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UNITED STATES
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, 2002.
[_] 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.
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Commission file number 001-18298
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $0.10 par value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
pursuant to Rights Agreement
Securities registered pursuant to Section 12(g) of the Act: None
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]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X] No [_]
Based on the closing market price of Registrant's common stock on June 28,
2002, the aggregate market value of such stock held by non-affiliates of
Registrant was approximately $2.35 billion as of the last business day of
Registrant's most recently completed second fiscal quarter. Solely for purposes
of this calculation, all executive officers and directors of Registrant are
considered affiliates.
Registrant had 67,596,409 shares of common stock outstanding as of January 27,
2003.
Documents Incorporated by Reference
Part of the Form 10-K
Document into which incorporated
Portions of Proxy Statement for 2003 Annual Part III
Meeting of Shareholders
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1
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.
The Company files annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, amendments to those reports, and other
information with the Securities and Exchange Commission (the "SEC"). The public
can obtain copies of these materials by visiting the SEC's Public Reference Room
at 450 Fifth Street, NW, Washington DC 20549, or by calling the SEC at
1-800-SEC-0330, or by accessing the SEC's website at http://www.sec.gov. In
addition, as soon as reasonably practicable after such materials are filed with
or furnished to the SEC, the Company makes copies available to the public free
of charge on or through its website at http://www.unitrin.com.
(a) General development of business
.. Acquisition of Kemper Personal Lines Insurance Business
On June 28, 2002, the Company closed its acquisition of the personal lines
property and casualty insurance business of the Kemper Insurance Companies
("KIC") in a cash transaction. The Individual and Family Group business unit
acquired from KIC, referred to herein as "Kemper Auto and Home" or "KAH,"
specializes in the sale of personal lines automobile and homeowners' insurance
through independent agents. The acquisition includes the purchase of the assets
of Kemper Auto and Home, but all pre-acquisition liabilities of Kemper Auto and
Home, including policy reserves and unearned premium reserves, are excluded and
remain with KIC. In connection with the acquisition, as described below, the
Company also acquired the stock of KIC's direct distribution personal lines
subsidiaries ("Kemper Direct"), which sell personal lines 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 development for policy losses incurred by Kemper
Direct prior to the acquisition date while KIC is entitled to 90% of any
favorable loss reserve development on such policy losses.
The purchase price is $42.3 million plus (i) 1% of premiums written by KAH
over a three-year period beginning January 1, 2003, and (ii) potential
performance bonuses if the KAH business meets certain loss ratio criteria over
such three-year period. For further details regarding the acquisition and
purchase price, please refer to (i) Note 3 to Unitrin's Consolidated Financial
Statements, which financial statements are further described in Item 15(a)1, and
filed as Exhibit 13.1, and incorporated by reference into Item 8 of this Annual
Report on Form 10-K (the "Financial Statements"), and (ii) Management's
Discussion and Analysis of Results of Operations and Financial Condition, which
is filed as Exhibit 13.2, and incorporated by reference into Item 7, of this
Annual Report on Form 10-K (the "MD&A").
KIC retains 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. For policies issued by Kemper
Direct prior to the acquisition date, the Company is liable for policy losses
incurred thereon, subject to the loss indemnification described above, and is
liable for unearned premiums as of the acquisition date. Kemper Auto and Home's
and Kemper Direct's personal lines net written premiums were approximately $700
million in 2001.
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 anticipates that its property and casualty
insurance subsidiaries will begin directly issuing insurance policies for new
business in certain states beginning in the first quarter of 2003 and will begin
issuing renewal insurance policies mid-year 2003. Accordingly, the Company
anticipates 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.
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).
While the rating action on KIC did not have an impact on the "A" (excellent)
ratings from A.M. Best & Co. of Unitrin's property and casualty insurance
subsidiaries, it may adversely impact the 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.
Accordingly, the Company is implementing certain plans in an effort to
preserve agent relationships and enhance the prospects for an orderly transition
of the KAH business to Unitrin's property and casualty insurance subsidiaries.
In connection with such plans, Unitrin acquired two inactive, or "shell,"
insurance companies with insurance licenses in many of the required states from
SCOR Reinsurance Company on December 31, 2002. The Company is also continuing to
pursue necessary state licenses and other insurance regulatory authorizations,
which may or may not include the acquisition of additional shell insurance
companies.
In addition, on January 8, 2003, Trinity and KIC amended the quota share
reinsurance agreement between the parties to provide for a "cut-through"
provision whereby Trinity will be required to pay claims directly to reinsured
policyholders (or their mortgagees or loss payees, as the case may be) who have
been issued new or renewal policies since July 1, 2002, in the event that KIC
becomes insolvent. In accordance with the amendment, Trinity's liability under
the reinsurance would be reduced by such payments made directly by Trinity to
claimants. The Company cannot presently predict what impact these plans to
preserve the KAH business will ultimately have on the ability of the Company to
write the KAH business, nor can the Company predict what impact these
developments will ultimately have on the contingent purchase price or
performance bonuses described above.
2
Unitrin Stock Repurchases
During 2002, Unitrin repurchased and retired 293,800 shares of its common
stock in open market transactions at an aggregate cost of approximately $9.4
million. Since its inception in 1990, Unitrin has repurchased, on a post-split
basis, approximately 54.6 million shares of its common stock, or nearly half of
Unitrin's shares originally outstanding, for an aggregate cost of approximately
$1.5 billion. At December 31, 2002, approximately 3.6 million shares of Unitrin
common stock remained under Unitrin's outstanding repurchase authorizations.
Stock repurchases may be made from time to time at prevailing prices in the
open market or in privately negotiated transactions, subject to market
conditions and other factors. Repurchases are financed through Unitrin's general
corporate funds. Unitrin may also borrow funds under an existing bank credit
facility to fund common stock repurchases.
(b) Business segment financial data
Financial information about Unitrin's business segments for the years ended
December 31, 2002, 2001, and 2000 is contained in the following portions of this
2002 Annual Report on Form 10-K of Unitrin, Inc. and is incorporated herein by
reference: (i) Note 17 to the Financial Statements, and (ii) the MD&A.
(c) Description of business
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.
Unitrin's subsidiaries employ over 8,700 full-time associates of which
approximately 1,150 are employed in the Multi Lines Insurance segment, 800 in
the Specialty Lines Insurance segment, 1,000 in the Kemper Auto and Home
segment, 4,570 in the Life and Health Insurance segment, 690 in the Consumer
Finance segment, and 500 in the Unitrin Direct Sales segment.
. Property and Casualty Insurance Business
Unitrin's property and casualty insurance business operations are conducted
through the following segments: Multi Lines Insurance, Specialty Lines
Insurance, Kemper Auto and Home, and Unitrin Direct Sales. The Unitrin companies
operating in these segments provide 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 50%, 41%, and 34% of
Unitrin's consolidated insurance premiums earned for the years ended December
31, 2002, 2001, and 2000, respectively.
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.
Multi Lines Insurance Segment
The Unitrin Multi Lines Insurance segment principally is comprised of 9
insurance companies operating mainly in the southern, midwestern, western and
northwestern regions of the United States. With operations located in 31 states,
the Multi Lines Insurance segment has over 375,000 policies in force. The states
which provided the largest amount of premium for the Multi Lines Insurance
segment in 2002 were Texas (40%), Oregon (9%), Wisconsin (5%), Illinois (5%),
Louisiana (5%) and Washington (5%).
Insurance products provided by the Multi Lines Insurance segment primarily
consist of preferred and standard risk automobile, homeowners, fire, commercial
liability and workers compensation insurance. Multi Lines Insurance products are
marketed by over 1,400 independent insurance agents in over 2,000 locations.
These personal and commercial products are designed and priced for those
individuals and businesses that have demonstrated favorable risk characteristics
and loss history.
Trinity Universal Insurance Company ("Trinity") and certain of Unitrin's
other subsidiaries (Milwaukee Casualty Insurance Co., Milwaukee Safeguard
Insurance Company, Security National Insurance Company, Trinity Universal
Insurance Company of
3
Kansas, Inc., Valley Insurance Company and Valley Property & Casualty Insurance
Company) and affiliates (Milwaukee Mutual Insurance Company, Charter County
Mutual Insurance Company and Trinity Lloyd's Insurance Company) principally
provide the Unitrin Multi Lines Insurance segment's preferred and standard
products. These products accounted for approximately 48% of the aggregate
insurance premium revenue of Unitrin's property and casualty insurance business
in 2002.
The Company is evaluating strategic alternatives available to its
commercial lines business. While evaluating these alternatives, the Company
expects to continue the following measures: (1) reduce policies in force in
certain commercial lines through extensive re-underwriting of contractors and
related industries, program business, workers compensation and product
liability, (2) intensify aggressive pricing on commercial lines on selected
portions of the book, (3) implement certain premium rate increases in most other
product lines, subject to regulatory approvals where applicable, and (4) review
underwriting guidelines in certain markets and other product lines and implement
certain underwriting changes as it writes and renews its business, including
placing a moratorium on new business in certain markets where adequate premium
rates cannot be obtained.
Specialty Lines Insurance Segment
Unitrin's Specialty Lines Insurance segment principally is comprised of 4
insurance companies operating in the southern, western, midwestern and
northwestern regions of the United States. With operations located in 25 states,
the Specialty Lines Insurance segment has over 346,000 policies in force. The
states which provided the largest amount of premium in 2002 were California
(30%), Texas (24%), and Washington (7%).
The Specialty Lines Insurance segment's products are provided primarily by
Financial Indemnity Company, Alpha Property & Casualty Insurance Company,
Charter Indemnity Company and Charter County Mutual Insurance Company, and
include nonstandard personal and commercial automobile, motorcycle, and
specialty watercraft insurance. Nonstandard automobile insurance is provided for
individuals and businesses that have had difficulty obtaining standard or
preferred risk insurance, usually because of their driving records. Nonstandard
automobile insurance products are marketed through approximately 10,000
independent agents in 13,000 locations. Specialty Lines Insurance products
accounted for approximately 37% of the aggregate insurance premium revenue of
Unitrin's property and casualty insurance business in 2002.
Kemper Auto and Home Segment
On June 28, 2002, the Company closed its previously announced asset
purchase transaction with the Kemper Insurance Companies ("KIC") in which the
Company acquired certain assets comprising the personal lines property and
casualty insurance business of KIC known as Kemper Auto and Home.
Unitrin's Kemper Auto and Home segment primarily conducts business in 30
states. The states which provided the largest amount of premium for Kemper Auto
and Home in 2002 were New York (24%), North Carolina (15%), California (11%),
Texas (6%) and Connecticut (6%).
Insurance products provided by the Kemper Auto and Home segment mainly
consist of preferred and standard risk automobile and homeowners insurance.
Kemper Auto and Home products are marketed by approximately 1,500 independent
insurance agents. These personal lines products are designed and priced for
those individuals who have demonstrated favorable risk characteristics and loss
history. Typical customers include middle to upper income individuals and
families in urban, suburban and rural communities.
As described above in Item 1(a), all new business, and all renewals of
existing business, issued by Kemper Auto and Home on and after July 1, 2002 is
presently being written on KIC insurance policy forms and 100% reinsured by
Trinity. The Company plans that certain of its insurance subsidiaries will begin
writing KAH business on their own policies in certain states during the first
quarter of 2003. Kemper Independence Insurance Company and two recently acquired
shell insurance companies will be dedicated to KAH and principally will provide
the segment's preferred and standard products. In addition, certain of Unitrin's
other property and casualty insurance subsidiaries may be made available to
write Kemper Auto and Home products as needed in states in which these companies
are not currently licensed.
Unitrin Direct Sales Segment
On January 3, 2000, Unitrin established Unitrin Direct, a direct marketing
automobile insurance unit, to market personal automobile insurance primarily
through direct mail and television advertising and, to a lesser extent, the
Internet. This business unit primarily utilizes Unitrin's wholly owned
subsidiary, Unitrin Direct Insurance Company, but has other subsidiaries of
Unitrin available for utilization as needed in states in which Unitrin Direct
Insurance Company is not currently licensed. Unitrin Direct began actively
marketing personal automobile insurance in the State of Pennsylvania at the
beginning of 2001 and currently has
4
sales in six states.
On June 28, 2002, the Company closed its previously announced acquisition
of the insurance companies comprising the Kemper Insurance Companies' direct
marketing unit ("Kemper Direct") in a cash transaction. Kemper Direct
established operations in 1997 and currently has sales in 19 states. Kemper
Direct's business model is based on selling automobile insurance over the
Internet through web insurance portals, click-thrus and its own e-Kemper
website.
Due to the similarity of Unitrin Direct's and Kemper Direct's business
models, products and back-office operations, the Company is in the process of
combining the operations of the two businesses into the single business unit,
Unitrin Direct Sales. 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.
Unitrin Direct Sales offers a wide range of standard, preferred and
nonstandard private passenger auto insurance products, and competes with
companies that sell insurance directly to the consumer, as well as with
companies that sell through agents. Irrespective of the sales methods used by a
company, personal auto insurance is a highly competitive business, particularly
in the areas of price and customer service. The overall business strategy of
Unitrin Direct Sales places great emphasis on competitive pricing and quality
customer service.
Building a direct marketing insurance operation 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. The
Company expects such operating losses to decrease in 2003.
Property and Casualty Loss and Loss Adjustment Expense Reserves
Property and casualty insurance companies establish reserves to cover their
estimated ultimate liability for losses and loss adjustment expenses with
respect to claims under their insurance policies. The reserves of the Unitrin
property and casualty insurance companies reflect management's estimate of these
amounts based on its judgment regarding a variety of factors, including the
facts and circumstances of the claims, past claims experience, current claim
trends, and relevant legal, economic and social conditions.
The objective of the Unitrin property and casualty companies is to set
reserves that are adequate; that is, the amounts recorded as reserves should at
least equal the ultimate net cost to investigate and settle claims. However, the
process of establishing adequate reserves is inherently uncertain, and the
ultimate net cost of a claim may vary materially from the amounts reserved. The
reserving process is particularly imprecise for claims involving asbestos,
environmental, mold, construction defect and other emerging and/or long-tailed
exposures now confronting property and casualty insurers. The Unitrin property
and casualty insurance companies regularly monitor and evaluate loss and loss
adjustment expense reserve development to verify reserve adequacy. Any
adjustment to reserves is reflected in net income for the accounting period in
which the adjustment is made.
For the year ended December 31, 2002, the Company increased its property
and casualty insurance reserves by $82.3 million to reflect adverse development
of losses from prior accident years. The reserve increases reflect developing
loss trends primarily related to construction defect, mold, automobile liability
and product liability loss exposures in its commercial lines of business as well
as personal automobile liability. For further information on reserves, please
refer to the MD&A and Notes 1, 2, 7 and 19 to the Financial Statements.
Storms/Catastrophe Losses
Catastrophe losses are inherent risks of the property insurance business.
Catastrophes are caused by various natural events including hurricances,
tornadoes, earthquakes, hailstorms, wildfires, high winds and winter storms.
Such catastrophic occurrences result in insurance losses that are and will
continue to be a material factor in the results of operations and financial
position of Unitrin's property and casualty insurance companies. Further,
because the level of these insurance losses experienced in any year cannot be
predicted, these losses contribute to the year-to-year fluctuations in the
results of operations and financial position of these companies. As a
consequence, management has implemented certain strategies intended to reduce
exposure to catastrophe losses, including, as described below, geographic
diversification of property insurance risk and catastrophe reinsurance
arrangements. Although management believes that such strategies have reduced or
will reduce the exposure of the property and casualty insurance operations to
storm and catastrophe losses over time, the extent of such reduction is
uncertain.
5
With respect to storm losses, the frequency and occurrence of severe
weather are difficult to predict in any year. However, geographic location can
have an impact on a property insurer's exposure to losses from storms. Moreover,
these storms add an element of seasonality to property insurance claims,
since certain natural events, such as winter storms, tornadoes and hurricanes,
typically occur more frequently at certain times of the year than others.
Management has endeavored to reduce its aggregate insurance exposures in certain
regions prone to natural event catastrophes through a combination of geographic
expansion outside of these areas and restrictions on the amount and location of
new business production.
As a part of the overall reinsurance program covering Unitrin's property
and casualty insurance companies, management acquires excess of loss reinsurance
coverage designed specifically to protect against losses arising from
catastrophic events such as storms. The catastrophe reinsurance program is
typically purchased annually and is structured according to a series of coverage
layers based on geographic region. For example, the 2002 catastrophe reinsurance
program covering Unitrin's Multi Lines and Specialty Lines property and casualty
insurance companies provided for $6 million in reinsurance protection for losses
in excess of $4 million occurring in Washington, Oregon, California, Idaho,
Nevada, Montana, Wyoming, Utah, Colorado and Arizona. With respect to New
Mexico, North Dakota, South Dakota, Nebraska, Kansas, Oklahoma, Minnesota, Iowa,
Missouri, Arkansas, Mississippi, Georgia, Tennessee, Kentucky, Ohio, Indiana,
Illinois and Wisconsin, the program provided for $5 million in reinsurance
protection for losses in excess of $5 million. The program provided $45 million
in reinsurance coverage for losses in excess of $10 million in all states in
which these companies operated, including the Gulf states of Texas, Louisiana
and Alabama. In addition, the 2002 program provided a further layer of
protection in the amount of 95% of $55 million for losses in excess of $55
million in all states in which these companies operated. This layer also was
shared with the Life and Health Insurance segment's property insurance
companies, but at a different attachment point and coverage level. Based on
external modeling studies, the estimated probable maximum loss of the Unitrin
Multi Lines and Specialty Lines property and casualty insurance companies for
storms occurring in all states with a statistical frequency of occurrence of
once per 100 years is approximately $29 million. For further discussion of the
reinsurance program, see discussion below and Note 18 to the Financial
Statements.
In addition to the catastrophe loss exposures caused by natural events
described above, the Company's property and casualty insurance companies are
exposed to catastrophic events that are not the result of acts of nature, such
as certain acts of terrorism, the nature and level of which in any period cannot
be predicted. While there were no reported losses experienced by the Company's
property and casualty insurance companies in relation to the terrorist attacks
on September 11, 2001, the Company has obtained catastrophe coverage to address
exposure to potential future terrorist attacks. For example, at present, the
Company has aggregate terrorist coverage in the amount of $9 million in excess
of a $1 million retention for personal and commercial lines business. The
Company's property and casualty insurance companies are in the process of
completing actions to comply with the federal Terrorism Risk Insurance Act of
2002 which, among other things, provides for the partial reimbursement of
covered terrorism losses for commercial lines, subject to certain deductible
amounts specified in the legislation.
Reinsurance
In addition to the catastrophe reinsurance program described above,
Unitrin's property and casualty insurance companies utilize reinsurance
arrangements to limit their maximum loss, provide greater diversification of
risk and minimize exposures on larger risks. Under such arrangements, these
companies are indemnified by reinsurers for losses incurred under insurance
policies issued by the companies. As indemnity reinsurance does not discharge an
insurer from its direct obligations to policyholders on risks insured, Unitrin's
property and casualty insurance companies remain contingently liable. However,
so long as the reinsurers meet their obligations, these companies' net liability
is limited to the amount of risk that they retain. See Note 18 to the Financial
Statements.
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. See MD&A regarding the Multi Lines Insurance,
Specialty Lines Insurance, Kemper Auto and Home, and Unitrin Direct Sales
segments.
Competition
Based on the most recent data published by A.M. Best Company ("A.M. Best")
as of the end of 2001, there were approximately 900 property and casualty
insurance groups in the United States, made up of nearly 2,400 companies.
Unitrin's property and casualty insurance companies ranked among the 65 largest
property and casualty insurance company organizations in the United States,
measured by net premiums written (54th), and policyholders' surplus (65th). With
respect to admitted assets,
6
Unitrin's property and casualty insurance companies ranked 70th relative to
industry peers.
In 2001, the industry's estimated net premiums written were over $310
billion, more than 82% of which were accounted for by 50 groups of companies.
Unitrin's property and casualty insurance companies wrote less than 1% of the
industry's estimated 2001 premium volume.
Property and casualty insurance is a highly competitive business,
particularly with respect to personal automobile insurance. Unitrin's property
and casualty insurance companies compete on the basis of, among other measures,
(i) using appropriate pricing, (ii) maintaining underwriting discipline, (iii)
selling to selected markets, (iv) utilizing technological innovations for the
marketing and sale of insurance, (v) controlling expenses, (vi) maintaining
adequate ratings from A.M. Best and other ratings agencies, (vii) providing
quality services to agents and policyholders, and (viii) making strategic
acquisitions of suitable property and casualty insurers.
. Life and Health Insurance Business
Unitrin conducts its life and health insurance business through its wholly
owned subsidiaries, United Insurance Company of America ("United"), The Reliable
Life Insurance Company ("Reliable"), Union National Life Insurance Company
("Union National Life"), and Reserve National Insurance Company ("Reserve
National").
The Unitrin Life and Health Insurance companies mainly focus on providing
individual life and health insurance products to customers who desire
fundamental protection for themselves and their families. The leading product of
the Unitrin Life and Health Insurance segment is ordinary life insurance,
including permanent and term insurance, with an average face amount of
approximately $8,600. Premiums are typically charged on a monthly basis and
average approximately $14 per policy per month. Permanent policies are offered
primarily on a non-participating, guaranteed-cost basis. This product accounted
for 21%, 25%, and 27% of Unitrin's consolidated insurance premiums for the years
ended December 31, 2002, 2001, and 2000, respectively. The states which provided
the largest amount of premium for the Life and Health Insurance companies were
Texas (21%), Louisiana (13%), Florida (6%), California (6%), North Carolina
(5%), and Mississippi (5%).
Career Agents
Approximately 82% of the Unitrin Life and Health Insurance segment's
premiums result from insurance products offered and distributed by the segment's
career agents. United, along with Reliable and Union National Life, employ over
2,900 career agents to distribute traditional whole life insurance products in
25 states. These career agents are full-time employees who call on customers in
their homes to sell life and health insurance products, provide services related
to policies in force and collect premiums, typically monthly. Property insurance
products written by United's subsidiaries, United Casualty Insurance Company of
America ("United Casualty") and Union National Fire Insurance Company ("Union
National Fire"), are also distributed by the segment's career agents.
Customers of Unitrin's career agency companies generally are families with
an annual income of less than $25,000. According to figures assembled by the
U.S. Bureau of the Census as of 2001, there are nearly 32 million households in
the United States with less than $25,000 of annual income, representing about
29% of all U.S. households.
Unitrin's career agency companies, United, Reliable and Union National
Life, are certified members of the Insurance Marketplace Standards Association
("IMSA"). IMSA is a voluntary membership organization whose purpose is to
promote high ethical standards in the sale of individual life insurance and
individual annuity products. IMSA membership must be renewed every three years.
In 2000, the Unitrin Life and Health Insurance segment's career agency
companies, including United, Reliable, Union National Life, United Casualty and
Union National Fire, initiated a plan to consolidate administrative operations.
Under the plan, certain duplicative back office functions of the career agency
companies based in Chicago, St. Louis and Baton Rouge have substantially been
combined at centralized locations. By eliminating operational redundancies, the
consolidation is intended to increase the overall efficiency and cost
effectiveness of the career agency companies.
Independent Agents
Reserve National has approximately 250 independent agents appointed to
market and distribute health insurance products. These agents typically
represent Reserve National only. Licensed in 31 states throughout the south,
southwest and midwest, Reserve National specializes in the sale of limited
benefit accident and health insurance products and Medicare Supplement
insurance, primarily to individuals living in rural areas where health
maintenance organizations and preferred provider organizations are less
prevalent.
7
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 Unitrin Life and Health
Insurance companies, 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 Unitrin Life and Health Insurance
companies' career agents are set at levels designed to cover the relatively
higher cost of this method of distribution. As a result of such higher expenses,
incurred claims as a percentage of premium income tend to be lower for companies
utilizing this 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
Consistent with insurance industry practice, the Unitrin Life and Health
Insurance companies utilize reinsurance arrangements to limit their maximum
loss, provide greater diversification of risk and minimize exposures on larger
risks. Under these arrangements, the Unitrin Life and Health Insurance companies
are indemnified by reinsurers for losses incurred under insurance policies
issued by the segment's companies. Included among the segment's reinsurance
arrangements is excess of loss reinsurance coverage specifically designed to
protect against losses arising from catastrophic events such as storms under the
property insurance policies written by United Casualty and Union National Fire.
As reinsurance does not discharge the Unitrin Life and Health Insurance
companies from their direct obligations to policyholders on risks insured, these
companies remain contingently liable. However, so long as the reinsurers meet
their obligations, the Unitrin Life and Health Insurance companies' net
liability is limited to the amount of risk that they retain. For descriptions of
certain of the reinsurance arrangements of the Unitrin Life and Health Insurance
segment, see 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 Unitrin Life and Health Insurance segment's lapse ratios for
individual life insurance were 9.5%, 9%, and 10% for the years 2002, 2001, and
2000, respectively.
The customer base served by the Unitrin Life and Health Insurance segment's
career agents and competing life insurance companies tends to have a higher
incidence of lapse than other demographic segments of the population. Thus, to
maintain or increase the level of its business, the Unitrin Life and Health
Insurance segment's career agents 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 2001,
there were approximately 460 life and health insurance company groups in the
United States, made up of nearly 1,000 companies. The Unitrin Life and Health
Insurance segment ranked among the 100 largest life and health insurance company
groups, as measured by admitted assets (79th), net premiums written (93rd), and
capital and surplus (48th).
Unitrin's insurance subsidiaries generally compete using appropriate
pricing, selling to selected markets, controlling expenses, maintaining adequate
ratings from A.M. Best, and providing competitive services to agents and
policyholders.
. Consumer Finance Business
8
Unitrin's subsidiary, Fireside Thrift Co. ("Fireside Thrift"), is engaged
in the consumer finance business. Fireside Thrift is organized under California
law as an industrial bank and is a member of the Federal Deposit Insurance
Corporation (the "FDIC").
Fireside Thrift's principal business is the financing of used automobiles
through the purchase of retail installment contracts from automobile dealers.
The borrowers under these contracts and loans typically have marginal credit
histories.
Fireside Thrift has 36 branches in California and loan production offices
in Arizona, Colorado, Kansas, Oregon and Washington. Fireside Thrift does
business with nearly 3,750 automobile dealers in California, Arizona, Colorado,
Idaho, Kansas, Missouri, Oregon and Washington, and is one of the largest
non-prime automobile lenders in California. Fireside Thrift has over 115,000
loans outstanding totaling in excess of $800 million.
Strong loan underwriting and collection practices are key elements to
successful operating performance in the non-prime automobile finance business.
Nearly 80% of Fireside Thrift's general and administrative expenses are devoted
to underwriting and collection activities. Fireside Thrift individually
underwrites each loan application and historically has declined to extend credit
to more than two-thirds of its loan applicants. See the discussion of Fireside
Thrift's loan loss reserves under the heading "Consumer Finance" in the MD&A and
Note 6 to the Financial Statements. Fireside Thrift competes for loans primarily
on the basis of timely service to its customers and by offering competitive loan
terms. Principal competitors include banks, finance companies, and "captive"
credit subsidiaries of automobile manufacturers.
Fireside Thrift's financing activities are funded primarily by FDIC-insured
deposits, including term certificates ranging from one to ten years in maturity
and savings accounts. Fireside Thrift competes for funds primarily with other
banks and savings and loan associations.
Investments
The quality, nature, and amount of the various types of investments which
can be made by insurance companies are regulated by state laws. Depending on the
state, 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 is concentrated in obligations of United States Government
Agencies and Authorities, investment-grade fixed maturities, Northrop Grumman
Corporation common and preferred stock, Baker Hughes Incorporated common stock,
and UNOVA, Inc. common stock and fixed maturity investments. See the discussions
of Unitrin's investments under the headings "Corporate Investments,"
"Investees," "Investment Results," "Quantitative and Qualitative Disclosures
about Market Risk," and "Liquidity and Capital Resources" in the MD&A and Notes
4, 5 and 13 to the Financial Statements.
Regulation
Insurance Regulation
Unitrin is subject to the insurance holding company laws of several states.
Certain dividends and distributions by an insurance subsidiary 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 of incorporation of each 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 types of insurance.
Insurance regulatory authorities perform periodic examinations of an insurer's
market conduct and other affairs.
Insurance companies are required to report their financial condition and
results in accordance with statutory accounting principles prescribed or
permitted by state insurance regulators in conjunction with the National
Association of Insurance
9
Commissioners (the "NAIC"). State insurance regulators also prescribe the form
and content of statutory 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 NAIC. These RBC
standards are intended to assess the level of risk inherent in an insurance
company's business and consider items such as asset risk, credit risk,
underwriting risk and other business risks relevant to its operations. In
accordance with RBC formulas, a company's RBC requirements are calculated and
compared to its total adjusted capital to determine whether regulatory
intervention is warranted. At December 31, 2002, the total adjusted capital of
each of Unitrin's insurance subsidiaries exceeded the minimum levels required
under RBC rules and had excess capacity to write additional premiums in relation
to these 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
thirteen IRIS ratios for life and health insurers and twelve IRIS ratios for
property and casualty insurers. 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." Based on calculations as of December 31,
2001, two of Unitrin's property and casualty insurance companies, including
Trinity, had three IRIS ratios outside of the usual ranges. With respect to
Trinity, such IRIS ratios were due primarily to operating losses incurred in
2001 and reserve strengthening measures taken during such period.
Unitrin'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. Unitrin's insurance subsidiaries also are required to
participate in various involuntary pools, principally involving workers
compensation and windstorms. In most states, the involuntary pool participation
of Unitrin's insurance subsidiaries is in proportion to their voluntary writings
of related lines of business in such states.
In addition to the regulatory requirements described above, a number of
current and pending legislative and regulatory measures may significantly affect
the insurance business in a variety of ways. These measures include, among other
things, tort reform, consumer privacy requirements, and financial services
deregulation initiatives. For example, at the federal level, the
Gramm-Leach-Bliley Act of 1999 removed many federal and state law barriers to
affiliations between insurers, banks, securities firms and other financial
services providers. This legislation and similar initiatives may lead to
increased consolidation and competition in the insurance industry.
State insurance laws intended primarily for the protection of policyholders
contain certain requirements that must be met prior to any change of control of
an insurance company or insurance holding company that is domiciled or, in some
cases, having such substantial business that it is deemed commercially
domiciled, in that state. These requirements may include the advance filing of
specific information with the state insurance regulators, a public hearing on
the matter, and review and approval of the change of control by such regulators.
The Company has insurance subsidiaries domiciled in a number of states,
including California, Illinois, Kansas, Louisiana, Missouri, New York, Oklahoma,
Oregon, Pennsylvania, Texas and Wisconsin. In these states, "control" generally
is presumed to exist through the direct or indirect ownership of 10% or more of
the voting securities of an insurance company. Any purchase of the Company's
shares that would result in the purchaser owning 10% or more of the Company's
voting securities would be presumed to result in the acquisition of control of
the Company's insurance subsidiaries. Such an acquisition generally would
require the prior approval of the insurance regulatory authorities in each state
in which the Company's insurance subsidiaries are domiciled or deemed to be
commercially domiciled. In addition, many states require pre-acquisition
notification to the state insurance regulators of a change of control of an
insurance company licensed in that state if specific market concentration
thresholds would be triggered by the acquisition. While those pre-acquisition
notification statutes generally do not authorize the state insurance regulators
to disapprove the change of control, they do authorize the issuance of a cease
and desist order with respect to the insurance company if certain conditions,
such as undue market concentration, would result from the acquisition. These
insurance regulatory requirements may deter, delay or prevent transactions
effecting control of the Company or the ownership of the Company's voting
securities, including transactions that could be advantageous to the Company's
shareholders.
Consumer Finance Regulation
Fireside Thrift is an industrial bank regulated by the California Department of
Financial Institutions. Under California banking law, Fireside Thrift is
permitted to engage in the activities of a commercial bank, except the activity
of accepting demand deposits, and is generally subject to the same laws and
regulations to which commercial banks are subject under the California banking
law, which imposes minimum capitalization requirements and limits dividends,
among other things. In addition, since Fireside Thrift is a member of the FDIC,
it is subject to a broad scheme of regulation under the Federal Deposit
Insurance Act and the regulations of the FDIC. Fireside Thrift is also subject
to a large number of federal and state laws of general applicability, including
Federal Reserve Board consumer credit regulations.
Item 2. Properties.
10
Owned Properties
Unitrin owns the 41-story office building at One East Wacker Drive,
Chicago, Illinois, that houses the executive offices of Unitrin. Unitrin
occupies approximately 82,600 square feet of the 527,000 rentable square feet in
the building. In addition, Unitrin subsidiaries together own 12 buildings
located in 9 states consisting of approximately 307,000 square feet in the
aggregate.
Leased Facilities
The Unitrin Life and Health Insurance segment leases facilities with
aggregate square footage of approximately 363,000 at 162 locations in 24 states.
The latest expiration date of the existing leases is December 31, 2007.
The Unitrin Multi Lines Insurance segment leases facilities with an
aggregate square footage of approximately 257,000 at 9 locations in 7 states.
The latest expiration date of the existing leases is January 1, 2008.
The Unitrin Specialty Lines Insurance segment leases facilities with an
aggregate square footage of approximately 148,000 at 3 locations in 3 states.
The latest expiration date of the existing leases is June 30, 2013.
The Kemper Auto and Home segment leases facilities with an aggregate
square footage of approximately 274,000 at 12 locations in 9 states. The latest
expiration date of the existing leases is in June 2008.
The Unitrin Direct Sales segment leases facilities with an aggregate
square footage of approximately 87,000 at 5 locations in 3 states. The latest
expiration date of the existing leases is in June 2005.
Fireside Thrift occupies 38 leased facilities with an aggregate square
footage of approximately 145,000 in 6 states (including consumer finance
branches and main office buildings). The latest expiration date of the existing
leases is July 22, 2008.
The properties described above are in good condition and suitable for
all presently anticipated requirements of Unitrin and its subsidiaries.
Item 3. Legal Proceedings.
In December 1999, a purported nationwide class action lawsuit was filed
against the Company's subsidiary, United Insurance Company of America ("United")
in the United States District Court for the Middle District of Florida on behalf
of "all African-American persons who have (or have had at the time of the
Policy's termination), an ownership interest in one or more Industrial Life
Insurance Policies issued, serviced, administered or purchased from United."
Plaintiffs alleged discrimination in life insurance premium rates in violation
of 42 U.S.C. Sections 1981 and 1982 in addition to various state law claims;
unspecified compensatory and punitive damages were sought together with
equitable relief. At least twenty similar lawsuits were filed in other
jurisdictions against the Company and/or its career agency life insurance
subsidiaries, and the Judicial Panel on Multi-District Litigation ordered that
substantially all of these lawsuits be consolidated for pretrial purposes.
In May 2002, the Company announced a settlement to resolve issues relating
to the use of race as a factor in the underwriting and pricing of life insurance
by United and its subsidiaries. The settlement resolved all pending class action
lawsuits on this issue, as well as other issues in the litigation unrelated to
race-based underwriting. At the same time, the Company announced the completion
of a settlement agreement concerning these matters with the Illinois Department
of Insurance on behalf of insurance regulators nationwide. On September 19,
2002, a court order was entered giving final approval to the settlement and the
Company is now in the process of implementing the terms of the settlement
agreement. The Company has received approximately 1,800 confirmed opt-outs from
the settlement, out of a class of more than 465,000 policies.
In 2000, the Company recorded an after-tax charge of $32.4 million for the
then estimated cost to settle these matters. In 2002, the Company recorded an
after-tax charge of $2.1 million to cover certain additional costs associated
with the implementation of the settlement. The precise cost to fully implement
the settlement may vary from these charges based on a variety of factors and
will not be known until a final accounting of settlement benefits is concluded,
which is expected to occur in mid-2003. However, the Company believes that such
difference, if any, will not have a material adverse effect on the Company's
financial position, but could have a material adverse effect on the Company's
financial results for a given period.
The Company and its subsidiaries are defendants in various other legal actions
incidental to their businesses. Many of these
11
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 the 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, case law there allows for
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.
Item 4. Submission of Matters to a Vote of Security Holders.
During the quarter ended December 31, 2002, 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 New York Stock Exchange under the
symbol of "UTR." Prior to becoming listed on the New York Stock Exchange in May
2001, Unitrin's common stock 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 2002 and 2001 are incorporated herein by reference to Note
21 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 2002 and 2001 is incorporated herein by
reference to the following portions of the Financial Statements:
(a) Consolidated Statements of Shareholders' Equity and Comprehensive
Income; and
(b) Dividends Paid to Shareholders (Per Share) included in Note 21 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, 2002, the approximate number of record holders of
Unitrin's common stock was 7,500.
Item 6. Selected Financial Data.
Selected consolidated financial data for the five years ended December 31,
2002 is incorporated herein by reference to the data captioned "Financial
Highlights" and 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 and filed as Exhibit 13.2
hereto.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
These disclosures are contained in the section of the MD&A entitled
"Quantitative and Qualitative Disclosures About Market Risk" which is
incorporated herein by reference and filed as Exhibit 13.2 hereto.
12
Item 8. Financial Statements and Supplementary Data.
The Financial Statements (including their related notes and the respective
reports of Deloitte & Touche LLP and KPMG LLP) are incorporated herein by
reference and filed as Exhibit 13.1 hereto, (with the exception of the reports
of KPMG LLP, which are filed as Exhibit 23.3 hereto).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
The change in Unitrin's certifying accountant was previously reported in a
Current Report on Form 8-K on November 15, 2001.
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 "Unitrin Executive Officers" in the Proxy Statement for the 2003
Annual Meeting of Shareholders of Unitrin. Unitrin plans to file such proxy
statement within 120 days after December 31, 2002, 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 "Executive Officer Compensation and
Benefits" in the Proxy Statement for the 2003 Annual Meeting of Shareholders of
Unitrin. Neither the report by the Compensation Committee 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 and
Related Stockholder Matters.
This information is incorporated herein by reference to the section
captioned "Ownership of Unitrin Common Stock" in the Proxy Statement for the
2003 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 2003 Annual Meeting of Shareholders of Unitrin.
Item 14. Controls and Procedures.
(a) Evaluation and Control 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 annual report (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.
PART IV
13
Item 15. 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 (except the reports
of KPMG LLP which have been filed as Exhibit 23.3) and together are
incorporated by reference into Item 8 hereof:
The consolidated balance sheets of Unitrin and subsidiaries as of December
31, 2002 and 2001, and the consolidated statements of income, cash flows and
shareholders' equity and comprehensive income for the years ended December
31, 2002, 2001 and 2000, together with the notes thereto and the respective
reports of Deloitte & Touche LLP and KPMG LLP thereon.
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
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 10.9 relate to
compensatory plans filed or incorporated by reference as exhibits hereto
pursuant to Item 15(c) of Form 10-K.
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 (incorporated herein by reference to
Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002)
4.1 Rights Agreement, dated as of August 3, 1994, as amended October
12, 2000, between Unitrin, Inc. and First Union National Bank as
Rights Agent, which includes: as Exhibit A thereto, the Form of
Certificate of Amendment of Certificate of Designation, Preferences
and Rights of Series A Preferred Stock of Unitrin, Inc.; as Exhibit
B thereto, the Form of Rights Certificate; and, as Exhibit C
thereto, the Summary of Rights to Purchase Series A Preferred Stock
(incorporated herein by reference to Exhibit 4.10 to the Company's
Registration Statement on Form S-3 filed May 9, 2002, Registration
No. 333-87866)
4.2 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)
14
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)
10.5 Unitrin, Inc. Pension Equalization Plan (incorporated herein by
reference to Exhibit 10.4 to Unitrin's Annual Report on Form 10-K
for the year ended December 31, 1994), 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, 2002), 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 3.00 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 Proxy Statement, dated
April 9, 1998, in connection with the 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 Unitrin's
Amendment No. 6 to its Schedule 13D with respect to Curtiss-Wright
Corporation dated August 17, 2001)
12 Ratios of Earnings to Fixed Charges
13.1 Financial Statements
13.2 MD&A
13.3 Financial Highlights
15
21 Subsidiaries of Unitrin, Inc.
23.1 Reports of Deloitte & Touche LLP (included in Exhibit 13.1 and
filed as Exhibit 23.1 hereof)
23.2 Consent of Deloitte & Touche LLP
23.3 Reports of KPMG LLP
23.4 Consent of KPMG LLP
24 Power of Attorney (included on the signature page hereof)
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.
(b) Reports on Form 8-K.
During the quarter ended December 31, 2002, the Company filed a Current
Report on Form 8-K dated October 17, 2002 reporting under Items 7 and 9
an increase in the Company's property and casualty insurance reserves in
the third quarter of 2002 to reflect development of prior accident year
losses.
(c) Exhibits. Included in Item 15(a)3 above
(d) Financial Statement Schedules. Included in Item 15(a)2 above
Caution Regarding Forward-Looking Statements
This 2002 Annual Report on Form 10-K, and the accompanying Financial
Statements and MD&A, contain forward-looking statements which usually include
words such as "believe(s)," "goal(s)," "target(s)," "estimate(s),"
"anticipate(s)," "expect(s)," "forecast(s)," "intend(s)," "plan(s)" and similar
expressions. Readers are cautioned not to place undue reliance on such
statements, which speak only as of the date of this 2002 Annual Report on Form
10-K. 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 the MD&A, the accompanying Financial Statements, 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 premium rates and 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 Unitrin 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 2002 Annual Report on Form
10-K.
16
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints each of
Richard C. Vie, Chairman of the Board and Chief Executive Officer, Eric J.
Draut, Executive Vice President and Chief Financial Officer, and Scott Renwick,
Senior Vice President, General Counsel and 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, 2002 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois, on January 29, 2003.
UNITRIN, INC.
(Registrant)
By: /s/ Richard C. Vie
---------------------------
Richard C. Vie
Chairman of the Board 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 January 29, 2003.
Signature Title
--------- -----
/s/ Richard C. Vie Chairman of the Board, Chief Executive
- ----------------------------------- Officer and Director
Richard C. Vie
/s/ Donald G. Southwell President, Chief Operating Officer
- ----------------------------------- and Director
Donald G. Southwell
/s/ Eric J. Draut Executive Vice President,
- ----------------------------------- Chief Financial Officer and Director
Eric J. Draut (principal financial officer)
/s/ Richard Roeske Vice President and Chief Accounting Officer
- ----------------------------------- (principal accounting officer)
Richard Roeske
/s/ James E. Annable Director
- -----------------------------------
James E. Annable
/s/ Douglas G. Geoga Director
- -----------------------------------
Douglas G. Geoga
/s/ Reuben L. Hedlund Director
- -----------------------------------
Reuben L. Hedlund
/s/ Jerrold V. Jerome Director
- -----------------------------------
Jerrold V. Jerome
/s/ William E. Johnston, Jr. Director
- -----------------------------------
William E. Johnston, Jr.
Director
- -----------------------------------
Fayez S. Sarofim
/s/ Ann E. Ziegler Director
- -----------------------------------
Ann E. Ziegler
17
CERTIFICATIONS
I, Richard C. Vie, certify that:
1. I have reviewed this annual report on Form 10-K of Unitrin, Inc.;
2. Based on my knowledge, this annual 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
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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
annual 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 annual report (the "Evaluation Date"); and
(c) presented in this annual 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 functions):
(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 annual report whether 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: January 29, 2003
/s/ Richard C. Vie
------------------------------
Richard C. Vie
Chairman of the Board and
Chief Executive Officer
18
CERTIFICATIONS
I, Eric J. Draut, certify that:
1. I have reviewed this annual report on Form 10-K of Unitrin, Inc.;
2. Based on my knowledge, this annual 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
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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
annual 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 annual report (the "Evaluation Date"); and
(c) presented in this annual 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 functions):
(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 annual report whether 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: January 29, 2003
/s/ Eric J. Draut
----------------------------
Eric J. Draut
Executive Vice President and
Chief Financial Officer
19
SCHEDULE I
UNITRIN, INC. AND SUBSIDIARIES
INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2002
(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 $ 1,260.4 $ 1,298.3 $ 1,298.3
States, Municipalities
and Political Subdivisions 608.2 629.8 629.8
Corporate Securities:
Other Bonds and Notes 957.4 1,031.6 1,031.6
Redemptive Preferred Stocks 61.7 63.3 63.3
------------------- ------------------ --------------------
Total Investments in Fixed Maturities 2,887.7 3,023.0 3,023.0
------------------- ------------------ --------------------
Northrop Grumman Corporation Preferred Stock 177.5 218.9 218.9
Northrop Grumman Corporation Common Stock 661.5 743.6 743.6
Other Equity Securities:
Common Stocks 286.9 333.7 333.7
Preferred Stocks 97.6 98.1 98.1
------------------- ------------------ --------------------
Total Investments in Other Equity Securities 384.5 431.8 431.8
------------------- ------------------ --------------------
Investees (A)
UNOVA, Inc. 64.9 75.9 64.9
------------------- ------------------ --------------------
Total Investees 64.9 75.9 64.9
------------------- ------------------ --------------------
Loans, Real Estate and Short-term Investments 821.6 XXX.X 821.6
------------------- --------------------
Total Investments $ 4,997.7 $ 5,303.8
=================== ====================
(A) - Amortized Cost = Cost Plus Cumulative Undistributed Earnings.
See Accompanying Independent Auditors' Report.
SCHEDULE II
UNITRIN, INC.
PARENT COMPANY STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(Dollars in Millions)
Years Ended December 31,
------------------------------------------------
2002 2001 2000
-------------- -------------- ------------
Net Income (Loss) $ (8.2) $ 380.9 $ 91.0
Other Comprehensive Income (Loss):
Gross Unrealized Holding Gains (Losses) Arising During Year:
Securities Held by Subsidiaries (11.3) 108.4 311.5
Securities Held by Parent (2.7) 35.0 0.1
Cumulative Translation Adjustment 2.4 3.7 (6.8)
-------------- -------------- ------------
Gross Unrealized Holding Gains (Losses) Arising During Year (11.6) 147.1 304.8
Income Tax Benefit (Expense) 4.1 (51.6) (107.0)
-------------- -------------- ------------
Unrealized Holding Gains (Losses) Arising During Year, Net (7.5) 95.5 197.8
-------------- -------------- ------------
Reclassification Adjustment for Gross (Gains) Losses Realized in
Net Income:
Securities Held by Subsidiaries 20.8 (10.5) (132.9)
Income Tax Expense (Benefit) (7.3) 3.7 46.5
-------------- -------------- ------------
Reclassification Adjustment for (Gains) Losses Realized in
Net Income (Loss), Net 13.5 (6.8) (86.4)
-------------- -------------- ------------
Other Comprehensive Income 6.0 88.7 111.4
-------------- -------------- ------------
Total Comprehensive Income (Loss) $ (2.2) $ 469.6 $ 202.4
============== ============== ============
See Accompanying Independent Auditors' Reports.
SCHEDULE II
UNITRIN, INC.
PARENT COMPANY BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(Dollars in Millions)
December 31,
-----------------------------
2002 2001
------------- -------------
ASSETS
- ------
Investment in Subsidiaries and Investee $ 1,981.8 $ 2,364.5
Northrop Grumman Preferred Stock at Fair Value (Cost: 2002 - $186.9; 2001 $146.2) 218.9 181.3
Northrop Grumman Common Stock at Fair Value (Cost: 2002 - $112.1) 111 0.0
Other Equity Securities at Fair Value (Cost: 2002 - $0.7; 2001 - $0.3) 0.8 0.5
Short Term Investments 13.0 0.0
Other Investments 70.0 0.0
Other Assets 3.7 2.6
------------- -------------
Total Assets $ 2,399.2 $ 2,548.9
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Senior Notes Payable, 5.75% Due 2007 (Fair Value: 2002 - $315.0) $ 297.1 $ 0.0
Notes Payable under Revolving Credit Agreement 80.0 254.0
Notes Payable to Subsidiary, 6.75% Due 2008 0.0 155.0
Accrued Expenses and Other Liabilities 219.7 223.1
------------- -------------
Total Liabilities 596.8 632.1
------------- -------------
Shareholders' Equity:
Common Stock 6.8 6.7
Additional Paid-in Capital 512.9 488.8
Retained Earnings 1,086.4 1,231.0
Accumulated Other Comprehensive Income 196.3 190.3
------------- -------------
Total Shareholders' Equity 1,802.4 1,916.8
------------- -------------
Total Liabilities and Shareholders' Equity $ 2,399.2 $ 2,548.9
============= =============
See Accompanying Independent Auditors' Reports.
SCHEDULE II
UNITRIN, INC.
PARENT COMPANY STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(Dollars in Millions)
Years Ended December 31,
----------------------------------
2002 2001 2000
--------- --------- --------
Operating Activities:
Net Income (Loss) $ (8.2) $ 380.9 $ 91.0
Adjustment Required to Reconcile Net Income
to Net Cash Provided by Operations:
Equity in Net Income (Loss) of Subsidiaries and Investees 8.6 (357.7) (120.9)
Cash Dividends from Subsidiaries 380.9 96.0 188.0
Cash Dividends from Investee - 1.7 2.3
Net Realized Investment (Gains) Losses - (54.8) 0.7
Other, Net (1.5) (98.9) 158.9
--------- --------- --------
Net Cash Provided (Used) by Operating Activities 379.8 (32.8) 320.0
--------- --------- --------
Investing Activities:
Purchase of Common Stock (32.4) - -
Acquisition of Businesses (55.2) - -
Intercompany Sale of Subsidiary - 207.0
Change in Short-term Investments (13.0) 173.1 (144.1)
Capital Contributed to Subsidiaries (133.0) (10.0) (25.0)
Other, Net (0.7) - -
--------- --------- --------
Net Cash Provided (Used) by Investing Activities (234.3) 370.1 (169.1)
--------- --------- --------
Financing Activities:
Notes Payable Proceeds:
Revolving Credit Agreement 638.0 831.0 756.7
Senior Notes Issued 296.8 - -
Notes Payable Payments:
Revolving Credit Agreement (812.0) (756.0) (688.7)
To Subsidiary (155.0) (295.0) -
Cash Dividends Paid (112.4) (108.0) (103.1)
Common Stock Repurchases (9.4) (26.6) (122.3)
Issuance of Unitrin Common Stock 8.5 17.3 6.5
--------- --------- --------
Net Cash Used by Financing Activities (145.5) (337.3) (150.9)
--------- --------- --------
Increase (Decrease) in Cash - - -
Cash, Beginning of Year - - -
--------- --------- --------
Cash, End of Year $ - $ - $ -
========= ========= ========
See Accompanying Independent Auditors' Reports.
SCHEDULE II
UNITRIN, INC.
PARENT COMPANY STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(Dollars in Millions)
Years Ended December 31,
------------------------------------------
2002 2001 2000
------------ ------------ ------------
Net Investment Income $ 13.4 $ 8.3 $ 0.0
Net Realized Investment Gains (Losses) 0.0 54.8 (0.7)
------------ ------------ ------------
Total Revenues 13.4 63.1 (0.7)
------------ ------------ ------------
Interest Expense 18.3 26.8 48.7
Other Operating (Income) Expenses (0.7) (2.3) (3.4)
------------ ------------ ------------
Total Operating Expenses 17.6 24.5 45.3
------------ ------------ ------------
Income (Loss) Before Income Taxes and Equity
in Net Income of Subsidiaries and Investees (4.2) 38.6 (46.0)
Income Tax Benefit (Expense) 4.6 (15.4) 16.1
------------ ------------ ------------
Income (Loss) Before Equity in
Net Income (Loss) of Subsidiaries and Investees 0.4 23.2 (29.9)
Equity in Net Income (Loss) of Subsidiaries and Investees (8.6) 357.7 120.9
------------ ------------ ------------
Net Income $ (8.2) $ 380.9 $ 91.0
============ ============ ============
See Accompanying Independent Auditors' Reports.
SCHEDULE III
UNITRIN, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(Dollars in Millions)
Insurance Amortization
Claims Of Deferred
Net and Policy Other
Premiums Other Investment Policyholders' Acquisition Insurance
Premiums Written Income Income Benefits Costs Expenses
----------- ---------- ---------- ---------- -------------- ----------- ------------
Year Ended December 31, 2002:
Life and Health (1) $ 653.2 $ N/A $ 4.3 $ 151.6 $ 387.3 $ 60.7 $ 273.3
Multi Lines 584.2 590.6 -- 31.6 524.8 84.9 99.3
Specialty Lines 452.9 485.0 -- 14.8 366.0 69.4 32.9
Unitrin Direct Sales 73.6 98.5 -- 0.9 65.8 1.4 42.4
Kemper Auto and Home 114.1 331.0 31.9 2.8 88.4 20.9 58.5
Other -- N/A 3.6 20.2 -- -- (13.0)
---------- ---------- ---------- --------- --------- ---------- ------------
Total $ 1,878.0 $ N/A $ 39.8 $ 221.9 $ 1,432.3 $ 237.3 $ 493.4
========== ========== ========== ========= ========= ========== ============
Year Ended December 31, 2001:
Life and Health (1) $ 635.1 $ N/A $ 4.9 $ 176.9 $ 371.7 $ 63.0 $ 275.9
Multi Lines 570.3 579.9 -- 42.0 546.2 71.5 106.9
Specialty Lines 345.4 347.6 -- 14.1 289.1 54.0 33.6
Unitrin Direct Sales 10.4 24.1 -- -- 10.1 -- 22.9
Other -- N/A 3.9 3.5 -- -- (3.0)
---------- ---------- ---------- --------- --------- ---------- ------------
Total $ 1,561.2 $ N/A $ 8.8 $ 236.5 $ 1,217.1 $ 188.5 $ 436.3
========== ========== ========== ========= ========= ========== ============
Year Ended December 31, 2000:
Life and Health (1) $ 678.3 $ N/A $ 3.7 $ 181.4 $ 423.0 $ 68.3 $ 304.0
Multi Lines 548.8 564.3 -- 45.0 450.2 69.7 102.7
Specialty Lines 215.0 258.5 -- 14.3 166.4 34.2 23.3
Unitrin Direct Sales (2) -- -- -- -- -- -- 6.1
Other -- N/A 4.3 (19.8) -- -- 1.2
---------- ---------- ---------- --------- --------- ---------- ------------
Total $ 1,442.1 $ N/A $ 8.0 $ 220.9 $ 1,039.6 $ 172.2 $ 437.3
========== ========== ========== ========= ========= ========== ============
Deferred
Policy
Acquisition Insurance Unearned
Costs Reserves Premiums
------------ ------------ -----------
Year Ended December 31, 2002:
Life and Health (1) $ 298.4 $ 2,221.9 $ 31.4
Multi Lines 27.1 675.5 261.0
Specialty Lines 18.9 192.1 151.6
Unitrin Direct Sales 1.1 50.1 73.4
Kemper Auto and Home 37.1 51.8 216.9
Other -- -- --
----------- ------------ -----------
Total $ 382.6 $ 3,191.4 $ 734.3
=========== ============ ===========
Year Ended December 31, 2001:
Life and Health (1) $ 282.6 $ 2,164.1 $ 27.7
Multi Lines 31.4 544.8 254.5
Specialty Lines 14.5 143.6 119.5
Unitrin Direct Sales 5.1 14.7
Other -- -- --
----------- ------------ -----------
Total $ 328.5 $ 2,857.6 $ 416.4
=========== ============ ===========
Year Ended December 31, 2000:
Life and Health (1) $ 273.6 $ 2,108.8 $ 27.6
Multi Lines 32.9 424.5 292.0
Specialty Lines 15.7 109.5 65.7
Unitrin Direct Sales (2) -- -- --
Other -- -- --
----------- ------------ -----------
Total $ 322.2 $ 2,642.8 $ 385.3
=========== ============ ===========
(1) The Company's Life and Health Insurance employee-agents also market
certain property and casualty insurance products under common management.
Accordingly, the Company includes the results of these property and
casualty insurance products in its Life and Health Insurance segment.
(2) Unitrin Direct Sales Other Insurance expenses include primarily start-up
costs.
See Accompanying Independent Auditors' Reports.
SCHEDULE IV
UNITRIN, INC.
REINSURANCE SCHEDULE
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 and 2000
(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, 2002:
- -----------------------------
Life Insurance in Force $ 20,497.2 $ 1,153.2 $ 0.0 $ 19,344.0 -
Premiums
Life Insurance $ 404.5 $ 1.5 $ 0.3 $ 403.3 -
Accident and Health Insurance 157.9 2.3 0.0 155.6 -
Property and Liability Insurance 1,125.8 36.3 229.6 1,319.1 17.4%
------------ ---------- ---------- ------------ -------------
Total Premiums $ 1,688.2 $ 40.1 $ 229.9 $ 1,878.0 12.2%
============ ========== ========== ============ =============
Year Ended December 31, 2001:
- -----------------------------
Life Insurance in Force $ 19,958.0 $ 1,157.9 $ 0.0 $ 18,800.1 -
Premiums
Life Insurance $ 398.0 $ 1.4 $ 0.0 $ 396.6 -
Accident and Health Insurance 153.3 2.4 0.0 150.9 -
Property and Liability Insurance 939.7 32.2 106.2 1,013.7 10.5%
------------ ---------- ---------- ------------ -------------
Total Premiums $ 1,491.0 $ 36.0 $ 106.2 $ 1,561.2 6.8%
============ ========== ========== ============ =============
Year Ended December 31, 2000:
- -----------------------------
Life Insurance in Force $ 20,990.1 $ 1,389.1 $ 0.0 $ 19,601.0 -
Premiums
Life Insurance $ 404.6 $ 1.9 $ 0.0 $ 402.7 -
Accident and Health Insurance 194.7 4.3 0.0 190.4 -
Property and Liability Insurance 769.5 23.5 103.0 849.0 12.1%
------------ ---------- ---------- ------------ -------------
Total Premiums $ 1,368.8 $ 29.7 $ 103.0 $ 1,442.1 7.1%
============ ========== ========== ============ =============
See Accompanying Independent Auditors' Reports.