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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2001.
[_] 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 Number)
One East Wacker Drive
Chicago, Illinois 60601
(Address of Principal Executive Offices) (Zip Code)
(312) 661-4600
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
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]
Based on the closing market price of Registrant's common stock on December
31, 2001 the aggregate market value of such stock held by non-affiliates of
Registrant is approximately $2.4 billion. Solely for purposes of this
calculation, all executive officers and directors of Registrant are considered
affiliates.
Registrant had 67,547,104 shares of common stock outstanding as of December
31, 2001.
Documents Incorporated by Reference
Part of the Form 10-K
Document into which incorporated
Portions of Proxy Statement for 2002 Annual Meeting Part III
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PART I
ITEM 1. Business
Unitrin, Inc. ("Unitrin") was incorporated in Delaware in 1990. Unitrin's
subsidiaries serve the basic financial needs of individuals, families and small
businesses by providing property and casualty insurance, life and health
insurance, and consumer finance services.
(a) General development of business
-------------------------------
. Events regarding Unitrin's Former Investees
-------------------------------------------
Prior to the transactions described below occurring in 2001, Unitrin's
investment portfolio included equity investments in Litton Industries, Inc.
("Litton") and Curtiss-Wright Corporation ("Curtiss-Wright"). In this
connection, Unitrin owned approximately 28% of Litton's outstanding common stock
and approximately 44% of Curtiss-Wright's outstanding common stock. Because
Unitrin's equity ownership interest in each of Litton and Curtiss-Wright
exceeded 20%, Unitrin accounted for these investments under the equity method of
accounting.
For further discussion of Unitrin's investment in these former investees
and the equity method of accounting, please refer to (i) Notes 2 and 5 to
Unitrin's Consolidated Financial Statements, which financial statements are
further described in Item 14(a)1, hereto and filed as Exhibit 13.1, hereto and
incorporated by reference into Item 8 hereof (the "Financial Statements"), and
(ii) "Management's Discussion and Analysis of Results of Operations and
Financial Condition," which is filed as Exhibit 13.2 hereto and incorporated by
reference into Item 7 hereof (the "MD&A").
During 2001, the following developments occurred with respect to Unitrin's
investments in Litton and Curtiss-Wright:
(i) Acquisition of Litton by Northrop
---------------------------------
In April 2001, Northrop Grumman Corporation ("Northrop") completed its
acquisition of Litton (the "Northrop-Litton Transaction"). Prior to the
Northrop-Litton Transaction, Unitrin and its subsidiaries owned approximately
12.7 million shares or 28% of Litton's outstanding common stock. In connection
with the Northrop-Litton Transaction, Unitrin and its subsidiaries tendered all
of their shares of Litton common stock to Northrop. In exchange for their
holdings of Litton common stock, Unitrin and its subsidiaries received
approximately 1.8 million shares of Northrop Series B convertible preferred
stock and approximately 7.7 million shares of Northrop common stock in a
tax-free exchange. In addition to receiving Northrop preferred and common stock,
Unitrin and its subsidiaries received approximately $171.8 million in cash, net
of transaction costs. In the second quarter of 2001, Unitrin recognized a
pre-tax accounting gain of $562.1 million and an after-tax accounting gain of
$362.4 million, or $5.37 per Unitrin common share, resulting from the
Northrop-Litton Transaction.
Prior to Northrop's acquisition of Litton, Unitrin accounted for its
investment in Litton under the equity method of accounting. As a result of the
Northrop-Litton Transaction, Unitrin's ownership percentage in the combined
company fell below 20% and, accordingly, Unitrin does not apply the equity
method of accounting to its investments in Northrop.
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(ii) Tax-Free Distribution of Unitrin's Investment in Curtiss-Wright
---------------------------------------------------------------
In November 2001, Unitrin distributed in a tax-free spin-off to its
shareholders all Class B common stock of Curtiss-Wright owned by Unitrin. Prior
to the spin-off, Unitrin owned approximately 4.4 million shares of
Curtiss-Wright's common stock, representing approximately 44% of
Curtiss-Wright's total issued and outstanding shares of common stock. In
connection with the spin-off, all of the 4.4 million Curtiss-Wright shares held
by Unitrin were exchanged for 4.4 million shares of a new Class B common stock
of Curtiss-Wright that is entitled to elect at least 80% of the Board of
Directors of Curtiss-Wright but is otherwise substantially identical to
Curtiss-Wright's existing common stock. The Curtiss-Wright Class B common stock
was distributed pro ratably to Unitrin shareholders of record as of November 12,
2001. Based on the market value of Curtiss-Wright common stock immediately prior
to November 7, 2001 (the date that Unitrin common stock began trading
ex-distribution), the Class B shares distributed to Unitrin shareholders were
valued at approximately $196.1 million.
For further information regarding the transactions described above
involving Unitrin's former investments in Litton and Curtiss-Wright, please
refer to Note 5 of the Financial Statements and the MD&A sections captioned
"Corporate Investments," "Investees" and "Investment Results."
. Unitrin Stock Repurchases
-------------------------
During 2001, Unitrin repurchased and retired approximately 723,000 shares
of its common stock in open market transactions at an aggregate cost of
approximately $26.6 million. Since its inception in 1990, Unitrin has
repurchased, on a post-split basis, approximately 54.3 million shares of its
common stock, or nearly half of Unitrin's shares originally outstanding, for an
aggregate cost of approximately $1.4 billion. At December 31, 2001,
approximately 3.9 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, 2001, 2000, and 1999 is contained in the following portions of this
2001 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
-----------------------
Unitrin is engaged, through its subsidiaries, in the property and casualty
insurance, life and health insurance and consumer finance businesses. Unitrin
conducts its operations through five operating segments: Multi Lines Insurance,
Specialty Lines Insurance, Unitrin Direct, Life and Health Insurance, and
Consumer Finance.
Unitrin's subsidiaries employ nearly 7,700 full-time associates of which
approximately 1,200 are employed in the Multi Lines Insurance segment, 690 in
the Specialty Lines Insurance segment, 225 in the Unitrin Direct segment, 4,740
in the Life and Health Insurance segment, and 655 in the Consumer Finance
segment.
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. 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
and Unitrin Direct. 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 41%,
34%, and 31% of Unitrin's consolidated insurance premiums for the years ended
December 31, 2001, 2000, and 1999, 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 11
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 424,000 policies in force. The states
which provided the largest amount of premium for the Multi Lines Insurance
segment in 2001 were Texas (38%), Oregon (9%), Wisconsin (6%), 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 exclusively by over 1,500 independent insurance agents in over 2,100
locations. These personal and commercial products are designed and priced for
those individuals and businesses that have demonstrated favorable risk
characteristics and loss history. Typical customers include "main street"
businesses and middle income families. Products are marketed primarily in
suburban and rural communities.
Trinity Universal Insurance Company ("Trinity") and certain of Unitrin's
subsidiaries (Milwaukee Casualty Insurance Co., Milwaukee Safeguard Insurance
Company, Security National Insurance Company, Trinity Universal Insurance
Company of Kansas, Inc., Valley Insurance Company and Valley Property & Casualty
Insurance Company) and affiliates (Milwaukee 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 62% of the aggregate insurance premium revenue of Unitrin's
property and casualty insurance business in 2001.
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 28 states,
the Specialty Lines Insurance segment has over 300,000 policies in force. The
states which provided the largest amount of premium in 2001 were California
(28%), Texas (26%), and Washington (6%).
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 8,000
independent agents in 11,500 locations. Specialty Lines Insurance products
3
accounted for approximately 37% of the aggregate insurance premium revenue of
Unitrin's property and casualty insurance business in 2001.
Unitrin Direct Segment
----------------------
On January 3, 2000, Unitrin established Unitrin Direct, a direct marketing
automobile insurance unit, to market personal automobile insurance through
direct mail, radio and television advertising and 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's efforts in 2000 generally were devoted to
the development of business plans and establishment of operational
infrastructure. Unitrin Direct began actively marketing personal automobile
insurance in the State of Pennsylvania in January 2001. Unitrin Direct then
entered Florida in May 2001, Michigan in September 2001, and California in
November of 2001. Several additional states are planned for introduction in
2002, subject to applicable state insurance regulatory approvals.
Unitrin Direct 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. Unitrin Direct's overall business strategy places great
emphasis on competitive pricing and quality customer service.
While key business metrics for Unitrin Direct are still developing, and
while initial results may not be indicative of future results, its first full
year of active operating results primarily are meeting or exceeding Unitrin's
expectations. Key business metrics include mix of business, conversion ratios
(number of quotes that become sold policies), acquisition cost per sale, average
premiums, claim frequencies and loss ratios. Building a direct marketing
insurance operation, such as Unitrin Direct, requires a significant investment
resulting in up-front costs and expenses associated with marketing products and
acquiring new policies. Although over time Unitrin Direct expects to experience
lower renewal costs than traditional insurance providers, Unitrin expects that
Unitrin Direct will produce operating losses for at least the next few years.
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 originally 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, toxic mold and other emerging 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 additional information regarding reserves, please refer
to the MD&A and Notes 2, 7 and 19 to the Financial Statements.
4
Storms/Catastrophe Losses
Severe weather and catastrophic events, such as hurricanes, tornadoes,
earthquakes and wind, snow, ice and hail storms, are inherent risks of the
property insurance business. Such 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 storm and 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.
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
windstorms and tornadoes tend to occur in the spring of the year, while
hurricanes generally occur in the summer and fall. Historically, Unitrin's
property and casualty insurance companies have written a sizable portion of
business in Texas, the plains states, and certain coastal areas that are prone
to storms. Management has endeavored to reduce its vulnerability to storm losses
through a combination of geographic expansion outside of these areas and reduced
concentration of property business in storm-prone areas.
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 2001 catastrophe reinsurance
program 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 the Unitrin
property and casualty insurance companies operated, including the Gulf states of
Texas, Louisiana and Alabama. In addition, the 2001 program provided a further
layer of protection in the amount of 75% of $55 million for losses in excess of
$55 million in all states in which Unitrin property and casualty insurance
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 property and casualty insurance companies
for storms occurring in all states with a statistical frequency of occurrence of
once per 100 years is approximately $34 million. For further discussion of the
reinsurance program, see discussion below and Note 18 to the Financial
Statements.
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
5
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 and Unitrin Direct segments.
Competition
Based on the most recent data published by A.M. Best Company ("A.M.
Best") as of the end of 2000, there were approximately 1,000 property and
casualty insurance groups in the United States, made up of nearly 2,500
companies. Unitrin's property and casualty insurance companies ranked among the
60 largest property and casualty insurance company organizations in the United
States, measured by net premiums written (54th), and policyholders' surplus
(56th). With respect to admitted assets, Unitrin's property and casualty
insurance companies ranked 69th relative to industry peers.
In 2000, the industry's estimated net premiums written were over $287
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 2000 premium volume.
Property and casualty insurance is a highly competitive business,
particularly with respect to personal and commercial lines automobile insurance
and workers compensation insurance. Over the past several years, competition has
become progressively more intense, due in large part to the efforts of many
insurance companies to obtain, maintain and expand market shares by offering
relatively low premium rates. Competition has grown not only because of the
efforts of established companies, but also because of the entry of new
competitors drawn to the industry by what were reasonably attractive profit
margins in certain lines. As a consequence of these and other factors, much of
the property and casualty insurance industry has been marked by low revenue
growth, deterioration in operating profits and, until recently, falling prices.
With the goal of reversing this trend, however, the industry has begun to show
renewed focus on premium rate adequacy. As a result, the downward pressure on
premium rates is abating as many competitors implement rate increases.
To remain competitive, the strategy of Unitrin's property and casualty
insurance companies includes, 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 high ratings from A.M.
Best, (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").
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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 $8,200. This product accounted for 25%, 27%, and 29% of Unitrin's
consolidated insurance premiums for the years ended December 31, 2001, 2000, and
1999, respectively. Premiums are typically charged on a monthly basis and
average approximately $22 per policy per month. Permanent policies are offered
primarily on a non-participating, guaranteed-cost basis.
Career Agents
Approximately 81% 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
26 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 2000, there are over 31 million households
in the United States with less than $25,000 of annual income, representing about
30% of all U.S. households.
Unitrin's career agency companies, United, Reliable and Union National
Life, are 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 were, or now are in the
process of being, combined and provided from centralized locations. By
eliminating operational redundancies, the consolidation is anticipated to
increase the overall efficiency and cost effectiveness of the career agency
companies.
Independent Agents
Reserve National has approximately 230 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.
Pricing
Premiums for life and health insurance products are based on
assumptions with respect to mortality, morbidity, investment yields, expenses,
7
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%, 10%, and 10% for the years 2001, 2000, and
1999, 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
2000, there were
8
approximately 460 life and health insurance company groups in the United States,
made up of more than 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 (78th), net premiums written (94th), and capital
and surplus (45th).
Unitrin's insurance subsidiaries generally compete using appropriate
pricing, selling to selected markets, controlling expenses, maintaining high
ratings from A.M. Best, and providing competitive services to agents and
policyholders.
. Consumer Finance Business
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. Fireside Thrift also makes personal loans, mostly secured by
automobiles. The borrowers under these contracts and loans typically have
marginal credit histories.
Fireside Thrift has 33 branches in California and loan production
offices in Arizona, Colorado, Oregon and Washington. Fireside Thrift does
business with over 3,500 automobile dealers in California, Arizona, Colorado,
Oregon and Washington, and is one of the largest non-prime automobile lenders in
California. Fireside Thrift has over 110,000 loans outstanding totaling in
excess of $700 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 thirty-one days
to five 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 United States Government obligations,
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
9
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 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, 2001, 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
twelve IRIS ratios. The primary purpose of the ratios is to provide an "early
warning" of any negative developments. The NAIC reports the ratios to state
regulators who may then contact the companies if three or more ratios fall
outside the NAIC's "usual ranges." Based upon calculations as of December 31,
2000, one of Unitrin's property and casualty insurance subsidiaries, Valley
Insurance Company, had three or more IRIS ratios outside the usual ranges
primarily due to the effects of ceding certain business to Trinity pursuant to
an intercompany reinsurance arrangement.
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,
10
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.
Consumer Finance Regulation
Fireside Thrift is regulated by the California Department of Financial
Institutions. Effective September 30, 2000, the California legislature changed
the name for institutions such as Fireside Thrift from "industrial loan company"
to "industrial bank" and made such institutions subject to the California
banking law, rather than its industrial loan law to which Fireside Thrift was
previously subject. Under the new law, Fireside Thrift is now permitted to
engage in the activities of a commercial bank, except the activity of accepting
demand deposits. Fireside Thrift is also now 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
Owned Properties
Unitrin's subsidiary, United, owns the 41-story office building at One
East Wacker Drive, Chicago, Illinois, that houses the executive offices of
Unitrin and United. Unitrin and United occupy approximately 83,000 square feet
of the 527,000 rentable square feet in the building. In addition, Unitrin
subsidiaries together own 14 buildings located in 10 states consisting of
approximately 317,600 square feet in the aggregate.
Leased Facilities
The Unitrin Life and Health Insurance segment leases facilities with
aggregate square footage of approximately 377,379 at 176 locations in 25 states.
The latest expiration date of the existing leases is January 2007.
The Unitrin Multi Lines Insurance segment leases facilities with an
aggregate square footage of approximately 265,700 at 10 locations in 7 states.
The latest expiration date of the existing leases is July 2007.
The Unitrin Specialty Lines Insurance segment leases facilities with an
aggregate square footage of approximately 132,700 at 4 locations in 4 states.
The latest expiration date of the existing leases is July 2007.
Unitrin Direct leases facilities with an aggregate square footage of
approximately 55,220 at 3
11
locations in California, Florida and Pennsylvania. The latest expiration date of
the existing leases is July 2006.
Fireside Thrift occupies 39 leased facilities with an aggregate square
footage of approximately 155,000 in California, Arizona, Colorado, Oregon and
Washington (including consumer finance branches and main office buildings). The
latest expiration date of the existing leases is September 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 October 1999, the Florida Department of Insurance filed and served a
subpoena upon Unitrin's subsidiary, United, in connection with that Department's
investigation into the sale and servicing of industrial life insurance and small
face amount life insurance policies in the State of Florida. Subsequently, on
December 15, 1999, a purported nationwide class action lawsuit was filed against
United in the United States District Court for the Middle District of Florida
(Wilson, et al. v. United Insurance Company of America), 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
allege discrimination in premium rates in violation of 42 U.S.C. ss.ss.1981 and
1982, in addition to various state law claims. Unspecified compensatory and
punitive damages are sought together with equitable relief. Unitrin has
determined that United and its other career agency life insurance subsidiaries
have in force insurance policies in which race was used as an underwriting
factor in pricing or benefits; however, to the best of Unitrin's knowledge, all
such practices ceased 30 or more years ago with regard to newly-issued policies.
At least twenty similar lawsuits have been filed in other jurisdictions against
Unitrin and/or its career agency life insurance subsidiaries. The Judicial Panel
on Multidistrict Litigation has ordered that substantially all of these lawsuits
be consolidated for pretrial purposes in the United States District Court for
the Eastern District of Louisiana. Unitrin believes that it and its subsidiaries
have meritorious defenses in these matters; nonetheless, Unitrin continues to
engage in settlement discussions with plaintiffs' counsel and representatives of
various insurance departments. In the second quarter of 2000, Unitrin recorded
an after-tax charge of $32.4 million for its estimated cost to ultimately settle
these matters. Actual costs may differ from this estimate. However, Unitrin
believes that such difference will not have a material adverse effect on
Unitrin's financial position, but could have a material adverse effect on
Unitrin's results for a given period.
Unitrin and its subsidiaries are defendants in various other legal
actions incidental to their businesses; some of these actions seek substantial
punitive damages that bear no apparent relationship to the actual damages
alleged. The plaintiffs in certain of these suits seek class action status
which, if granted, could expose Unitrin and its subsidiaries to potentially
significant liability by virtue of the size of the purported classes. In
addition, the State of Mississippi, where Unitrin and some of its subsidiaries
are defendants in a number of lawsuits, has recently received national attention
for a large number of multi-million dollar jury verdicts and settlements against
corporations in a variety of industries. Although Mississippi law does not
permit class actions, recent case law there allows for virtually unlimited
joinder of plaintiffs in a single action, thereby simulating a class action
lawsuit. Although Unitrin and its subsidiaries believe that there are
meritorious defenses to the cases referenced in this paragraph and are defending
them vigorously, and although Unitrin believes that resolution of these cases
will not have a material adverse effect on Unitrin's financial position, there
can be no assurance that one or more of these cases will not produce significant
jury awards which could have a material adverse effect on Unitrin's results for
any given period.
12
ITEM 4. Submission of Matters to a Vote of Security Holders
During the quarter ended December 31, 2001, 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 (NYSE: UTR). Prior to becoming listed in 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 2001 and 2000 are incorporated herein by reference to
Note 20 to the Financial Statements, captioned "Quarterly Financial Information
(Unaudited)."
Information as to the amount and frequency of cash dividends declared by
Unitrin on its common stock during 2001 and 2000 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 20 under
the caption "Quarterly Financial Information (Unaudited)."
Information as to restrictions on the ability of Unitrin's subsidiaries to
transfer funds to Unitrin in the form of cash dividends, loans, or advances is
incorporated herein by reference to the following items:
(a) Note 9 to the Financial Statements, captioned "Shareholders' Equity;"
and
(b) The "Liquidity and Capital Resources" section of the MD&A.
As of December 31, 2001, the approximate number of record holders of
Unitrin's common stock was 7,700.
ITEM 6. Selected Financial Data
Selected consolidated financial data for the five years ended December 31,
2001 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.
ITEM 8. Financial Statements and Supplementary Data
13
The Financial Statements (including their related notes and the report of
KPMG LLP) are incorporated herein by reference and filed as Exhibit 13.1 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 2002
Annual Meeting of Shareholders of Unitrin. Unitrin plans to file such proxy
statement within 120 days after December 31, 2001, 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 2002 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
14
This information is incorporated herein by reference to the section
captioned "Ownership of Unitrin Common Stock" in the Proxy Statement for the
2002 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 2002 Annual Meeting of Shareholders of Unitrin.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of this Report:
1. Financial Statements. The following financial statements, in response to
--------------------
Item 8 of the Form 10-K, have been filed as Exhibit 13.1 and are
incorporated by reference into Item 8 hereof:
The consolidated balance sheets of Unitrin and subsidiaries as of December
31, 2001 and 2000, and the consolidated statements of income, cash flows
and shareholders' equity and comprehensive income for the years ended
December 31, 2001, 2000 and 1999, together with the notes thereto and the
report of KPMG LLP thereon, dated January 31, 2002.
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 10.6 and 10.8
and 10.9 relate to compensatory plans filed or incorporated by reference as
exhibits hereto pursuant to Item 14(c) of Form 10-K.
3.1 Certificate of Incorporation (incorporated herein by reference to
Exhibit 3.1 to Unitrin's Registration Statement on Form 10 dated
February 15, 1990)
3.2 Amended and Restated By-Laws (incorporated herein by reference to
Exhibit 3.2 to Unitrin's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997)
4 Rights Agreement between Unitrin, Inc. and First Chicago Trust
Company of New York, as rights agent, dated as of August 3, 1994
(incorporated herein by reference to Exhibit 1 to Unitrin's
Registration Statement on Form 8-A dated August 3, 1994), as
amended by Letter Agreement between Unitrin, Inc. and First Union
National Bank, dated October 12, 2000, pursuant to which First
Union National Bank was appointed as successor rights agent under
such Rights Agreement, effective October 30, 2000 (such Letter
Agreement incorporated herein by reference to Exhibit 4 to
Unitrin's Annual Report on Form 10-K for the year ended December
31, 2000)
15
10.1 Unitrin, Inc. 1990 Stock Option Plan, as amended and restated
10.2 Unitrin, Inc. 1997 Stock Option Plan, as amended and restated
10.3 Unitrin, Inc. 1995 Non-Employee Director Stock Option Plan, as
amended and restated
10.4 Unitrin, Inc. Pension Equalization Plan (incorporated herein by
reference to Exhibit 10.4 to 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
10.5 Unitrin is a party to individual severance agreements, the form
of which is filed as Exhibit 10.5 to this Form 10-K, with the
following executive officers:
Richard C. Vie (Chairman, President and Chief Executive
Officer)
David F. Bengston (Vice President)
Eric J. Draut (Senior Vice President, Treasurer and Chief
Financial Officer)
Edward J. Konar (Vice President)
Scott Renwick (General Counsel and Secretary)
Richard Roeske (Vice President and Chief Accounting
Officer)
Donald G.Southwell (Senior Vice President)
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.
10.6 Unitrin, Inc. Severance Plan
10.7 Amended and Restated Credit Agreement, dated September 17,
1997, among Unitrin, Inc., the Lenders party thereto, and
NationsBank of Texas, N.A. (incorporated herein by reference
to Exhibit 10.7 to Unitrin's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997. Pursuant to the terms of
such agreement, Unitrin's borrowing capacity thereunder was
increased to $440 million, effective March 28, 2000.)
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 Unitrin's
Annual Meeting of Shareholders)
10.9 Unitrin, Inc. Non-Qualified Deferred Compensation Plan
10.10 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.
10.11 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).
13.1 Financial Statements
13.2 MD&A
13.3 Financial Highlights
21 Subsidiaries of Unitrin, Inc.
23.1 Reports of KPMG LLP (included in Exhibit 13.1 hereof and filed
as Exhibit 23.1 hereof)
16
23.2 Consent of KPMG LLP
24 Power of Attorney (included on the signature page hereof)
(b) Reports on Form 8-K.
During the quarter ended December 31, 2001, Unitrin filed a Current
Report on Form 8-K on November 15, 2001 reporting changes in Unitrin's
certifying accountant.
(c) Exhibits. Included in Item 14(a)3 above
(d) Financial Statement Schedules. Included in Item 14(a)2
above
Caution Regarding Forward-Looking Statements
--------------------------------------------
This 2001 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)," "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 2001 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, changes in economic factors (such as interest 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, license applications
and similar matters, governmental actions (including new laws or regulations or
court decisions interpreting existing laws and regulations) and adverse
judgments in litigation to which Unitrin or its subsidiaries are parties. No
assurances can be given that the results contemplated in any forward-looking
statements will be achieved or will be achieved in any particular timetable.
Unitrin 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 2001 Annual Report on Form 10-K.
17
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints each of
Richard C. Vie, Chairman of the Board, President and Chief Executive Officer,
Eric J. Draut, Senior Vice President, Treasurer and Chief Financial Officer, and
Scott Renwick, 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, 2001 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois, on January 31, 2002.
UNITRIN, INC.
(Registrant)
By: /s/ Richard C. Vie
-------------------------
Richard C. Vie
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of Unitrin,
Inc. in the capacities indicated on January 31, 2002.
Signature Title
--------- -----
/s/ Richard C. Vie Chairman of the Board, President,
--------------------------- Chief Executive Officer and
Richard C. Vie Director
/s/ Eric J. Draut Senior Vice President, Treasurer
--------------------------- and Chief Financial Officer
Eric J. Draut (principal financial officer)
/s/ Richard Roeske Vice President and Chief
--------------------------- Accounting Officer
Richard Roeske (principal accounting officer)
/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.
/s/ Fayez S. Sarofim Director
---------------------------
Fayez S. Sarofim
/s/ Ann E. Ziegler Director
---------------------------
Ann E. Ziegler
18
SCHEDULE I
UNITRIN, INC. AND SUBSIDIARES
INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2001
(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 $1,567.9 $1,592.8 $1,592.8
States, Municipalities
and Political Subdivisions 227.5 227.3 227.3
Corporate Securities:
Other Bonds and Notes 991.7 1,015.1 1,015.1
Redemptive Preferred Stocks 89.1 91.2 91.2
-------- -------- --------
Total Investments in Fixed Maturities 2,876.2 2,926.4 2,926.4
-------- -------- --------
Equity Securities:
Common Stocks 872.2 1,077.4 1,077.4
Non-redemptive Preferred Stocks 267.1 310.0 310.0
-------- -------- --------
Total Investments in Equity Securities 1,139.3 1,387.4 1,387.4
-------- -------- --------
Investees (A)
UNOVA, Inc. 65.4 73.4 65.4
-------- -------- --------
Total Investees 65.4 73.4 65.4
-------- -------- --------
Loans, Real Estate and Short-term Investments 748.3 XXX.X 748.3
-------- --------
Total Investments $4,829.2 $5,127.5
======== ========
(A) - Amortized Cost = Cost Plus Cumulative Undistributed Earnings.
See Accompanying Independent Auditors' Report.
SCHEDULE II
UNITRIN, INC.
PARENT COMPANY BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
(Dollars in Millions)
December 31,
-------------------------------------
2001 2000
----------------- -----------------
ASSETS
Investment in Subsidiaries and Investees $ 2,364.5 $ 2,459.7
Equity Securities at Fair Value (Cost: 2001 - $146.5; 2000 - $0.3) 181.8 0.5
Short Term Investments - 173.1
Other Assets 2.6 1.9
----------------- -----------------
Total Assets $ 2,548.9 $ 2,635.2
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes Payable - Revolving Credit Agreement $ 254.0 $ 179.0
Notes Payable to Subsidiary, 6.75% Due 2008 155.0 450.0
Accrued Expenses and Other Liabilities 223.1 305.0
----------------- -----------------
Total Liabilities 632.1 934.0
----------------- -----------------
Shareholders' Equity:
Common Stock 6.7 6.8
Additional Paid-in Capital 488.8 442.6
Retained Earnings 1,231.0 1,150.2
Accumulated Other Comprehensive Income 190.3 101.6
----------------- -----------------
Total Shareholders' Equity 1,916.8 1,701.2
----------------- -----------------
Total Liabilities and Shareholders' Equity $ 2,548.9 $ 2,635.2
================= =================
See Accompanying Independent Auditors' Report.
SCHEDULE II
UNITRIN, INC.
PARENT COMPANY STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Dollars in Millions)
Years Ended December 31,
---------------------------------------------------------
2001 2000 1999
----------------- ----------------- -----------------
Net Investment Income $ 8.3 $ - $ 2.7
Net Gains (Losses) on Sales of Investments 54.8 (0.7) 82.1
----------------- ----------------- -----------------
Total Revenues 63.1 (0.7) 84.8
----------------- ----------------- -----------------
Interest Expense 26.8 48.7 38.8
Other Operating (Income) Expenses (2.3) (3.4) (1.6)
----------------- ----------------- -----------------
Total Operating Expenses 24.5 45.3 37.2
----------------- ----------------- -----------------
Income (Loss) Before Income Taxes and Equity
in Net Income of Subsidiaries and Investees 38.6 (46.0) 47.6
Income Tax Benefit (Expense) (15.4) 16.1 (16.2)
----------------- ----------------- -----------------
Income (Loss) Before Equity in
Net Income of Subsidiaries and Investees 23.2 (29.9) 31.4
Equity in Net Income of Subsidiaries and Investees 357.7 120.9 169.6
----------------- ----------------- -----------------
Net Income $ 380.9 $ 91.0 $ 201.0
================= ================= =================
See Accompanying Independent Auditors' Report.
SCHEDULE II
UNITRIN, INC.
PARENT COMPANY STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Dollars in Millions)
Years Ended December 31,
-----------------------------------------------
2001 2000 1999
---------- ----------- -----------
Operating Activities:
Net Income $ 380.9 $ 91.0 $ 201.0
Adjustment Required to Reconcile Net Income
to Net Cash Provided by Operations:
Equity in Net Income of Subsidiaries and (357.7) (120.9) (169.6)
Investees
Cash Dividends from Subsidiaries 96.0 188.0 7.5
Cash Dividends from Investee 1.7 2.3 2.3
(Gain) Loss on Sale of Investments (54.8) 0.7 (82.1)
Other, Net (98.9) 158.9 (128.4)
---------- ----------- -----------
Net Cash Provided (Used) by Operating Activities (32.8) 320.0 (169.3)
---------- ----------- -----------
Investing Activities:
Purchase of Common Stock - - (0.3)
Sale of Baker Hughes Common Stock - - 392.1
Intercompany Sale of Subsidiary 207.0
Change in Short-term Investments 173.1 (144.1) 61.0
Capital Contributed to Subsidiaries (10.0) (25.0)
Other, Net - - -
---------- ----------- -----------
Net Cash Provided (Used) by Investing Activities 370.1 (169.1) 452.8
---------- ----------- -----------
Financing Activities:
Notes Payable Proceeds:
Revolving Credit Agreement 831.0 756.7 436.3
Notes Payable Payments:
Revolving Credit Agreement (756.0) (688.7) (435.3)
To Subsidiary (295.0)
Cash Dividends Paid (108.0) (103.1) (101.7)
Common Stock Repurchases (26.6) (122.3) (191.4)
Issuance of Unitrin Common Stock 17.3 6.5 8.6
---------- ----------- -----------
Net Cash Used by Financing Activities (337.3) (150.9) (283.5)
---------- ----------- -----------
Increase (Decrease) in Cash - - -
Cash, Beginning of Year - - -
---------- ----------- -----------
Cash, End of Year $ - $ - $ -
========== =========== ===========
See Accompanying Independent Auditors' Report.
SCHEDULE II
UNITRIN, INC.
PARENT COMPANY STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Dollars in Millions)
Years Ended December 31,
---------------------------
2001 2000 1999
------- ------- -------
Net Income $ 380.9 $ 91.0 $ 201.0
Other Comprehensive Income:
Gross Unrealized Holding Gains (Losses) Arising During Year:
Securities Held by Subsidiaries 108.4 311.5 (54.5)
Securities Held by Parent 35.0 0.1 132.9
Equity in Other Comprehensive Income (Loss) of Investees 3.7 (6.8) (2.0)
------- ------- -------
Gross Unrealized Holding Gains (Losses) Arising During Year 147.1 304.8 76.4
Income Tax Benefit (Expense) (51.6) (107.0) (26.9)
------- ------- -------
Unrealized Holding Gains (Losses) Arising During Year, Net 95.5 197.8 49.5
------- ------- -------
Reclassification Adjustment for Gross (Gains) Losses Realized in Net Income:
Securities Held by Subsidiaries (10.5) (132.9) (29.5)
Securities Held by Parent 0.0 0.0 (82.1)
------- ------- -------
Reclassification Adjustment for Gross Gains Realized in Net Income (10.5) (132.9) (111.6)
Income Tax Expense 3.7 46.5 39.1
------- ------- -------
Reclassification Adjustment for Gains Realized in Net Income, Net (6.8) (86.4) (72.5)
------- ------- -------
Other Comprehensive Income (Loss) 88.7 111.4 (23.0)
------- ------- -------
Total Comprehensive Income $ 469.6 $ 202.4 $ 178.0
======= ======= =======
See Accompanying Independent Auditors' Report.
SCHEDULE III
UNITRIN, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(Dollars in Millions)
Insurance Amortization
Claims Of Deferred Deferred
Net and Policy Other Policy
Premiums Investment Policyholder's Acquisition Insurance Acquisition Insurance Unearned
Premiums Written Income Benefits Costs Expenses Costs Reserves Premiums
-------- -------- ---------- -------------- ------------ --------- ----------- --------- --------
Year Ended December 31,
2001:
Life and Health (1) $ 640.0 $ N/A $ 176.9 $ 371.7 $ 63.0 $ 278.9 $ 282.6 $ 2,164.1 $ 27.7
Multi Lines 570.3 579.9 42.0 546.2 71.5 110.7 31.4 544.8 254.5
Specialty Lines 347.3 347.6 14.1 289.1 54.0 37.0 14.5 143.6 119.5
Unitrin Direct 10.4 24.1 - 10.1 - 22.5 5.1 14.7
Other - N/A 5.5 - - (12.8) - - -
-------- -------- ---------- -------------- ------------ --------- ----------- --------- --------
Total $1,568.0 $ N/A $ 238.5 $ 1,217.1 $ 188.5 $ 436.3 $ 328.5 $ 2,857.6 $ 416.4
======== ======== ========== ============== ============ ========= =========== ========= ========
Year Ended December 31,
2000:
Life and Health (1) $ 682.0 $ N/A $ 181.4 $ 423.0 $ 68.3 $ 307.1 $ 273.6 $ 2,108.8 $ 27.6
Multi Lines 548.8 564.3 45.0 450.2 69.7 106.4 32.9 424.5 292.0
Specialty Lines 217.1 258.5 14.3 166.4 34.2 27.0 15.7 109.5 65.7
Unitrin Direct (2) - - - - - 6.1 - - -
Other - N/A (17.6) - - (9.3) - - -
-------- -------- ---------- -------------- ------------ --------- ----------- --------- --------
Total $1,447.9 $ N/A $ 223.1 $ 1,039.6 $ 172.2 $ 437.3 $ 322.2 $ 2,642.8 $ 385.3
======== ======== ========== ============== ============ ========= =========== ========= ========
Year Ended December 31,
1999:
Life and Health (1) $ 713.2 $ N/A $ 164.8 $ 406.4 $ 74.2 $ 300.0
Multi Lines 488.4 497.0 36.1 366.7 67.4 87.9
Specialty Lines 171.7 159.7 10.9 116.0 21.5 27.4
Other - N/A (8.8) - - (4.8)
-------- -------- ---------- -------------- ------------ ---------
Total $1,373.3 $ N/A $ 203.0 $ 889.1 $ 163.1 $ 410.5
======== ======== ========== ============== ============ =========
(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 Other Insurance expenses include primarily start-up costs.
See Accompanying Independent Auditors' Report.
SCHEDULE IV
UNITRIN, INC.
REINSURANCE SCHEDULE
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, and 1999
(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, 2001:
----------------------------
Life Insurance in Force $ 19,958.0 $ 1,157.9 $ 0.0 $ 18,800.1 -
Premiums
Life Insurance $ 403.0 $ 1.4 $ 0.0 $ 401.6 -
Accident and Health Insurance 153.3 2.4 0.0 150.9 -
Property and Liability Insurance 943.2 32.2 104.5 1,015.5 10.3%
------------- -------------- -------------- ------------- -------------
Total Premiums $ 1,499.5 $ 36.0 $ 104.5 $ 1,568.0 6.7%
============= ============= ============= ============= =============
Year Ended December 31, 2000:
----------------------------
Life Insurance in Force $ 20,990.1 $ 1,389.1 $ 0.0 $ 19,601.0 -
Premiums
Life Insurance $ 408.3 $ 1.9 $ 0.0 $ 406.4 -
Accident and Health Insurance 194.7 4.3 0.0 190.4 -
Property and Liability Insurance 771.6 23.5 103.0 851.1 12.1%
------------- -------------- -------------- -------------- -------------
Total Premiums $ 1,374.6 $ 29.7 $ 103.0 $ 1,447.9 7.1%
============= ============= ============= ============= =============
Year Ended December 31, 1999:
----------------------------
Life Insurance in Force $ 21,307.7 $ 1,505.1 $ 0.0 $ 19,802.6 -
Premiums
Life Insurance $ 416.4 $ 3.2 $ 0.0 $ 413.2 -
Accident and Health Insurance 223.9 6.0 0.1 218.0 0.0%
Property and Liability Insurance 670.4 24.4 96.1 742.1 12.9%
------------- ------------- ------------- ------------- -------------
Total Premiums $ 1,310.7 $ 33.6 $ 96.2 $ 1,373.3 7.0%
============= ============= ============= ============= =============
See Accompanying Independent Auditors' Report.