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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the fiscal year ended December 31, 1997.
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from N/A to N/A.
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 Number)
One East Wacker Drive
Chicago, Illinois 60601
(Address of Principal Executive Offices) (Zip Code)
(312) 661-4600
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value
Preferred Share Purchase Rights Pursuant to Rights Agreement
(Titles of classes)
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[X]
Based on the closing market price of Registrant's common stock on January
30, 1998, the aggregate market value of such stock held by non-affiliates of
Registrant is approximately $1.7 billion. Solely for purposes of this
calculation, all executive officers and directors of Registrant are considered
affiliates.
Registrant had 37,576,586 shares of common stock outstanding as of
January 31, 1998.
Documents Incorporated by Reference
Part of the Form 10-K
Document into which incorporated
Portions of 1997 Annual Report to Shareholders Parts I, II and IV
Portions of Proxy Statement for 1998 Annual Meeting Part III
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PART I
ITEM 1. Business
Unitrin, Inc. ("Unitrin" or the "Company") was incorporated in Delaware in
1990. Unitrin's subsidiaries serve the basic financial needs of individuals,
families and small businesses by providing property and casualty insurance, life
and health insurance, and consumer finance services.
(a) General development of business
During 1997, Unitrin repurchased 395,500 shares of its common stock in open
market transactions at an aggregate cost of approximately $20.7 million.
Unitrin has repurchased approximately 18.8 million shares of its common stock at
an aggregate cost of approximately $870 million since 1990. At December 31,
1997, approximately 2.8 million shares of Unitrin common stock remained under
the Company's outstanding repurchase authorizations.
Effective as of January 1, 1997, Unitrin acquired Union Automobile
Indemnity Company ("Union") of Bloomington, Illinois, a property and casualty
insurance company with annual direct written premiums of approximately $35
million. As consideration for the acquisition, Unitrin issued 342,000 shares of
its common stock, then valued at approximately $18.6 million, to Union's former
parent company.
Effective January 1, 1997, Unitrin's principal life and health insurance
subsidiary, United Insurance Company of America ("United"), sold all its life
and health insurance business in the states of Missouri and Arkansas to The
Reliable Life Insurance Company ("Reliable") by means of a 100% coinsurance
agreement. Reliable paid a ceding commission of approximately $14 million to
United and reinsured liabilities of approximately $28 million. Reliable offered
employment to approximately 150 persons who had been all the employees of United
in Missouri and Arkansas. The transaction also contemplated an eventual
assumption reinsurance of the affected policies, which has not yet occurred.
Accordingly, under applicable accounting requirements, the Company continues to
include the life insurance reserves for these policies on its balance sheet
along with a corresponding amount classified as "Other Receivables." As a
result of this transaction, premiums in Unitrin's Life and Health Insurance
segment decreased by approximately $10 million in 1997.
Subsequent to the successful consummation of United's coinsurance
transaction with and transfer of employees to Reliable, the Company first
considered acquiring Reliable. At that time, the Company concluded that there
might be significant economies of scale from combining United's business in
Texas with Reliable's larger life operations there. Based in St. Louis,
Reliable operates primarily in Missouri, Arkansas and Texas and has
approximately 1,400 employees. On June 20, 1997, Unitrin and Reliable entered
into a definitive agreement, subject to certain approvals and other customary
closing conditions, providing for the acquisition of Reliable by Unitrin.
On October 31, 1997, the Missouri Department of Insurance (the "Missouri
Department") held a hearing to consider approval of the transaction. On
December 12, 1997, the Missouri Department issued an order disapproving the
proposed acquisition. The Missouri Department found that the effect of the
acquisition would be substantially to lessen competition in insurance in the
State of Missouri. On December 23, 1997, Unitrin filed suit in the Circuit
Court of Cole County, Missouri seeking a reversal of the Missouri Department's
order.
If the acquisition is consummated as proposed, Unitrin would issue
approximately 3,760,000 shares of its common stock for all of Reliable's
outstanding common stock. If consummated, the acquisition would be accounted
for by the purchase method and, accordingly, the operations of Reliable would be
included in Unitrin's financial statements from the date of acquisition. The
acquisition would increase annual premiums in Unitrin's Life and Health
Insurance segment by approximately $90 million.
(b) Business segment financial data
Financial information about the Company's business segments for the years
ended December 31, 1997, 1996, and 1995 is contained in the following portions
of Unitrin's 1997 Annual Report and is incorporated herein by reference: (i)
Note 17 to the Company's Consolidated Financial Statements, which financial
statements are further described in Item 14(a)1 hereto and filed as Exhibit 13.1
hereto and incorporated by reference into Item 8 hereof (the "Financial
Statements"), and (ii) "Management's Discussion and Analysis of Results of
Operations and Financial Condition," which is filed as Exhibit 13.2 hereto and
incorporated by reference into Item 7 hereof (the "MD&A").
(c) Description of business
Through its subsidiaries, Unitrin conducts its operations in three
segments: Property and Casualty Insurance, Life and Health Insurance, and
Consumer Finance. Unitrin and its subsidiaries have approximately 6,900 full-
time employees of which approximately 4,600 are employed in the Life and Health
Insurance segment, 1,600 in the Property and Casualty Insurance segment, and 600
in the Consumer Finance segment.
Property and Casualty Insurance
Trinity Universal Insurance Company ("Trinity"), together with its
subsidiaries and affiliates (collectively, the "Property and Casualty Group"),
comprise a network of regional insurers operating in the southern, midwestern
and western United States. The Property and Casualty Group provides insurance
coverage to over 730,000 policyholders in 32 states. The five states which
provided the largest amount of 1997 premium are Texas (31%), California (15%),
Wisconsin (8%), Illinois (7%), and Louisiana (6%).
Property insurance indemnifies an insured with an interest in physical
property for loss of such property or the loss of its income-producing
abilities. Casualty insurance primarily covers liability for damage to property
of, or injury to, a person or entity other than the insured.
Products and Distribution
The Property and Casualty Group provides automobile, homeowners, commercial
multi-peril, motorcycle, boat and watercraft, fire, casualty, workers
compensation, and other types of property and casualty insurance to individuals
and businesses. Automobile insurance accounted for 40%, 37%, and 33% of
Unitrin's consolidated insurance premiums for the years ended December 31, 1997,
1996, and 1995, respectively.
Preferred and standard risk insurance products are marketed exclusively by
over 2,000 independent agents. These personal and commercial products are
designed and priced for those individuals and businesses that have demonstrated
favorable risk characteristics and loss history. Typical customers include
"main street" businesses and middle income families. Products are marketed
primarily in suburban and rural communities. Trinity and certain of Unitrin's
subsidiaries (Union, Milwaukee Guardian Insurance, Inc., Milwaukee Safeguard
Insurance Company, Security National Insurance Company, and Trinity Universal
Insurance Company of Kansas, Inc.) and affiliates (Milwaukee Mutual Insurance
Company and Trinity Lloyd's Insurance Company) principally provide the Property
and Casualty Group's preferred and standard products in 32 states including
Texas, Wisconsin, Illinois, Louisiana, Minnesota, and other southern, mid-
western, and northwestern states. These products accounted for approximately
73% of the Property and Casualty Group's 1997 premium revenue.
Specialty products are principally provided by two Trinity subsidiaries,
Financial Indemnity Company and Alpha Property & Casualty Insurance Company, and
include nonstandard personal and commercial automobile, motorcycle, and
specialty watercraft insurance. Nonstandard automobile insurance is provided
for individuals and companies that have had difficulty obtaining standard or
preferred risk insurance, usually because of their driving records. Nonstandard
automobile insurance products are marketed through over 4,600 independent agents
in California and 22 other states.
Storm Losses/Seasonality
Geographic location can have an impact on a property insurer's exposure to
losses from hazards such as hurricanes, tornadoes, windstorms, and hail.
Moreover, these storms add an element of seasonality to property insurance
claims, since windstorms and tornadoes tend to occur in the spring of the year,
while hurricanes generally occur in the summer and fall. Historically, the
Property and Casualty Group wrote a sizable portion of its business in Texas,
the plains states, and certain coastal areas that are storm-prone. In recent
years, the Property and Casualty Group has endeavored to reduce its
vulnerability to storm losses through a combination of geographic expansion
outside of these areas and reduced concentration of business in storm-prone
areas.
Pricing
Pricing levels for property and casualty insurance are influenced by many
factors, including the frequency and severity of claims, state regulation and
legislation, competition, general business conditions, inflation, expense
levels, and judicial decisions. In addition, many state regulators require
consideration of investment income when approving or setting rates, which
reduces underwriting margins.
Reinsurance
In accordance with the practice of the insurance industry, the Company
cedes insurance to other insurers. These reinsurance arrangements limit the
Company's exposure arising from large risks or from hazards of a catastrophic
nature. Although such reinsurance does not discharge the Company from its
obligations on risks insured, so long as reinsurers meet their obligations, the
Company's net liability is limited to the amount of risk it retains. See Note
18 to the Financial Statements.
Competition
Based on the most recent data published by A.M. Best Company ("A.M. Best")
as of the end of 1996, there were approximately 1,140 property and casualty
insurance organizations in the United States, made up of more than 2,400
companies. The Unitrin Property and Casualty Group ranked among the 100 largest
property and casualty insurance company organizations in the United States,
measured by admitted assets (67th), net premiums written (62nd), and
policyholders' surplus (50th).
In 1996, the industry's estimated net premiums written were $268 billion,
more than 73% of which were accounted for by 50 groups of companies. Unitrin's
property and casualty insurance companies together wrote less than 1% of the
industry's estimated 1996 premium volume.
Profitability of the property and casualty insurance industry is cyclical,
particularly with respect to commercial lines. Periods of severe price
competition and excess capacity to write new business tend to be followed by
periods of premium increases and diminished capacity to provide coverage.
Unitrin's insurance subsidiaries generally compete using appropriate
pricing, selling to selected markets, controlling expenses, maintaining ratings
from A.M. Best, and providing competitive services to agents and policyholders.
Life and Health Insurance
Unitrin conducts its life and health insurance business through United and
United's subsidiaries, Union National Life Insurance Company and The Pyramid
Life Insurance Company (collectively, the "Life and Health Group"). The leading
product of the Life and Health Group is ordinary life insurance, including
permanent and term insurance. This product accounted for 26%, 28%, and 32% of
Unitrin's consolidated insurance premiums for the years ended December 31, 1997,
1996, and 1995, respectively. Permanent policies are offered primarily on a
non-participating, guaranteed-cost basis.
United, together with Union National Life Insurance Company, is one of the
largest providers of insurance through the home service method of distribution
in the United States. Under the home service method of distribution, agents who
are full-time employees of the insurer call on customers in their homes to sell
insurance products (primarily ordinary life insurance), provide services related
to policies in force, and collect premiums, typically monthly. These customers
generally are middle and lower income families.
Approximately 2,700 Life and Health Group employee-agents offer a variety
of individual life, accident, and health insurance in 26 states. The Life and
Health Group's home service operations generated over 80% of the Group's
premiums in 1997.
The Life and Health Group also distributes property and casualty insurance
products to its home service customers through United Casualty Insurance Company
of America and Union National Fire Insurance Company.
United also specializes in employer-paid and voluntary group and individual
life insurance products. It provides such products primarily through brokers
and independent agents, as well as directly, on behalf of employers and
employees.
The Pyramid Life Insurance Company focuses primarily on selling insurance
to the senior market. Its products include medicare supplement, long-term care,
home health care, and supplemental health insurance. Products are marketed in
34 states through over 2,000 independent agents and agencies. Medicare
supplement insurance is also marketed through hospital networks.
Pricing
Premiums for life and health insurance products are based on assumptions
with respect to mortality, morbidity, investment yields, expenses, and lapses
and are also affected by state laws and regulations, as well as competition.
Pricing assumptions are based on the experience of the Life and Health Group, as
well as the industry in general, depending upon the factor being considered.
The actual profit or loss produced by a product will vary from the anticipated
profit if the actual experience differs from the assumptions used in pricing the
product.
Premiums for policies sold through the Life and Health Group's home service
operations are set at levels designed to cover the relatively higher cost of
home service distribution. As a result of such higher expenses, incurred claims
as a percentage of premium income tend to be lower for companies utilizing the
home service method of distribution than the insurance industry average.
Premiums for medicare supplement and other accident and health policies
must take into account the rising costs of medical care. The annual rate of
medical cost inflation has historically been higher than the general rate of
inflation, necessitating frequent rate increases, most of which are subject to
approval by state regulatory agencies.
Reinsurance
As is customary among life and health insurance companies, the Life and
Health Group cedes insurance above certain Company-determined retention limits
to other insurance companies to limit losses on risks. Under these reinsurance
arrangements, should the reinsurer be unable to meet the obligations it assumes,
the ceding insurance company remains contingently liable with respect to the
ceded insurance. For descriptions of these and certain other reinsurance
arrangements of the Company's Life and Health Group, see Items 1(a) and 7 of
this Form 10-K and Note 18 to the Financial Statements.
Lapse Ratio
The lapse ratio is a measure reflecting a life insurer's loss of existing
business. For a given year, this ratio is commonly computed as the total face
amount of individual life insurance policies lapsed, surrendered, expired and
decreased during such year, less policies increased and revived during such
year, divided by the total face amount of policies at the beginning of the year
plus the face amount of policies issued and reinsurance assumed in the prior
year. The Life and Health Group's lapse ratios for individual life insurance
were 15%, 19%, and 18% for the years 1997, 1996, and 1995, respectively.
The lapse ratios of companies utilizing the home service method of
distribution tend to be higher than the lapse ratios of most other life
insurance companies. Thus, to maintain or increase the level of its home
service business, the Life and Health Group's home service operations must
continue to write a high volume of new policies.
Competition
Based on the most recent data published by A.M. Best as of the end of 1996,
there were approximately 610 life and health insurance company groups in the
United States, made up of about 1,150 companies. Unitrin's Life and Health
Group ranked among the 100 largest life and health insurance company groups, as
measured by admitted assets (99th) and capital and surplus (43rd).
Unitrin's insurance subsidiaries generally compete using appropriate
pricing, selling to selected markets, controlling expenses, maintaining ratings
from A.M. Best, and providing competitive services to agents and policyholders.
Consumer Finance
Unitrin is engaged in the consumer finance business through its subsidiary,
Fireside Thrift Co. ("Fireside Thrift"), which has 37 branches in California and
one loan production office in Arizona.
Fireside Thrift is organized under California law as an industrial loan
company and is a member of the Federal Deposit Insurance Corporation (the
"FDIC"). Industrial loan companies are sometimes also referred to as thrift and
loan companies and are distinct from both savings and loan associations and
banks. See also "Regulation" below.
Fireside Thrift's principal business is the financing of used automobiles
through the purchase of conditional sales contracts from automobile dealers.
Fireside Thrift also makes personal loans, mostly secured by automobiles. The
borrowers under these contracts and loans typically have marginal credit
histories. However, Fireside Thrift individually underwrites each loan
application and historically has declined to extend credit to more than three
quarters of its loan applicants. See "Management's Discussion and Analysis of
Results of Operations-Consumer Finance" in Item 7 below for a discussion about
Fireside Thrift's loan loss reserves.
Fireside Thrift competes for loans primarily on the basis of timely service
to its customers and by offering flexible loan terms. Principal competitors
include banks, finance companies, "captive" credit subsidiaries of automobile
manufacturers, and other industrial loan companies.
Fireside Thrift's financing activities are funded primarily by thrift
investment certificates (i.e., interest-bearing instruments that may be redeemed
by the owner or repurchased by Fireside Thrift under certain circumstances)
ranging from thirty-one days to five years in maturity and money market
accounts. It competes for funds primarily with banks, savings and loan
associations, and other industrial loan companies.
Investments
The quality, nature, and amount of the various types of investments which
can be made by insurance companies are regulated by state laws. These laws
permit investments in qualified assets, including municipal, state and federal
government obligations, corporate bonds, real estate, preferred and common
stocks, and mortgages where the value of the underlying real estate exceeds the
amount of the loan.
Unitrin's investment strategy is based on current market conditions and
other factors that it reviews from time to time. Unitrin's consolidated
investment portfolio consists primarily of United States Government obligations
and investment-grade fixed maturities and investments in investees. The
Company's investment in non-investment grade, fixed maturity investments is
insignificant. See the discussions of the Company's investments under the
headings "Investees," "Investment Results," and "Liquidity and Capital
Resources" in Item 7 of this Form 10-K and in Notes 4 and 5 to the Financial
Statements.
Regulation
Unitrin is subject to the insurance holding company laws of several states.
Certain dividends and distributions by an insurance subsidiary to its holding
company are subject to approval by the insurance regulators of the state of
incorporation of such subsidiary. Other significant transactions between an
insurance subsidiary and its holding company or other subsidiaries of the
holding company may require approval by insurance regulators in the state(s) of
incorporation of one or more of the insurance subsidiaries participating in such
transactions.
Unitrin's insurance subsidiaries are subject to regulation in the states in
which they do business. Such regulation pertains to matters such as approving
policy forms and various premium rates, licensing agents, granting and revoking
licenses to transact business and regulating trade practices. The majority of
Unitrin's insurance operations are in states requiring prior approval by
regulators before proposed rates for property, casualty, or health insurance
policies may be implemented. However, rates proposed for life insurance
generally become effective immediately upon filing with a state, even though the
same state may require prior rate approval for other forms of insurance.
Insurance regulatory authorities perform periodic examinations of an insurer's
market conduct and other affairs.
State insurance regulators also prescribe the form and content of financial
statements, perform periodic financial examinations of insurers, set minimum
reserve and loss ratio requirements, establish standards for the types and
amounts of investments and require minimum capital and surplus levels. Such
statutory capital and surplus requirements include risk-based capital ("RBC")
rules promulgated by the National Association of Insurance Commissioners (the
"NAIC"). Compliance with the RBC rules is determined by the ratio of regulatory
total adjusted capital, as defined by the NAIC, to the authorized control level
RBC, as defined by the NAIC. At December 31, 1997, the total adjusted capital
of every one of Unitrin's insurance subsidiaries significantly exceeded the
minimum RBC requirements.
The NAIC annually calculates certain statutory financial ratios for most
insurance companies in the United States. These calculations are known as the
Insurance Regulatory Information System ("IRIS") ratios. There presently are
twelve IRIS ratios. The primary purpose of the ratios is to provide an "early
warning" of any negative developments. The NAIC reports the ratios to state
regulators who may then contact the companies if three or more ratios fall
outside the NAIC's "usual ranges." At December 31, 1996, Unitrin had no
subsidiaries with three or more ratios outside the usual range.
In addition, the Company's insurance subsidiaries are required under the
guaranty fund laws of most states in which they transact business to pay
assessments up to prescribed limits to fund policyholder losses or liabilities
of insolvent insurance companies. The Company also is required to participate
in various involuntary pools, principally involving workers compensation and
windstorms. The Company's involuntary pool participation in most states is
generally in proportion to its voluntary writings of related lines of business
in such states.
Fireside Thrift is regulated by the California Department of Financial
Institutions and is subject to the provisions of the California Industrial Loan
Law, which imposes minimum capitalization requirements, limits dividends,
regulates loan terms, collection practices and remedies, and mandates disclosure
of certain contract terms. In addition, since Fireside Thrift is a member of
the FDIC, it is subject to regulations imposed by the FDIC on member
institutions, including federal consumer credit regulations. Fireside Thrift is
also governed by Federal Reserve Board regulations applicable to non-member
state banks.
ITEM 2. Properties
Owned Properties
Unitrin's subsidiary, United, owns the 41-story office building at One East
Wacker Drive, Chicago, Illinois, that houses the executive offices of Unitrin
and United. Unitrin and United occupy approximately 160,000 square feet of the
527,000 rentable square feet in the building. Unitrin's subsidiary, Milwaukee
Insurance Group, Inc., owns a two-story office building in downtown Milwaukee,
Wisconsin, consisting of approximately 132,000 square feet, which houses the
Property and Casualty Group's northern regional office. In addition, the Life
and Health Group occupies approximately 211,000 square feet in 29 Company-owned
buildings located in 14 states.
Leased Facilities
The Life and Health Group leases facilities at 171 locations in 26 states
and the District of Columbia with aggregate square footage of approximately
382,000. The latest expiration date of the existing leases is October 2002.
The Property and Casualty Group leases facilities at 19 locations in 11
states with an aggregate square footage of approximately 313,000. The latest
expiration date of the existing leases is July 2007.
Fireside Thrift occupies 41 leased facilities (including consumer finance
branches and home office buildings) with an aggregate square footage of
approximately 129,000. The latest expiration date of the existing leases is
February 2003.
The properties described above are in good condition and suitable for all
presently anticipated requirements of the Company.
ITEM 3. Legal Proceedings
Unitrin and its subsidiaries are parties to various legal actions
incidental to their businesses. Some of these actions seek substantial punitive
damages that bear no apparent relationship to the actual damages alleged.
Although no assurances can be given and no determination can be made as of the
date hereof as to the outcome of any particular legal action, the Company and
its subsidiaries believe that there are meritorious defenses to these legal
actions and are defending them vigorously. Unitrin believes that resolution of
these actions will not have a material adverse effect on Unitrin's financial
position.
In connection with one action, Ronnie Dale Bleeker v. Trinity Universal
Insurance Company et al., the District Court of Hildalgo County, Texas, on
February 9, 1995 entered a judgment in the amount of $77.0 million, including
attorney's fees of $38.5 million, against Trinity. The case involves an
accident in which Ronnie Bleeker, a former insured of Trinity under a $40
thousand automobile insurance policy, while driving his truck struck another
truck parked alongside a road, killing one person and injuring several others.
Suit was filed against Bleeker by the injured parties (the "Claim Case"). In
1993, the plaintiffs in the Claim Case were awarded damages in excess of $9
million. In 1994, these plaintiffs, acting as assignees of a purported claim by
Bleeker against Trinity, filed suit against Trinity (the "Bad Faith Case")
alleging that negligent claim handling by Trinity led to the large verdict
against Bleeker in the Claim Case. The Bad Faith Case was tried in 1995 and
resulted in the judgment against Trinity described above.
Trinity appealed the judgment to the Thirteenth Court of Appeals in Corpus
Christi, Texas. On February 27, 1997, the court of appeals issued its decision
affirming in part and reversing and remanding in part the judgment of the trial
court. The effect of the Court of Appeals decision was to reduce the judgment
to $12.8 million plus interest, and to remand the case back to the trial court
for a new trial on the plaintiffs' claim of unconscionability. Trinity then
filed an application for writ of error in the Supreme Court of Texas and, on
January 29, 1998, that court agreed to review the decision of the Court of
Appeals. The Company continues to believe that Trinity has a number of
meritorious defenses. The Company believes that resolution of this action will
not have a material adverse effect on the Company's financial position.
ITEM 4. Submission of Matters to a Vote of Security Holders
During the quarter ended December 31, 1997, no matters were submitted to a
vote of shareholders.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
Unitrin's common stock is traded on the National Market Tier of the Nasdaq
Stock Market. The high and low prices for Unitrin's common stock during each
quarterly period in 1997 and 1996 are incorporated herein by reference to Note
20 to the Financial Statements, captioned "Quarterly Financial Information
(Unaudited)."
Information as to the amount and frequency of cash dividends declared by
Unitrin on its common stock during 1997 and 1996 is incorporated herein by
reference to the following portions of the Financial Statements:
(a) Consolidated Statements of Shareholders' Equity, and
(b) Dividends Paid to Common Shareholders (Per Share) included in Note 20
under the caption "Quarterly Financial Information (Unaudited)."
Information as to restrictions on the ability of Unitrin's subsidiaries to
transfer funds to Unitrin in the form of cash dividends, loans, or advances is
incorporated herein by reference to the following items:
(a) Note 9 to the Financial Statements, captioned "Shareholders' Equity,"
and
(b) The "Liquidity and Capital Resources" section of the MD&A.
As of December 31, 1997, the approximate number of record holders of
Unitrin's common stock was 9,300.
ITEM 6. Selected Financial Data
Selected consolidated financial data for the five years ended December 31,
1997 is incorporated herein by reference to the data captioned "Financial
Highlights" on page 1 of Unitrin's 1997 Annual Report, which data are filed as
Exhibit 13.3 hereto.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The MD&A is incorporated herein by reference to Exhibit 13.2.
On January 22, 1998, Navistar International Corporation announced its
intent to redeem its $6.00 Cumulative Convertible Preferred Stock, Series G, at
a price of $50 per share. Unitrin owns 949,600 shares and expects to recognize
an after-tax gain of approximately $27.7 million upon their redemption, which is
anticipated in the first quarter of 1998. The Company expects to use the net
proceeds from the redemption, approximately $40.2 million, for general corporate
purposes.
On February 23, 1998, Starwood Hotels & Resorts Worldwide, Inc.
("Starwood") announced the completion of its acquisition of ITT Corporation
("ITT"). The Company owned 243,100 shares of ITT common stock which were
acquired by Starwood in the acquisition and, accordingly, will recognize an
after-tax gain of approximately $11.7 million in the first quarter of 1998.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
(a) Quantitative Information About Market Risk
The Company 's balance sheet reflects three types of financial instruments
subject to the market risk disclosures required by Item 7A of Form 10-K:
investments in fixed maturities, consumer finance receivables, and investment
certificates. None of the three is entered into for trading purposes. These
financial instruments are subject to interest rate risk.
The fair value analysis set forth in the following table illustrates the
sensitivity of these financial instruments to adverse changes in interest rates.
Interest rates were assumed to increase by 100 basis points for investments in
fixed maturities and consumer finance receivables and decrease by 100 basis
points for investment certificates.
In Millions at December 31, 1997 Increase
Fair Value Pro Forma (Decrease) Percent
---------- --------- ---------- -------
Assets
Investments in Fixed Maturities $2,315.4 $2,262.3 $(53.1) (2.3)%
Consumer Finance Receivables 542.1 535.2 (6.9) (1.3)
Liabilities
Investment Certificates $ 565.0 $ 568.7 $ 3.7 0.7%
The pro forma fair values of fixed maturities and consumer finance
receivables have been estimated by discounting the future contractual cash flows
using the current rates in effect at December 31, 1997, plus 100 basis points,
at which similar investments and loans, respectively, would be made in and to
issuers and borrowers, respectively, with similar credit ratings and the same
remaining maturities. Similarly, the pro forma fair values of investment
certificates have been estimated using the rates currently offered for deposits
of similar remaining maturities, less 100 basis points.
To the extent that an adverse 100 basis point change occurs in increments
over a period of time, such as one year instead of a one-time shock at the
beginning of a year, the adverse impact on fair values would be partially
mitigated because portions of the underlying financial instruments would have
matured. Proceeds from maturing assets can be reinvested and any new
liabilities would be incurred at then current interest rates.
(b) Qualitative Information About Market Risk
The Company's primary market risk exposures are interest rate risks related
to fixed maturities, consumer finance receivables, and investment certificates
listed in the preceding table. The Company manages the interest rate exposures
with respect to fixed maturity investments primarily by investing in investment-
grade securities of relatively short 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 which Fireside Thrift issues to fund the receivables.
The Company's investments in equity securities and in investees ($245.7
million and $705.8 million at December 31, 1997, respectively) also provide
diversification away from interest rate risks. The Company believes that the
liquidity from its operations and investments in fixed maturities permit the
Company to hold its investments in equity securities and investees for the
foreseeable future.
ITEM 8. Financial Statements and Supplementary Data
The Financial Statements (including their related notes and the report of
KPMG Peat Marwick LLP) are incorporated herein by reference to Exhibit 13.1
hereto.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There was no change in, or disagreement with, the Company's accountants
during or relating to the year ended December 31, 1997.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information regarding directors and executive officers, including, to the
extent applicable, information required by Item 405 of Regulation S-K, is
incorporated herein by reference to the sections captioned "Election of
Directors" and "Executive Officers" in the Proxy Statement for the 1998 Annual
Meeting of Shareholders of Unitrin. Unitrin plans to file such proxy statement
within 120 days after December 31, 1997, the end of Unitrin's fiscal year.
ITEM 11. Executive Compensation
Information regarding compensation of executive officers is incorporated
herein by reference to the section captioned "Compensation of Executive
Officers" in the Proxy Statement for the 1998 Annual Meeting of Shareholders of
Unitrin. Neither the joint report by the Compensation and Stock Option
Committees of Unitrin's Board of Directors nor the Unitrin stock performance
graph to be included in such proxy statement shall be deemed to be incorporated
herein by this reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
This information is incorporated herein by reference to the section
captioned "Ownership of Common Stock" in the Proxy Statement for the 1998 Annual
Meeting of Shareholders of Unitrin.
ITEM 13. Certain Relationships and Related Transactions
This information is incorporated herein by reference to the section
captioned "Compensation Committee Interlocks and Insider Participation" in the
Proxy Statement for the 1998 Annual Meeting of Shareholders of Unitrin.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of this Report:
1. Financial Statements. The following financial statements, in response to
Item 8 of the Form 10-K, have been filed as Exhibit 13.1 and are
incorporated by reference into Item 8 hereof:
The consolidated balance sheets of Unitrin and subsidiaries as of December
31, 1997 and 1996, and the consolidated statements of income, cash flows
and shareholders' equity for the years ended December 31, 1997, 1996 and
1995, together with the notes thereto and the report of KPMG Peat Marwick
LLP thereon, dated January 7, 1998.
2. Financial Statement Schedules. The following four financial statement
schedules are included on the following pages hereof. Schedules not listed
here have been omitted because they are not applicable or not material or
the required information is included in the Financial Statements.
Schedule I: Investments - Other Than Investments in Related Parties
Schedule II: Parent Company Financial Statements
Schedule III: Supplementary Insurance Information
Schedule IV: Reinsurance Schedule
SCHEDULE 1
UNITRIN, INC. AND SUBSIDIARES
INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
(Dollars in Millions)
Amount
Amortized Fair Carried in
Cost Value Balance Sheet
------------- ------------- -------------
Fixed Maturities:
Bonds and Notes:
United States Government and
Government Agencies and Authorities $ 2,000.1 $ 2,032.3 $ 2,032.3
States, Municipalities
and Political Subdivisions 103.8 106.6 106.6
Corporate Securities:
Other Bonds and Notes 121.0 125.0 125.0
Redemptive Preferred Stocks 49.5 51.5 51.5
------------- ------------- -------------
Total Investments in Fixed Maturities 2,274.4 2,315.4 2,315.4
------------- ------------- -------------
Equity Securities:
Common Stocks 19.7 77.1 77.1
Non-redemptive Preferred Stocks 111.3 168.6 168.6
------------- ------------- -------------
Total Investments in Equity Securities 131.0 245.7 245.7
------------- ------------- -------------
Investees (A)
Litton Industries, Inc. 291.0 727.8 291.0
Western Atlas Inc. 188.8 936.7 188.8
UNOVA, Inc. 143.3 208.1 143.3
Curtiss-Wright Corporation 82.7 159.1 82.7
------------- ------------- -------------
Total Investees 705.8 2,031.7 705.8
------------- ------------- -------------
Loans, Real Estate and Short-term Investments 181.6 XXX.X 181.6
------------- -------------
Total Investments $ 3,292.8 $ 3,448.5
============= =============
(A) - Amortized Cost = Cost Plus Cumulative Undistributed Earnings.
UNITRIN, INC. SCHEDULE II
PARENT COMPANY BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(Dollars in Millions)
December 31,
--------------------
1997 1996
---------- ---------
ASSETS
- ------
Investment in Subsidiaries and Investees $ 1,641.0 $ 1,663.9
Equity Securities at Fair Value
(Cost: 1997 and 1996 - $50.0) 56.7 53.6
Short Term Investments 10.8 -
Other Assets 2.0 7.1
--------- ---------
Total Assets $ 1,710.5 $ 1,724.6
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Notes Payable $ 75.0 $ 53.0
Accrued Expenses and Other Liabilities 102.5 191.3
--------- ---------
Total Liabilities 177.5 244.3
--------- ---------
Shareholders' Equity:
Common Stock 3.8 3.7
Additional Paid-in Capital 217.8 133.0
Retained Earnings 1,209.7 1,265.8
Net Unrealized Appreciation on Equity Securities 4.4 2.4
Net Unrealized Appreciation in Subsidiaries' Securities 97.3 75.4
--------- ---------
Total Shareholders' Equity 1,533.0 1,480.3
--------- ---------
Total Liabilities and Shareholders' Equity $ 1,710.5 $ 1,724.6
========= =========
SCHEDULE II
UNITRIN, INC.
PARENT COMPANY STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars in Millions)
Years Ended December 31,
-----------------------------
1997 1996 1995
------ ------ ------
Net Investment Income $ 5.5 $ 7.1 $ 1.9
Interest Expense 10.0 9.8 10.5
Other Operating (Income) Expenses (2.7) 1.6 6.0
------ ------ ------
Total Operating Expenses 7.3 11.4 16.5
------ ------ ------
Income (Loss) Before Income Taxes and Equity
in Net Income of Subsidiaries and Investees (1.8) (4.3) (14.6)
Income Tax (Benefit) Expense (2.0) (3.2) (5.4)
------ ------ ------
Income (Loss) Before Equity in
Net Income of Subsidiaries and Investees 0.2 (1.1) (9.2)
Equity in Net Income of Subsidiaries and Investees 117.7 133.6 159.8
------ ------ ------
Net Income $117.9 132.5 150.6
====== ====== ======
SCHEDULE II
UNITRIN, INC.
PARENT COMPANY STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars in Millions)
Years Ended December 31,
----------------------------
1997 1996 1995
------- ------- --------
Operating Activities:
Net Income $ 117.9 $ 132.5 $ 150.6
Adjustment Required to Reconcile Net Income
to Net Cash Provided by Operations:
Equity in Net Income of Subsidiaries and Investees (117.7) (133.6) (159.8)
Cash Dividends from Subsidiaries 181.1 149.8 441.1
Cash Dividends from Investee 2.2 1.4 -
Other, Net (95.8) 128.4 52.4
------- ------- -------
Net Cash Provided by Operating Activities 87.7 278.5 484.3
------- ------- -------
Investing Activities:
Purchase of Securities from Subsidiaries:
Curtiss-Wright Common Stock - (95.4) -
Navistar Series G Preferred Stock - - (50.0)
Litton Industries, Inc. Common Stock - - (77.0)
Change in Short-term Investments (10.8) - 41.0
Purchases of Property - (3.7) -
------- ------- -------
Net Cash Used by Investing Activities (10.8) (99.1) (86.0)
------- ------- -------
Financing Activities:
Notes Payable Proceeds 515.0 170.0 401.0
Notes Payable Payments (493.0) (210.0) (308.0)
Cash Dividends Paid (89.9) (83.0) (80.7)
Common Stock Repurchases (20.7) (61.1) (416.0)
Issuance of Unitrin Common Stock 11.7 4.7 4.6
------- ------- -------
Net Cash Used by Financing Activities (76.9) (179.4) (399.1)
------- ------- -------
Increase (Decrease) in Cash - - (0.8)
Cash, Beginning of Year - - 0.8
------- ------- -------
Cash, End of Year $ - $ - $ -
======= ======= =======
SCHEDULE III
UNITRIN, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(Dollars in Millions)
Insurance Amortization
Claims Of Deferred
Net and Policy
Premiums Investment Policyholders' Acquisition
Premiums Written Income Benefits Costs
-------- -------- ---------- -------------- -----------
Year Ended December 31, 1997:
Life and Health $ 446.7 $ N/A $ 119.8 $ 255.3 $ 52.6
Property and Casualty 775.3 784.7 56.4 524.8 114.8
Other - N/A 3.3 - -
-------- -------- ---------- -------------- -----------
Total $1,222.0 $ N/A $ 179.5 $ 780.1 $ 167.4
======== ======== ========== ============== ===========
Year Ended December 31, 1996:
Life and Health $ 489.1 $ N/A $ 123.0 $ 289.7 $ 59.8
Property and Casualty 731.2 741.3 50.0 510.0 110.3
Other - N/A 6.0 - -
-------- -------- ---------- -------------- -----------
Total $1,220.3 $ N/A $ 179.0 $ 799.7 $ 170.1
======== ======== ========== ============== ===========
Year Ended December 31, 1995:
Life and Health $ 511.8 $ N/A $ 137.9 $ 302.3 $ 64.5
Property and Casualty 587.3 575.0 44.2 415.2 93.0
Other - N/A 4.5 - -
-------- -------- ---------- -------------- -----------
Total $1,099.1 $ N/A $ 186.6 $ 717.5 $ 157.5
======== ======== ========== ============== ===========
Deferred
Other Policy
Insurance Acquisition Insurance Unearned
Expenses Costs Reserves Premiums
--------- ----------- --------- --------
Year Ended December 31, 1997:
Life and Health $ 208.4 $ 195.3 $ 1,567.5 $ 5.6
Property and Casualty 108.4 41.8 468.5 273.9
Other (3.8) - - -
--------- ----------- --------- --------
Total $ 313.0 $ 237.1 $ 2,036.0 $ 279.5
========= =========== ========= ========
Year Ended December 31, 1996:
Life and Health $ 222.3 $ 225.9 $ 1,599.0 $ 6.7
Property and Casualty 97.7 39.4 454.8 253.8
Other (3.9) - - -
--------- ----------- --------- --------
Total $ 316.1 $ 265.3 $ 2,053.8 $ 260.5
========= =========== ========= ========
Year Ended December 31, 1995:
Life and Health $ 230.1
Property and Casualty 73.1
Other (2.3)
---------
Total $ 300.9
=========
SCHEDULE IV
UNITRIN, INC.
REINSURANCE SCHEDULE
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
(Dollars in Millions)
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed to
Amount Companies Companies Amount Net
--------- --------- ---------- --------- ----------
Year Ended December 31, 1997:
- -----------------------------
Life Insurance in Force $17,709.2 $ 1,797.8 $ - $15,911.4 -
Premiums
Life Insurance $ 350.7 $ 19.8 $ - $ 330.9 -
Accident and Health Insurance 119.1 3.3 - 115.8 -
Property and Liability Insurance 697.9 18.0 95.4 775.3 12.3%
--------- --------- ---------- --------- ----------
Total Premiums $ 1,167.7 $ 41.1 $ 95.4 $ 1,222.0 7.8%
========= ========= ========== ========= ==========
Year Ended December 31, 1996:
- -----------------------------
Life Insurance in Force $18,747.2 $ 2,120.2 $ - $16,627.0 -
Premiums
Life Insurance $ 368.8 $ 9.4 $ - $ 359.4 -
Accident and Health Insurance 130.6 0.9 - 129.7 -
Property and Liability Insurance 643.4 21.8 109.6 731.2 15.0%
--------- --------- ---------- --------- ----------
Total Premiums $ 1,142.8 $ 32.1 $ 109.6 $ 1,220.3 9.0%
========= ========= ========== ========= ==========
Year Ended December 31, 1995:
- -----------------------------
Life Insurance in Force $20,082.9 $ 565.7 $ - $19,517.2 -
Premiums
Life Insurance $ 370.5 $ 1.9 $ - $ 368.6 -
Accident and Health Insurance 144.4 1.2 - 143.2 -
Property and Liability Insurance 566.1 15.7 36.9 587.3 6.3%
--------- --------- ---------- --------- ----------
Total Premiums $ 1,081.0 $ 18.8 $ 36.9 $ 1,099.1 3.4%
========= ========= ========== ========= ==========
3. Exhibits. The following exhibits are either filed as a part hereof or are
incorporated by reference. Exhibit numbers correspond to the numbering
system in Item 601 of Regulation S-K. Exhibits 10.1 through 10.7 relate to
compensatory plans filed or incorporated by reference as exhibits hereto
pursuant to Item 14(c) of Form 10-K.
2 Agreement and Plan of Reorganization among Unitrin, Inc., Unitrin
Acquisition Corporation and The Reliable Life Insurance Company dated
June 20, 1997, as amended (incorporated herein by reference to
Appendix A to the Company's Amendment No. 3 to Form S-4 filed on
November 6, 1997)
3.1 Certificate of Incorporation (incorporated herein by reference to
Exhibit 3.1 to the Company's Registration Statement on Form 10 dated
February 15, 1990)
3.2 Amended and Restated By-Laws (incorporated herein by reference to
Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997)
4 Rights Agreement between Unitrin, Inc. and First Chicago Trust Company
of New York, as rights agent, dated as of August 3, 1994 (incorporated
herein by reference to Exhibit 1 to the Company's Registration
Statement on Form 8-A dated August 3, 1994)
10.1 Unitrin, Inc. 1990 Stock Option Plan , as amended and restated
(incorporated herein by reference to Exhibit 10.1 to the Company's
1995 Annual Report on Form 10-K)
10.2 Unitrin, Inc. 1997 Stock Option Plan (incorporated herein by reference
to Exhibit A to the Proxy Statement dated April 9, 1997 for the Annual
Meeting of Shareholders of Unitrin held May 14, 1997)
10.3 Unitrin, Inc. 1995 Non-Employee Director Stock Option Plan
(incorporated herein by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1995)
10.4 Unitrin, Inc. Pension Equalization Plan (incorporated herein by
reference to Exhibit 10.4 to the Company's 1994 Annual Report on Form
10-K)
10.5 Unitrin is a party to individual severance agreements (the form of
which is incorporated herein by reference to Exhibit 10.5 to the
Company's 1994 Annual Report on Form 10-K), with the following
executive officers:
Jerrold V. Jerome (Chairman)
Richard C. Vie (President and Chief Executive Officer)
David F. Bengston (Vice President)
James W. Burkett (Vice President)
Thomas H. Maloney (Vice President and General Counsel)
Eric J. Draut (Vice President, Treasurer, and Chief
Financial Officer)
Scott Renwick (Secretary)
(Note: Each of the foregoing agreements is identical except that
the severance compensation multiple is 2.99 for Messrs. Jerome and Vie
and 2.0 for the other executive officers. The term of these agreements
has been extended by action of Unitrin's board of directors through
December 31, 1998.)
10.6 Severance Compensation Plan After Change of Control (incorporated
herein by reference to Exhibit 10.6 to the Company's 1994 Annual
Report on Form 10-K; the term of this plan has been extended by
action of Unitrin's board of directors through December 31, 1998)
10.7 Description of Bonus Plan for Senior Executives dated August 6, 1997
(incorporated herein by reference to Exhibit 10.9 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1997)
10.8 Amended and Restated Credit Agreement, dated September 17, 1997
among Unitrin, Inc., the Lenders party thereto, and NationsBank of
Texas, N.A. (incorporated herein by reference to Exhibit 10.7 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997)
13.1 Financial Statements (pages 23 through 47 of Unitrin's 1997 Annual
Report)
13.2 MD&A (pages 16 through 22 of Unitrin's 1997 Annual Report)
13.3 Financial Highlights (page 1 of Unitrin's 1997 Annual Report)
21 Subsidiaries of Unitrin, Inc.
23.1 Reports of KPMG Peat Marwick LLP (included in Exhibit 13.1 hereof
and filed as Exhibit 23.1 hereof)
23.2 Consent of KPMG Peat Marwick LLP
24 Power of Attorney (included on the signature page hereof)
27 Financial Data Schedule
(b) Reports on Form 8-K. None
(c) Exhibits. Included in Item 14(a)3 above.
(d) Financial Statement Schedules. Included in Item 14(a)2 above.
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints each of Richard
C. Vie, President and Chief Executive Officer, Eric J. Draut, Vice President,
Treasurer and Chief Financial Officer, and Scott Renwick, Secretary, his true
and lawful attorney-in-fact with authority together or individually to execute
in the name of each such signatory, and with authority to file with the
Securities and Exchange Commission, any and all amendments to this Annual Report
on Form 10-K of Unitrin, Inc., together with any and all exhibits thereto and
other documents therewith, necessary or advisable to enable Unitrin, Inc. to
comply with the Securities Exchange Act of 1934, as amended, and any rules,
regulations, and requirements of the Securities and Exchange Commission in
respect thereof, which amendments may make such other changes in the Annual
Report on Form 10-K as the aforesaid attorney-in-fact executing the same deems
appropriate.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, Unitrin, Inc. has duly caused this Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois, on February 20, 1998.
UNITRIN, INC.
(Registrant)
By: /S/ Richard C. Vie
------------------
Richard C. Vie
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Unitrin, Inc.
in the capacities indicated on February 20, 1998.
Signature Title
--------- -----
/S/ Richard C. Vie President, Chief Executive Officer and Director
- ------------------
Richard C. Vie
/S/ Jerrold V. Jerome Chairman of the Board and Director
- ---------------------
Jerrold V. Jerome
/S/ Eric J. Draut Vice President, Treasurer and Chief Financial Officer
- ----------------- (principal accounting and financial officer)
Eric J. Draut
/S/ James E. Annable Director
- --------------------
James E. Annable
/S/ Reuben L. Hedlund Director
- ---------------------
Reuben L. Hedlund
/S/ William E. Johnston, Jr. Director
- ----------------------------
William E. Johnston, Jr.
/S/ George A. Roberts Director
- ---------------------
George A. Roberts
/S/ Fayez S. Sarofim Director
- --------------------
Fayez S. Sarofim
/S/ Henry E. Singleton Director
- ----------------------
Henry E. Singleton