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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 March 31, 2003
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
Unitrin, Inc.
(Exact name of registrant as specified in its charter)
Delaware 95-4255452
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One East Wacker Drive, Chicago, Illinois 60601
(Address of principal executive offices) (Zip Code)
(312) 661-4600
(Registrant's telephone number, including area code)
Not Applicable
(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 _____
67,534,595 shares of common stock, $0.10 par value, were outstanding as of March
31, 2003.
UNITRIN, INC.
INDEX
Page
----
PART I. Financial Information.
Item 1. Financial Statements
Condensed Consolidated Statements of Income for the Three Months Ended
March 31, 2003 and 2002 (Unaudited). 1
Condensed Consolidated Balance Sheets as of March 31, 2003 (Unaudited)
and December 31, 2002. 2
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2003 and 2002 (Unaudited). 3
Notes to the Condensed Consolidated Financial Statements (Unaudited). 4-14
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition. 15-23
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 24-26
Item 4. Controls and Procedures. 27
PART II. Other Information.
Item 1. Legal Proceedings. 28
Item 6. Exhibits and Reports on Form 8-K. 28-30
Signatures 31
Certifications 32-33
UNITRIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share amounts)
(Unaudited)
Three Months Ended
---------------------
March 31, March 31,
2003 2002
--------- ---------
Revenues:
Premiums $581.1 $414.7
Consumer Finance Revenues 46.6 39.9
Net Investment Income 51.7 55.2
Other Income 10.3 1.8
Net Realized Investment Gains 5.9 0.3
------ ------
Total Revenues 695.6 511.9
------ ------
Expenses:
Insurance Claims and Policyholders' Benefits 423.6 301.5
Insurance Expenses 210.7 156.7
Consumer Finance Expenses 35.3 32.4
Interest and Other Expenses 9.7 4.8
------ ------
Total Expenses 679.3 495.4
------ ------
Income before Income Taxes and Equity
in Net Income (Loss) of Investee 16.3 16.5
Income Tax Expense 3.3 4.6
------ ------
Income before Equity in Net Income (Loss) of Investee 13.0 11.9
Equity in Net Income (Loss) of Investee 0.4 (2.7)
------ ------
Net Income $ 13.4 $ 9.2
====== ======
Net Income Per Share $ 0.20 $ 0.14
====== ======
Net Income Per Share Assuming Dilution $ 0.20 $ 0.13
====== ======
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)
March 31, December 31,
2003 2002
----------- ------------
(Unaudited)
Assets:
Investments:
Fixed Maturities at Fair Value (Amortized
Cost: 2003 - $3,148.4; 2002 - $2,887.7) $3,285.7 $3,023.0
Northrop Grumman Corporation Preferred Stock at Fair Value
(Cost: 2003 - $177.5; 2002 - $177.5) 221.8 218.9
Northrop Grumman Corporation Common Stock at Fair Value
(Cost: 2003 - $661.5; 2002 - $661.5) 657.7 743.6
Other Equity Securities at Fair Value
(Cost: 2003 - $361.1; 2002 - $384.5) 380.1 431.8
Investee at Cost Plus Cumulative Undistributed Earnings
(Fair Value: 2003 - $68.0; 2002 - $75.9) 65.2 64.9
Short-term Investments at Cost which Approximates Fair Value 437.7 556.8
Other 284.1 264.8
-------- --------
Total Investments 5,332.3 5,303.8
-------- --------
Cash 19.0 16.9
Consumer Finance Receivables at Cost (Fair
Value: 2003 - $856.8; 2002 - $829.9) 860.5 830.3
Other Receivables 918.2 669.6
Deferred Policy Acquisition Costs 392.4 382.6
Goodwill 344.7 344.7
Other Assets 153.0 157.7
-------- --------
Total Assets $8,020.1 $7,705.6
======== ========
Liabilities and Shareholders' Equity:
Insurance Reserves:
Life and Health $2,233.1 $2,216.5
Property and Casualty 1,290.9 974.9
-------- --------
Total Insurance Reserves 3,524.0 3,191.4
-------- --------
Investment Certificates and Savings Accounts at Cost
(Fair Value: 2003 - $881.4; 2002 - $864.7) 880.4 857.6
Unearned Premiums 789.5 734.3
Accrued and Deferred Income Taxes 313.2 350.5
Note Payable under Revolving Credit Agreement at
Cost which approximates Fair Value 80.0 80.0
Senior Notes Payable at Amortized Cost
(Fair Value: 2003 - $315.5; 2002 - $315.0) 297.2 297.1
Accrued Expenses and Other Liabilities 419.8 392.3
-------- --------
Total Liabilities 6,304.1 5,903.2
-------- --------
Shareholders' Equity:
Common Stock, $0.10 par value, 100 million Shares Authorized;
67,534,595 and 67,596,409 Shares Issued and Outstanding at
March 31, 2003 and December 31, 2002 6.8 6.8
Paid-in Capital 512.9 512.9
Retained Earnings 1,070.9 1,086.4
Accumulated Other Comprehensive Income 125.4 196.3
-------- --------
Total Shareholders' Equity 1,716.0 1,802.4
-------- --------
Total Liabilities and Shareholders' Equity $8,020.1 $7,705.6
======== ========
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)
Three Months Ended
---------------------
March 31, March 31,
2003 2002
--------- ---------
Operating Activities:
Net Income $ 13.4 $ 9.2
Adjustments to Reconcile Net Income to Net Cash
Provided (Used) by Operations:
Increase in Deferred Policy Acquisition Costs (8.4) (5.4)
Equity in Net (Income) Loss of Investee before Taxes (0.7) 4.2
Amortization of Investments 2.9 1.8
Increase (Decrease) in Receivables 37.6 (13.4)
Increase in Insurance Reserves and Unearned Premiums 100.3 68.7
Increase in Accrued and Deferred Income Taxes 1.0 1.1
Increase in Accrued Expenses and Other Liabilities 2.1 41.9
Net Realized Investment Gains (5.9) (0.3)
Provision for Loan Losses 11.0 9.7
Other, Net 8.7 6.3
------- -------
Net Cash Provided by Operating Activities 162.0 123.8
------- -------
Investing Activities:
Sales and Maturities of Fixed Maturities 428.7 462.9
Purchases of Fixed Maturities (689.3) (375.8)
Sales and Redemptions of Equity Securities 39.8 3.2
Purchases of Equity Securities (13.5) (34.0)
Change in Short-term Investments 119.1 (27.3)
Acquisition and Improvements of Investment Real Estate (18.2) (0.3)
Change in Other Investments (0.8) (1.0)
Change in Consumer Finance Receivables (41.2) (27.9)
Change in Capital Assets (3.2) (8.9)
------- -------
Net Cash Used by Investing Activities (178.6) (9.1)
------- -------
Financing Activities:
Change in Investment Certificates and Savings Accounts 22.9 6.3
Change in Universal Life and Annuity Contracts 1.3 1.3
Change in Liability for Funds Held for Securities on Loan 24.0 (97.1)
Notes Payable Proceeds 40.0 183.0
Notes Payable Payments (40.0) (183.8)
Cash Dividends Paid (28.1) (28.1)
Common Stock Repurchases (1.4) --
Other, Net -- 3.1
------- -------
Net Cash Provided (Used) by Financing Activities 18.7 (115.3)
------- -------
Increase (Decrease) in Cash 2.1 (0.6)
Cash, Beginning of Year 16.9 27.9
------- -------
Cash, End of Period $ 19.0 $ 27.3
======= =======
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. In the opinion of the
Company's management, the unaudited Condensed Consolidated Financial Statements
reflect all adjustments necessary for a fair presentation. Certain prior period
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, 2002.
Accounting Changes
- ------------------
Effective January 1, 2003, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," and as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure,"
prospectively to all awards granted, modified or settled on or after January 1,
2003.
The effects on Net Income, Net Income Per Share and Net Income Per Share
Assuming Dilution if the fair value based method had been applied to all awards
since the effective date of SFAS No. 123 for the periods presented below were:
Three Months Ended
----------------------
March 31, March 31,
(Dollars in Millions, Except Per Share Amounts) 2003 2002
- ----------------------------------------------- --------- ---------
Net Income, As Reported $13.4 $ 9.2
Add: Stock-Based Compensation Expense Included
in Reported Net Income, Net of Related Tax
Effects 0.3 0.2
Deduct: Total Stock-Based Employee Compensation
Expense Determined under Fair Value Based
Method for All Awards, Net of Related Tax
Effects (0.9) (1.4)
----- -----
Pro Forma Net Income $12.8 $ 8.0
===== =====
Net Income Per Share:
As Reported $0.20 $0.14
===== =====
Pro Forma $0.19 $0.12
===== =====
Net Income Per Share Assuming Dilution:
As Reported $0.20 $0.13
===== =====
Pro Forma $0.19 $0.12
===== =====
Prior to January 1, 2003, the Company accounted for its stock option plans under
the recognition and measurement provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. For the three months ended March 31, 2002, the Company recorded
compensation expense of $0.2 million after-tax due to the modification of
certain stock options accounted for under APB Opinion No. 25.
4
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation (continued)
On January 1, 2003, the Company adopted 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 initial application
of SFAS No. 143 did not have an impact on the Company's financial statements.
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
FIN 46 clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," for certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN 46
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. The Company did not create or obtain an interest in a
variable interest entity during the period February 1, 2003 through March 31,
2003. Accordingly, FIN 46 had no impact on the Company's financial statements.
Note 2 - Acquisition of Businesses
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, referred to herein as "Kemper Auto and Home" or "KAH,"
specializes in the sale of personal automobile and homeowners' insurance through
independent agents.
KIC retained all liabilities for policies issued by Kemper Auto and Home 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 Kemper Auto and Home after the closing and is
liable for losses and expenses incurred thereon. 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 and loss adjustment expense reserve
development for policy losses incurred by Kemper Direct prior to the acquisition
date, while KIC is entitled to 90% of any favorable development on such policy
losses.
At the acquisition date, Unitrin's property and casualty insurance subsidiaries
were not licensed in all the states where the KAH business is written nor were
certain computer and data processing modifications completed to allow for the
migration of the KAH business to the Company's property and casualty insurance
subsidiaries. Accordingly, Trinity and KIC entered into a quota share
reinsurance agreement whereby Trinity assumed 100% of the KAH business written
or renewed by KIC after the acquisition date in order to provide a transitional
period for Unitrin's property and casualty insurance subsidiaries to obtain
licenses in the necessary states and other insurance regulatory authorizations
and to complete the required computer and data processing modifications.
The Company's property and casualty insurance subsidiaries began directly
issuing insurance policies for new business in a few states in March 2003. The
Company anticipates that its property and casualty insurance subsidiaries will
begin directly issuing insurance policies for new business in most of KAH's
remaining states in the second quarter of 2003. The Company alsoanticipates that
it will begin issuing renewal insurance policies in the second quarter of 2003.
Accordingly, the Company expects that the migration of the KAH business to the
Company's property and casualty insurance subsidiaries will be substantially
completed no earlier than the end of 2004. The Company will continue to rely on
KIC to write new policies and renew existing policies on Unitrin's behalf until
Unitrin's insurance subsidiaries have obtained all insurance regulatory
authorizations and have completed certain computer and data processing
modifications necessary to allow the migration of such policies to such
subsidiaries.
5
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 - Acquisition of Businesses (Continued)
In December 2002, A. M. Best & Co., the principal insurance company rating
agency, lowered its rating for KIC from "A-" (excellent) to "B+" (very good). On
March 3, 2003, A. M. Best & Co. further lowered its rating for KIC from "B+"
(very good) to "B" (fair) with negative implications pending analysis of KIC's
year-end 2002 financial statements. While these rating actions on KIC did not
have an impact on Unitrin's property and casualty insurance subsidiaries' "A"
(excellent) ratings from A. M. Best & Co., they may adversely impact the future
willingness of independent agents to renew their customers' insurance policies
with KIC, even though they are reinsured by Trinity. In particular, homeowners'
insurance is ratings-sensitive due to minimum rating standards imposed by
certain residential mortgage lenders. Should KIC suffer further downgrades,
these effects could be magnified.
In addition, Lumbermens Mutual Casualty Company, KIC's lead company, has
disclosed in its Annual Statement for the year ended December 31, 2002 filed
with the Illinois Department of Insurance, that its total adjusted capital on
such date was less than the authorized control level risk-based capital as
defined by the Illinois Insurance Code. In such an event, the Illinois Director
of Insurance is empowered to impose a variety of remedial measures some of
which, if imposed, could adversely affect KIC's ability to continue to write
business on behalf of Unitrin's insurance subsidiaries. Meanwhile, Unitrin
continues aggressive actions to accelerate the migration of the personal lines
business to Unitrin's insurance subsidiaries and thereby to reduce their
dependence on KIC.
The Company cannot presently predict what impact its plans to preserve the
Kemper Auto and Home business will ultimately have on the ability of the Company
to write the Kemper Auto and Home business, nor can the Company predict what
impact these developments will ultimately have on the contingent purchase price
or performance bonuses described in Note 3 to the Company's Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2002.
On December 31, 2002, Unitrin completed the acquisition of two inactive, or
"shell," insurance companies, General Security Insurance Company and General
Security Property and Casualty Company (the "SCOR Companies"), from SCOR
Reinsurance Company in a cash transaction for a total purchase price of
approximately $31.8 million. The results of the SCOR Companies are included in
Unitrin's results from the date of the acquisition. The seller is responsible
for liabilities of the SCOR Companies incurred prior to the acquisition.
Accordingly, in connection with the sale the seller entered into an assumption
reinsurance agreement with the SCOR Companies whereby the SCOR Companies are
intended to be ultimately relieved of their legal liability to policyholders as
of December 31, 2002. At December 31, 2002, the Company completed a preliminary
allocation of the purchase price to the net assets acquired and allocated the
entire cost in excess of the fair value of the tangible assets acquired to the
fair value of the state insurance licenses acquired. During the first quarter of
2003, the Company received a final closing balance sheet and determined that the
assumption was not yet complete for certain policies and that the SCOR Companies
have not yet been relieved of their legal obligations to policyholders.
Accordingly, the allocation of the purchase price to the net assets acquired has
been adjusted to reflect such obligations to policyholders as liabilities of the
SCOR Companies, with an offsetting and corresponding receivable from the seller
reflected in Other Receivables, and to reflect other changes in the purchase
price resulting from changes in other assets and liabilities as reflected in the
final closing balance sheet.
6
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 - Acquisition of Business (Continued)
Based on the Company's most recent allocation of the purchase price, the assets
acquired and liabilities assumed in connection with the acquisition of the SCOR
Companies were:
(Dollars in Millions)
- ---------------------
Investments $ 20.9
Other Receivables 286.1
Value of Licenses Acquired 10.0
Other Assets 0.9
Insurance Reserves (267.5)
Unearned Premiums (18.6)
-------
Total Purchase Price $ 31.8
=======
Note 3 - Investment in Investee
Equity in Net Income (Loss) of Investee was income of $0.4 million and a loss of
$2.7 million for the three months ended March 31, 2003 and 2002, respectively.
Unitrin accounts for its investment in its investee, UNOVA, Inc. ("UNOVA"),
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 three-month-delay basis. In 2000,
Unitrin wrote down the carrying value of its investment in UNOVA and allocated
the loss to Unitrin's proportionate share of UNOVA's non-current assets.
Accordingly, Unitrin's reported equity in UNOVA's results for the three months
ended March 31, 2003 and 2002 differs from Unitrin's proportionate share of
UNOVA's results included in UNOVA's financial reports due to the extent that
such reported results include depreciation, amortization or other charges
related to such non-current assets and due to differences in the timing of
UNOVA's other publicly-available information and its inclusion in UNOVA's
financial reports.
Note 4 - Other Receivables
Under the agreement governing the 1999 acquisition of Valley Group, Inc.
("VGI"), the Company is entitled to recover 90% of unfavorable development on
VGI's pre-acquisition loss and loss adjustment expense reserves from the seller,
White Mountains Insurance Group, Ltd. ("White Mountains") (formerly Fund
American Enterprise Holdings, Inc.). The recovery is subject to a maximum limit
of $50 million. Such reserves have experienced unfavorable development, 90% of
the amount of which exceeded the maximum recovery under the agreement.
Accordingly, the recoverable at March 31, 2003 is recorded at the maximum limit.
The Company delivered a final reserve report to White Mountains on March 7,
2003.
On April 4, 2003, White Mountains responded to the Company and indicated, among
other things, that it believes that "the final reserve report does not
constitute an appropriate calculation of the [unfavorable development] and we
will not pay Unitrin the amount indicated." The Company believes it has
accurately calculated the reserve amount in question and intends to submit the
matter for resolution pursuant to the dispute resolution process provided in the
agreement.
7
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5 - 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"). The FTB asserted that Fireside and Unitrin and its insurance company
subsidiaries were 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. On March 12, 2003, Fireside was officially
notified that its tax returns for 1998, 1999 and 2000 would be examined. The
Company cannot presently predict whether the FTB will assess any additional tax
for these years under the new policy. Accordingly, this notification did not
have an impact on the results of operations for the three months ended March 31,
2003.
Note 6 - Notes Payable
The Company has a $360 million unsecured revolving credit agreement, expiring on
August 30, 2005, with a group of banks. The agreement 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 the
ratio of total debt to total capitalization and minimum risk-based capital
ratios for the Company's largest insurance subsidiaries. Proceeds from advances
under the agreement may be used for general corporate purposes, including
repurchases of the Company's common stock. Interest expense under the revolving
credit agreement was $0.4 million for the three months ended March 31, 2003.
Interest expense under the Company's former revolving credit agreement was $1.6
million for the three months ended March 31, 2002.
On July 1, 2002, the Company issued 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. Interest
expense under the Senior Notes was $4.5 million for the three months ended March
31, 2003.
Note 7 - 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 $24.0 million at March 31, 2003. No securities were
on loan at December 31, 2002.
8
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8 - Net Income Per Share
Net Income Per Share and Net Income Per Share Assuming Dilution for the three
months ended March 31, 2003 and 2002 were as follows:
Three Months Ended
---------------------
March 31, March 31,
(Dollars and Shares in Millions, Except Per Share Amounts) 2003 2002
- ---------------------------------------------------------- --------- ---------
Net Income $13.4 $ 9.2
Dilutive Effect on Net Income from
Investee's Equivalent Shares -- --
----- -----
Net Income Assuming Dilution $13.4 $ 9.2
===== =====
Weighted Average Common Shares Outstanding 67.6 67.6
Dilutive Effect of Unitrin Stock Option Plans 0.1 0.8
----- -----
Weighted Average Common Shares and
Equivalent Shares Outstanding Assuming Dilution 67.7 68.4
===== =====
Net Income Per Share $0.20 $0.14
===== =====
Net Income Per Share Assuming Dilution $0.20 $0.13
===== =====
Options outstanding at March 31, 2003 and 2002 to purchase 6.1 million and 0.1
million common shares, respectively, of Unitrin common stock were excluded from
the computation of Net Income Per Share Assuming Dilution for the three months
ended March 31, 2003 and 2002, respectively, because the exercise price exceeded
the average market price.
Note 9 - Other Comprehensive Income (Loss)
Other Comprehensive Income (Loss) related to the Company's investments for the
three months ended March 31, 2003 and 2002 was:
Three Months Ended
---------------------
March 31, March 31,
(Dollars in Millions) 2003 2002
- --------------------- --------- ---------
Increase (Decrease) in Unrealized Gains, Net of
Reclassification Adjustment for Gains
Included in Net Income $(109.3) $ 83.6
Other -- (0.6)
Effect of Income Taxes 38.4 (29.0)
------- ------
Other Comprehensive Income (Loss) $ (70.9) $ 54.0
======= ======
The Company's Investment in Investee is accounted for under the equity method of
accounting and, accordingly, changes in its fair value are excluded from the
determination of Total Comprehensive Income (Loss) and Other Comprehensive
Income (Loss). Total Comprehensive Loss for the three months ended March 31,
2003 was $57.5 million. Total Comprehensive Income for the three months ended
March 31, 2002 was $63.2 million.
9
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10 - Income from Investments
Net Investment Income for the three months ended March 31, 2003 and 2002 was:
Three Months Ended
---------------------
March 31, March 31,
(Dollars in Millions) 2003 2002
- --------------------- --------- ---------
Investment Income:
Interest and Dividends on Fixed Maturities $40.4 $44.2
Dividends on Equity Securities 6.4 5.9
Short-term 1.6 0.6
Real Estate 5.7 5.4
Other 2.1 2.8
----- -----
Total Investment Income 56.2 58.9
----- -----
Investment Expenses:
Real Estate 4.1 3.5
Other 0.4 0.2
----- -----
Total Investment Expenses 4.5 3.7
----- -----
Net Investment Income $51.7 $55.2
===== =====
The components of Net Realized Investment Gains for the three months ended
March 31, 2003 and 2002 were:
Three Months Ended
---------------------
March 31, March 31,
(Dollars in Millions) 2003 2002
- --------------------- --------- ---------
Fixed Maturities:
Gains on Dispositions $ 3.4 $ 0.7
Losses from Write-downs (1.3) (1.9)
Equity Securities:
Gains on Dispositions 17.9 1.5
Losses on Dispositions (2.3) --
Losses from Write-downs (11.8) --
------ -----
Net Realized Investment Gains $ 5.9 $ 0.3
====== =====
10
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11 - 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 Direct Sales. It is the Company's
management practice to allocate certain corporate expenses to its operating
units. The Company considers the management of certain investments, including
Northrop Grumman Corporation 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.
Insurance provided by the Multi Lines Insurance segment consists 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.
The Specialty Lines Insurance segment consists 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 usually 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. The Company's Life and Health Insurance
employee-agents also market property insurance products under common management.
The Consumer Finance segment finances purchases of used automobiles and offers
thrift products in the form of investment certificates and savings accounts.
On January 3, 2000, the Company established a new business unit to market
personal automobile insurance 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. Kemper
Direct sells automobile insurance over the Internet through web insurance
portals, click-throughs and its own e-Kemper website. The two direct units are
being combined and are managed as a separate business segment referred to herein
as Unitrin Direct Sales. Unitrin Direct Sales, as a direct marketer, typically
incurs higher up-front acquisition costs associated with marketing products and
acquiring new policies but is expected to experience lower renewal costs than
traditional insurance providers.
11
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11 - Business Segments (continued)
Segment Revenues for the three months ended March 31, 2003 and 2002 were:
Three Months Ended
---------------------
March 31, March 31,
(Dollars in Millions) 2003 2002
- --------------------- --------- ---------
Revenues:
Multi Lines Insurance:
Premiums $141.6 $145.6
Net Investment Income 7.7 8.8
------ ------
Total Multi Lines Insurance 149.3 154.4
------ ------
Specialty Lines Insurance:
Premiums 124.0 101.7
Net Investment Income 3.9 3.7
------ ------
Total Specialty Lines Insurance 127.9 105.4
------ ------
Kemper Auto and Home:
Premiums 118.0 --
Net Investment Income 2.7 --
Other Income 8.4 --
------ ------
Total Kemper Auto and Home 129.1 --
------ ------
Life and Health Insurance:
Premiums 163.9 161.1
Net Investment Income 33.3 42.3
Other Income 1.1 1.1
------ ------
Total Life and Health Insurance 198.3 204.5
------ ------
Consumer Finance 46.6 39.9
------ ------
Unitrin Direct Sales:
Premiums 33.6 6.3
Net Investment Income 0.4 0.1
------ ------
Total Unitrin Direct Sales 34.0 6.4
------ ------
Total Segment Revenues 685.2 510.6
Dividend Income from Corporate Investments 3.4 3.4
Other Investment Income 0.6 --
Net Realized Investment Gains 5.9 0.3
Other Income 0.8 0.7
Eliminations (0.3) (3.1)
------ ------
Total Revenues $695.6 $511.9
====== ======
12
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11 - Business Segments (continued)
Segment Operating Profit (Loss) for the three months ended March 31, 2003 and
2002 was:
Three Months Ended
---------------------
March 31, March 31,
(Dollars in Millions) 2003 2002
- --------------------- --------- ---------
Segment Operating Profit (Loss):
Multi Lines Insurance $ 5.5 $(6.8)
Specialty Lines Insurance 4.9 0.6
Kemper Auto and Home (14.1) --
Life and Health Insurance 12.0 23.2
Consumer Finance 11.3 7.5
Unitrin Direct Sales (7.9) (7.7)
------ -----
Total Segment Operating Profit 11.7 16.8
Dividend Income from Corporate Investments 3.4 3.4
Net Realized Investment Gains 5.9 0.3
Interest and Other Expense, Net (4.4) (0.9)
Eliminations (0.3) (3.1)
------ -----
Income Before Income Taxes and
Equity in Net Income (Loss) of Investee $ 16.3 $16.5
====== =====
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. 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 upon 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 March 31, 2003, the Company's subsidiaries and the
Company's pension plan had approximately $126.6 million and $55.6 million,
respectively, in investments managed by FS&C. During the first three months of
2003, the Company's subsidiaries and the Company's pension plan paid $0.1
million in the aggregate to FS&C.
13
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12 - Related Party Transactions (Continued)
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 March 31, 2003, employees participating in the Company's 401(k) Savings
Plan had allocated approximately $18.5 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
The Company and its subsidiaries are defendants in various 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 and the Company and
some of its subsidiaries are defendants in such quasi-class action lawsuits. 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.
14
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 Direct Sales.
The Company's management practice is to allocate certain corporate expenses to
its operating units. The Company considers the management of certain
investments, including Northrop Grumman Corporation ("Northrop") common and
preferred stock, Baker Hughes, Inc. ("Baker Hughes") 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
Three Months Ended
---------------------
March 31, March 31,
(Dollars in Millions) 2003 2002
- --------------------- --------- ---------
Premiums:
Personal Lines:
Personal Automobile $ 50.0 $ 47.3
Homeowners 17.9 17.3
Other 2.6 2.6
------ ------
Total Personal Lines 70.5 67.2
------ ------
Commercial Lines:
Commercial Property & Liability 33.6 34.4
Commercial Automobile 26.3 28.4
Other 11.2 15.6
------ ------
Total Commercial Lines 71.1 78.4
------ ------
Total Premiums $141.6 $145.6
====== ======
Underwriting Profit (Loss):
Personal Lines $ 0.1 $ (7.6)
Commercial Lines (2.3) (8.0)
------ ------
Total Underwriting Profit (Loss) (2.2) (15.6)
Net Investment Income 7.7 8.8
------ ------
Operating Profit (Loss) $ 5.5 $ (6.8)
====== ======
Ratio Based on Earned Premiums
- ------------------------------
Incurred Loss Ratio (excluding Storms) 68.2% 74.3%
Incurred Storm Loss Ratio 2.9% 6.3%
------ ------
Total Incurred Loss Ratio 71.1% 80.6%
Incurred Expense Ratio 30.5% 30.2%
------ ------
Combined Ratio 101.6% 110.8%
====== ======
15
Multi Lines Insurance (continued)
Premiums in the Multi Lines Insurance segment decreased by $4.0 million for the
three months ended March 31, 2003, compared to the same period in 2002. Personal
lines premiums increased by $3.3 million for the three months ended March 31,
2003, compared to the same period in 2002, due primarily to higher premium
rates, partially offset by lower premium volume. Commercial lines premiums
decreased by $7.3 million for the three months ended March 31, 2003, compared to
the same period in 2002, due primarily to lower premium volume, partially offset
by higher premium rates. Net Investment Income decreased by $1.1 million for the
three months ended March 31, 2003, due primarily to lower yields on investments,
partially offset by higher levels of investments. Investment levels in the Multi
Lines Insurance segment increased due primarily to capital contributions
received from its parent, Unitrin, Inc. (see discussion under "Liquidity and
Capital Resources").
Operating results in the Multi Lines Insurance segment improved by $12.3 million
for the three months ended March 31, 2003, compared to the same period in 2002,
due primarily to lower non-storm losses as a percent of premium in both personal
lines and commercial lines, due in part to improved premium rate adequacy and
the effects of certain underwriting actions. Storm losses were $4.1 million for
the three months ended March 31, 2003, a decrease of $5.0 million compared to
the same period in 2002.
The Company continues to evaluate strategic alternatives for its commercial
lines of businesses. While evaluating these alternatives, the Company expects
to continue reducing 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
continue aggressive pricing on commercial lines on selected portions of the
book. The Company is also 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
Three Months Ended
---------------------
March 31, March 31,
(Dollars in Millions) 2003 2002
- --------------------- --------- ---------
Premiums:
Personal Automobile $106.7 $ 93.5
Commercial Automobile 17.0 7.9
Other 0.3 0.3
------ ------
Total Premiums $124.0 $101.7
====== ======
Underwriting Profit (Loss):
Personal Automobile $ 0.6 $ (4.5)
Commercial Automobile 0.3 1.4
Other 0.1 --
------ ------
Total Underwriting Profit (Loss) 1.0 (3.1)
Net Investment Income 3.9 3.7
------ ------
Operating Profit $ 4.9 $ 0.6
====== ======
Ratio Based on Earned Premiums
- ------------------------------
Incurred Loss Ratio (excluding Storms) 76.9% 79.7%
Incurred Storm Loss Ratio 0.0% 0.0%
------ ------
Total Incurred Loss Ratio 76.9% 79.7%
Incurred Expense Ratio 22.3% 23.3%
------ ------
Combined Ratio 99.2% 103.0%
====== ======
16
Specialty Lines Insurance (continued)
Premiums in the Specialty Lines Insurance segment increased by $22.3 million for
the three months ended March 31, 2003, compared to the same period in 2002, due
to higher premium volume and premium rates. Net Investment Income in the
Specialty Lines Insurance segment increased by $0.2 million for the three months
ended March 31, 2003, compared to the same period last year, due to higher
levels of investments, partially offset by lower yields on investments.
Operating Profit in the Specialty Lines Insurance segment increased by $4.3
million for the three months ended March 31, 2003, compared to the same period
last year, due primarily to lower losses and expenses as a percentage of
premium. Loss reserve development (which reflects changes in estimates of prior
period loss reserves in the current period) had an adverse effect of $3.1
million for the three months ended March 31, 2003, compared to an adverse effect
of $6.2 million for the same period in 2002. Expenses decreased as a percentage
of premiums due in part to the increased premium and to lower bad debt expense.
Kemper Auto and Home
On June 28, 2002, Unitrin closed its acquisition of the personal lines property
and casualty insurance business of the Kemper Insurance Companies ("KIC") in a
cash transaction. The results of the Kemper Auto and Home segment ("KAH") are
comprised of the former Individual and Family Group business unit of KIC that
specializes in the sale of personal automobile and homeowners insurance through
independent agents. The quarterly results of the Kemper Auto and Home segment
included in the Company's results of operations from the date of acquisition
were as follows:
Three Months Ended
--------------------------------------
March 31, December 31, September 30,
(Dollars in Millions) 2003 2002 2002
- --------------------- --------- ------------ -------------
Net Written Premiums $157.1 $161.4 $169.6
====== ====== ======
Earned Premiums $118.0 $ 84.5 $ 29.6
Net Investment Income 2.7 2.3 0.5
Other Income 8.4 12.9 19.0
------ ------ ------
Total Revenues 129.1 99.7 49.1
------ ------ ------
Incurred Losses 98.2 65.2 23.2
Insurance Expenses 45.0 42.4 37.0
------ ------ ------
Operating Loss $(14.1) $ (7.9) $(11.1)
====== ====== ======
Pursuant to the agreements among the parties, KIC retained all liabilities for
policies issued by Kemper Auto and Home 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 the Kemper
Auto and Home segment 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 $157.1 million for the quarter
ended March 31, 2003. Premiums earned, which relate to the elapsed portion of
each policy's term were $118.0 million for the quarter ended March 31, 2003. The
Company expects that premiums written will continue to exceed premiums earned
until at least one full policy renewal cycle has been completed.
The Kemper Auto and Home segment 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 quarter
ended March 31, 2003, the Kemper Auto and Home segment recorded revenues of $8.4
million reflected as Other Income related to the administration of the KIC
Run-off. Other Income has decreased each quarter since the acquisition. The
Company anticipates that the volume of administered policies and related claims
will continue to decrease.
17
Kemper Auto and Home (Continued)
The Kemper Auto and Home segment recorded Operating Losses of $14.1 million for
the quarter ended March 31, 2003, due primarily to the seasonal nature of its
business. The Kemper Auto and Home segment's results included storm losses of
$15.0 million, primarily due to winter storms in the Mid-Atlantic and North-
eastern states.
At the acquisition date, Unitrin's property and casualty insurance subsidiaries
were not licensed in all the states where the KAH business is written nor were
certain computer and data processing modifications completed to allow for the
migration of the KAH business to the Company's property and casualty insurance
subsidiaries. Accordingly, Trinity and KIC entered into a quota share
reinsurance agreement whereby Trinity assumed 100% of the KAH business written
or renewed by KIC after the acquisition date in order to provide a transitional
period for Unitrin's property and casualty insurance subsidiaries to obtain
licenses in the necessary states and other insurance regulatory authorizations
and to complete the required computer and data processing modifications.
The Company's property and casualty insurance subsidiaries began directly
issuing insurance policies for new business in a few states in March 2003. The
Company anticipates that its property and casualty insurance subsidiaries will
begin directly issuing insurance policies for new business in most of KAH's
remaining states in the second quarter of 2003. The Company also anticipates
that it will begin issuing renewal insurance policies in the second quarter of
2003. Accordingly, the Company expects that the migration of the KAH business to
the Company's property and casualty insurance subsidiaries will be substantially
completed no earlier than the end of 2004. The Company will continue to rely on
KIC to write new policies and renew existing policies on Unitrin's behalf until
Unitrin's insurance subsidiaries have obtained all insurance regulatory
authorizations and have completed certain computer and data processing
modifications necessary to allow the migration of such policies to such
subsidiaries.
In December 2002, A. M. Best & Co., the principal insurance company rating
agency, lowered its rating for KIC from "A-" (excellent) to "B+" (very good). On
March 3, 2003, A.M. Best & Co. further lowered its rating for KIC from "B+"
(very good) to "B" (fair) with negative implications pending analysis of KIC's
year-end 2002 financial statements. While these rating actions on KIC did not
have an impact on Unitrin's property and casualty insurance subsidiaries' "A"
(excellent) ratings from A. M. Best & Co., they may adversely impact the future
willingness of independent agents to renew their customers' insurance policies
with KIC, even though they are reinsured by Trinity. In particular, homeowners'
insurance is ratings-sensitive due to minimum rating standards imposed by
certain residential mortgage lenders. Should KIC suffer further downgrades,
these effects could be magnified. In addition, Lumbermens Mutual Casualty
Company ("LMCC"), KIC's lead company, has disclosed in its Annual Statement for
the year ended December 31, 2002 filed with the Illinois Department of
Insurance, that its total adjusted capital on such date was less than the
authorized control level risk-based capital as defined by the Illinois Insurance
Code. In such an event, the Illinois Director of Insurance is empowered to
impose a variety of remedial measures some of which, if imposed, could adversely
affect KIC's ability to continue to write business on behalf of Unitrin's
insurance subsidiaries. Meanwhile, Unitrin continues aggressive actions to
accelerate the migration of the personal lines business to Unitrin's insurance
subsidiaries and thereby to reduce their dependence on KIC.
The Company cannot presently predict what impact its plans to preserve the
Kemper Auto and Home business will ultimately have on the ability of the Company
to write the Kemper Auto and Home business, nor can the Company predict what
impact these developments will ultimately have on the contingent purchase price
or performance bonuses described in Note 3 to the Company's Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2002.
18
Life and Health Insurance
Three Months Ended
---------------------
March 31, March 31,
(Dollars in Millions) 2003 2002
- --------------------- --------- ---------
Premiums:
Life $101.2 $100.3
Accident and Health 38.6 38.5
Property 24.1 22.3
------ ------
Total Premiums 163.9 161.1
Net Investment Income 33.3 42.3
Other Income 1.1 1.1
------ ------
Total Revenues $198.3 $204.5
====== ======
Operating Profit $ 12.0 $ 23.2
====== ======
Premiums in the Life and Health Insurance segment increased by $2.8 million for
the three months ended March 31, 2003, compared to the same period in 2002, due
primarily to higher accident and health insurance premium rates, higher volume
of property insurance sold by the Life and Health Insurance segment's career
agents and higher volume of life insurance, partially offset by lower volume of
accident and health insurance. Net Investment Income in the Life and Health
Insurance segment decreased by $9.0 million for the three months ended March 31,
2003, compared to the same period in 2002, due primarily to lower levels of
investments and lower yields on investments. Investment levels in the Life and
Health Insurance segment decreased due primarily to intercompany dividends of
$427 million in the form of cash and other investments paid by the segment in
2002 to its parent, Unitrin, Inc.
Operating Profit in the Life and Health Insurance segment decreased by $11.2
million for the three months ended March 31, 2003, compared to the same period
in 2002, due primarily to the lower net investment income.
Consumer Finance
Three Months Ended
---------------------
March 31, March 31,
(Dollars in Millions) 2003 2002
- --------------------- --------- ---------
Interest, Loan Fees and Earned Discount $ 43.7 $ 36.9
Net Investment Income 1.6 1.8
Other 1.3 1.2
------ ------
Total Revenues 46.6 39.9
------ ------
Provision for Loan Losses 11.0 9.7
Interest Expense on Investment Certificates
and Savings Accounts 8.6 9.1
General and Administrative Expenses 15.7 13.6
------ ------
Operating Profit $ 11.3 $ 7.5
====== ======
Consumer Finance Loan Originations $154.0 $138.1
Percentage of Consumer Finance Receivables
Greater than Sixty Days Past Due 2.09% 1.79%
Ratio of Reserve for Loan Losses
to Gross Consumer Finance Receivables 5.01% 4.95%
Weighted-Average Interest Yield on
Investment Certificates and Savings Accounts 3.84% 4.73%
19
Consumer Finance (continued)
Interest, Loan Fees and Earned Discount in the Consumer Finance segment
increased by $6.8 million for the three months ended March 31, 2003, compared to
the same period in 2002, due primarily to a higher level of loans outstanding.
Net Investment Income in the Consumer Finance segment decreased by $0.2 million
for the three months ended March 31, 2003, compared to the same period in 2002,
due primarily to lower yields on investments.
Operating Profit in the Consumer Finance segment increased by $3.8 million for
the three months ended March 31, 2003, compared to the same period in 2002.
Provision for Loan Losses increased by $1.3 million due primarily to a higher
level of loans outstanding. Interest Expense on Investment Certificates and
Savings Accounts decreased by $0.5 million 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 36.9% for the three
months ended March 31, 2002, to 35.9% for the three months ended March 31, 2003,
due primarily to the higher levels of loans outstanding.
Unitrin Direct Sales
Three Months Ended
---------------------
March 31, March 31,
(Dollars in Millions) 2003 2002
- --------------------- --------- ---------
Net Written Premiums:
Direct Mail $15.2 $ 9.3
Internet 22.0 --
----- -----
Total Net Written Premiums $37.2 $ 9.3
===== =====
Earned Premiums:
Direct Mail $13.3 $ 6.3
Internet 20.3 --
----- -----
Total Earned Premiums 33.6 6.3
Net Investment Income 0.4 0.1
----- -----
Total Revenues $34.0 $ 6.4
===== =====
Operating Loss $(7.9) $(7.7)
===== =====
Premiums written for the three months ended March 31, 2003 were $37.2 million,
compared to $9.3 million for the same period in 2002. For the three months ended
March 31, 2003, premiums written by the direct mail business unit were comprised
of $8.8 million and $6.4 million of new business written premiums and renewal
business written premiums, respectively. For the three months ended March 31,
2003, premiums written by the internet business unit were comprised of $9.7
million and $12.3 million of new business written premiums and renewal business
written premiums, respectively. The states of Florida, California and
Pennsylvania comprised 24.4%, 21.7% and 13.5%, respectively, of premiums written
by the Unitrin Direct Sales segment for the three months ended March 31, 2003.
Premiums earned for the three months ended March 31, 2003 were $33.6 million,
compared to $6.3 million for the same period in 2002. Earned premiums increased
due primarily to the acquisition of the internet business unit and new business
premiums written by the direct mail business unit during 2002. Net Investment
Income in the Unitrin Direct Sales segment increased by $0.3 million for the
three months ended March 31, 2003, compared to the same period last year, due to
higher levels of investments. For the three months ended March 31, 2003, the
Unitrin Direct Sales segment recorded an Operating Loss of $7.9 million,
compared to an Operating Loss of $7.7 million for the same period in 2002, due
primarily to up-front marketing expenses, uneconomic scale and inadequate
premium rates in some states. The Company is continuing to implement premium
rate increases in the Unitrin Direct Sales segment.
20
Unitrin Direct Sales (continued)
Due to the similarity of the business units' models, products and back-office
operations, the Company is in the process of combining its direct mail business
unit with the internet business unit that it acquired from LMCC in June 2002.
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.
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 Direct Sales
segment is positioned to achieve economies of scale over the next few years, the
Company expects that Unitrin Direct Sales will continue to produce operating
losses until such economies of scale are achieved.
Equity in Net Income (Loss) of Investee
Equity in Net Income (Loss) of Investee was income of $0.4 million and a loss of
$2.7 million for the three months ended March 31, 2003 and 2002, respectively.
Unitrin accounts for its investment in its investee, UNOVA, 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 three-month-delay basis. In 2000, Unitrin wrote
down the carrying value of its investment in UNOVA and allocated the loss to
Unitrin's proportionate share of UNOVA's non-current assets. Accordingly,
Unitrin's reported equity in UNOVA's results for the three months ended March
31, 2003 and 2002 differs from Unitrin's proportionate share of UNOVA's results
included in UNOVA's financial reports due to the extent that such reported
results include depreciation, amortization or other charges related to such
non-current assets and due to differences in the timing of UNOVA's other
publicly-available information and its inclusion in UNOVA's financial reports.
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 Corporate Investments was:
Three Months Ended
---------------------
March 31, March 31,
(Dollars in Millions) 2003 2002
- --------------------- --------- ---------
Northrop Common Stock $3.1 $3.1
Northrop Preferred Stock -- --
Baker Hughes Common Stock 0.3 0.3
---- ----
Total Dividend Income on Corporate Investments $3.4 $3.4
==== ====
The fair value of Corporate Investments decreased by $97.6 million for the three
months ended March 31, 2003. The changes in fair values of Corporate Investments
are summarized below:
Fair Value Increase / Fair Value
Dec. 31, (Decrease) in March 31,
(Dollars in Millions) 2002 Fair Values Dispositions 2003
- --------------------- ---------- ------------- ------------ ----------
Northrop Common Stock $ 743.6 $(85.9) $ -- $ 657.7
Northrop Preferred Stock 218.9 2.9 -- 221.8
Baker Hughes Common Stock 97.0 (6.7) (13.8) 76.5
UNOVA Common Stock 75.9 (7.9) -- 68.0
-------- ------ ------ --------
Total Fair Value $1,135.4 $(97.6) $(13.8) $1,024.0
======== ====== ====== ========
21
Net Realized Investments Gains
Net Realized Investment Gains were $5.9 million and $0.3 million for the three
months ended March 31, 2003 and 2002, respectively. Net Realized Investment
Gains for the three months ended March 31, 2003 included pre-tax gains of $21.3
million from dispositions, pre-tax losses of $2.3 million from dispositions and
pre-tax losses of $13.1 million resulting from other than temporary declines in
fair value of investments. Net Realized Investment Gains for the three months
ended March 31, 2002 included pre-tax gains of $2.2 million from dispositions
and pre-tax losses of $1.9 million resulting from other than temporary declines
in fair value of investments. 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. During the
first quarter of 2003, the Company wrote down investments in 19 issuers to
reflect other than temporary declines in market values. During the first quarter
of 2002, the Company wrote down investments in 2 issuers to reflect other than
temporary declines in market values. The Company cannot anticipate when or if
similar investment losses may occur in the future.
Other Items
Interest and Other Expense, Net increased by $3.5 million for the three months
ended March 31, 2003, compared to the same period in 2002. Interest and Other
Expense, Net includes interest expense of $4.9 million for the three months
ended March 31, 2003, compared to $1.6 million for the same period in 2002.
The Company's effective tax rate was 20.4% for the three months ended March 31,
2003, compared to 27.9% for the same period in 2002. The Company's effective tax
rate decreased due primarily to the tax-exempt income from investments in
states, municipalities and political subdivisions.
Liquidity and Capital Resources
At March 31, 2003, the Company had approximately 3.5 million shares remaining
under the existing common stock repurchase authorization. During the first three
months of 2003, the Company repurchased 62,000 shares of its common stock at an
aggregate cost of $1.4 million in open market transactions.
The Company has a $360 million unsecured revolving credit agreement, expiring on
August 30, 2005, with a group of banks. The agreement 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 the
ratio of total debt to total capitalization and minimum risk-based capital
ratios for the Company's largest insurance subsidiaries. Proceeds from advances
under the agreement may be used for general corporate purposes, including
repurchases of the Company's common stock. At March 31, 2003, the Company had
$80 million of outstanding borrowings under the revolving credit agreement. At
March 31, 2003, the unused commitment under the Company's revolving credit
facility was $280 million. Interest expense under the revolving credit agreement
was $0.4 million for the three months ended March 31, 2003. Interest expense
under the Company's former revolving credit agreement was $1.6 million for the
three months ended March 31, 2002.
On July 1, 2002, the Company issued 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. Interest
expense under the Senior Notes was $4.5 million for the three months ended March
31, 2003.
22
Liquidity and Capital Resources (continued)
During the first three months of 2003, one of Unitrin's subsidiaries (Fireside
Securities Corporation) paid $3.5 million in dividends to Unitrin. During the
first quarter of 2003, Unitrin made capital contributions totaling $123.0
million to its property and casualty insurance subsidiaries. During 2002,
Unitrin made a $75.6 million capital contribution, net of dividends received, to
its property and casualty insurance subsidiaries. Unitrin expects to make
additional contributions to its property and casualty insurance subsidiaries
during the remainder of 2003. Unitrin has several sources available to it to
fund the capital contributions, including dividends from Unitrin's life and
health insurance and Consumer Finance subsidiaries, borrowings under the
revolving credit agreement, monetization or contribution of corporate assets or
the issuance of securities remaining under Unitrin's shelf registration
statement.
The Company has no significant commitments for capital expenditures. During
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 7 to the Condensed Consolidated Financial Statements,
some of Unitrin's subsidiaries hold collateral totaling $24.0 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 March 31, 2003, the Company's subsidiaries had capacity to write
additional premiums relative to statutory capital and surplus requirements.
Accounting Changes
Effective January 1, 2003, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," and as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure,"
prospectively to all awards granted, modified or settled on or after January 1,
2003. Prior to January 1, 2003, the Company accounted for its stock option plans
under the recognition and measurement provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations.
For the three months ended March 31, 2003, the Company recognized compensation
expense of $0.5 million before tax, due to the adoption of SFAS No. 123. The
Company estimates that it will recognize compensation expense of $2.5 million
before tax for the full year in 2003 due to the adoption of SFAS No. 123.
On January 1, 2003, the Company adopted 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 initial application
of SFAS No. 143 did not have an impact on the Company's financial statements.
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
FIN 46 clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," for certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN 46
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. The Company did not create or obtain an interest in a
variable interest entity during the period February 1, 2003 through March 31,
2003. Accordingly, FIN 46 had no impact of the Company's financial statements.
23
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 five 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, (4) Investment Certificates and Savings Accounts
and (5) Senior Notes Payable. Investments in Fixed Maturities, Consumer Finance
Receivables, Investment Certificates and Savings Accounts and Senior Notes
Payable 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 as an illustration of
the impact of such events.
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 March 31, 2003 and December
31, 2002, respectively, and an adverse and instantaneous decrease of 100 basis
points in market interest rates for Investment Certificates and Savings Accounts
and Senior Notes Payable from their levels at March 31, 2003 and December 31,
2002, 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 March 31,
2003 and December 31, 2002, 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 0.40 and 0.40 at March
31, 2003 and December 31, 2002, respectively. The portfolio's weighted-average
beta was calculated using each security's beta for the five-year periods ended
March 31, 2003 and December 31, 2002, respectively, and weighted on the fair
value of such securities at March 31, 2003 and December 31, 2002, 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.
24
Quantitative Information About Market Risk (continued)
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
- --------------------- ---------- --------- ---------- ------------
March 31, 2003
- --------------
Assets
Investments in Fixed Maturities $3,285.7 $(153.3) $ -- $(153.3)
Investments in Equity Securities 1,259.6 (3.1) (46.1) (49.2)
Consumer Finance Receivables 856.8 (11.3) -- (11.3)
Liabilities
Investment Certificates and Savings Accounts $ 881.4 $ 15.9 $ -- $ 15.9
Senior Notes Payable 315.5 11.9 -- 11.9
December 31, 2002
- -----------------
Assets
Investments in Fixed Maturities $3,023.0 $(119.1) $ -- $(119.1)
Investments in Equity Securities 1,394.3 (4.1) (51.7) (55.8)
Consumer Finance Receivables 829.9 (10.9) -- (10.9)
Liabilities
Investment Certificates and Savings Accounts $ 864.7 $ 15.2 $ -- $ 15.2
Senior Notes Payable 315.0 12.2 -- 12.2
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 would be incurred at the then
current interest rates.
25
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.
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)," "plan(s)," "intend(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, the Condensed Consolidated Financial Statements (including notes
thereto), 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, policy forms,
license applications and similar matters, governmental actions (including new
laws or regulations or court decisions interpreting existing laws and
regulations), adverse judgments in litigation to which the Company or its
subsidiaries are parties, realization of economies of scale, and the successful
migration of the Kemper Auto and Home business. 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.
26
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
The Company's Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness of the Company's disclosure controls and procedures (as such
term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior
to the filing date of this Quarterly Report on Form 10-Q (the "Evaluation
Date"). Based on such evaluation, such officers have concluded that, as of the
Evaluation Date, the Company's disclosure controls and procedures are effective
in alerting them on a timely basis to material information relating to the
Company (including its consolidated subsidiaries) required to be included in the
Company's periodic filings under the Exchange Act.
(b) Changes in internal controls.
Since the Evaluation Date, there have not been any significant changes in the
Company's internal controls or in other factors that could significantly affect
such controls.
27
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.
2 Asset Purchase Agreement, dated as of April 19, 2002, by and among
Trinity Universal Insurance Company, Unitrin Services Company and
Lumbermens Mutual Casualty Company and certain of its subsidiaries and
affiliates (Incorporated herein by reference to Exhibit 2.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 2002.)
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.
4.1 Rights Agreement, dated as of August 3, 1994, as amended October 12,
2000, between Unitrin, Inc. and Wachovia Bank, N.A. (formerly known as
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 Senior Indenture dated as of June 26, 2002, by and between Unitrin,
Inc. and BNY Midwest Trust Company as Trustee (Incorporated herein by
reference to Exhibit 4.1 to the Company's current report on Form 8-K
dated July 1, 2002.)
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 Officer's Certificate, including form of Senior Note with respect to
the Company's 5.75% Senior Notes due July 1, 2007 (Incorporated herein
by reference 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. 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.)
10.4 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 the Company's 2002 Annual Meeting of Shareholders.)
28
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.)
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 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)
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 Unitrin, Inc. Bonus Plan for Senior Executives (Incorporated
herein by reference to Exhibit A to the Company's Proxy Statement,
dated April 9, 1998, in connection with Company's 1998 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.)
10.12 Second Amended and Restated Distribution Agreement, dated as of
August 17, 2001, between Unitrin, Inc. and Curtiss-Wright Corporation
(Incorporated by reference to Exhibit 99.1 to the Company's Amendment
No. 6 to its Schedule 13D with respect to Curtiss-Wright Corporation
dated August 17, 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 Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
29
(b) Reports on Form 8-K.
On March 6, 2003, the Company filed a report on Form 8-K to report a
ratings downgrade of the Kemper Insurance Companies ("KIC") by A.M. Best &
Co. and its potential implications with respect to the Company's
acquisition of the personal lines insurance business from KIC.
On April 15, 2003, the Company filed a report on Form 8-K to furnish its
announcement that, beginning with the first quarter 2003 Unitrin would
expense stock options granted to employees and directors using the
"prospective" method under Statement of Financial Accounting Standards
("SFAS") No. 123 as amended by SFAS No. 148.
30
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: April 23, 2003 /s/ Richard C. Vie
-------------------------------------------
Richard C. Vie
Chairman of the Board
and Chief Executive Officer
Date: April 23, 2003 /s/ Eric J. Draut
-------------------------------------------
Eric J. Draut
Executive Vice President and
Chief Financial Officer
Date: April 23, 2003 /s/ Richard Roeske
-------------------------------------------
Richard Roeske
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
31
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: April 23, 2003
/s/ Richard C. Vie
- -------------------------------
Richard C. Vie
Chairman of the Board and
Chief Executive Officer
32
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: April 23, 2003
/s/ Eric J. Draut
- -------------------------------
Eric J. Draut
Executive Vice President and
Chief Financial Officer
33