Back to GetFilings.com

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

Commission file number 001-18298

UNITRIN, INC.

(Exact Name of Registrant as Specified in its Charter)

(312) 661-4600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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 30, 2004, the aggregate market value of such stock held by non-affiliates of Registrant was approximately $2.6 billion as of June 30, 2004, 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 68,863,790 shares of common stock outstanding as of January 27, 2005.

Documents Incorporated by Reference

PART I

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 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 www.unitrin.com.

(a) GENERAL DEVELOPMENT OF BUSINESS

Settlement Related to Acquisition of Kemper Personal Lines 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 business unit acquired from KIC, referred to herein as “Kemper Auto and Home” or “KAH,” specializes in the sale of personal automobile and homeowners insurance through independent agents. In connection with the acquisition, the Company also acquired the stock of KIC’s direct distribution personal lines subsidiaries which sell personal automobile insurance to consumers over the Internet (“Kemper Direct”).

On August 20, 2004, the Company and KIC agreed to settle and extinguish certain liabilities and obligations arising under the acquisition including, but not limited to, the variable component of the purchase price and the potential for payment to KIC of certain bonuses based on the performance of KAH in the years 2003 through 2005. On August 31, 2004, the Company paid KIC to settle these issues, and KIC paid the Company to settle its obligations to reimburse the Company for the cost of administering certain business of KIC which was excluded from the acquisition, and its loss reserve indemnification obligation in connection with the Kemper Direct acquisition. More detailed information on the purchase price, liabilities and obligations under the acquisition and settlement agreement referenced above is included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in Exhibits 13.2 and 13.4 to this Annual Report on Form 10-K and have been disclosed in reports previously filed by the Company with the SEC, including the Current Report on Form 8-K dated August 20, 2004, and its Quarterly Reports on Form 10-Q filed during 2004.

Consolidation of Multi Lines Insurance and Kemper Auto and Home Segments

The Company is in the process of consolidating the personal lines insurance operations of its former Multi Lines Insurance segment into the operations of its Kemper Auto and Home segment. The consolidated Kemper Auto and Home segment is headquartered in Jacksonville, Florida. Kemper Auto and Home maintains regional offices in California, New York, North Carolina, Texas, Washington and Wisconsin, and customer care operations in Pennsylvania and Wisconsin.

The commercial insurance operations of the Company’s former Multi Lines Insurance segment, which include commercial automobile, general liability, fire, multi-peril and workers compensation insurance, are continuing as the Unitrin Business Insurance segment, effective January 1, 2005. Unitrin Business Insurance is headquartered in Dallas, Texas and operates regional offices in Oregon, Texas and Wisconsin.

White Mountains Settlement

As previously disclosed, Unitrin and White Mountains Insurance Group, Ltd. (“White Mountains”) entered an agreement on June 23, 2004 that resolved a matter related to the Company’s 1999 acquisition of Valley Group, Inc. (“VGI”) involving the Company’s right to recover 90% of unfavorable development on VGI’s pre-acquisition loss and loss adjustment reserves from the seller, White Mountains. Subsequent to the closing, these reserves experienced unfavorable development and the Company recorded a recoverable at the maximum recovery permitted under the terms of the acquisition. White Mountains initially disputed its obligation to indemnify Unitrin, which resulted in the commencement of dispute resolution in accordance with the acquisition agreement. The June 23, 2004 agreement settled this matter for substantially all of the amount that Unitrin had previously recorded as a recoverable. On June 25, 2004, White Mountains paid the negotiated settlement amount to Unitrin. The effect of the negotiated settlement is not material to Unitrin.

1

Unitrin Stock Repurchases

During 2004, Unitrin did not repurchase any shares of its common stock. As previously announced, the Company may, from time to time, subject to then-existing market conditions and other factors, in the market or in privately negotiated transactions, repurchase shares of Company common stock pursuant to the outstanding repurchase authorization of Unitrin’s Board of Directors. At December 31, 2004, approximately 3.5 million shares of Unitrin common stock remained under the outstanding repurchase authorization.

(b) BUSINESS SEGMENT FINANCIAL DATA

Financial information about Unitrin’s business segments for the years ended December 31, 2004, 2003 and 2002 is contained in the following portions of this 2004 Annual Report on Form 10-K of Unitrin, Inc. and is incorporated herein by reference: (i) Note 18 to the Financial Statements; and (ii) Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in Exhibits 13.2 and 13.4 to this Annual Report on Form 10-K (“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: Unitrin Business Insurance, Unitrin Specialty, Kemper Auto and Home, Unitrin Direct, Life and Health Insurance and Consumer Finance.

Unitrin’s subsidiaries employ more than 8,400 full-time associates of which approximately 825 are employed in the Unitrin Business Insurance segment, 770 in the Unitrin Specialty segment, 1,170 in the Kemper Auto and Home segment, 470 in the Unitrin Direct segment, 4,210 in the Life and Health Insurance segment, 835 in the Consumer Finance segment and the remainder in various corporate and other staff functions.

Property and Casualty Insurance Business

Unitrin’s property and casualty insurance business operations are conducted through the following segments: Unitrin Business Insurance, Unitrin Specialty, Kemper Auto and Home, and Unitrin Direct. The Unitrin companies operating in these segments provide automobile, homeowners, commercial multi-peril, fire, casualty, workers compensation, general liability and other types of property and casualty insurance to individuals and businesses. Automobile insurance accounted for 54%, 56% and 50% of Unitrin’s consolidated insurance premiums earned for the years ended December 31, 2004, 2003 and 2002, respectively. Automobile insurance accounted for 45%, 47% and 41% of Unitrin’s consolidated revenues for the years ended December 31, 2004, 2003 and 2002, respectively. Homeowners insurance accounted for 15%, 13% and 10% of Unitrin’s consolidated insurance premiums earned for the years ended December 31, 2004, 2003 and 2002, respectively. Homeowners insurance accounted for 12%, 11% and 8% of Unitrin’s consolidated revenues for the years ended December 31, 2004, 2003 and 2002, respectively.

Property insurance indemnifies an insured with an interest in physical property for loss of, or damage to, 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. In most cases casualty insurance also obligates the insurance company to provide a defense for the insured in litigation arising out of events covered by the policy.

All of Unitrin’s property and casualty insurance segments except Unitrin Direct distribute their products through independent agents who are paid commissions for their services. Unitrin Direct distributes its products directly to consumers.

Unitrin Business Insurance. Effective January 1, 2005, the commercial lines operations of Unitrin’s former Multi Lines Insurance segment became the Unitrin Business Insurance segment. Unitrin Business Insurance, based in Dallas, conducts business in 30 states, with a geographic emphasis in the south, northwest and midwest. In 2004, the following states provided more than two-thirds of the premium revenues for the business that is now included in this segment: Texas (39%), Illinois (8%), Louisiana (7%), Washington (6%), Arkansas (5%) and California (5%). Unitrin Business Insurance has more than 40,000 policies in force.

Unitrin Business Insurance primarily sells the following types of commercial insurance: automobile, general liability, fire, multi-peril and workers compensation insurance. Unitrin Business Insurance products accounted for approximately 9% of the aggregate insurance premium revenues of Unitrin’s property and casualty insurance business in 2004. Unitrin Business Insurance products are marketed by more than 1,200 independent insurance agents. These commercial products are designed and priced for those businesses that have demonstrated favorable risk characteristics and loss history.

Unitrin Specialty. Unitrin Specialty, based in Dallas, conducts business in 22 states, with a geographic emphasis in areas outside of the northeast and mid-Atlantic states. In 2004, the following states provided more than two-thirds of the premium revenues in this segment: California (28%), Texas (26%), Washington (8%), Oregon (4%) and Georgia (4%). Unitrin Specialty has more than 290,000 policies in force.

2

Unitrin Specialty provides nonstandard personal and commercial automobile insurance. Unitrin Specialty products accounted for approximately 27% of the aggregate insurance premium revenues of Unitrin’s property and casualty insurance business in 2004. 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, claims or premium payment history. Unitrin Specialty products are marketed through approximately 8,500 independent agents/brokers.

Kemper Auto and Home. Kemper Auto and Home, based in Jacksonville, Florida, includes the personal lines operations of Unitrin’s former Multi Lines segment effective January 1, 2005. Kemper Auto and Home conducts business in 39 states geographically dispersed throughout the United States. In 2004, the following states provided more than two-thirds of the premium revenues for the personal lines business that is now included in this segment: New York (17%), Texas (14%), North Carolina (12%), California (11%), Connecticut (4%), Maryland (4%), Oregon (4%) and Illinois (3%).

Kemper Auto and Home primarily sells preferred and standard risk automobile and homeowners insurance. Kemper Auto and Home products, including the personal lines operations of Unitrin’s former Multi Lines segment, accounted for approximately 52% of the aggregate insurance premium revenues of Unitrin’s property and casualty insurance business in 2004. Kemper Auto and Home’s products are marketed by approximately 2,500 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.

Unitrin Direct. Unitrin Direct markets auto insurance primarily through direct mail, web insurance portals, “click-throughs” and its own website. Unitrin Direct actively sells automobile insurance in 18 states geographically dispersed throughout the United States. In 2004, the following states provided more than two-thirds of the premium revenues in this segment: Florida (28%), California (21%), New York (12%) and Pennsylvania (11%). Unitrin Direct insurance products accounted for approximately 10% of the aggregate insurance premium revenues of Unitrin’s property and casualty insurance business in 2004.

Unitrin Direct writes a broad spectrum of auto insurance risks ranging from preferred to non-standard private passenger auto customers, and competes with companies that sell insurance directly to the consumer, as well as companies that sell through agents. During 2004, Unitrin Direct continued to reduce operating losses and build economies of scale. Unitrin Direct reached profitability on a discrete quarter basis in the fourth quarter of 2004. The Company anticipates that Unitrin Direct will achieve full year profitability in 2005.

Property and Casualty Loss and Loss Adjustment Expense Reserves. Property and casualty insurance reserves for losses and loss adjustment expenses (“LAE”) are reported using the Company’s estimate of its ultimate liability for losses and LAE for claims that occurred prior to the end of any given accounting period but have not yet been paid. At December 31, 2004, the Company had $1,510.7 million of gross loss and LAE reserves. The process of estimating and establishing reserves for losses and LAE for property and casualty insurance is inherently uncertain and the actual ultimate net cost of a claim or group of claims may vary materially from the estimated amounts reserved. The reserving process is particularly imprecise for claims involving asbestos, environmental matters, construction defect and other emerging and/or long-tailed exposures which may not be discovered or reported until years after the insurance policy period has ended.

The Company’s actuaries generally estimate reserves at least quarterly for most product lines and/or coverage levels using accident quarters or accident months spanning 10 or more years depending on the size of the product line and/or coverage level or emerging issues relating to them. The Company’s actuaries use a variety of generally accepted actuarial loss reserving estimation methodologies including, but not limited to, the following:

a) Incurred Loss Development Methodology;

b) Paid Loss Development Methodology;

c) Bornhuetter - Ferguson Incurred Loss Methodology;

d) Bornhuetter - Ferguson Paid Loss Methodology; and

e) Frequency and Severity Methodology.

3

The Company’s actuaries generally review the results of at least four different estimation methodologies, two based on paid data and two based on incurred data to initially estimate loss and LAE reserves and to deter-mine if a change in prior estimates is required. In some cases, the methodologies produce a cluster of estimates with a tight band of indicated possible outcomes. In other cases, however, the methodologies produce conflicting results and wider bands of indicated possible outcomes. However, such bands do not necessarily constitute a range of outcomes, nor does management or the Company’s actuaries calculate a range of outcomes. The Company does not perform additional analysis on the variability of its estimate of Property and Casualty Insurance Reserves. The Company believes that its historical loss and LAE reserve development recognized into income provides an understanding of the potential variability in the Company’s estimate of Property and Casualty Insurance Reserves.

In the event of a wide variation among results generated by the different projection methodologies, the Company’s actuaries further analyze the data using additional techniques.

In estimating reserves, the Company’s actuaries exercise professional judgment and must consider and, are influenced by, many variables that are difficult to quantify, such as:

a) Changes in the level of minimum case reserves, and the automatic aging of those minimum case reserves;

b) Changes to claims practices including, but not limited to, changes in the reporting and impact of large losses, adequacy of case reserves, implementation of new systems for handling claims, turnover of claims department staffs, timing and depth of the audit review of claims handling procedures;

c) Changes in underwriting practices

d) Changes in the mix of business by class and policy limit within product line;

e) Growth in new lines of business;

f) Changes in the attachment points of the Company’s reinsurance programs;

g) Medical costs including, but not limited to, the ability to assess the extent of injuries and the impact of inflation;

h) Repair costs including, but not limited to, the impact of inflation and the availability of labor and materials;

i) Changes in the legal environment including, but not limited to, the impact of jury awards and changes in case law; and

j) Changes in state regulatory requirements.

A change in any one or more of the foregoing factors is likely to result in a projected ultimate net claim loss and LAE that is different from the previously estimated reserve and/or previous frequency and severity trends. Such changes in estimates may be material.

For example, the Company’s actuaries review frequency (number of claims per policy or exposure), severity (dollars of loss per claim) and average premium (dollars of premium per exposure). Actual frequency and severity experienced will vary depending on changes in mix by class of insured risk. Similarly, the actual frequency and rate of recovery from reinsurance will vary depending on changes in the attachment point for reinsurance. In particular, in periods of high growth or expansion into new markets, such as that experienced by the Unitrin Specialty segment and Unitrin Direct, there may be additional uncertainty in estimating the ultimate losses and LAE. The contributing factors of this potential risk are changes in the Company’s mix by policy limit and mix of business by state or jurisdiction.

Actuaries use historical experience and trends as predictors of how losses and LAE will emerge over time. However, historical experience may not necessarily be indicative of how actual losses and LAE will emerge. Changes in reserve adequacy, changes in minimum case reserves and changes in internal claims handling could impact the timing and recognition of incurred claims and produce an estimate that is either too high or too low if not adjusted for by the actuary. For example, if due to changes in claims handling, actual claims are settled more rapidly than they were settled historically, then the estimate produced by the paid loss development methodology would tend to be overstated if the actuary does not identify and adjust for the impact of the changes in claims handling. Similarly, if, due to changes in claims handling, actual claim reserves are set at levels higher than past experience, then the estimate produced by the incurred loss development methodology would tend to be overstated if the actuary does not identify and adjust for the impact of the changes in claims handling.

Property and Casualty Insurance Reserves by business segment at December 31, 2004 and 2003 were:

The Company does not allocate reserves from its 2002 acquisition of General Security Insurance Company and General Security Property and Casualty Company to its business segments (See Notes 3 and 7 to the Financial Statements).

4

The Multi Lines Insurance segment has exposure to construction defect losses through general liability and commercial multiperil coverages it provided to contractors. Construction defect claims arise from alleged defective work performed in the construction of buildings and the alleged resulting loss of economic value of those structures. The majority of the Multi Lines Insurance segment’s construction defect losses is concentrated in a limited number of western states, including California, and was primarily written by the Company’s Valley Insurance Company and Valley Property & Casualty Insurance Company subsidiaries (the “Valley Companies”). The Company acquired the Valley Companies in 1999, at which time the Valley Companies substantially limited their exposure to contractors on a going-forward basis in the western United States. As a result, the Company is tracking construction defect activity throughout the United States to forecast any emerging trends. There can be no assurance that such a trend will not emerge in non-western states in which the Company may have significant general liability insurance risks. The process of estimating reserves for these claims is particularly difficult due to the potentially long period of time between the loss date and the date the loss is actually reported, changes in the regulatory and legal environment and involvement of multiple plaintiffs, defendants and insurers.

Loss and LAE reserves for the Valley Companies’ construction defect losses were $38.2 million and $46.1 million at December 31, 2004 and 2003, respectively. Information on construction defect claim activity is contained in the MD&A under the caption “Critical Accounting Estimates”.

The following table illustrates the change over time in the Company’s estimate of reserves for losses and LAE. The first section shows the amount of reserves reported in the Company’s consolidated financial statements as originally reported at the end of each calendar year. The second section, reading down, shows the cumulative amount of payments made through the end of each successive year with respect to that reserve liability. The third section, reading down, shows a reestimation of the original reserve shown in the first section. In the third section, the original reserve is reestimated using information that has become known in subsequent years and as trends become more apparent. The last section compares the latest reestimate with the original estimate. Conditions and trends that affected development in the past may not necessarily repeat in the future. Accordingly, it may not be appropriate to extrapolate reserve deficiencies or redundancies based on this table.

5

Loss and Loss Adjustment Expense Reserve Development

(Dollars in Millions)