortization of Goodwill, Net of Tax 5.5 1.8
------ -----
Pro Forma Net Income $398.5 $21.9
====== =====
Per Share:
Net Income as Reported $ 5.82 $0.30
Amortization of Goodwill, Net of Tax 0.08 0.03
------- -----
Pro Forma Net Income Per Share $ 5.90 $0.33
======= =====
Per Share Assuming Dilution:
Net Income as Reported $ 5.78 $0.30
Amortization of Goodwill, Net of Tax 0.08 0.02
------- -----
Pro Forma Net Income Per Share Assuming Dilution $ 5.86 $0.32
======= =====
4
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation (continued)
In connection with the adoption of SFAS No. 142, in the first quarter of 2002,
the Company revised the management reporting of its segment results shown in
Note 10 to the Condensed Consolidated Financial Statements to exclude
amortization of Goodwill from its Operating Segments for the periods prior to
the date of adoption that are presented in these financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 applies to all entities. It
applies to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and (or) the normal
operation of a long-lived asset, except for certain obligations of lessees. SFAS
No. 143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002. The Company expects that the initial application of SFAS
No. 143 will not have an impact on its financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 replaces SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS No. 144 is intended to develop one accounting model, based on the
framework established in SFAS No. 121, for long-lived assets to be disposed of
by sale and to address significant implementation issues. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years. On January 1,
2002, the Company adopted SFAS No. 144. The initial application of SFAS No. 144
did not have an impact on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
supersedes Emerging Issues Task Force ("EITF") No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of commitment to an exit or disposal
plan. On July 1, 2002, the Company adopted the provisions of SFAS No. 146
prospectively. The initial adoption of SFAS No. 146 did not have an impact on
the Company's financial statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 provides guidance on the accounting for
the acquisition of a financial institution, and applies to all acquisitions of
financial institutions except those between two or more mutual enterprises.
Pursuant to the provisions of SFAS No. 147, the specialized accounting guidance
specified in paragraph 5 of SFAS No. 72, "Accounting for Certain Acquisitions of
Banking or Thrift Institutions" will not apply after September 30, 2002. The
Company has not yet determined whether or not adoption of SFAS No. 147 will have
an impact on the Company's financial statements.
5
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 - Net Income (Loss) Per Share
Net Income (Loss) Per Share and Net Income (Loss) Per Share Assuming Dilution
for the nine and three months ended September 30, 2002 and 2001 were as follows:
Nine Months Ended Three Months Ended
----------------------- -----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Dollars and Shares in Millions, Except Per Share Amounts) 2002 2001 2002 2001
- ---------------------------------------------------------- ---------- --------- ---------- ---------
Net Income (Loss) $ (4.5) $393.0 $(18.1) $20.1
Dilutive Effect on Net Income from
Investees' Equivalent Shares - (0.4) - (0.1)
----- ------ ------ -----
Net Income (Loss) Assuming Dilution $ (4.5) $392.6 $(18.1) $20.0
====== ====== ====== =====
Weighted Average Common Shares Outstanding 67.7 67.5 67.7 67.4
Dilutive Effect of Unitrin Stock Option Plans - 0.4 - 0.3
----- ------ ------ -----
Weighted Average Common Shares and
Equivalent Shares Outstanding Assuming Dilution 67.7 67.9 67.7 67.7
===== ====== ====== =====
Net Income (Loss) Per Share $(0.07) $ 5.82 $(0.27) $0.30
====== ====== ====== =====
Net Income (Loss) Per Share Assuming Dilution $(0.07) $ 5.78 $(0.27) $0.30
====== ====== ====== =====
For the nine and three months ended September 30, 2002, 0.5 million common
shares and 0.1 million common shares were excluded from the determination of
Weighted Average Common Shares and Equivalent Shares Outstanding Assuming
Dilution and the computation of Net Income (Loss) Per Share Assuming Dilution
because the effects of inclusion would be antidilutive.
Note 3 - Acquisition of Business
On June 28, 2002, the Company closed its acquisition of the personal lines
property and casualty insurance business of the Kemper Insurance Companies
("KIC") in a cash transaction. The Individual and Family Group business unit
acquired from KIC ("IFG") specializes in the sale of personal automobile and
homeowners' insurance through independent agents. The acquisition includes the
purchase of the assets of IFG, but all pre-acquisition liabilities of IFG,
including policy reserves and unearned premium reserves, are excluded and remain
with KIC. In connection with the acquisition, the Company also acquired the
stock of KIC's direct distribution personal lines subsidiaries ("Kemper
Direct"), which sell personal automobile insurance to consumers over the
Internet. Pursuant to the provisions of the stock acquisition agreement between
the Company and KIC, the Company is indemnified for 90% of any adverse loss
reserve development for policy losses incurred by Kemper Direct prior to the
acquisition date while KIC is entitled to 90% of any favorable loss reserve
development on such policy losses.
The purchase price is $42.3 million (the "Determinable Purchase Price
Component"), plus 1% of premiums written over a three-year period beginning
January 1, 2003 (the "Variable Purchase Price Component"). Due to the nature of
the Variable Purchase Price Component, the Company cannot reasonably determine
the contingent consideration that will be paid. Accordingly, pursuant to the
provisions of SFAS No. 141, the Variable Purchase Price Component has not been
recorded in these financial statements, but will be reflected as a cost of the
acquisition when such determination can be reasonably made.
6
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 - Acquisition of Business (continued)
As further consideration, KIC will be eligible for performance bonuses if the
business meets certain loss ratio criteria over the same three years. Such
performance bonuses will be expensed as incurred and will be calculated,
treating each year in the three year period beginning January 1, 2003 as a
discrete period. KIC will be paid a bonus equal to 0.75% of earned premium for
the year under consideration if the loss and loss adjustment expense ratio does
not exceed 74%. For each one percentage point decrease from 74%, KIC will be
paid an additional bonus equal to 0.75% of earned premium, up to a total maximum
bonus equal to 5.25% of earned premium. No bonus will be paid if the loss and
loss adjustment expense ratio exceeds 74%.
KIC retained all liabilities for policies issued by IFG prior to the closing,
while Trinity Universal Insurance Company ("Trinity"), a subsidiary of Unitrin,
is entitled to premiums written for substantially all policies issued or renewed
by IFG after the closing and is liable for losses and expenses incurred thereon.
For policies issued by Kemper Direct prior to the acquisition date, the Company
is liable for policy losses incurred thereon, subject to the loss
indemnification described above, and is liable for unearned premiums as of the
acquisition date. IFG's and Kemper Direct's personal lines net written premiums
were approximately $700 million in 2001. In addition, Trinity is administering
on behalf of KIC all policies issued prior to the closing and certain policies
issued or renewed after the closing, but excluded from the acquisition (the "KIC
Run-off"). For the three months ended September 30, 2002 the Company recorded
Other Income of $19.0 million related to the administration of the KIC Run-off.
The results of IFG and Kemper Direct are included in the Company's results of
operations from the date of acquisition. Based on the Company's allocation of
the Determinable Purchase Price Component, the assets acquired and liabilities
assumed, primarily those associated with Kemper Direct, in connection with the
acquisition were:
(Dollars in Millions)
- ---------------------------------------
Investments $ 58.0
Other Receivables 26.5
Accrued and Deferred Income Taxes 0.4
Other Assets 20.6
Insurance Reserves (27.6)
Unearned Premium Reserves (34.8)
Accrued Expenses and Other Liabilities (0.8)
-----
Purchase Price $ 42.3
======
The Company manages IFG as a separate business unit, and accordingly, reports
the operating results as a separate operating segment referred to as Kemper Auto
and Home. The Company is combining the operations of Kemper Direct with its
Unitrin Direct operations and manages the combined operations as a separate
business unit. Accordingly, the operating results of the combined operations are
reported as a separate operating segment referred to as Unitrin and Kemper
Direct.
7
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Investment in Investees
Unitrin accounts for its Investments in Investees under the equity method of
accounting using the most recent and sufficiently timely publicly-available
financial reports and other publicly-available information which generally
results in a two or three-month-delay basis depending on the investee being
reported. Equity in Net Income (Loss) of Investees for each of the Company's
investee or former investee companies for the nine and three months ended
September 30, 2002 and 2001 was:
Nine Months Ended Three Months Ended
---------------------- ----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Dollars in Millions) 2002 2001 2002 2001
- ----------------------------------------- --------- --------- --------- ---------
UNOVA, Inc. $(1.7) $(1.3) $3.4 $6.0
Litton Industries, Inc. - 8.8 - -
Curtiss-Wright Corporation - 8.7 - 3.1
----- ----- ---- ----
Equity In Net Income (Loss) of Investees $(1.7) $16.2 $3.4 $9.1
===== ===== ==== ====
In 2000, Unitrin wrote down the carrying value of its investment in UNOVA, Inc.
("UNOVA") to its then current estimated realizable value. The loss was allocated
to Unitrin's proportionate share of UNOVA's non-current assets. Accordingly,
Unitrin's reported equity in UNOVA's results for subsequent periods, including
the periods presented above, differs from Unitrin's proportionate share of
UNOVA's reported results to the extent that such results include depreciation,
amortization or other charges related to such non-current assets.
UNOVA's results generally are publicly-available after Unitrin has filed its
quarterly results with the SEC. Accordingly, the amounts recorded above for
UNOVA are for periods ending three months prior to the periods presented. On
October 29, 2002, UNOVA publicly announced its results for its three months
ended September 30, 2002. Consistent with reporting UNOVA's results on a
three-month-delay basis, Unitrin will include net income of $2.3 million in
Unitrin's fourth quarter results for Unitrin's proportionate share of UNOVA's
results for the three months ended September 30, 2002. On October 29, 2002,
UNOVA also announced that it will record certain restructuring charges ranging
from $27 million to $32 million before taxes in its fourth quarter ending
December 31, 2002. Unitrin estimates that it will record an after-tax charge
ranging from $2.5 million to $3.0 million for Unitrin's proportionate share of
these charges.
On July 12, 2001, three of Unitrin's subsidiaries entered into a financing
agreement whereby the subsidiaries and other unrelated parties became
participants in a $75 million three-year term loan agreement with UNOVA. Under
the agreement, the subsidiaries provided $31.5 million in funding to UNOVA. The
outstanding principal balance owed to Unitrin's subsidiaries was $8.5 million
and $30.7 million at September 30, 2002 and December 31, 2001, respectively, and
is reflected in Investments in Fixed Maturities in these financial statements.
During 2001, two of Unitrin's subsidiaries purchased a portion of UNOVA's
outstanding publicly-traded notes maturing in March 2005 with a total par value
of $5.0 million.
In April 2001, Northrop Grumman Corporation ("Northrop") completed its
acquisition of Litton Industries, Inc. ("Litton"). Prior to the Northrop-Litton
transaction, Unitrin and its subsidiaries owned approximately 12.7 million
shares or 28% of Litton's outstanding common stock. Unitrin and its subsidiaries
tendered all of their shares of Litton common stock to Northrop. In exchange for
their holdings of Litton common stock, Unitrin and its subsidiaries received
approximately 1.8 million shares of Northrop Series B convertible preferred
stock and approximately 7.7 million shares of Northrop common stock in a
tax-free exchange. In addition to receiving the Northrop preferred and common
stock, Unitrin and its subsidiaries received cash of $171.8 million, net of
transaction costs. In the second quarter of 2001, the Company recognized a
pre-tax accounting gain of $562.1 million and an after-tax accounting gain of
$362.4 million, or $5.37 per common share related to this transaction. Prior to
Northrop's acquisition of Litton, Unitrin accounted for its investment in Litton
under the equity method of accounting. As a result of the Northrop-Litton
transaction, Unitrin's ownership percentage in the combined company fell below
20%, and accordingly, Unitrin does not apply the equity method of accounting to
its investments in Northrop.
8
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 - Investment in Investees (continued)
In November 2001, Unitrin spun off its 44% equity ownership interest in
Curtiss-Wright Corporation ("Curtiss-Wright") in a tax-free distribution to
Unitrin's shareholders. In connection with the spin-off, all of the 4.4 million
Curtiss-Wright shares previously held by Unitrin were exchanged for 4.4 million
shares of a new Class B common stock of Curtiss-Wright that is entitled to elect
at least 80% of the Board of Directors of Curtiss-Wright but was otherwise
substantially identical to Curtiss-Wright's existing common stock. The
Curtiss-Wright Class B common stock was distributed pro ratably to shareholders
of Unitrin. All of the other outstanding shares of Curtiss-Wright common stock
remained outstanding and are entitled to elect approximately 20% of the Board of
Directors of Curtiss-Wright.
Note 5 - Property and Casualty Insurance Reserves
Property and Casualty Insurance Reserves are estimated based on historical
experience patterns and current economic trends. Actual loss experience and loss
trends are likely to differ from these historical experience patterns and
economic conditions. Loss experience and loss trends emerge over several years
from the dates of loss inception. The Company monitors such emerging loss
trends. Upon concluding, based on the data available, that the emerging loss
trend will continue, the Company adjusts its property and casualty insurance
reserves to reflect these trends. Changes in such estimates are included in Net
Income in the period of change.
For the nine and three months ended September 30, 2002, the Company increased
its property and casualty insurance reserves by $62.4 million and $49.2 million,
respectively, to reflect adverse development of losses from prior accident
years. The reserve increases reflect developing loss trends primarily related to
construction, mold, automobile liability and product liability loss exposures in
its commercial lines of business as well as personal automobile liability. For
the nine and three months ended September 30, 2001, the Company increased its
property and casualty insurance reserves $22.1 million and $10.1 million,
respectively, to reflect adverse development of losses from prior accident
years.
The Company cannot predict whether or not losses will develop favorably or
unfavorably from the amounts recorded in the Company's financial statements.
However, the Company believes that such development will not have a material
effect on the Company's financial position, but could have a material effect on
the Company's financial results for a given period.
Note 6 - Securities Lending
Some of the Company's subsidiaries are parties to securities lending agreements
whereby unrelated parties, primarily large brokerage firms, borrow securities
from the subsidiaries' accounts. Borrowers of these securities must deposit cash
collateral with the subsidiaries equal to 102% of the fair value of the
securities loaned. The subsidiaries continue to receive the interest on loaned
securities as beneficial owners, and accordingly, the loaned securities are
included in Fixed Maturities. The amount of collateral received is invested in
short-term securities and is included in these financial statements as
Short-term Investments with a corresponding Liability for Funds Held for
Securities on Loan included in Accrued Expenses and Other Liabilities. The fair
value of collateral held was $95.0 million and $172.5 million at September 30,
2002 and December 31, 2001, respectively.
9
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7 - Notes Payable
On August 30, 2002, the Company entered into a $360 million unsecured revolving
credit agreement with a group of banks that expires on August 30, 2005, and
provides for fixed and floating rate advances for periods of up to 180 days at
various interest rates. The agreement contains various financial covenants,
including limits on total debt to total capitalization and minimum risk-based
capital ratios for the Company's largest insurance subsidiaries. The proceeds
from advances under the revolving credit agreement may be used for general
corporate purposes, including repurchases of the Company's common stock. The new
revolving credit agreement replaces the Company's former credit facility which
was terminated on August 30, 2002.
At September 30, 2002, the Company had no outstanding borrowings under the new
revolving credit agreement. At December 31, 2001, the Company had outstanding
borrowings under the former revolving credit agreement of $254 million, at a
weighted average interest rate of 2.44%. Interest expense under the revolving
credit agreements was $3.2 million and $7.2 million for the nine months ended
September 30, 2002 and 2001, respectively. Interest expense under the revolving
credit agreements was $0.1 million and $2.1 million for the three months ended
September 30, 2002 and 2001, respectively.
On June 26, 2002, the Company commenced an initial public offering of its 5.75%
senior notes due July 1, 2007 with an aggregate principal amount of $300 million
(the "Senior Notes"). The Senior Notes are unsecured and may be redeemed in
whole at any time or in part from time to time at the Company's option at
specified redemption prices. On July 1, 2002, the Company issued the Senior
Notes in exchange for proceeds of $296.8 million, net of transaction costs, for
an effective yield of 5.99%. Proceeds were used to repay borrowings under the
former revolving credit agreement. Interest expense under the Senior Notes was
$4.4 million for the nine and three months ended September 30, 2002.
Note 8 - Other Comprehensive Income
Other Comprehensive Income related to the Company's investments for the nine and
three months ended September 30, 2002 and 2001 was:
Nine Months Ended Three Months Ended
-------------------------- -------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Dollars in Millions) 2002 2001 2002 2001
- ------------------------------------------------------------------- ----------- ----------- ----------- -----------
Increase in Unrealized Gains, Net of
Reclassification Adjustment for Gains Included in Net Income $232.1 $142.0 $21.4 $204.7
Equity In Other Comprehensive Income (Loss) of Investees 2.1 (0.2) 2.9 (1.1)
Effect of Income Taxes (82.2) (49.7) (8.6) (71.6)
----------- ----------- ----------- ----------
Other Comprehensive Income $152.0 $ 92.1 $15.7 $132.0
=========== =========== =========== ==========
The Company's Investments in Investees are accounted for under the equity method
of accounting and, accordingly, changes in the fair value of the Company's
Investments in Investees are excluded from the determination of Total
Comprehensive Income and Other Comprehensive Income. Total Comprehensive Income
for the nine months ended September 30, 2002 and 2001 was $147.5 million and
$485.1 million, respectively. Total Comprehensive Loss for the three months
ended September 30, 2002 was $2.4 million. Total Comprehensive Income for the
three months ended September 30, 2001 was $152.1 million.
10
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9 - Income from Investments
Net Investment Income for the nine and three months ended September 30, 2002 and
2001 was:
Nine Months Ended Three Months Ended
---------------------- -----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Dollars in Millions) 2002 2001 2002 2001
- ----------------------------------------------------- --------- --------- ---------- ----------
Investment Income:
Interest and Dividends on Fixed Maturities $120.7 $132.8 $37.5 $44.2
Dividends on Equity Securities 25.5 17.6 9.9 9.0
Short-term 7.1 11.5 2.8 3.5
Real Estate 15.9 15.9 5.2 5.0
Other 8.9 9.4 2.8 3.1
------- -------- ------- ------
Total Investment Income 178.1 187.2 58.2 64.8
------- -------- ------- ------
Investment Expenses:
Real Estate 11.4 11.3 4.0 3.8
Other 0.8 0.5 0.3 0.1
------- -------- ------- ------
Total Investment Expenses 12.2 11.8 4.3 3.9
------- -------- ------- ------
Net Investment Income $165.9 $175.4 $53.9 $60.9
======= ======== ======= ======
The components of Net Gains (Losses) on Sales of Investments for the nine and
three months ended September 30, 2002 and 2001 were:
Nine Months Ended Three Months Ended
----------------------- -----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Dollars in Millions) 2002 2001 2002 2001
- ----------------------------------------------------- --------- ---------- --------- ----------
Fixed Maturities
Net Gains on Dispositions $ 3.5 $ 1.2 $ 2.8 $0.5
Loss from Write-downs (10.4) (0.9) (4.5) -
Equity Securities
Net Gains on Dispositions 1.6 1.7 - 0.7
Loss from Write-downs (16.6) - (16.6) -
Investees
Gains - 562.1 - -
Other Investments
Net Gains (Losses) on Dispositions 8.1 (0.3) 5.8 -
-------- --------- -------- ------
Net Gains (Losses) on Sales of Investments $(13.8) $563.8 $(12.5) $1.2
======== ========= ======== ======
11
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9 - Income from Investments (continued)
Net Gains (Losses) on Sales of Investments were losses of $13.8 million and
$12.5 million for the nine and three months ended September 30, 2002,
respectively, compared to gains of $563.8 million and $1.2 million for the nine
and three months ended September 30, 2001, respectively. Net Gains (Losses) on
Sales of Investments for the nine and three months ended September 30, 2002
includes a pre-tax gain of $8.1 million and $5.8 million, respectively, due to
the sale of certain investment real estate. Net Gains (Losses) on Sales of
Investments for the nine months ended September 30, 2002 includes pre-tax gains
of $1.5 million resulting from sales of a portion of the Company's investment in
Baker Hughes common stock. Net Gains (Losses) on Sales of Investments for the
nine months ended September 30, 2001 includes a pre-tax gain of $562.1 million
resulting from the acquisition of Litton by Northrop - See Note 4 - Investment
in Investees. Net Gains (Losses) on Sales of Investments for the nine months
ended September 30, 2001 includes pre-tax gains of $1.4 million resulting from
sales of a portion of the Company's investment in Baker Hughes common stock. The
Company cannot anticipate when or if similar investment gains or losses may
occur in the future.
The Company regularly reviews its investment portfolio for factors that may
indicate that a decline in fair value of an investment is other than temporary.
Some factors considered in evaluating whether or not a decline in fair value is
other than temporary include: 1) the Company's ability and intent to retain the
investment for a period of time sufficient to allow for an anticipated recovery
in value; 2) the duration and extent to which the fair value has been less than
cost; and 3) the financial condition and prospects of the issuer. Net Gains
(Losses) on Sales of Investments for the nine and three months ended September
30, 2002 includes losses of $27.0 million and $21.1 million, respectively,
resulting from other than temporary declines in the fair value of investments.
Net Gains (Losses) on Sales of Investments for the nine months ended September
30, 2001 includes losses of $0.9 million resulting from other than temporary
declines in the fair value of investments. The Company cannot anticipate when or
if similar investment losses may occur in the future.
Note 10 - Business Segments
The Company is engaged, through its subsidiaries, in the property and casualty
insurance, life and health insurance and consumer finance businesses. The
Company conducts its operations through six operating segments: Multi Lines
Insurance, Specialty Lines Insurance, Kemper Auto and Home, Life and Health
Insurance, Consumer Finance and Unitrin and Kemper Direct. Insurance products
provided by the Multi Lines Insurance segment consist of preferred and standard
risk automobile, homeowners, fire, commercial liability and workers compensation
and other related lines. Multi Lines Insurance products are marketed to
individuals and businesses with favorable risk characteristics and loss
histories and are sold by independent agents. Specialty Lines Insurance products
consist of automobile, motorcycle and watercraft insurance sold to individuals
and businesses in the non-standard and specialty market through independent
agents. The non-standard automobile insurance market consists of individuals and
companies that have difficulty obtaining standard or preferred risk insurance
because of their driving records. Kemper Auto and Home provides preferred and
standard risk personal automobile and homeowners insurance through independent
agents. The Life and Health Insurance segment includes individual life,
accident, health and hospitalization insurance sold primarily by
employee-agents. The Life and Health Insurance employee-agents also market
property insurance products under common management. The Consumer Finance
segment makes consumer loans primarily for the purchase of used automobiles and
offers thrift products in the form of investment certificates and savings
accounts. Unitrin and Kemper Direct provides personal automobile insurance
marketed through direct mail and television advertising and over the Internet.
12
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 - Business Segments (continued)
It is the Company's management practice to allocate certain corporate expenses
to its operating units. As further discussed in Note 1 to the Condensed
Consolidated Financial Statements, effective January 1, 2002, the Company is no
longer required to amortize Goodwill, but rather test it at least annually for
recoverability. Accordingly, the Company revised its management reporting in the
first quarter of 2002 to exclude Goodwill amortization from its Operating
Segments. The Company has reclassified Goodwill amortization for periods prior
to the date of adoption of SFAS No. 142 to a separate line. The effects of the
revision on Segment Operating Profit (Loss) for the nine and three months ended
September 30, 2001 were:
Nine Months Ended Three Months Ended
September 30, 2001 September 30, 2001
-------------------------------------- ----------------------------------
As Goodwill As Goodwill
(Dollars in Millions) Reported Amortization Revised Reported Amortization Revised
- --------------------------------------------- -------- ------------ ------- -------- ------------ -------
Segment Operating Profit (Loss):
Multi Lines Insurance $(42.9) $ 2.9 $(40.0) $(19.2) $ 0.9 $(18.3)
Specialty Lines Insurance (13.3) 1.4 (11.9) (0.7) 0.5 (0.2)
Life and Health Insurance 73.9 2.3 76.2 28.7 0.8 29.5
Consumer Finance 22.6 -- 22.6 9.2 -- 9.2
Unitrin and Kemper Direct (15.6) -- (15.6) (5.2) -- (5.2)
------ ----- ------ ------ ----- ------
Total Segment Operating Profit (Loss) $ 24.7 $ 6.6 $ 31.3 $ 12.8 $ 2.2 $ 15.0
====== ===== ====== ====== ===== ======
The Company considers the management of certain investments, including Northrop
common and preferred stock, Baker Hughes common stock and UNOVA common stock, to
be a corporate responsibility and excludes income from these investments from
its Operating Segments.
13
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 - Business Segments (continued)
Segment Revenues for the nine and three months ended September 30, 2002 and 2001
were:
Nine Months Ended Three Months Ended
------------------------- -------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Dollars in Millions) 2002 2001 2002 2001
- --------------------------------------- ---------- ---------- ---------- ----------
Revenues:
Multi Lines Insurance:
Premiums $ 436.3 $ 427.2 $147.6 $148.4
Net Investment Income 24.8 31.9 7.3 10.3
-------- -------- ------ ------
Total Multi Lines Insurance 461.1 459.1 154.9 158.7
-------- -------- ------ ------
Specialty Lines Insurance:
Premiums 330.1 246.9 118.9 93.0
Net Investment Income 11.3 10.8 3.9 3.9
-------- -------- ------ ------
Total Specialty Lines Insurance 341.4 257.7 122.8 96.9
-------- -------- ------ ------
Kemper Auto and Home:
Premiums 29.6 - 29.6 -
Net Investment Income 0.5 - 0.5 -
Other Income 19.0 - 19.0 -
-------- -------- ------ ------
Total Kemper Auto and Home 49.1 - 49.1 -
-------- -------- ------ ------
Life and Health Insurance:
Premiums 487.8 476.4 163.5 159.0
Net Investment Income 118.0 135.4 34.7 44.3
Other Income 3.2 3.6 1.2 1.2
-------- -------- ------ ------
Total Life and Health Insurance 609.0 615.4 199.4 204.5
-------- -------- ------ ------
Consumer Finance 126.0 119.0 44.1 40.7
-------- -------- ------ ------
Unitrin and Kemper Direct:
Premiums 41.7 5.0 27.0 3.3
Net Investment Income 0.5 - 0.3 -
-------- -------- ------ ------
Total Unitrin and Kemper Direct 42.2 5.0 27.3 3.3
-------- -------- ------ ------
Total Segment Revenues 1,628.8 1,456.2 597.6 504.1
Dividend Income from Corporate Investments 16.9 10.5 7.0 6.6
Other Investment Income 0.4 0.4 0.4 (0.1)
Net Gains (Losses) on Sales of Investments (13.8) 563.8 (12.5) 1.2
Other Income 2.8 3.1 1.0 0.9
Eliminations (6.5) (13.6) (0.2) (4.1)
-------- -------- ------ ------
Total Revenues $1,628.6 $2,020.4 $593.3 $508.6
======== ======== ====== ======
14
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 - Business Segments (continued)
Segment Operating Profit (Loss) for the nine and three months ended September
30, 2002 and 2001 was:
Nine Months Ended Three Months Ended
---------------------- ------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Dollars in Millions) 2002 2001 2002 2001
- ------------------------------------------- --------- --------- --------- ---------
Segment Operating Profit (Loss):
Multi Lines Insurance $(65.8) $(40.0) $(51.6) $(18.3)
Specialty Lines Insurance 0.4 (11.9) 2.9 (0.2)
Kemper Auto and Home (11.1) - (11.1) -
Life and Health Insurance 68.8 76.2 27.4 29.5
Consumer Finance 27.3 22.6 11.1 9.2
Unitrin and Kemper Direct (24.7) (15.6) (7.5) (5.2)
------ ------ ------ ------
Total Segment Operating Profit (Loss) (5.1) 31.3 (28.8) 15.0
Dividend Income from Corporate Investments 16.9 10.5 7.0 6.6
Net Gains (Losses) on Sales of Investments (13.8) 563.8 (12.5) 1.2
Goodwill Amortization - (6.6) - (2.2)
Other Expense, Net (5.8) (4.0) (3.7) (1.4)
Eliminations (6.5) (13.6) (0.2) (4.1)
------ ------ ------ ------
Income (Loss) Before Income Taxes and
Equity in Net Income (Loss) of Investees $(14.3) $581.4 $(38.2) $ 15.1
====== ====== ====== ======
Note 11 - Income Taxes
On September 27, 1999, Fireside Securities Corporation ("Fireside"), a
subsidiary of Unitrin received Notices of Proposed Adjustment to its California
Franchise tax returns from the State of California Franchise Tax Board (the
"FTB") in the amount of $7.5 million for 1992 and $8.3 million for 1993,
excluding interest. The FTB asserted that Fireside and Unitrin and its insurance
company subsidiaries are members of a single unitary group. The FTB assertion
would have had the effect of taxing inter-company dividends paid by Unitrin's
insurance subsidiaries to Unitrin, but excluding the apportionment factors of
the insurance company subsidiaries in determining the income taxable in
California. This assessment was vigorously contested and a formal protest was
filed with the FTB by Fireside on November 23, 1999.
On August 26, 2002, Fireside received official notification from the FTB that
after consideration of the protest filed, the FTB has withdrawn these
assessments.
The FTB implemented a new policy in 2002, that for tax years ending on or after
December 1, 1997 all dividends received from an 80 percent or more owned
insurance subsidiary are taxable. Fireside's tax returns for 1997 and subsequent
years have not been examined by the FTB, nor has Fireside been notified that
they will be examined, and the Company cannot presently predict whether the FTB
will assess any additional tax for these years. These notifications or
assessments did not have an impact on the results of operations for 2002 or
2001.
15
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12 - Related Party Transactions
One of Unitrin's directors, Mr. Fayez Sarofim, is the Chairman of the Board,
President and the majority shareholder of Fayez Sarofim & Co. ("FS&C"), a
registered investment advisory firm. Certain of the Company's insurance company
subsidiaries and FS&C are parties to agreements under which FS&C provides
investment management services to these subsidiaries. In addition, FS&C provides
investment management services with respect to certain funds of the Company's
pension plan. The agreements governing these arrangements are terminable by
either party at any time on 30 days advance written notice.
Under these investment advisory arrangements, FS&C is entitled to a fee
calculated and payable quarterly based upon the fair market value of the assets
under management. At September 30, 2002, the Company's subsidiaries and the
Company's pension plan had approximately $125.6 million and $54.4 million,
respectively, in assets with FS&C for investment management. During the first
nine months of 2002, the Company's subsidiaries and the Company's pension plan
paid $0.4 million in the aggregate to FS&C.
With respect to the Company's 401(k) Savings Plan, one of the alternative
investment choices afforded to participating employees is the Dreyfus
Appreciation Fund, an open-end, diversified managed investment fund (the
"Fund"). FS&C provides investment management services to the Fund as a
sub-investment advisor. According to published reports filed by FS&C with the
SEC, the Fund pays monthly fees to FS&C according to a graduated schedule
computed at an annual rate based on the value of the Fund's average daily net
assets. The Company does not compensate FS&C for services rendered to the Fund.
As of September 30, 2002, Company employees participating in the Company's
401(k) Savings Plan had allocated approximately $17.9 million for investment in
the Fund, representing approximately 11% of the total amount invested in the
Company's 401(k) Savings Plan.
The Company believes that the transactions described above have been entered
into on terms no less favorable than could have been negotiated with
non-affiliated third parties.
Note 13 - Legal Proceedings and Other Regulatory Matters
In October 1999, the Florida Department of Insurance filed and served a subpoena
upon the Company's subsidiary, United Insurance Company of America ("United"),
in connection with that Department's investigation into the sale and servicing
of industrial life insurance and small face amount life insurance policies in
the State of Florida. Subsequently, on December 15, 1999, a purported nationwide
class action lawsuit was filed against United in the United States District
Court for the Middle District of Florida on behalf of "all African-American
persons who have (or have had at the time of the Policy's termination), an
ownership interest in one or more Industrial Life Insurance Policies issued,
serviced, administered or purchased from United...." Plaintiffs alleged
discrimination in premium rates in violation of 42 U.S.C. 1981 and 1982 in
addition to various state law claims; unspecified compensatory and punitive
damages were sought together with equitable relief. At least twenty similar
lawsuits were filed in other jurisdictions against the Company and/or its career
agency life insurance subsidiaries, and the Judicial Panel on Multi-District
Litigation ordered that substantially all of these lawsuits be consolidated for
pretrial purposes.
On May 2, 2002, the Company announced a settlement, subject to court approval,
to resolve issues relating to the use of race as a factor in the underwriting
and pricing of life insurance by United and its subsidiaries. The settlement
resolved all pending class action lawsuits on this issue, as well as other
issues in the litigation unrelated to race-based underwriting. At the same time,
the Company announced the completion of a settlement agreement concerning these
matters with the Illinois Department of Insurance on behalf of insurance
regulators nationwide. On September 19, 2002, a court order was entered giving
final approval to the settlement. The period during which an appeal of that
court order could be filed has expired, and the Company is now in the process of
implementing the terms of the settlement agreement. As of October 22, 2002, the
Company has received approximately 1,800 confirmed opt-outs from the settlement,
out of a class of more than 465,000 policies. Persons who opt out of the
settlement have the right to bring individual lawsuits for the matters covered
by the settlement.
16
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 13 - Legal Proceedings and Other Regulatory Matters (continued)
In 2000, the Company recorded an after-tax charge of $32.4 million for the then
estimated cost to settle these matters. In the third quarter of 2002, the
Company recorded an after-tax charge of $2.1 million to cover certain additional
costs associated with the implementation of the settlement. The precise cost to
fully implement the settlement may vary from these charges based on a variety of
factors and will not be known until a final accounting of settlement benefits is
concluded, which is expected to occur in mid-2003. However, the Company believes
that such difference, if any, will not have a material adverse effect on the
Company's financial position, but could have a material adverse effect on the
Company's financial results for a given period.
The Company and its subsidiaries are defendants in various other legal actions
incidental to their businesses. Many of these actions are pending in
jurisdictions that permit damages, including punitive damages, that are
disproportionate to the actual economic damages alleged to have been incurred.
The plaintiffs in certain of these suits seek class action status that, if
granted, could expose the Company and its subsidiaries to potentially
significant liability by virtue of the size of the purported classes. The State
of Mississippi, where the Company and some of its subsidiaries are defendants in
a number of lawsuits, has received national attention for a large number of
multi-million dollar jury verdicts and settlements against corporations in a
variety of industries. Although Mississippi law does not permit class actions,
recent case law there allows for virtually unlimited joinder of plaintiffs in a
single action, thereby simulating a class action lawsuit. The Company and its
subsidiaries believe that there are meritorious defenses to the cases referenced
in this paragraph and are defending them vigorously. Although the Company
believes that resolution of these cases will not have a material adverse effect
on the Company's financial position, the frequency of large damage awards,
including punitive damage awards having little or no relationship to the actual
economic damages allegedly incurred, means that there can be no assurance that
one or more of these cases will not produce a damage award which could have a
material adverse effect on the Company's financial results for any given period.
17
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The Company is engaged, through its subsidiaries, in the property and casualty
insurance, life and health insurance and consumer finance businesses. The
Company conducts its operations through six operating segments: Multi Lines
Insurance, Specialty Lines Insurance, Kemper Auto and Home, Life and Health
Insurance, Consumer Finance and Unitrin and Kemper Direct. On June 28, 2002,
Unitrin closed its previously announced acquisition of the personal lines
property and casualty insurance business of the Kemper Insurance Companies (the
"KIC Acquisition"). The results of the KIC Acquisition are included in the
Company's results of operations from the date of acquisition.
It is the Company's management practice to allocate certain corporate expenses
to its operating units. As further discussed in Notes 1 and 10 to the Condensed
Consolidated Financial Statements, in connection with the adoption of Statement
of Financial Accounting Standards ("SFAS") No. 142, in the first quarter of
2002, the Company revised the management reporting of its segment results to
exclude amortization of Goodwill from its Operating Segments. The Company has
reclassified Goodwill amortization for periods prior to the date of adoption of
SFAS No. 142 to a separate line. The Company considers the management of certain
investments, including Northrop Grumman Corporation ("Northrop") common and
preferred stock, Baker Hughes, Inc. common stock and UNOVA, Inc. ("UNOVA")
common stock, to be a corporate responsibility and excludes income from these
investments from its Operating Segments.
Multi Lines Insurance
Nine Months Ended Three Months Ended
---------------------- -----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Dollars in Millions) 2002 2001 2002 2001
- -------------------------------------------- --------- --------- --------- ---------
Premiums:
Personal Lines:
Personal Automobile $143.9 $148.7 $ 48.9 $ 49.6
Homeowners 52.9 52.7 18.1 17.7
Other 7.9 7.9 2.6 2.6
------ ------ ------ ------
Total Personal Lines 204.7 209.3 69.6 69.9
------ ------ ------ ------
Commercial Lines:
Commercial Property & Liability 103.8 97.4 35.7 35.1
Commercial Automobile 85.8 80.3 29.2 28.5
Other 42.0 40.2 13.1 14.9
------ ------ ------ ------
Total Commercial Lines 231.6 217.9 78.0 78.5
------ ------ ------ ------
Total Premiums 436.3 427.2 147.6 148.4
------ ------ ------ ------
Net Investment Income 24.8 31.9 7.3 10.3
------ ------ ------ ------
Total Revenues $461.1 $459.1 $154.9 $158.7
====== ====== ====== ======
Operating Profit (Loss) $(65.8) $(40.0) $(51.6) $(18.3)
====== ====== ====== ======
GAAP Incurred Loss Ratio (excluding Storms) 80.4% 72.5% 100.0% 76.1%
GAAP Incurred Storm Loss Ratio 9.4% 14.6% 7.8% 12.5%
Total GAAP Incurred Loss Ratio 89.8% 87.1% 107.8% 88.6%
GAAP Combined Ratio 120.8% 116.8% 140.0% 119.3%
18
Multi Lines Insurance (continued)
Premiums in the Multi Lines Insurance segment increased by $9.1 million for the
nine months ended September 30, 2002, compared to the same period in 2001, due
primarily to higher premium rates in both personal lines and commercial lines,
partially offset by lower volume. Premiums decreased by $0.8 million for the
three months ended September 30, 2002, compared to the same period in 2001, as
lower volume was almost entirely offset by higher premium rates. Net Investment
Income decreased by $7.1 million and $3.0 million for the nine and three months
ended September 30, 2002, respectively, due primarily to lower yields on
investments.
Operating results in the Multi Lines Insurance segment reflect increases in
Operating Losses of $25.8 million and $33.3 million for the nine and three
months ended September 30, 2002, respectively, compared to the same periods in
2001, due primarily to reserve strengthening related to adverse reserve
development (which reflects changes in estimates of prior year reserves in the
current period) and lower net investment income, partially offset by lower storm
losses. Loss reserve development had an adverse effect of $43.6 million for the
nine months ended September 30, 2002, compared to an adverse effect of $15.0
million for the same period in 2001. The reserve increases reflect developing
loss trends primarily related to construction, mold, automobile liability and
product liablity loss exposures in commercial lines of business. Storm losses
were $40.8 million for the nine months ended September 30, 2002, a decrease of
$21.4 million compared to the same period in 2001. Storm losses were $11.5
million for the three months ended September 30, 2002, a decrease of $7.1
million compared to the same period in 2001.
The Company expects to reduce policies in force in certain commercial lines
through extensive re-underwriting of contractors and related industries, program
business, workers compensation, and product liability. The Company intends to
intensify aggressive pricing on commercial lines on selected portions of the
book. In addition, the Company is continuing to implement certain premium rate
increases in most other product lines, subject to regulatory approvals where
applicable. The Company is also continuing to review underwriting guidelines in
certain markets and other product lines and continues to implement certain
underwriting changes as it writes and renews its business, including placing a
moratorium on new business in certain markets where adequate rates cannot be
obtained.
Specialty Lines Insurance
Nine Months Ended Three Months Ended
-------------------------- --------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Dollars in Millions) 2002 2001 2002 2001
- ---------------------------------------------- ------------ ------------ ------------ ------------
Premiums:
Personal Automobile $299.1 $229.2 $105.8 $86.6
Commercial Automobile 30.2 16.9 12.9 6.2
Other 0.8 0.8 0.2 0.2
------- ------ ------ -----
Total Premiums 330.1 246.9 118.9 93.0
------- ------ ------ -----
Net Investment Income 11.3 10.8 3.9 3.9
------- ------ ------ -----
Total Revenues $341.4 $257.7 $122.8 $96.9
======= ====== ====== =====
Operating Profit (Loss) $ 0.4 $(11.9) $ 2.9 $(0.2)
======= ====== ====== =====
GAAP Incurred Loss Ratio (excluding Storms) 80.3% 81.2% 78.0% 80.7%
GAAP Incurred Storm Loss Ratio 0.4% 2.6% 0.1% (1.2%)
Total GAAP Incurred Loss Ratio 80.7% 83.8% 78.1% 79.5%
GAAP Combined Ratio 103.3% 109.1% 100.8% 104.4%
19
Specialty Lines Insurance (continued)
Premiums in the Specialty Lines Insurance segment increased by $83.2 million and
$25.9 million for the nine and three months ended September 30, 2002, compared
to the same periods in 2001, due to higher premium volume and higher premium
rates. Net Investment Income in the Specialty Lines Insurance segment increased
by $0.5 million for the nine months ended September 30, 2002, compared to the
same period in 2001, due to higher levels of investments, partially offset by
lower yields on investments. Net Investment Income in the Specialty Lines
Insurance segment was flat for the three months ended September 30, 2002,
compared to the same period in 2001, as higher levels of investments were offset
by lower yields on investments.
Operating results in the Specialty Lines Insurance segment improved by $12.3
million for the nine months ended September 30, 2002, compared to the same
period last year. Losses and expenses as a percent of premiums decreased, due in
part to improved premium rate adequacy and the effects of certain underwriting
actions and lower storm losses, partially offset by the effects of adverse loss
reserve development. Loss reserve development, which reflects changes in
estimates of prior year loss reserves in the current period, had an adverse
effect of $18.8 million for the nine months ended September 30, 2002, compared
to an adverse impact of $7.1 million for the same period in 2001.
Operating results in the Specialty Lines Insurance segment improved by $3.1
million for the three months ended September 30, 2002, compared to the same
period last year. Losses and expenses as a percent of premiums decreased, due in
part to improved premium rate adequacy and the effects of certain underwriting
actions, partially offset by the effects of adverse loss reserve development and
higher storm losses. Loss reserve development had an adverse effect of $5.8
million for the three months ended September 30, 2002, compared to an adverse
impact of $1.7 million for the same period in 2001.
The Company is continuing to implement certain premium rate increases in most
states and product lines, subject to regulatory approvals where applicable. The
Company is also continuing to review underwriting guidelines in certain markets
and product lines and continues to implement certain underwriting changes as it
writes and renews its business.
20
Kemper Auto and Home
On June 28, 2002, Unitrin closed its previously announced acquisition of the
personal lines property and casualty insurance business of the Kemper Insurance
Companies ("KIC") in a cash transaction. The results of Kemper Auto and Home
segment are comprised of the former Individual and Family Group business unit of
KIC ("IFG") that specializes in the sale of personal automobile and homeowners
insurance through independent agents. The acquisition is more fully described in
Note 3 to the Company's Condensed Consolidated Financial Statements. The results
of the Kemper Auto and Home segment are included in the Company's results of
operations from the date of acquisition and were as follows:
Nine and Three
Months Ended
(Dollars in Millions) Sept. 30, 2002
- ---------------------------- ---------------
Premiums Written $169.6
======
Premiums Earned $ 29.6
Net Investment Income 0.5
Other Income 19.0
------
Total Revenues 49.1
------
Incurred Losses 23.1
Insurance Expenses 37.1
------
Operating Loss $(11.1)
======
Pursuant to the acquisition agreement, KIC retained all liabilities for policies
issued by IFG prior to the closing, while Trinity Universal Insurance Company
("Trinity"), a subsidiary of Unitrin, is entitled to premiums written for
substantially all policies issued or renewed by IFG after the closing and is
liable for losses and expenses incurred thereon. Premiums written, which reflect
the total amount of premiums to be received over the entire policy term were
$169.6 million for both the nine and three months ended September 30, 2002.
Premiums for short-duration insurance contracts are deferred when written and a
liability for unearned premium is recorded. Such unearned premiums are
recognized as earned over the term of the insurance policy. Accordingly, the
Company's revenues only reflect $29.6 million of the premiums written as earned
during both the nine and three months ended September 30, 2002, with the balance
of $140.0 million of premiums written deferred and reflected as Unearned
Premiums in the Company's Condensed Consolidated Balance Sheet at September 30,
2002. The Company's premiums written will continue to exceed premiums earned
until at least one full policy renewal cycle has been completed.
Trinity is administering on behalf of KIC all policies issued prior to the
closing and certain policies issued or renewed after the closing, but excluded
from the acquisition (the "KIC Run-off"). For the three months ended September
30, 2002 the Company recorded Other Income of $19.0 million related to the
administration of the KIC Run-off.
The Kemper Auto and Home segment recorded an Operating Loss of $11.1 million for
both the nine and three months ended September 30, 2002, due primarily to
differences between the timing of recognition of earned premium and certain
fixed period costs. The Kemper Auto and Home segment's results also included
certain transition expenses, including consulting, recruiting, training and
temporary help services, to transfer systems and certain home office functions
from KIC to the Company. The Company will incur additional transition expenses
in the future, but expects such expenses to decline in the fourth quarter of
2002 and taper off in the first half of 2003. The Company expects that results
for the Kemper Auto and Home segment will improve in the fourth quarter of 2002,
but the Company expects to record an Operating Loss due to transition expenses
and differences between the timing of the recognition of earned premium and
certain fixed period costs.
21
Kemper Auto and Home (continued)
As discussed in Note 3 to the Company's Condensed Consolidated Financial
Statements, KIC is eligible to receive performance bonuses from the Company if
the business acquired from KIC meets certain loss ratio criteria over a
three-year period beginning January 1, 2003. The Company expects that the
profitability of the Kemper Auto and Home segment will be limited for the next
few years due to the Company's obligation to pay bonuses to KIC based on the
performance of the business.
Life and Health Insurance
Nine Months Ended Three Months Ended
------------------------ ------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Dollars in Millions) 2002 2001 2002 2001
- ----------------------- --------- --------- --------- ---------
Premiums:
Life $302.5 $297.5 $101.1 $ 98.9
Accident and Health 116.3 113.4 39.0 37.9
Property 69.0 65.5 23.4 22.2
--------- --------- --------- ---------
Total Premiums 487.8 476.4 163.5 159.0
Net Investment Income 118.0 135.4 34.7 44.3
Other Income 3.2 3.6 1.2 1.2
--------- --------- --------- ---------
Total Revenues $609.0 $615.4 $199.4 $204.5
========= ========= ========= =========
Operating Profit $ 68.8 $ 76.2 $ 27.4 $ 29.5
========= ========= ========= =========
Premiums in the Life and Health Insurance segment increased by $11.4 million and
$4.5 million for the nine and three months ended September 30, 2002,
respectively, compared to the same periods in 2001, due primarily to higher
accident and health insurance premium rates, higher volume of life insurance and
higher volume of property insurance sold by the Life and Health Insurance
segment's career agents, partially offset by lower volume of accident and health
insurance. Net Investment Income decreased by $17.4 million and $9.6 million for
the nine and three months ended September 30, 2002, respectively, compared to
the same periods last year, due to lower yields on investments and lower levels
of investments.
Operating Profit in the Life and Health Insurance segment decreased by $7.4
million and $2.1 million for the nine and three months ended September 30, 2002,
respectively, compared to the same periods in 2001, due primarily to the lower
net investment income and higher losses on property insurance sold by the Life
and Health Insurance segment's career agents, partially offset by a reduction of
reserves of $9.6 million resulting from a change in the Company's actuarial
estimate of certain reserves.
As discussed in Note 13 to the Company's Condensed Consolidated Financial
Statements, in the third quarter of 2002, the Company recorded a pre-tax charge
of $3.3 million to cover certain additional costs associated with the
implementation of the Company's settlement of certain legal proceedings. The
precise cost to fully implement the settlement may vary from amounts provided
for in the Company's financial statements based on a variety of factors and will
not be known until a final accounting of settlement benefits is concluded, which
is expected to occur in mid-2003. However, the Company believes that such
difference, if any, will not have a material adverse effect on the Company's
financial position, but could have a material adverse effect on the Company's
results for a given period.
22
Consumer Finance
Nine Months Ended Three Months Ended
------------------------- -------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Dollars in Millions) 2002 2001 2002 2001
- ---------------------------------------------------------------- --------- --------- --------- ---------
Interest, Loan Fees and Earned Discount $117.1 $109.2 $ 41.1 $ 37.4
Net Investment Income 5.4 6.6 1.8 2.0
Other 3.5 3.2 1.2 1.3
------ ------ ------ ------
Total Revenues 126.0 119.0 44.1 40.7
------ ------ ------ ------
Provision for Loan Losses 29.2 22.2 9.7 6.9
Interest Expense on Investment Certificates and Savings Accounts 26.9 33.4 8.8 10.8
General and Administrative Expenses 42.6 40.8 14.5 13.8
------ ------ ------ ------
Operating Profit $ 27.3 $ 22.6 $ 11.1 $ 9.2
====== ====== ====== ======
Consumer Finance Loan Originations $427.7 $367.3 $148.7 $111.6
====== ====== ====== ======
Percentage of Consumer Finance Receivables
Greater than Ninety Days Past Due 0.5% 0.6% 0.5% 0.6%
Ratio of Reserve for Loan Losses
to Gross Consumer Finance Receivables 5.4 5.0 5.4 5.0
Weighted-Average Interest Yield on
Investment Certificates and Savings Accounts 4.2% 5.5% 4.2% 5.5%
Interest, Loan Fees and Earned Discount in the Consumer Finance segment
increased by $7.9 million and $3.7 million for the nine and three months ended
September 30, 2002, respectively, compared to the same periods in 2001, due
primarily to a higher level of loans outstanding. Net Investment Income in the
Consumer Finance segment decreased by $1.2 million and $0.2 million for the nine
and three months ended September 30, 2002, respectively, compared to the same
periods in 2001, due primarily to lower yields on investments.
Operating Profit in the Consumer Finance segment increased by $4.7 million and
$1.9 million for the nine and three months ended September 30, 2002,
respectively, compared to the same periods in 2001. Provision for Loan Losses
increased by $7.0 million and $2.8 million for the nine and three months ended
September 30, 2002, respectively, compared to the same periods in 2001. Interest
Expense on Investment Certificates and Savings Accounts decreased by $6.5
million and $2.0 million for the nine and three months ended September 30, 2002,
respectively, compared to the same periods in 2001, due primarily to lower
interest rates on Investment Certificates and Savings Accounts, partially offset
by higher levels of deposits. General and Administrative Expenses, as a
percentage of Interest, Loan Fees and Earned Discount, decreased from 37.4% for
the nine months ended September 30, 2001, to 36.4% for the nine months ended
September 30, 2002, due primarily to the higher levels of loans outstanding.
Unitrin and Kemper Direct
On January 3, 2000, the Company established Unitrin Direct, a direct marketing
automobile insurance unit, to market personal automobile insurance directly to
customers primarily through direct mail and television advertising and, to a
lesser extent, the Internet. The business unit primarily utilizes the Company's
wholly-owned subsidiary, Unitrin Direct Insurance Company, but may also utilize
the licenses of other Unitrin subsidiaries as needed in states in which it is
not currently licensed. Unitrin Direct began actively marketing personal
automobile insurance in Pennsylvania at the beginning of 2001 and currently has
a presence in 6 states.
23
Unitrin and Kemper Direct (continued)
On June 28, 2002, the Company acquired the insurance companies comprising Kemper
Direct from KIC in a cash transaction. The results of its operations are
included in the Company's results of operation from the date of acquisition. See
Note 3 to Company's Condensed Consolidated Financial Statements. Kemper Direct
established operations in 1997 and currently has a presence in 19 states. Kemper
Direct's business model is based on selling automobile insurance over the
Internet through web insurance portals, click-thrus and its own e-Kemper
website.
Due to the similarity of Unitrin Direct's and Kemper Direct's business models,
products and back-office operations, the Company is in the process of combining
the operations of the two businesses into a single business unit. The Company
believes that such a combination provides an opportunity to achieve economies of
scale in a shorter time frame than would have been possible if both businesses
were operated as stand alone units.
Premiums written for the nine and three months ended September 30, 2002 were
$58.9 million and $36.8 million, respectively, compared to $16.0 million and
$7.9 million for the same periods in 2001. Premiums earned for the nine and
three months ended September 30, 2002 were $41.7 million and $27.0 million,
respectively, compared to $5.0 million and $3.3 million for the same periods in
2001. For the nine and three months ended September 30, 2002, the Unitrin and
Kemper Direct segment recorded Operating Losses of $24.7 million and $7.5
million, respectively, compared to Operating Losses of $15.6 million and $5.2
million for the same periods in 2001, due primarily to up-front marketing
expenses and uneconomic scale. Results for the nine months ended September 30,
2002 also included $1.3 million for certain severance costs.
Building a direct marketing insurer requires a significant investment resulting
in up-front costs and expenses associated with marketing products and acquiring
new policies. Although the Company believes that the Unitrin and Kemper Direct
segment is positioned to achieve economies of scale over the next few years, the
Company expects that Unitrin and Kemper Direct will continue to produce
operating losses until such economies of scale are achieved.
Equity in Net Income (Loss) of Investees
Unitrin accounts for its Investments in Investees under the equity method of
accounting using the most recent and sufficiently timely publicly-available
finance reports and other publicly-available information which generally results
in a two or three-month-delay basis depending on the investee being reported.
Equity in Net Income (Loss) of Investees for each of the Company's investee or
former investee companies for the nine and three months ended September 30, 2002
and 2001 was:
Nine Months Ended Three Months Ended
---------------------- ----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Dollars in Millions) 2002 2001 2002 2001
- ---------------------------------------- --------- --------- --------- ---------
UNOVA, Inc. $(1.7) $(1.3) $3.4 $6.0
Litton Industries, Inc. - 8.8 - -
Curtiss-Wright Corporation - 8.7 - 3.1
----- ----- ---- ----
Equity in Net Income (Loss) of Investees $(1.7) $16.2 $3.4 $9.1
===== ===== ==== ====
In 2000, Unitrin wrote down the carrying value of its investment in UNOVA to its
then current estimated realizable value. The loss was allocated to Unitrin's
proportionate share of UNOVA's non-current assets. Accordingly, Unitrin's
reported equity in UNOVA's results for subsequent periods, including the periods
presented above, differs from Unitrin's proportionate share of UNOVA's reported
results to the extent that such results include depreciation, amortization or
other charges related to such non-current assets.
24
Equity in Net Income (Loss) of Investees (continued)
UNOVA's results generally are publicly-available after Unitrin has filed its
quarterly results with the Securities and Exchange Commission. Accordingly, the
amounts recorded above for UNOVA are for periods ending three months prior to
the periods presented. On October 29, 2002, UNOVA publicly announced its results
for its three months ended September 30, 2002. Consistent with reporting UNOVA's
results on a three-month-delay basis, Unitrin will include net income of $2.3
million in Unitrin's fourth quarter results for Unitrin's proportionate share of
UNOVA's results for the three months ended September 30, 2002. On October 29,
2002, UNOVA also announced that it will record certain restructuring charges
ranging from $27 million to $32 million before taxes in its fourth quarter
ending December 31, 2002. Unitrin estimates that it will record an after-tax
charge ranging from $2.5 million to $3.0 million for Unitrin's proportionate
share of these charges.
On July 12, 2001, three of Unitrin's subsidiaries entered into a financing
agreement whereby the subsidiaries and other unrelated parties became
participants in a $75 million three-year term loan agreement with UNOVA. Under
the agreement, the subsidiaries provided $31.5 million in funding to UNOVA. The
outstanding principal balance owed to Unitrin's subsidiaries was $8.5 million
and $30.7 million at September 30, 2002 and December 31, 2001, respectively, and
is reflected in Investments in Fixed Maturities in these financial statements.
During 2001, two of Unitrin's subsidiaries purchased a portion of UNOVA's
outstanding publicly traded Notes maturing in March 2005 with a total par value
of $5.0 million.
In April 2001, Northrop completed its acquisition of Litton Industries, Inc.
("Litton"). Prior to the Northrop-Litton transaction, Unitrin and its
subsidiaries owned approximately 12.7 million shares or 28% of Litton's
outstanding common stock. Unitrin and its subsidiaries tendered all of their
shares of Litton common stock to Northrop. In exchange for their holdings of
Litton common stock, Unitrin and its subsidiaries received approximately 1.8
million shares of Northrop Series B convertible preferred stock and
approximately 7.7 million shares of Northrop common stock in a tax-free
exchange. In addition to receiving the Northrop preferred and common stock,
Unitrin and its subsidiaries received cash of $171.8 million, net of transaction
costs. In the second quarter of 2001, the Company recognized a pre-tax
accounting gain of $562.1 million and an after-tax accounting gain of $362.4
million, or $5.37 per common share related to this transaction. Prior to
Northrop's acquisition of Litton, Unitrin accounted for its investment in Litton
under the equity method of accounting. As a result of the Northrop-Litton
transaction, Unitrin's ownership percentage in the combined company fell below
20%, and accordingly, Unitrin does not apply the equity method of accounting to
its investments in Northrop.
In November 2001, Unitrin spun off its 44% equity ownership interest in
Curtiss-Wright Corporation ("Curtiss-Wright") in a tax-free distribution to
Unitrin's shareholders. In connection with the spin-off, all of the 4.4 million
Curtiss-Wright shares previously held by Unitrin were exchanged for 4.4 million
shares of a new Class B common stock of Curtiss-Wright that is entitled to elect
at least 80% of the Board of Directors of Curtiss-Wright but was otherwise
substantially identical to Curtiss-Wright's existing common stock. The
Curtiss-Wright Class B common stock was distributed pro ratably to shareholders
of Unitrin. All of the other outstanding shares of Curtiss-Wright common stock
remained outstanding and are entitled to elect approximately 20% of the Board of
Directors of Curtiss-Wright.
25
Corporate Investments
The Company considers the management of certain investments, including Northrop
common and preferred stock and Baker Hughes common stock, to be a corporate
responsibility and excludes income from these investments from its Operating
Segments. Dividend income from these Corporate Investments was:
Nine Months Ended Three Months Ended
-------------------------- --------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Dollars in Millions) 2002 2001 2002 2001
- ----------------------------------------------- ------------ ------------ ------------ ------------
Northrop Common Stock $ 9.2 $ 6.1 $3.1 $3.1
Northrop Preferred Stock 6.6 3.1 3.5 3.1
Baker Hughes Common Stock 1.1 1.3 0.4 0.4
------------ ------------ ------------ ------------
Total Dividend Income on Corporate Investments $16.9 $10.5 $7.0 $6.6
============ ============ ============ ============
The Company received its shares of Northrop common and preferred stock as a
result of the acquisition of the Company's former investee, Litton, by Northrop.
See Note 4 to the Condensed Consolidated Financial Statements. The acquisition
occurred in the second quarter of 2001 and, accordingly, the Company had no
dividends from Northrop common or preferred stock during the first quarter of
2001. In the first quarter of 2002 and the second quarter of 2001, the Company
did not record dividend income on its investment in Northrop preferred stock due
to the timing of the ex-dividend date. The Company sold a portion of its Baker
Hughes common stock holdings in 2001 and the first three months of 2002.
Accordingly, dividend income from Baker Hughes common stock has decreased for
the nine and three months ended September 30, 2002, compared to the same periods
last year. The Company cannot anticipate when or if similar investment sales may
occur in the future.
Subsequent to September 30, 2002, the fair value of Unitrin's investments in
Northrop preferred and common stocks decreased $212.4 million. While
experiencing a recent decline, Unitrin's investments in Northrop preferred and
common stocks have appreciated by $150.7 million since April 2001 when they were
acquired in connection with Northrop's acquisition of Litton.
Net Gains (Losses) on Sales of Investments
Net Gains (Losses) on Sales of Investments were losses of $13.8 million and
$12.5 million for the nine and three months ended September 30, 2002,
respectively, compared to gains of $563.8 million and $1.2 million for the nine
and three months ended September 30, 2001, respectively. Net Gains (Losses) on
Sales of Investments for the nine and three months ended September 30, 2002
includes a pre-tax gain of $8.1 million and $5.8 million due to the sale of
certain investment real estate. Net Gains (Losses) on Sales of Investments for
the nine months ended September 30, 2002 includes pre-tax gains of $1.5 million
resulting from sales of a portion of the Company's investment in Baker Hughes
common stock. Net Gains (Losses) on Sales of Investments for the nine months
ended September 30, 2001 includes a pre-tax gain of $562.1 million resulting
from the acquisition of Litton by Northrop - See discussion above under the
heading "Equity in Net Income (Loss) of Investees." Net Gains (Losses) on Sales
of Investments for the nine months ended September 30, 2001 includes pre-tax
gains of $1.4 million resulting from sales of a portion of the Company's
investment in Baker Hughes common stock. The Company cannot anticipate when or
if similar investment gains or losses may occur in the future.
26
Net Gains (Losses) on Sales of Investments (continued)
The Company regularly reviews its investment portfolio for factors that may
indicate that a decline in fair value of an investment is other than temporary.
Some factors considered in evaluating whether or not a decline in fair value is
other than temporary include: 1) the Company's ability and intent to retain the
investment for a period of time sufficient to allow for an anticipated recovery
in value; 2) the duration and extent to which the fair value has been less than
cost; and 3) the financial condition and prospects of the issuer. Net Gains
(Losses) on Sales of Investments for the nine and three months ended September
30, 2002 includes losses of $27.0 million and $21.1 million, respectively,
resulting from other than temporary declines in the fair value of investments.
Net Gains (Losses) on Sales of Investments for the nine months ended September
30, 2001 includes losses of $0.9 million resulting from other than temporary
declines in the fair value of investments. The Company cannot anticipate when or
if similar investment losses may occur in the future.
Other Items
Other Expense, Net increased by $1.8 million and $2.3 million for the nine and
three months ended September 30, 2002, respectively, compared to the same
periods in 2001. Other Expense, Net includes interest expense of $7.6 million
and $4.6 million for the nine and three months ended September 30, 2002,
respectively, compared to $7.2 million and $2.1 million, respectively, for the
same periods in 2001. In 2001, the Company settled a certain dispute with a
vendor. The amount recovered by the Company in 2001 exceeded the Company's
previous estimate of recovery by $1.0 million.
The Company's effective tax rate was a benefit of 80% for the nine months ended
September 30, 2002, due primarily to the Company's pre-tax operating loss and
the inclusion of tax-exempt income from investments in states, municipalities
and political subdivisions and dividends received on Northrop common and
preferred stock. The Company's effective tax rate was 35% for the nine months
ended September 30, 2001, as the effects of state income taxes and goodwill
amortization were primarily offset by tax-exempt income. Pursuant to the
provisions of SFAS No. 142 (See Note 1 to the Condensed Consolidated Financial
Statements) Goodwill is not amortized in 2002.
Liquidity and Capital Resources
At September 30, 2002, the Company had approximately 3.7 million shares
remaining under the existing common stock repurchase authorization. During the
first nine months of 2002, the Company repurchased 212,400 shares of its common
stock at an aggregate cost of $7.1 million in open market transactions.
On August 30, 2002, the Company entered into a $360 million unsecured revolving
credit agreement with a group of banks, which expires on August 30, 2005.
Proceeds from advances under the agreement may be used for general corporate
purposes, including repurchases of the Company's common stock. At September 30,
2002, the Company had no outstanding borrowings under the revolving credit
agreement. At September 30, 2002, the unused commitment under the Company's
revolving credit facility was $360 million.
On June 26, 2002, the Company commenced an initial public offering of its 5.75%
senior notes due July 1, 2007 with an aggregate principal amount of $300 million
(the "Senior Notes"). The Senior Notes are unsecured and may be redeemed in
whole at any time or in part from time to time at the Company's option at
specified redemption prices. On July 1, 2002, the Company issued the Senior
Notes in exchange for proceeds of $296.9 million, net of transaction costs, for
an effective yield of 5.99%. Proceeds were used to repay borrowings under the
Company's former revolving credit agreement. Interest expense under the Senior
Notes was $4.4 million for the nine and three months ended September 30, 2002.
During the first nine months of 2002, three of Unitrin's subsidiaries (United
Insurance Company of America, Trinity and Fireside Securities Corporation) paid
$357.0 million, $84.0 million and $14.0 million, respectively, in dividends to
Unitrin. As a result of the KIC acquisition, continuing losses in the Multi
Lines Insurance segment, and premium growth in the Specialty Lines Insurance
segment and Unitrin and Kemper Direct segment, Unitrin intends to contribute
capital to its property and casualty insurance operations. Unitrin has several
sources available to it to fund the capital contribution, including dividends
from Unitrin's life and health insurance operations, borrowings under the
revolving credit agreement, monetization of corporate assets or the issuance of
securities remaining under Unitrin's shelf registration statement.
27
Liquidity and Capital Resources (continued)
The Company has no significant commitments for capital expenditures. During the
first nine months of 2002, the Company's subsidiaries invested $14.0 million in
an investment fund and have an outstanding commitment to invest an additional
$21.0 million in such fund. The Company's subsidiaries maintain levels of cash
and liquid assets sufficient to meet ongoing obligations to policyholders and
claimants, as well as ordinary operating expenses. The Company's reserves are
set at levels expected to meet contractual liabilities. The Company maintains
adequate levels of liquidity and surplus capacity to manage the risks inherent
with any differences between the duration of its liabilities and invested
assets. As further discussed in Note 6 to the Condensed Consolidated Financial
Statements, some of Unitrin's subsidiaries hold collateral totaling $95.0
million from unrelated parties pursuant to securities lending agreements whereby
unrelated parties borrow securities from the subsidiaries' accounts. The
subsidiaries are required to return such collateral upon return of the loaned
security. Accordingly, the amount of such collateral would not be available to
meet ongoing obligations to policyholders and claimants, as well as ordinary
operating expenses. Unitrin and its subsidiaries have not formed special purpose
entities or similar structured financing vehicles to access capital and/or
manage risk. At September 30, 2002, the Company's subsidiaries had capacity to
write additional premiums relative to statutory capital and surplus
requirements.
Accounting Changes
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 141, "Business Combinations." SFAS No. 141 requires that all business
combinations be accounted for under the purchase method of accounting. SFAS
No. 141 also changes the criteria for the separate recognition of intangible
assets acquired in a business combination. SFAS No. 141 is effective for all
business combinations initiated after June 30, 2001.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses accounting and reporting for intangible
assets acquired, except for those acquired in a business combination.
SFAS No. 142 presumes that goodwill and certain intangible assets have
indefinite useful lives. Accordingly, goodwill and certain intangible assets
will not be amortized but rather will be tested at least annually for
impairment. SFAS No. 142 also addresses accounting and reporting for goodwill
and other intangible assets subsequent to their acquisition. SFAS No. 142
is effective for fiscal years beginning after December 15, 2001. On
January 1, 2002, the Company adopted SFAS No. 142. During the first quarter
of 2002, the Company tested Goodwill on the date of adoption for impairment
and determined that Goodwill was recoverable under the provisions of SFAS
No. 142. (See Note 1 to the Condensed Consolidated Financial Statements).
In connection with the adoption of SFAS No. 142, in the first quarter of 2002,
the Company revised the management reporting of its segment results to exclude
amortization of Goodwill from its previously reported Operating Segments (See
Notes 1 and 10 to the Condensed Consolidated Financial Statements).
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS No. 143 applies to all entities.
SFAS No. 143 applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of a long-lived asset, except for certain
obligations of lessees. SFAS No. 143 is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The Company expects that
the initial application of SFAS No. 143 will not have an impact on its
financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 replaces SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." SFAS No. 144 is intended to develop one accounting model,
based on the framework established in SFAS No. 121, for long-lived assets to
be disposed of by sale and to address significant implementation issues. SFAS
No. 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001, and interim periods within those fiscal years.
On January 1, 2002, the Company adopted SFAS No. 144. The initial application
of SFAS No. 144 did not have an impact on the Company's financial statements.
28
Accounting Changes (continued)
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
supersedes Emerging Issues Task Force ("EITF") No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of commitment to an exit or disposal
plan. On July 1, 2002, the Company adopted the provisions of SFAS No. 146
prospectively. The initial adoption of SFAS No. 146 did not have an impact on
the Company's financial statements.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 provides guidance on the accounting for
the acquisition of a financial institution, and applies to all acquisitions of
financial institutions except those between two or more mutual enterprises.
Pursuant to the provisions of SFAS No. 147, the specialized accounting guidance
specified in paragraph 5 of SFAS No. 72, "Accounting for Certain Acquisitions of
Banking or Thrift Institutions" will not apply after September 30, 2002. The
Company has not yet determined whether or not adoption of SFAS No. 147 will have
an impact on the Company's financial statements.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Pursuant to the rules and regulations of the U.S. Securities and Exchange
Commission (the "SEC"), the Company is required to provide the following
disclosures about Market Risk.
Quantitative Information About Market Risk
The Company's condensed consolidated balance sheets include four types of
financial instruments subject to material risk disclosures required by the SEC:
(1) Investments in Fixed Maturities, (2) Investments in Equity Securities,
(3) Consumer Finance Receivables and (4) Investment Certificates and Savings
Accounts. Investments in Fixed Maturities, Consumer Finance Receivables and
Investment Certificates and Savings Accounts are subject to material interest
rate risk. The Company's Investments in Equity Securities includes common and
preferred stocks, which are subject to material equity price risk and interest
rate risk, respectively.
For purposes of this disclosure, market risk sensitive financial instruments are
divided into two categories: financial instruments acquired for trading purposes
and financial instruments acquired for purposes other than trading. The
Company's market risk sensitive instruments are classified as held for purposes
other than trading. The Company's holdings of derivative instruments are
insignificant.
The Company measures its sensitivity to market risk by evaluating the change in
its financial assets and liabilities relative to fluctuations in interest rates
and equity prices. The evaluation is made using instantaneous changes in
interest rates and equity prices on a static balance sheet to determine the
effect such changes would have on the Company's market value at risk and the
resulting pre-tax effect on Shareholders' Equity. The changes chosen reflect the
Company's view of adverse changes that are reasonably possible over a one-year
period. The selection of the changes chosen should not be construed as the
Company's prediction of future market events, but rather an illustration of the
impact of such events.
29
Quantitative Information About Market Risk (continued)
For the interest rate sensitivity analysis presented below, the Company assumed
an adverse and instantaneous increase of 100 basis points in market interest
rates for Investments in Fixed Maturities, Preferred Stock Equity Securities and
Consumer Finance Receivables from their levels at September 30, 2002 and
December 31, 2001, respectively, and an adverse and instantaneous decrease of
100 basis points in market interest rates for Investment Certificates and
Savings Accounts from their levels at September 30, 2002 and December 31, 2001,
respectively. All other variables were held constant. The Company measured
equity price sensitivity assuming an adverse and instantaneous 10% decrease in
the Standard and Poor's Stock Index (the "S&P 500") from its levels at September
30, 2002 and December 31, 2001, with all other variables held constant. The
Company's Investment in Common Stock Equity Securities were correlated with the
S&P 500 using the portfolio's weighted-average beta of 0.46 and 0.55 at
September 30, 2002 and December 31, 2001, respectively. The portfolio's
weighted-average beta was calculated using each security's beta for the
five-year periods ended September 30, 2002 and December 31, 2001, respectively,
and weighted on the fair value of such securities at September 30, 2002 and
December 31, 2001, respectively. Beta measures a stock's relative volatility in
relation to the rest of the stock market with the S&P 500 having a beta
coefficient of 1.00.
Subsequent to September 30, 2002, the fair value of Unitrin's investments in
Northrop preferred and common stocks decreased by $212.4 million. While
experiencing a recent decline, Unitrin's investments in Northrop preferred and
common stocks have appreciated by $150.7 million since April 2001 when they were
acquired in connection with Northrop's acquisition of Litton.
The estimated adverse effects on the market value of the Company's financial
instruments using these assumptions were:
-------------------------------------------------
Pro Forma Increase (Decrease)
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Equity Total Market
(Dollars in Millions) Fair Value Rate Risk Price Risk Risk
- -----------------------------------------------------------------------------------------------------------------------------------
September 30, 2002
- --------------------------------------------------
Assets
Investments in Fixed Maturities $2,852.5 $ (99.4) $ - $ (99.4)
Investments in Equity Securities 1,582.8 (4.3) (68.7) (73.0)
Consumer Finance Receivables 796.3 (10.1) - (10.1)
Liabilities
Investment Certificates and Savings Accounts $ 820.0 $ 12.0 $ - $ 12.0
December 31, 2001
- --------------------------------------------------
Assets
Investments in Fixed Maturities $2,926.4 $(118.8) $ - $(118.8)
Investments in Equity Securities 1,387.4 (3.8) (71.7) (75.5)
Consumer Finance Receivables 720.1 (9.1) - (9.1)
Liabilities
Investment Certificates and Savings Accounts $ 753.7 $ 8.6 $ - $ 8.6
30
Quantitative Information About Market Risk (continued)
The market risk sensitivity analysis assumes that the composition of the
Company's interest rate sensitive assets and liabilities, including but not
limited to future contractual cash flows and credit quality, and equity price
sensitive assets existing at the beginning of the period remains constant over
the period being measured. It also assumes that a particular change in interest
rates is reflected uniformly across the yield curve regardless of the time to
maturity. Interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Also, any future
correlation, either in the near term or the long term, between the Company's
common stock equity securities portfolio and the S&P 500 may differ from the
historical correlation as represented by the weighted-average historical beta of
the common stock equity securities portfolio. Accordingly, the market risk
sensitivity analysis may not be indicative of, is not intended to provide, and
does not provide a precise forecast of the effect of changes of market rates on
the Company's income or Shareholders' Equity. Further, the computations do not
contemplate any actions the Company may undertake in response to changes in
interest rates or equity prices.
To the extent that any adverse 100 basis point change occurs in increments over
a period of time instead of instantaneously, the adverse impact on fair values
would be partially mitigated because some of the underlying financial
instruments would have matured. For example, proceeds from any maturing assets
could be reinvested and any new liabilities incurred at the then current
interest rates.
Qualitative Information About Market Risk
Market risk is a broad term related to economic losses due to adverse changes in
the fair value of a financial instrument and is inherent to all financial
instruments. SEC disclosure rules focus on only one element of market
risk--price risk. Price risk relates to changes in the level of prices due to
changes in interest rates, equity prices, foreign exchange rates or other
factors that relate to market volatility of the rate, index, or price underlying
the financial instrument. The Company's primary market risk exposures are to
changes in interest rates and certain exposures to changes in equity prices. The
Company manages its interest rate exposures with respect to Investments in Fixed
Maturities by investing primarily in investment-grade securities of moderate
duration. The interest rate risks with respect to the fair value of Consumer
Finance Receivables should be partially offset by the impact of interest rate
movements on Investment Certificates and Savings Accounts which are issued to
fund its receivables.
At September 30, 2002 and December 31, 2001, $1,202.1 million and $992.8 million
of the Company's Investments in Equity Securities, which exclude the Company's
Investments in Investees, was concentrated in the common and preferred stock of
Northrop. Northrop stated in its 2001 Annual Report on Form 10-K that it
"provides technologically advanced innovative products, services and solutions
in defense and commercial electronics, information technology, systems
integration and nuclear and non-nuclear shipbuilding and systems." Additionally,
Northrop stated that it "is subject to the usual vagaries of the marketplace, it
is also affected by the unique characteristics of the defense industry and by
certain elements peculiar to its own business mix." At September 30, 2002 and
December 31, 2001, respectively, the Company's Investments in Equity Securities
included $87.4 million and $112.8 million of Baker Hughes common stock. Baker
Hughes stated in its 2001 Annual Report on Form 10-K that it "is engaged in the
oil field and process industry," and in addition, it "manufactures and sells
other products and provides services to industries that are not related to the
oilfield or continuous process industries." Accordingly, the Company's
Investments in Equity Securities is sensitive to the nature of Northrop and
Baker Hughes' industry segments.
31
Caution Regarding Forward-Looking Statements
Management's Discussion and Analysis of Results of Operations and Financial
Condition, Quantitative and Qualitative Information About Market Risk 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),"
"forecast(s)," "intend(s)," "plan(s)," "expect(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 on Form 10-Q. 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 in this
Management's Discussion and Analysis of Results of Operations and Financial
Condition, changes in economic factors (such as interest rates, unemployment
rates and stock market fluctuations), changes in competitive conditions
(including availability of labor with required technical or other skills), the
number and severity of insurance claims (including those associated with
catastrophe losses), regulatory approval of insurance rates, license
applications and similar matters, governmental actions (including new laws or
regulations or court decisions interpreting existing laws and regulations),
consummation of business acquisitions 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
or will be achieved in any particular timetable. 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 on Form 10-Q.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Within 90 days prior to the filing date of this Form 10-Q (the "Evaluation
Date"), Richard C. Vie, Chairman of the Board and Chief Executive Officer of
Unitrin, and Eric J. Draut, Executive Vice President and Chief Financial
Officer, completed an evaluation, with the participation of other members of
management as they deemed appropriate, of the effectiveness of the design and
operation of Unitrin's disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended,
(the "Exchange Act")). Based upon such evaluation, and as of the Evaluation
Date, they concluded that Unitrin's disclosure controls and procedures were
adequate, in all material respects, to ensure that information required to be
disclosed by Unitrin in the reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission's rules and forms.
(b) Changes in internal controls.
Since the Evaluation Date, there were no significant changes in Unitrin's
internal controls or in other factors that could significantly affect such
controls.
32
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Information concerning pending legal proceedings is incorporated herein by
reference to Note 13 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 the Company's Registration Statement on Form S-3
filed May 9, 2002, Registration No. 333-87866.)
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 March 31, 2002.)
4.1 Rights Agreement, dated as of August 3, 1994, as amended October
12, 2000, between Unitrin, Inc. and First Union National Bank as
Rights Agent, which includes: as Exhibit A thereto, the Form of
Certificate of Amendment of Certificate of Designation, Preferences
and Rights of Series A Preferred Stock of Unitrin, Inc.; as Exhibit
B thereto, the Form of Rights Certificate; and, as Exhibit C
thereto, the Summary of Rights to Purchase Series A Preferred Stock
(Incorporated herein by reference to Exhibit 4.10 to the Company's
Registration Statement on Form S-3 filed May 9, 2002, Registration
No. 333-87866.)
4.2 Form of Senior Indenture (Incorporated herein by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-3
filed May 9, 2002, Registration No. 333-87866.)
4.3 Form of Subordinated Indenture (Incorporated herein by reference to
Exhibit 4.2 to the Company's Registration Statement on Form S-3
filed May 9, 2002, Registration No. 333-87866.)
4.4 Form of Senior Note with respect to the Company's 5.75% Senior
Notes due July 1, 2007 (Incorporated herein by reference to Exhibit
A attached to Exhibit 4.2 to the Company's Current Report on Form
8-K filed July 1, 2002.)
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, 2001.)
10.2 Unitrin, Inc. 1997 Stock Option Plan as amended and restated
(Incorporated herein by reference to Exhibit 10.2 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.)
10.3 Unitrin, Inc. 2002 Stock Option Plan (Incorporated herein by
reference to Exhibit A of the Company's Proxy Statement, dated
March 25, 2002, in connection with Company's annual meeting of
shareholders.)
10.4 Unitrin, Inc. 1995 Non-Employee Director Stock Option Plan as
amended and restated (Incorporated herein by reference to
Exhibit 10.3 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2001.)
10.5 Unitrin, Inc. Pension Equalization Plan (Incorporated herein by
reference to Exhibit 10.4 to the Company's Annual Report on Form
10-K for the year ended December 31, 1994), as amended by First and
Second Amendments to the Unitrin, Inc. Pension Equalization Plan
(Incorporated herein by reference to Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.)
33
10.6 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 Annual Report on Form 10-K for the year ended December
31, 2001), with the following executive officers:
Richard C. Vie (Chairman of the Board and Chief Executive
Officer)
Donald G. Southwell (President and Chief Operating Officer)
David F. Bengston (Vice President)
John M. Boschelli (Treasurer)
Eric J. Draut (Executive Vice President and Chief Financial
Officer)
Edward J. Konar (Vice President)
Scott Renwick (Senior Vice President, General Counsel and
Secretary)
Richard Roeske (Vice President and Chief Accounting Officer)
(Note: Each of the foregoing agreements is identical except that
the severance compensation multiple is 3.0 for Mr. Vie and 2.0 for
the other executive officers.)
10.7 Unitrin, Inc. Severance Plan (Incorporated herein by reference to
Exhibit 10.6 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2001.)
10.8 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.)
10.9 Unitrin, Inc. Non-Qualified Deferred Compensation Plan
(Incorporated herein by reference to Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.)
10.10 Credit Agreement, dated August 30, 2002, among Unitrin, Inc., the
Lenders party thereto, Bank One, N.A., as administrative agent and
Wachovia Bank, N.A., as syndication agent (Incorporated herein by
reference to Exhibit 10.1 to Unitrin's Current Report on Form 8-K
filed September 4, 2002.)
10.11 Registration Rights Agreement, dated as of January 23, 2001, by and
among, Northrop Grumman Corporation, NNG, Inc., a direct wholly
owned subsidiary of Northrop Grumman Corporation, and Unitrin, Inc.
(Incorporated by reference to Exhibit 2.1 to Unitrin's Schedule 13D
with respect to Northrop Grumman Corporation dated April 13, 2001.)
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Executive Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
34
(b) Reports on Form 8-K.
On July 1, 2002, the Company filed a report on Form 8-K to furnish
copies of an underwriting agreement (attached thereto as Exhibit 1.1)
and a pricing agreement relating to $300 million aggregate principal
amount of 5.75% senior notes due July 1, 2007 (the "Senior Notes")
(attached thereto as Exhibit 1.2), each among Unitrin, Inc., and a
group of underwriters consisting of Goldman, Sachs & Co., Banc One
Capital Markets, Inc., Wachovia Securities, Inc., BNY Capital Markets,
Inc., Tokyo-Mitsubishi International plc and Wells Fargo Brokerage
Services, LLC, (the "Underwriters") pursuant to which the Underwriters
agreed to purchase the Senior Notes from the Company.
The Senior Notes were sold pursuant to the shelf registration
statement filed by the Company with the Securities and Exchange
Commission on May 9, 2002, as amended June 24, 2002, and a prospectus
supplement dated June 26, 2002 and accompanying prospectus dated June
26, 2002.
The terms of the Senior Notes are set forth in an indenture dated as
of June 26, 2002 (attached to such Form 8-K as Exhibit 4.1), as
supplemented by an Officers' Certificate dated as of July 1, 2002,
including the form of Senior Note attached thereto as Exhibit A
(attached to such Form 8-K as Exhibit 4.2.)
On August 1, 2002, the Company filed a report on Form 8-K to furnish
the Statements under Oath of its Principal Executive Officer and its
Principal Financial Officer regarding facts and circumstances relating
to Exchange Act filings. Such statements were filed on August 1, 2002
with the Securities and Exchange Commission (the "SEC") pursuant to
the SEC's Order No. 4-460 (June 27, 2002.)
On September 4, 2002, the Company filed a report on Form 8-K to report
that on August 30, 2002, the Company entered into a $360 million
revolving credit facility pursuant to a credit agreement dated as of
August 30, 2002 (the "Credit Agreement") by and among Unitrin, the
Lenders party thereto, Bank One, N.A., as administrative agent and
Wachovia Bank, N.A., as syndication agent and to file a copy of the
Credit Agreement with the SEC.
35
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 6, 2002 /s/ Richard C. Vie
-------------------------------------------
Richard C. Vie
Chairman of the Board
and Chief Executive Officer
Date: November 6, 2002 /s/ Eric J. Draut
-------------------------------------------
Eric J. Draut
Executive Vice President and
Chief Financial Officer
Date: November 6, 2002 /s/ Richard Roeske
-------------------------------------------
Richard Roeske
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
36
CERTIFICATIONS
I, Richard C. Vie, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Unitrin, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 6, 2002
/s/ Richard C. Vie
- -----------------------------------------------------
Richard C. Vie
Chairman of the Board and
Chief Executive Officer
37
CERTIFICATIONS
I, Eric J. Draut, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Unitrin, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 6, 2002
/s/ Eric J. Draut
- ----------------------------
Eric J. Draut
Executive Vice President and
Chief Financial Officer
38