FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
| x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For Quarterly Period Ended September 30, 2004
OR
| ¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Transition Period from to
Commission file number 0-18298
Unitrin, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 95-4255452 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| One East Wacker Drive, Chicago, Illinois | 60601 | |
| (Address of principal executive offices) | (Zip Code) |
(312) 661-4600
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
68,571,156 shares of common stock, $0.10 par value, were outstanding as of October 26, 2004.
INDEX
| Page | ||||
| PART I. | FINANCIAL INFORMATION. | |||
| Item 1. | Financial Statements. | |||
| Condensed Consolidated Statements of Income for the Nine and Three Months Ended September 30, 2004 and 2003 (Unaudited). | 1 | |||
| Condensed Consolidated Balance Sheets as of September 30, 2004 (Unaudited) and December 31, 2003. | 2 | |||
| Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003 (Unaudited). | 3 | |||
| Notes to the Condensed Consolidated Financial Statements (Unaudited). | 4-17 | |||
| Item 2. | Management’s Discussion and Analysis of Results of Operations and Financial Condition. | 18-34 | ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | 34-37 | ||
| Item 4. | Controls and Procedures. | 38 | ||
| PART II. | OTHER INFORMATION. | |||
| Item 1. | Legal Proceedings. | 38 | ||
| Item 6. | Exhibits. | 38-40 | ||
| Signatures | 41 | |||
UNITRIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in millions, except per share amounts)
(Unaudited)
| Nine Months Ended |
Three Months Ended | ||||||||||||
| Sept. 30, 2004 |
Sept. 30, 2003 |
Sept. 30, 2004 |
Sept. 30, 2003 | ||||||||||
| Revenues: |
|||||||||||||
| Earned Premiums |
$ | 1,862.5 | $ | 1,833.1 | $ | 630.7 | $ | 634.3 | |||||
| Consumer Finance Revenues |
150.6 | 145.1 | 51.1 | 50.1 | |||||||||
| Net Investment Income |
189.1 | 167.2 | 65.9 | 58.3 | |||||||||
| Other Income |
11.7 | 21.4 | 6.3 | 4.4 | |||||||||
| Net Realized Investment Gains |
67.2 | 25.5 | 24.7 | 8.8 | |||||||||
| Total Revenues |
2,281.1 | 2,192.3 | 778.7 | 755.9 | |||||||||
| Expenses: |
|||||||||||||
| Insurance Claims and Policyholders’ Benefits |
1,266.1 | 1,314.4 | 429.3 | 443.2 | |||||||||
| Insurance Expenses |
625.5 | 637.1 | 220.3 | 214.5 | |||||||||
| Consumer Finance Expenses |
116.1 | 110.3 | 37.0 | 37.8 | |||||||||
| Interest and Other Expenses |
43.5 | 31.0 | 14.4 | 10.0 | |||||||||
| Total Expenses |
2,051.2 | 2,092.8 | 701.0 | 705.5 | |||||||||
| Income before Income Taxes and Equity in Net Income (Loss) of Investee |
229.9 | 99.5 | 77.7 | 50.4 | |||||||||
| Income Tax Expense |
65.6 | 19.0 | 22.2 | 7.4 | |||||||||
| Income before Equity in Net Income (Loss) of Investee |
164.3 | 80.5 | 55.5 | 43.0 | |||||||||
| Equity in Net Income (Loss) of Investee |
2.6 | (1.3 | ) | 1.0 | 0.1 | ||||||||
| Net Income |
$ | 166.9 | $ | 79.2 | $ | 56.5 | $ | 43.1 | |||||
| Net Income Per Share |
$ | 2.44 | $ | 1.17 | $ | 0.82 | $ | 0.64 | |||||
| Net Income Per Share Assuming Dilution |
$ | 2.42 | $ | 1.17 | $ | 0.82 | $ | 0.64 | |||||
The Notes to the Condensed Consolidated Financial Statements are an integral part of these financial statements.
1
UNITRIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share amounts)
| September 30, 2004 |
December 31, 2003 | |||||
| (Unaudited) | ||||||
| Assets: |
||||||
| Investments: |
||||||
| Fixed Maturities at Fair Value (Amortized Cost: 2004 - $4,129.5; 2003 - $3,531.6) |
$ | 4,257.2 | $ | 3,634.7 | ||
| Northrop Grumman Corporation Preferred Stock at Fair Value (Cost: 2004 - $177.5; 2003 - $177.5) |
232.5 | 220.9 | ||||
| Northrop Grumman Corporation Common Stock at Fair Value (Cost: 2004 - $371.9; 2003 - $572.2) |
459.6 | 633.9 | ||||
| Other Equity Securities at Fair Value (Cost: 2004 - $342.6; 2003 - $342.7) |
419.3 | 432.8 | ||||
| Investee (UNOVA, Inc.) at Cost Plus Cumulative Undistributed Earnings (Fair Value: 2004 - $177.8; 2003 - $290.5) |
69.7 | 64.7 | ||||
| Short-term Investments at Cost which Approximates Fair Value |
294.9 | 495.5 | ||||
| Other |
327.4 | 300.4 | ||||
| Total Investments |
6,060.6 | 5,782.9 | ||||
| Cash |
67.8 | 65.7 | ||||
| Consumer Finance Receivables at Cost (Fair Value: 2004 - $960.7; 2003 - $906.7) |
956.1 | 904.8 | ||||
| Other Receivables |
872.9 | 899.4 | ||||
| Deferred Policy Acquisition Costs |
421.5 | 400.2 | ||||
| Goodwill |
344.7 | 344.7 | ||||
| Other Assets |
145.6 | 139.1 | ||||
| Total Assets |
$ | 8,869.2 | $ | 8,536.8 | ||
| Liabilities and Shareholders’ Equity: |
||||||
| Insurance Reserves: |
||||||
| Life and Health |
$ | 2,318.6 | $ | 2,265.1 | ||
| Property and Casualty |
1,522.9 | 1,426.3 | ||||
| Total Insurance Reserves |
3,841.5 | 3,691.4 | ||||
| Investment Certificates and Savings Accounts at Cost (Fair Value: 2004 - $916.0; 2003 - $918.9) |
915.9 | 915.2 | ||||
| Unearned Premiums |
824.1 | 794.7 | ||||
| Accrued and Deferred Income Taxes |
260.0 | 382.0 | ||||
| Notes Payable at Amortized Cost (Fair Value: 2004 - $516.9; 2003 - $519.4) |
502.6 | 495.7 | ||||
| Accrued Expenses and Other Liabilities |
562.3 | 438.9 | ||||
| Total Liabilities |
6,906.4 | 6,717.9 | ||||
| Shareholders’ Equity: |
||||||
| Common Stock, $0.10 par value, 100 million Shares Authorized; 68,542,898 Shares Issued and Outstanding at September 30, 2004 and 67,778,023 Shares Issued and Outstanding at December 31, 2003 |
6.9 | 6.8 | ||||
| Paid-in Capital |
599.6 | 537.8 | ||||
| Retained Earnings |
1,129.0 | 1,079.8 | ||||
| Accumulated Other Comprehensive Income |
227.3 | 194.5 | ||||
| Total Shareholders’ Equity |
1,962.8 | 1,818.9 | ||||
| Total Liabilities and Shareholders’ Equity |
$ | 8,869.2 | $ | 8,536.8 | ||
The Notes to the Condensed Consolidated Financial Statements are an integral part of these financial statements.
2
UNITRIN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
| Nine Months Ended |
||||||||
| September 30, 2004 |
September 30, 2003 |
|||||||
| Operating Activities: |
||||||||
| Net Income |
$ | 166.9 | $ | 79.2 | ||||
| Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities: |
||||||||
| Increase in Deferred Policy Acquisition Costs |
(19.2 | ) | (17.8 | ) | ||||
| Equity in Net (Income) Loss of Investee before Taxes |
(4.0 | ) | 2.0 | |||||
| Amortization of Investments |
9.5 | 8.6 | ||||||
| Decrease in Other Receivables |
26.6 | 17.4 | ||||||
| Increase in Insurance Reserves and Unearned Premiums |
175.1 | 263.1 | ||||||
| Increase (Decrease) in Accrued and Deferred Income Taxes |
(135.2 | ) | 33.0 | |||||
| Increase in Accrued Expenses and Other Liabilities |
14.5 | 54.8 | ||||||
| Net Realized Investment Gains |
(67.2 | ) | (25.5 | ) | ||||
| Provision for Loan Losses |
34.7 | 36.0 | ||||||
| Other, Net |
31.6 | 32.3 | ||||||
| Net Cash Provided by Operating Activities |
233.3 | 483.1 | ||||||
| Investing Activities: |
||||||||
| Sales and Maturities of Fixed Maturities |
602.8 | 1,204.1 | ||||||
| Purchases of Fixed Maturities |
(1,206.1 | ) | (1,742.0 | ) | ||||
| Sales of Northrop Grumman Corporation Common Stock |
234.8 | — | ||||||
| Sales of Other Equity Securities |
90.6 | 80.1 | ||||||
| Purchases of Equity Securities |
(59.4 | ) | (30.0 | ) | ||||
| Change in Short-term Investments |
200.3 | (35.1 | ) | |||||
| Acquisition and Improvements of Investment Real Estate |
(26.7 | ) | (19.9 | ) | ||||
| Sale of Investment Real Estate |
4.3 | — | ||||||
| Change in Other Investments |
3.7 | (4.3 | ) | |||||
| Change in Consumer Finance Receivables |
(86.8 | ) | (116.8 | ) | ||||
| Other, Net |
(33.4 | ) | (9.7 | ) | ||||
| Net Cash Used by Investing Activities |
(275.9 | ) | (673.6 | ) | ||||
| Financing Activities: |
||||||||
| Change in Investment Certificates and Savings Accounts |
0.8 | 83.8 | ||||||
| Change in Universal Life and Annuity Contracts |
4.4 | 3.4 | ||||||
| Change in Liability for Funds Held for Securities on Loan |
104.2 | 124.6 | ||||||
| Notes Payable Proceeds |
— | 180.0 | ||||||
| Notes Payable Payments |
— | (120.0 | ) | |||||
| Cash Dividends Paid |
(85.0 | ) | (84.1 | ) | ||||
| Common Stock Repurchases |
— | (1.4 | ) | |||||
| Cash Exercise of Stock Options |
20.3 | 0.6 | ||||||
| Net Cash Provided by Financing Activities |
44.7 | 186.9 | ||||||
| Increase (Decrease) in Cash |
2.1 | (3.6 | ) | |||||
| Cash, Beginning of Year |
65.7 | 16.9 | ||||||
| Cash, End of Period |
$ | 67.8 | $ | 13.3 | ||||
The Notes to the Condensed Consolidated Financial Statements are an integral part of these financial statements.
3
UNITRIN, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The unaudited Condensed Consolidated Financial Statements included herein have been prepared by Unitrin, Inc. (“Unitrin” or the “Company”) pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Certain financial information that is normally included in annual financial statements, including certain financial statement footnote disclosures, prepared in accordance with accounting principles generally accepted in the United States of America, is not required by the rules and regulations of the SEC and have been condensed or omitted. In the opinion of the Company’s management, the unaudited Condensed Consolidated Financial Statements include all adjustments necessary for a fair presentation. The preparation of interim financial statements relies heavily on estimates. This factor and certain other factors, such as the seasonal nature of some portions of the insurance business, as well as market conditions, call for caution in drawing specific conclusions from interim results. The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related notes included in the Company’s Annual Report on Form 10-K, filed with the SEC for the year ended December 31, 2003 (the “2003 Annual Report”).
Stock-Based Compensation
Effective January 1, 2003, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” and as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” prospectively to all awards granted, modified or settled on or after January 1, 2003.
The effects on Net Income, Net Income Per Share and Net Income Per Share Assuming Dilution if the fair value based method had been applied to all awards since the effective date of SFAS No. 123 for the periods presented below were:
| Nine Months Ended |
Three Months Ended |
|||||||||||||||
| (Dollars in Millions, Except Per Share Amounts) |
Sept. 30, 2004 |
Sept. 30, 2003 |
Sept. 30, 2004 |
Sept. 30, 2003 |
||||||||||||
| Net Income, As Reported |
$ | 166.9 | $ | 79.2 | $ | 56.5 | $ | 43.1 | ||||||||
| Add: Stock-Based Compensation Expense Included in Reported Net Income, Net of Related Tax Effects |
4.3 | 1.3 | 1.4 | 0.4 | ||||||||||||
| Deduct: Total Stock-Based Employee Compensation Expense Determined under Fair Value Based Method for All Awards, Net of Related Tax Effects |
(5.0 | ) | (3.2 | ) | (1.6 | ) | (1.0 | |||||||||