UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-18298
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
(Registrants 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 per share Preferred Share Purchase Rights pursuant to Rights Agreement |
New York Stock Exchange New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x
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 registrants 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of June 30, 2008, the aggregate market value of the registrants common stock held by non-affiliates of the registrant was $1.6 billion based on the closing sale price as reported on the New York Stock Exchange. Solely for purposes of this calculation, all executive officers and directors of the registrant are considered affiliates.
Registrant had 62,314,503 shares of common stock outstanding as of January 30, 2009.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 6, 2009 are incorporated by reference into Part III.
1 | ||||
Part I | ||||
Item 1. |
2 | |||
Item 1A. |
18 | |||
Item 1B. |
23 | |||
Item 2. |
24 | |||
Item 3. |
24 | |||
Item 4. |
25 | |||
Part II | ||||
Item 5. |
25 | |||
Item 6. |
28 | |||
Item 7. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
29 | ||
Item 7A. |
76 | |||
Item 8. |
79 | |||
Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
140 | ||
Item 9A. |
140 | |||
Item 9B. |
141 | |||
Part III | ||||
Item 10. |
141 | |||
Item 11. |
141 | |||
Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
142 | ||
Item 13. |
Certain Relationships and Related Transactions and Director Independence |
142 | ||
Item 14. |
142 | |||
Part IV | ||||
Item 15. |
Exhibits, Financial Statement Schedules | 143 |
Caution Regarding Forward-Looking Statements
This 2008 Annual Report on Form 10-K, including the accompanying consolidated financial statements of Unitrin, Inc. (Unitrin) and its subsidiaries (individually and collectively referred to herein as the Company) and the notes thereto appearing in Item 8 herein (the Consolidated Financial Statements), the Managements Discussion and Analysis of Financial Condition and Results of Operations appearing in Item 7 herein (the MD&A) and the other Exhibits and Financial Statement Schedules filed as a part hereof or incorporated by reference herein may contain or incorporate by reference information that includes or is based on forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements give expectations or forecasts of future events. The reader can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as believe(s), goal(s), target(s), estimate(s), anticipate(s), forecast(s), project(s), plan(s), intend(s), expect(s), might, may and other words and terms of similar meaning in connection with a discussion of future operating or financial performance. Forward-looking statements, in particular, include statements relating to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, trends in operations and financial results.
Any or all forward-looking statements may turn out to be wrong, and, accordingly, readers are cautioned not to place undue reliance on such statements, which speak only as of the date of this 2008 Annual Report on Form 10-K. Forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining the Companys actual future results. These statements are based on current expectations and the current economic environment. They involve a number of risks and uncertainties that are difficult to predict. These statements are not guarantees of future performance; actual results could differ materially from those expressed or implied in the forward-looking statements.
Among the general factors that could cause actual results to differ materially from estimated results are:
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Changes in general economic conditions, including performance of financial markets, interest rates, unemployment rates and fluctuating values of particular investments held by the Company; |
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Heightened competition, including, with respect to pricing, entry of new competitors and the development of new products by new and existing competitors; |
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The number and severity of insurance claims (including those associated with catastrophe losses) and their impact on the adequacy of loss reserves; |
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The impact of inflation on insurance claims, including, but not limited to, the effects attributed to scarcity of resources available to rebuild damaged structures, including labor and materials and the amount of salvage value recovered for damaged property; |
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Orders, interpretations or other actions by regulators that impact the reporting, adjustment and payment of claims; |
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Changes in the pricing or availability of reinsurance; |
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Changes in the financial condition of reinsurers and amounts recoverable therefrom; |
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Changes in industry trends and significant industry developments; |
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Regulatory approval of insurance rates, policy forms, license applications and similar matters; |
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Developments related to insurance policy claims and coverage issues including, but not limited to, interpretations or decisions by courts or regulators that may govern or influence insurance policy coverage issues arising with respect to losses incurred in connection with hurricanes and other catastrophes; |
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Governmental actions, including new laws or regulations or court decisions interpreting existing laws and regulations or policy provisions; |
1
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Adverse outcomes in litigation or other legal or regulatory proceedings involving Unitrin or its subsidiaries or affiliates; |
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Regulatory, accounting or tax changes that may affect the cost of, or demand for, the Companys products or services; |
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The impact of residual market assessments and assessments for insurance industry insolvencies; |
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Changes in distribution channels, methods or costs resulting from changes in laws or regulations, lawsuits or market forces; |
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Changes in ratings by credit rating agencies including A.M. Best Co., Inc. (A.M. Best); |
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Changes in laws or regulations governing or affecting the regulatory status of industrial banks, such as Fireside Bank, and their parent companies, including minimum capital requirements and restrictions on the non-financial activities and equity investments of companies that acquire control of industrial banks; |
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Changes in the estimated rates of automobile loan receivables net charge-off used to estimate Fireside Banks reserve for loan losses, including, but not limited to, the impact of changes in the value of collateral held; |
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The failure to complete the acquisition of Direct Response Corporation and its subsidiaries (Direct Response); |
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The level of success and costs expended in realizing economies of scale and implementing significant business consolidations and technology initiatives; |
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Increased costs and risks related to data security; |
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Absolute and relative performance of the Companys products or services; and |
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Other risks and uncertainties described from time to time in the Companys filings with the Securities and Exchange Commission (SEC). |
No assurances can be given that the results contemplated in any forward-looking statements will be achieved or will be achieved in any
particular timetable. The Company assumes no obligation to publicly correct or update any forward-looking statements as a result of events or developments subsequent to the date of this 2008 Annual Report on Form 10-K. The reader is advised,
PART I
Item 1. | Business. |
Unitrin was incorporated in Delaware in 1990. Unitrins subsidiaries serve the basic financial needs of individuals, families and small businesses by providing property and casualty insurance, life and health insurance, and automobile 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 SEC. The public can obtain copies of these materials by visiting the SECs 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 SECs website at sec.gov, where the SEC maintains reports, proxy and information statements and other information regarding the Company and other issuers that file electronically with the SEC. 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 through its website at unitrin.com.
2
(a) GENERAL DEVELOPMENT OF BUSINESS
Purchase of Primesco, Inc.
On April 1, 2008, Unitrin completed its acquisition of Primesco, Inc. (Primesco) of Decatur, Alabama, in a cash merger transaction for a total purchase price of $95.5 million, including transaction costs of $0.2 million. Primescos wholly-owned subsidiaries, Mutual Savings Life Insurance Company (Mutual Savings Life) and Mutual Savings Fire Insurance Company (Mutual Savings Fire), specialize in the sale of life, health and fire insurance products to persons of modest financial means in Alabama, Georgia, Mississippi and several other states in the Southeast. Similar to the Companys Career Agency Companies business unit, Mutual Savings Life and Mutual Savings Fire employ a network of employee agents who call on customers in their homes to sell and service products and collect premiums. Due to the similarity of the products, distribution network and back-office operations of the Companys Career Agency Companies and Mutual Savings Life and Mutual Savings Fire, the Company is in the process of combining the businesses into a single business unit.
Pending Purchase of Direct Response Corporation
On August 29, 2008, Unitrins subsidiary, Trinity, entered into a definitive agreement to acquire Direct Response in a cash transaction initially valued at approximately $220 million, subject to certain purchase price adjustments. Such purchase price adjustments are currently estimated to reduce the purchase price to approximately $200 million. Except for approval yet to be received from a state insurance regulator, the Company has received all federal and state regulatory approvals necessary to close the transaction. The transaction is subject to timely approval by such insurance regulator and the satisfaction of other customary closing conditions. Direct Response specializes in the sale of personal automobile insurance through direct mail and the Internet through web insurance portals and its own websites, response.com and teachers.com. Due to the similarity of the products and back-office operations of the Companys Unitrin Direct business unit and Direct Response, the Company intends to combine the two businesses into a single business unit.
Sale of Unitrin Business Insurance
On June 3, 2008, the Company completed its previously disclosed sale of its Unitrin Business Insurance operations to AmTrust Financial Services, Inc. (AmTrust) for total consideration of $101.8 million. AmTrust acquired the renewal rights to the Unitrin Business Insurance book of business, certain legal entities and selected other assets, and the workforce that the Company employed to underwrite and process its Unitrin Business Insurance products. The Company retained pre-closing loss and loss adjustment expense (LAE) reserves. Results of operations for Unitrin Business Insurance are reported as discontinued operations in the Consolidated Financial Statements.
Unitrin Business Insurances products included commercial automobile, general liability, fire, multi-peril and workers compensation insurance and were marketed by independent insurance agents.
Unitrin Common Stock Repurchases
During 2008, Unitrin repurchased approximately 2 million shares of its common stock at an aggregate cost of $69 million in open market transactions. Subject to market conditions and other factors, the Company may, from time to time, repurchase additional shares of Unitrin common stock, in the open market or in privately negotiated transactions, pursuant to the outstanding repurchase authorization of Unitrins Board of Directors. At December 31, 2008, approximately 1.4 million shares of Unitrin common stock remained under such authorization.
3
(b) BUSINESS SEGMENT FINANCIAL DATA
Financial information about Unitrins business segments for the years ended December 31, 2008, 2007 and 2006 is contained in the following portions of this 2008 Annual Report on Form 10-K of Unitrin, Inc. and is incorporated herein by reference: (i) Note 19, Business Segments, to the Consolidated Financial Statements; and (ii) MD&A.
(c) DESCRIPTION OF BUSINESS
The Company is engaged, through its subsidiaries, in the property and casualty insurance, life and health insurance and automobile finance businesses. The Company conducts its operations through five operating segments: Kemper, Unitrin Specialty, Unitrin Direct, Life and Health Insurance and Fireside Bank.
NOTE: The Company uses the registered trademark, Kemper, under license, for personal lines insurance only, from Lumbermens Mutual Casualty Company (Lumbermens), which is not affiliated with the Company. Lumbermens continues to use the name, Kemper Insurance Companies (KIC), in connection with its operations, which are distinct from, and not to be confused with, Unitrins Kemper business segment.
Unitrins subsidiaries employ approximately 7,700 full-time associates supporting its operations of which approximately 1,220 are employed in the Kemper segment, 770 in the Unitrin Specialty segment, 610 in the Unitrin Direct segment, 4,100 in the Life and Health Insurance segment, 730 at Fireside Bank and the remainder in various corporate and other staff functions.
Property and Casualty Insurance Business
Unitrins property and casualty insurance business operations are primarily conducted through the Kemper, Unitrin Specialty, and Unitrin Direct segments. In addition, the Life and Health Insurance segments career agents also sell property insurance to its customers. Unitrins insurance subsidiaries operating in the Kemper, Unitrin Specialty, Unitrin Direct and Life and Health Insurance segments provide automobile, homeowners, fire, and other types of property and casualty insurance to individuals and commercial automobile insurance to businesses. Automobile insurance in these segments accounted for 57%, 57% and 56% of Unitrins consolidated insurance premiums earned from continuing operations for the years ended December 31, 2008, 2007 and 2006, respectively. Automobile insurance in these segments accounted for 50%, 45% and 45% of Unitrins consolidated revenues from continuing operations for the years ended December 31, 2008, 2007 and 2006, respectively. Homeowners insurance, excluding dwellings and personal property insurance, in these segments accounted for 12%, 13% and 12% of Unitrins consolidated insurance premiums earned from continuing operations for the years ended December 31, 2008, 2007 and 2006, respectively. Homeowners insurance, excluding dwellings and personal property insurance, in these segments accounted for 11%, 10% and 10% of Unitrins consolidated revenues from continuing operations for the years ended December 31, 2008, 2007 and 2006, 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.
The Kemper and Unitrin Specialty segments distribute their products through independent agents who are paid commissions for their services. The Unitrin Direct segment distributes its products directly to consumers and through employer-sponsored voluntary benefit programs.
4
Kemper
Kemper, based in Jacksonville, Florida, conducts business in 39 states geographically dispersed throughout the United States. In 2008, the following states provided approximately three-fifths of the premium revenues included in this segment: New York (18%), North Carolina (13%), California (13%) and Texas (12%).
Kemper primarily sells preferred and standard risk automobile and homeowners insurance. Kempers insurance products accounted for approximately 51% of the aggregate insurance premium revenues of Unitrins continuing property and casualty insurance business in 2008. Kempers products are marketed by over 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.
Unitrin Specialty
Unitrin Specialty, based in Dallas, Texas, conducts business in 24 states, principally in the midwest, southeast, southwest and western United States. In 2008, the following states provided more than two-thirds of the premium revenues in this segment: California (38%), Texas (20%), Washington (5%) and Louisiana (5%).
Unitrin Specialty provides nonstandard personal and commercial automobile insurance. Unitrin Specialtys insurance products accounted for approximately 27% of the aggregate insurance premium revenues of Unitrins continuing property and casualty insurance business in 2008. 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 or claims or premium payment history. Unitrin Specialtys products are marketed through approximately 8,000 independent agents and brokers.
Unitrin Direct
Unitrin Direct, based in Chicago, Illinois, markets automobile insurance primarily through direct mail, web insurance portals, click-thrus, and its own website. In addition, Merastar Insurance Company, based in Chattanooga, Tennessee, specializes in the sale of personal automobile and homeowners insurance through employer-sponsored voluntary benefit programs. The combined Unitrin Direct segments automobile and homeowners insurance products are available in every state in the U.S. with the exception of Alaska, Hawaii and Massachusetts. In 2008, the following states provided approximately two-thirds of the premium revenues in this segment: California (14%), Florida (14%), Michigan (7%), Pennsylvania (7%), New York (6%), Virginia (6%), Georgia (5%) and New Jersey (5%). Unitrin Directs insurance products accounted for approximately 16% of the aggregate insurance premium revenues of Unitrins continuing property and casualty insurance business in 2008.
Unitrin Direct writes a broad spectrum of personal automobile insurance risks ranging from preferred to non-standard private passenger automobile insurance risks, and competes with companies that sell insurance directly to the consumer and employer-sponsored voluntary benefit programs, as well as companies that sell through agents. Unitrin Direct also offers homeowners and renters insurance across 48 states, and in 2008 began offering homeowners and renters insurance directly to consumers across 10 states, complementing its direct automobile insurance business.
5
Property and Casualty Loss and Loss Adjustment Expense Reserves
The Companys reserves for losses and LAE for property and casualty insurance (Property and Casualty Insurance Reserves) are reported using the Companys 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. The Company had $1,268.7 million and $1,322.9 million of gross loss and LAE reserves at December 31, 2008 and 2007, respectively. Property and Casualty Insurance Reserves by business segment at December 31, 2008 and 2007 were:
Dollars in Millions |
2008 | 2007 | ||||
Business Segments: |
||||||
Kemper |
$ | 476.1 | $ | 502.4 | ||
Unitrin Specialty |
293.1 | 278.6 | ||||
Unitrin Direct |
163.1 | 142.6 | ||||
Life and Health Insurance |
23.0 | 11.4 | ||||
Total Business Segments |
955.3 | 935.0 | ||||
Discontinued Operations |
280.0 | 342.2 | ||||
Unallocated Ceded Reserves |
33.4 | 45.7 | ||||
Total Property and Casualty Insurance Reserves |
$ | 1,268.7 | $ | 1,322.9 | ||
Certain reserves acquired in connection with a business acquisition from SCOR Reinsurance Company (SCOR) in 2002 (the Unallocated Ceded Reserves) are reinsured by an insurance subsidiary of SCOR (see Note 8, Property and Casualty Insurance Reserves, to the Consolidated Financial Statements). The Company does not allocate these reserves to its business segments.
In estimating the Companys Property and Casualty Insurance Reserves, the Companys actuaries exercise professional judgment and must consider, and are influenced by, many variables that are difficult to quantify. Accordingly, the process of estimating and establishing the Companys Property and Casualty Insurance Reserves is inherently uncertain and the actual ultimate net cost 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. See MD&A, Critical Accounting Estimates, under the caption Property and Casualty Insurance Reserves for Losses and Loss Adjustment Expense beginning on page 32 for a discussion of the Companys reserving process and the factors considered by the Companys actuaries in estimating the Companys Property and Casualty Insurance Reserves.
6
The Companys goal is to ensure its total reserves for property and casualty insurance losses and LAE are adequate to cover all costs, while sustaining minimal variation from the time reserves for losses and LAE are initially estimated until losses and LAE are fully developed. Changes in the Companys estimates of these losses and LAE over time, also referred to as development, will occur and may be material. Favorable development is recognized when the Company decreases its estimate of previously reported losses and LAE and results in an increase in net income in the period recognized, whereas adverse development is recognized when the Company increases its estimate of previously reported losses and LAE and results in a decrease in net income. The Company recognized total favorable development of $79.3 million, $101.1 million and $91.6 million before tax for the years ended December 31, 2008, 2007 and 2006, respectively. Development for each of the Companys continuing business segments and Unitrin Business Insurance for the years ended December 31, 2008, 2007 and 2006, was:
Favorable (Adverse) Development | ||||||||||||
Dollars in Millions |
2008 | 2007 | 2006 | |||||||||
Continuing Operations: |
||||||||||||
Kemper |
$ | 61.0 | $ | 54.2 | $ | 68.2 | ||||||
Unitrin Specialty |
5.5 | 15.3 | 8.9 | |||||||||
Unitrin Direct |
(3.2 | ) | (5.5 | ) | (4.5 | ) | ||||||
Life and Health Insurance |
(13.7 | ) | (8.6 | ) | (6.8 | ) | ||||||
Total Favorable Development from Continuing Operations, Net |
49.6 | 55.4 | 65.8 | |||||||||
Discontinued Operations: |
||||||||||||
Unitrin Business Insurance, Net |
29.7 | 45.7 | 25.8 | |||||||||
Total Favorable Development, Net |
$ | 79.3 | $ | 101.1 | $ | 91.6 | ||||||
Development in the Companys Kemper segment comprised a substantial portion of the Companys development reported in continuing operations in 2008, 2007 and 2006. See MD&A, Critical Accounting Estimates, under the caption Property and Casualty Insurance Reserves for Losses and Loss Adjustment ExpenseKemper Development for additional information regarding this development. See MD&A, Catastrophes, Kemper, Unitrin Specialty, Unitrin Direct, and Life and Health Insurance for the impact of development on the results reported by the Companys business segments. See MD&A, Catastrophes, for additional information on the impact of catastrophes on the development reported for the Companys Life and Health Insurance segment. See Note 8, Property and Casualty Insurance Reserves to the Consolidated Financial Statements for a tabular reconciliation for the latest three one-year periods setting forth the Companys Property and Casualty Insurance Reserves as of the beginning of each year, incurred losses and LAE for insured events of the current year, changes in incurred losses and LAE for insured events of prior years, payments of losses and LAE for insured events of the current year, payments of losses and LAE for insured events of prior years and the Companys Property and Casualty Insurance Reserves at the end of the year and additional information regarding the nature of adjustments to incurred losses and LAE for insured events of prior years.
Ten Year Loss Development History
The following table illustrates the change over time in the Companys estimate of reserves for losses and LAE. The first section shows the amount of reserves reported in the Companys 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.
7
Loss and Loss Adjustment Expense Reserve Development
December 31, | |||||||||||||||||||||||||||||||||
Dollars in Millions |
1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | ||||||||||||||||||||||
Gross Reserve for Unpaid Losses and LAE |
$ | 448 | $ | 521 | $ | 541 | $ | 700 | $ | 975 | $ | 1,426 | $ | 1,511 | $ | 1,531 | $ | 1,433 | $ | 1,323 | $ | 1,269 | |||||||||||
Deduct: |
|||||||||||||||||||||||||||||||||
Reinsurance Recoverables |
16 | 35 | 36 | 62 | 92 | 325 | 229 | 209 | 138 | 85 | 85 | ||||||||||||||||||||||
Net Reserve for Unpaid Losses and LAE |
$ | 432 | $ | 486 | $ | 505 | $ | 638 | $ | 883 | $ | 1,101 | $ | 1,282 | $ | 1,322 | $ | 1,295 | $ | 1,238 | $ | 1,184 | |||||||||||
Cumulative Amount Paid, Net of Reinsurance as of: |
|||||||||||||||||||||||||||||||||
One Year Later |
$ | 191 | $ | 229 | $ | 274 | $ | 341 | $ | 402 | $ | 405 | $ | 487 | $ | 508 | $ | 511 | $ | 518 | |||||||||||||
Two Years Later |
288 | 336 | 393 | 483 | 578 | 621 | 707 | 742 | 724 | ||||||||||||||||||||||||
Three Years Later |
339 | 404 | 477 | 568 | 682 | 788 | 830 | 854 | |||||||||||||||||||||||||
Four Years Later |
368 | 456 | 523 | 617 | 731 | 850 | 891 | ||||||||||||||||||||||||||
Five Years Later |
386 | 486 | 556 | 647 | 762 | 882 | |||||||||||||||||||||||||||
Six Years Later |
400 | 508 | 576 | 666 | 781 | ||||||||||||||||||||||||||||
Seven Years Later |
409 | 523 | 590 | 679 | |||||||||||||||||||||||||||||
Eight Years Later |
421 | 531 | 600 | ||||||||||||||||||||||||||||||
Nine Years Later |
427 | 539 | |||||||||||||||||||||||||||||||
Ten Years Later |
434 | ||||||||||||||||||||||||||||||||
Reestimate of Net Reserve for Unpaid Losses and LAE as of: |
|||||||||||||||||||||||||||||||||
End of Year |
$ | 432 | $ | 486 | $ | 505 | $ | 638 | $ | 883 | $ | 1,101 | $ | 1,282 | $ | 1,322 | $ | 1,295 | $ | 1,238 | $ | 1,184 | |||||||||||
One Year Later |
419 | 485 | 564 | 720 | 886 | 1,062 | 1,190 | 1,230 | 1,195 | 1,159 | |||||||||||||||||||||||
Two Years Later |
408 | 495 | 612 | 722 | 879 | 1,026 | 1,131 | 1,158 | 1,106 | ||||||||||||||||||||||||
Three Years Later |
427 | 533 | 619 | 724 | 872 | 1,006 | 1,088 | 1,106 | |||||||||||||||||||||||||
Four Years Later |
441 | 544 | 623 | 725 | 857 | 980 | 1,049 | ||||||||||||||||||||||||||
Five Years Later |
448 | 548 | 624 | 719 | 840 | 951 | |||||||||||||||||||||||||||
Six Years Later |
453 | 549 | 623 | 709 | 819 | ||||||||||||||||||||||||||||
Seven Years Later |
453 | 548 | 618 | 693 | |||||||||||||||||||||||||||||
Eight Years Later |
452 | 543 | 608 | ||||||||||||||||||||||||||||||
Nine Years Later |
449 | 535 | |||||||||||||||||||||||||||||||
Ten Years Later |
442 |
8
Loss and Loss Adjustment Expense Reserve Development
December 31, | ||||||||||||||||||||||||||||||||||||||||||
Dollars in Millions |
1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | |||||||||||||||||||||||||||||||
Initial Net Reserve for Unpaid Loses and LAE in Excess Of (Less Than) Reestimated Net Reserve for Unpaid Losses and LAE: |
||||||||||||||||||||||||||||||||||||||||||
Amount of Reestimate |
$ | (10 | ) | $ | (49 | ) | $ | (103 | ) | $ | (55 | ) | $ | 64 | $ | 150 | $ | 233 | $ | 216 | $ | 189 | $ | 79 | ||||||||||||||||||
Reestimate as a Percentage of Initial Net Reserve for Unpaid Losses and LAE |
(2.3 | )% | (10.1 | )% | (20.4 | )% | (8.6 | )% | 7.2 | % | 13.6 | % | 18.2 | % | 16.3 | % | 14.6 | % | 6.4 | % | ||||||||||||||||||||||
Latest Reestimate of: |
||||||||||||||||||||||||||||||||||||||||||
Gross Reserve for Unpaid Losses and LAE |
$ | 468 | $ | 629 | $ | 712 | $ | 796 | $ | 921 | $ | 1,283 | $ | 1,275 | $ | 1,328 | $ | 1,246 | $ | 1,216 | ||||||||||||||||||||||
Recoverable for Reinsurance |
26 | 94 | 104 | 103 | 102 | 332 | 226 | 222 | 140 | 57 | ||||||||||||||||||||||||||||||||
Net Reserve for Unpaid Losses and LAE |
$ | 442 | $ | 535 | $ | 608 | $ | 693 | $ | 819 | $ | 951 | $ | 1,049 | $ | 1,106 | $ | 1,106 | $ | 1,159 | ||||||||||||||||||||||
Cumulative (Increase) Decrease to Reestimation of Gross Reserve for Unpaid Losses and LAE: |
$ | (20 | ) | $ | (108 | ) | $ | (171 | ) | $ | (96 | ) | $ | 54 | $ | 143 | $ | 236 | $ | 203 | $ | 187 | $ | 107 | ||||||||||||||||||
9
The Company acquired Valley Group Inc. and its subsidiaries (VGI) in 1999. Accordingly, reserves for VGI are included in the table for 1999 and forward. Under the agreement governing the acquisition of VGI, the Company was entitled to recover from the seller 90% of the unfavorable development of VGIs pre-acquisition loss and LAE reserves, subject to a maximum recovery of $50 million. Reserve development shown in the preceding table for the years 1999 to 2004 is net of changes in the Companys estimated recovery, which was received in 2004. Reserves increased in 2002 and 2003 partly due to the Companys acquisition of the personal lines business of KIC. At the end of 2002, the Company also acquired two insurance companies from SCOR. Reinsurance recoverable in 2003 and forward includes a recoverable from a subsidiary of SCOR under an indemnity reinsurance agreement whereby the subsidiary assumed the pre-acquisition liabilities of the two insurance companies acquired by the Company. In 2005, three major hurricanes that significantly impacted the Company (Katrina, Rita and Wilma) made landfall in the United States. Accordingly, reserves at December 31, 2005 increased as claims from these hurricanes were established for adjudication, and declined in subsequent years as claims were paid. The Company acquired Merastar in 2007. Accordingly, reserves for this business are included in the table for 2007 and forward. In 2008, three major hurricanes that significantly impacted the Company (Dolly, Gustav and Ike) made landfall in the United States. Accordingly, reserves at December 31, 2008 increased as claims from these hurricanes were established for adjudication.
Reserve estimates increase or decrease as more information becomes known about individual claims and as changes in conditions and claims trends become more apparent. In 2008, the Company reduced its property and casualty insurance reserves by $79.3 million to recognize favorable development of losses and LAE from prior accident years. Personal lines insurance losses and LAE reserves developed favorably by $45.8 million and commercial lines insurance losses and LAE reserves developed favorably by $33.5 million in 2008. Personal lines insurance losses and LAE reserves developed favorably in 2008 due primarily to the emergence of more favorable loss trends than expected for the 2006 and 2005 accident years due to the improvements in the Companys claims handling procedures, partially offset by adverse development of $8.9 million related to certain re-opened claims from Hurricane Rita, which occurred in the 2005 accident year. Commercial lines insurance losses and LAE reserves developed favorably in 2008 primarily in the Companys discontinued operations. During the fourth quarter of 2008, the Companys actuaries conducted their regular reserve review of the Unitrin Business Insurance run-off business for all traditional reserving groups. In addition, the Companys actuaries updated certain analyses using the Companys experience as well as more recent industry studies to re-estimate asbestos, environmental liabilities and construction defect liabilities. These updated analyses, along with the actuaries regular reserve reviews during 2008, resulted in favorable reserve development of $29.7 million in 2008. In 2007, the Company reduced its property and casualty insurance reserves by $101.1 million to record favorable development of losses and LAE from prior accident years. Personal lines insurance losses and LAE and commercial lines insurance losses and LAE developed favorably by $44.4 million and $56.7 million, respectively, in 2007. The reserve reductions were primarily due to the emergence of more favorable loss trends than expected for the 2006, 2005 and 2004 accident years, partially due to the improvements in the Companys claims handling procedures. In 2006, the Company reduced its property and casualty insurance reserves by $91.6 million to record favorable development of losses and LAE from prior accident years. Personal lines insurance losses and LAE and commercial lines insurance losses and LAE developed favorable by $63.6 million and $28.0 million, respectively, in 2006. The reserve reductions were primarily due to the emergence of more favorable loss trends than expected for the 2005 and 2004 accident years, partially due to the improvements in the Companys claims handling procedures. In 2005, the Company reduced its property and casualty insurance reserves by $92.1 million to record favorable development of losses and LAE from prior accident years. Personal lines insurance losses and LAE and commercial lines insurance losses and LAE developed favorably by $73.1 million and $19.0 million, respectively, in 2005. The reserve reductions were primarily due to the emergence of more favorable loss trends than expected for the 2004 and 2003 accident years, partially due to improvements in the Companys claims handling procedures. In 2004, the Company reduced its property and casualty insurance reserves by $39.0 million to record favorable development of losses and LAE from prior accident years. Personal lines insurance losses and LAE and commercial lines insurance losses and LAE developed favorably by $29.7 million and $9.3 million, respectively, in 2004. The reserve reductions were primarily due to favorable development of the 2003 accident year. During 2001 and 2002, the Company increased its property and casualty
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insurance reserves to reflect adverse development due to developing loss trends primarily related to construction defect, mold, automobile liability and product liability loss exposures in its commercial lines of business as well as personal automobile liability.
The Company does not discount reserves. There are no significant differences between the Companys property and casualty reserves carried on a statutory basis and those computed in accordance with accounting principles generally accepted in the United States of America, except that such reserves for statutory reporting purposes are recorded net of reinsurance in the statutory financial statements.
Catastrophe Losses
Catastrophes and storms are inherent risks of the property and casualty insurance business. These catastrophic events and natural disasters include hurricanes, tornadoes, earthquakes, hailstorms, wildfires, high winds and winter storms. Such events result in insured losses that are, and will continue to be, a material factor in the results of operations and financial position of Unitrins property and casualty insurance companies. Further, because the level of insured losses that could occur in any one year cannot be accurately predicted, these losses contribute to material year-to-year fluctuations in the results of the operations and financial position of these companies. Specific types of catastrophic events are more likely to occur at certain times within the year than others. This factor adds an element of seasonality to property and casualty insurance claims. The occurrence and severity of catastrophic events are difficult to accurately predict in any year. However, some geographic locations are more susceptible to these events than others. Management has endeavored to control its direct insurance exposures in certain regions that are prone to naturally occurring catastrophic events through a combination of geographic diversification, restrictions on the amount and location of new business production in such regions, and reinsurance. The Company has adopted the industry-wide catastrophe classifications of storms and other events promulgated by Insurance Services Office, Inc. (ISO) to track and report losses related to catastrophes. ISO classifies a disaster as a catastrophe when the event causes $25.0 million or more in direct losses to property and affects a significant number of policyholders and insurers. ISO-classified catastrophes are assigned a unique serial number recognized throughout the insurance industry. The discussions that follow utilize ISOs definition of catastrophes.
The process of estimating and establishing reserves for catastrophe losses is inherently uncertain and the actual ultimate cost of a claim, net of actual reinsurance recoveries, may vary materially from the estimated amount reserved. The Companys estimates of direct catastrophe losses are generally based on inspections by claims adjusters and historical loss development experience for areas that have not been inspected or for claims that have not yet been reported. The Companys estimates of direct catastrophe losses are based on the coverages provided by its insurance policies. The Companys homeowners insurance policies do not provide coverage for losses caused by floods, but generally provide coverage for physical damage caused by wind or wind driven rain. Accordingly, the Companys estimates of direct losses for homeowners insurance do not include losses caused by flood. Depending on the policy, automobile insurance may provide coverage for losses caused by flood. Estimates of the number of and severity of claims ultimately reported are influenced by many variables including, but not limited to, repair or reconstruction costs and determination of cause of loss, that are difficult to quantify and will influence the final amount of claim settlements. All these factors, coupled with the impact of the availability of labor and material on costs, require significant judgment in the reserve setting process. A change in any one or more of these factors is likely to result in an ultimate net claim cost different from the estimated reserve. The Companys estimates of indirect losses from residual market assessments are based on a variety of factors including, but not limited to, actual or estimated assessments provided by or received from the assessing entity, insurance industry estimates of losses, and estimates of the Companys market share in the assessable states. Actual assessments may differ materially from these estimated amounts.
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Reinsurance
The Company manages its exposure to catastrophes and other natural disasters through a combination of geographical diversification, restrictions on the amount and location of new business production in such regions, and reinsurance. To limit its exposures to catastrophic events, the Company maintains various primary catastrophe reinsurance programs for its property and casualty insurance businesses. Coverage for each primary catastrophe reinsurance program is provided in various layers. In addition to these programs, the Company purchases reinsurance from the Florida Hurricane Catastrophe Fund (the FHCF) for hurricane losses in Florida at retentions lower than those described below for the Companys primary catastrophe reinsurance programs. See Note 20, Catastrophe Reinsurance, to the Consolidated Financial Statements for information pertaining to the Companys primary catastrophe reinsurance programs for 2008, 2007 and 2006. The Companys catastrophe reinsurance programs for 2009 are described below.
Coverage for each catastrophe reinsurance program effective January 1, 2009 is provided in various layers as presented below:
Catastrophe Losses and
LAE |
Percentage
of Coverage |
||||||||
(Dollars in Millions) |
In Excess of | Up to | |||||||
Kemper Segment |
|||||||||
Retained |
$ | | $ | 50.0 | 0.0 | % | |||
1st Layer of Coverage |
50.0 | 100.0 | 55.4 | % | |||||
2nd Layer of Coverage |
100.0 | 200.0 | 95.0 | % | |||||
3rd Layer of Coverage |
200.0 | 350.0 | 86.6 | % | |||||
Unitrin Direct and Unitrin Specialty Segments |
|||||||||
Retained |
$ | | $ | 2.0 | 0.0 | % | |||
1st Layer of Coverage |
2.0 | 15.0 | 95.7 | % | |||||
Life and Health Insurance SegmentProperty Insurance Operations |
|||||||||
Retained |
$ | | $ | 8.0 | 0.0 | % | |||
1st Layer of Coverage |
8.0 | 15.0 | 97.0 | % | |||||
2nd Layer of Coverage |
15.0 | 25.0 | 100.0 | % |
The Company substantially reduced the level of catastrophe reinsurance coverage purchased for its Life and Health Insurance segment in 2009 in anticipation of reducing its exposure to catastrophe risks prior to the beginning of the hurricane season. If the Company does not substantially reduce the Life and Health Insurance segments exposure to catastrophe risks prior to the beginning of the hurricane season, the Company expects to purchase additional catastrophe reinsurance coverage, subject to availability of coverage on terms acceptable to the Company.
The estimated aggregate annual premiums, excluding reinstatement premium in 2009 are $22.8 million for the Kemper segment program, $1.2 million for the Unitrin Direct and Unitrin Specialty segments program and $3.8 million for the Life and Health Insurance segment program.
In the event that the Companys incurred catastrophe losses and LAE covered by any of its catastrophe reinsurance programs exceed the retention for that particular layer, each of the programs above requires one reinstatement of such coverage. In such an instance, the Company is required to pay a reinstatement premium to the reinsurers to reinstate the full amount of reinsurance available under such layer. The reinstatement premium is a percentage of the original premium based on the ratio of the losses exceeding the Companys retention to the reinsurers coverage limit. The catastrophe reinsurance program for the Life and Health Insurance segment also includes reinsurance coverage from the FHCF for hurricane losses in Florida at retentions lower than those described above.
In addition to the catastrophe loss exposures caused by natural events described above, Unitrins property and casualty insurance companies are exposed to losses from catastrophic events that are not the result of acts of nature, such as acts of terrorism, the nature and level of which in any period are very difficult to predict. While
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there were no reported losses experienced by Unitrins property and casualty insurance companies in relation to the terrorist attacks on September 11, 2001, the companies have reinsurance coverage to address certain exposures to potential future terrorist attacks. The reinsurance coverage for certified events, as designated by the federal government, is from the Terrorist Risk Insurance Act and the coverage for non-certified events is available in the catastrophe reinsurance program for Unitrins property and casualty insurance companies. However, certain perils, such as biological, chemical, nuclear pollution or contamination, are excluded from the Companys reinsurance coverage for non-certified events.
In addition to the catastrophe reinsurance programs described above, Unitrins property and casualty insurance companies utilize other reinsurance arrangements to limit their maximum loss, provide greater diversification of risk and minimize exposures on larger risks.
Under the various reinsurance arrangements, Unitrins property and casualty insurance companies are indemnified by reinsurers for certain losses incurred under insurance policies issued by the companies. As indemnity reinsurance does not discharge an insurer from its direct obligations to policyholders on risks insured, Unitrins property and casualty insurance companies remain directly liable. However, so long as the reinsurers meet their obligations, the net liability for Unitrins property and casualty insurance companies is limited to the amount of risk that they retain. Unitrins property and casualty insurance companies purchase their reinsurance only from reinsurers rated A- or better by A. M. Best at the time of purchase.
For further discussion of the reinsurance programs, see Note 8, Property and Casualty Insurance Reserves, Note 20, Catastrophe Reinsurance, and Note 21, Other Reinsurance, to the Consolidated 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 and economic conditions including market rates of interest, 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 under the captions Kemper, Unitrin Specialty and Unitrin Direct.
Competition
Based on the most recent annual data published by A.M. Best as of the end of 2007, there were approximately 965 property and casualty insurance groups in the United States, made up of approximately 2,350 companies. Unitrins property and casualty insurance companies ranked among the 70 largest property and casualty insurance groups in the United States, measured by net premiums written (42nd), policyholders surplus (68th) and admitted assets (64th).
In 2007, the industrys estimated net premiums written were more than $450 billion, of which 77% were accounted for by the top 50 groups of companies. Unitrins property and casualty insurance companies wrote less than 1% of the industrys estimated 2007 premium volume.
Property and casualty insurance is a highly competitive business, particularly with respect to personal automobile insurance. Unitrins property and casualty insurance companies compete on the basis of, among other measures, (i) using appropriate pricing, (ii) maintaining underwriting discipline, (iii) selling to selected markets, (iv) utilizing technological innovations for the marketing and sale of insurance, (v) controlling expenses, (vi) maintaining adequate ratings from A.M. Best and other ratings agencies, (vii) providing quality services to agents and policyholders, and (viii) making strategic acquisitions of suitable property and casualty insurers.
Life and Health Insurance Business
The Companys Life and Health Insurance segment consists of Unitrins wholly-owned subsidiaries, United Insurance Company of America (United Insurance), The Reliable Life Insurance Company (Reliable), Union
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National Life Insurance Company (Union National Life), Mutual Savings Life, United Casualty Insurance Company of America (United Casualty), Union National Fire Insurance Company (Union National Fire), Mutual Savings Fire and Reserve National Insurance Company (Reserve National). As discussed below, United Insurance, Reliable, Union National Life, Mutual Savings Life, United Casualty, Union National Fire and Mutual Savings Fire (the Career Agency Companies) distribute their products through a network of employee, or career, agents. Reserve National distributes its products through a network of exclusive independent agents. Both these career agents and independent agents are paid commissions for their services. In 2008, the following states provided more than two-thirds of the Life and Health Insurance segments premium revenues: Texas (24%), Louisiana (11%), Mississippi (6%), Alabama (5%), Illinois (4%), Florida (4%), North Carolina (4%), Missouri (4%), Georgia (4%) and South Carolina (4%) . Life insurance accounted for 17% of the Companys consolidated insurance premiums earned from continuing operations for each of the years ended December 31, 2008, 2007 and 2006. Life insurance accounted for 15%, 13%, and 14% of Unitrins consolidated revenues from continuing operations for the years ended December 31, 2008, 2007 and 2006, respectively.
Career Agency Companies
The Career Agency Companies, based in St. Louis, Missouri, focus on providing individual life and health insurance products to customers of modest incomes who desire basic protection for themselves and their families. Their leading product is ordinary life insurance, including permanent and term insurance. Face amounts of these policies are lower than those of policies typically sold to higher income customers by other companies in the industry. Premiums average $15 per policy per month. Permanent policies are offered primarily on a non-participating, guaranteed-cost basis. Approximately 80% of the Life and Health Insurance segments premium revenues are generated by the Career Agency Companies.
The Career Agency Companies employ nearly 2,700 career agents to distribute their products in 25 states. These career agents are full-time employees who call on customers in their homes to sell insurance products, provide services related to policies in force and collect premiums, typically monthly. The Life and Health Insurance segments career agents also distribute certain property insurance products.
Customers of the Career Agency Companies generally are families with annual incomes of less than $25,000. According to the U.S. Bureau of the Census, in 2007, there were approximately 27 million households in the United States with less than $25,000 of annual income, representing approximately 24% of all U.S. households.
Reserve National
Reserve National, based in Oklahoma City, Oklahoma, is licensed in 31 states throughout the south, southwest and midwest, and specializes in the sale of 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.
Reserve National has approximately 240 independent agents appointed to market and distribute its products. These agents typically represent only Reserve National.
Reinsurance
Consistent with insurance industry practice, Unitrins life and health insurance companies utilize reinsurance arrangements to limit their maximum loss, provide greater diversification of risk and minimize exposures on larger risks. Included among the segments reinsurance arrangements is excess of loss reinsurance coverage specifically designed to protect against losses arising from catastrophic events under the property insurance policies distributed by the Career Agency Companies agents and written by United Casualty, Union National Fire and Mutual Savings Fire or written by Capitol County Mutual Fire Insurance Company (Capitol), a mutual insurance company owned by its policyholders, and its subsidiary, Old Reliable Casualty Company (ORCC), and reinsured by Unitrins subsidiary, Trinity. The annual catastrophe reinsurance program for the Career Agency Companies, Capitol and ORCC is described above in the discussion of Reinsurance under Property
14
and Casualty Insurance Business of this Item 1 beginning on page 12. Also see MD&A Catastrophes and Note 20, Catastrophe Reinsurance to the Consolidated Financial Statements for additional information pertaining to the Life and Health Insurance segments catastrophe reinsurance program.
Lapse Ratio
The lapse ratio is a measure of a life insurers loss of existing business. For a given year, this ratio is commonly computed as the total face amount of individual life insurance policies lapsed, surrendered, expired and decreased during such year, less policies increased and revived during such year, divided by the total face amount of policies at the beginning of the year plus the face amount of policies issued and reinsurance assumed in the prior year. The Life and Health Insurance segments lapse ratio for individual life insurance was 9%, 10%, and 10% in 2008, 2007 and 2006, respectively.
The customer base served by the Career Agency Companies 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 Career Agency Companies must continue to write a high volume of new policies.
Pricing
Premiums for life and health insurance products are based on assumptions with respect to mortality, morbidity, investment yields, expenses, and lapses and are also affected by state laws and regulations, as well as competition. Pricing assumptions are based on the experience of Unitrins life and health insurance subsidiaries, 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 by the Career Agency Companies are set at levels designed to cover the relatively high cost of in home servicing of such policies. As a result of such higher expenses, incurred claims as a percentage of earned premiums tend to be lower for companies utilizing this method of distribution than the life 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.
Competition
Based on the most recent data published by A.M. Best as of the end of 2007, there were approximately 400 life and health insurance company groups in the United States, made up of approximately 2,000 companies. The Unitrin Life and Health Insurance segment ranked in the top quartile of life and health insurance company groups, as measured by admitted assets (91st), net premiums written (88th) and capital and surplus (96th).
Unitrins life and health insurance subsidiaries generally compete by using appropriate pricing, selling to selected markets, controlling expenses, maintaining adequate ratings from A.M. Best, and providing competitive services to agents and policyholders.
Automobile Finance Business
Fireside Bank, based in Pleasanton, California, is engaged in the automobile finance business. Fireside Bank is organized under California law as an industrial bank and its deposits are insured by the Federal Deposit Insurance Corporation (the FDIC). Fireside Banks principal business is the financing of used automobiles through the purchase of retail installment contracts from automobile dealers. The borrowers under these contracts typically have marginal credit histories and are considered to be sub-prime.
15
Fireside Bank purchases loan contracts from automobile dealers in 19 states. At December 31, 2008, the following states comprised over four-fifths of Fireside Banks outstanding loans and contracts: California (65%), Oregon (6%), Washington (5%), Colorado (5%) and Arizona (4%). Fireside Bank is one of the largest sub-prime automobile finance sources in California. Fireside Bank does business with over 5,000 automobile dealers. Fireside Bank has over 135,000 contracts and loans outstanding, totaling in excess of $1 billion.
Strong underwriting and collection practices are key elements to successful operating performance in the sub-prime automobile finance business. Over two-thirds of Fireside Banks general and administrative expenses are devoted to loan production and servicing activities. Fireside Bank individually underwrites each credit application and historically has declined to extend credit to more than three-quarters of its credit applicants. See the discussion of loan loss reserves under the headings Fireside Bank and Critical Accounting Estimates in the MD&A and Note 1, Basis of Presentation and Significant Estimates, Note 2, Summary of Accounting Policies and Accounting Changes, and Note 6, Automobile Loan Receivables and Certificates of Deposits, to the Consolidated Financial Statements. Fireside Bank competes for automobile loan contracts primarily on the basis of timely service to its automobile dealer customers and by offering competitive terms. Principal competitors include banks, finance companies, credit unions and captive credit subsidiaries of automobile manufacturers.
Fireside Banks financing activities are funded primarily by FDIC-insured certificates of deposits. Fireside Bank originates deposits through its California branch network, through brokers and over the Internet and competes for funds primarily with other banks, credit unions and savings and loan associations.
The Company is in the process of exploring strategic alternatives associated with its investment in Fireside Bank.
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, but not limited to, municipal, state and federal government obligations, corporate bonds, real estate, preferred and common stocks, investment partnerships, limited liability investment companies and limited partnerships and mortgages, where the value of the underlying real estate exceeds the amount of the loan.
The Company employs a total return investment strategy while maintaining liquidity to meet both its short and long-term insurance obligations primarily through the combination of investment-grade fixed maturity investments and, to a lesser extent, equity securities with the potential for long-term price appreciation. See the discussions of the Companys investments under the headings Critical Accounting Estimates, Investment Results, Investment Quality and Concentrations, Securities Lending, Credit Default Swaps and Hedging Activities, Distressed and Mezzanine Debt and Secondary Transactions Investments and Liquidity and Capital Resources in the MD&A, Quantitative and Qualitative Disclosures about Market Risk, in Item 7A and Note 5, Investments, and Note 15, Income from Investments, to the Consolidated Financial Statements.
Regulation
Insurance Regulation
Unitrin is subject to the insurance holding company laws of a number of 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.
Unitrins insurance subsidiaries are subject to extensive regulation in the states in which they do business. Such regulation pertains to a variety of matters, including policy forms, premium rate plans, licensing of agents, licenses to transact business, trade practices, investments and solvency. The majority of Unitrins insurance
16
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 insurers market conduct and other affairs.
Insurance companies are required to report their financial condition and results of operation 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 companys 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 companys RBC requirements are calculated and compared to its total adjusted capital to determine whether regulatory intervention is warranted. At December 31, 2008, the total adjusted capital of each of Unitrins insurance subsidiaries exceeded the minimum levels required under RBC rules.
Unitrins 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. Unitrins insurance subsidiaries also are required to participate in various involuntary pools or assigned risk pools, principally involving windstorms and high risk drivers. In most states, the involuntary pool participation of Unitrins 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 legislative and regulatory measures pending or enacted in recent years may significantly affect the insurance business in a variety of ways. These measures include, among other things, tort reform, consumer privacy requirements, credit score regulation, producer compensation regulations, corporate governance requirements and financial services deregulation initiatives.
State insurance laws intended primarily for the protection of policyholders contain certain requirements that must be met prior to any change of control of an insurance company or insurance holding company that is domiciled or, in some cases, an insurance company having such substantial business that it is deemed commercially domiciled, in that state. These requirements may include the advance filing of specific information with the state insurance regulators, a public hearing on the matter, and the review and approval of the change of control by such regulators. The Company has insurance subsidiaries domiciled in a number of states, including Alabama, California, Illinois, Indiana, Louisiana, Missouri, New York, Oklahoma, Oregon, Texas and Wisconsin. In these states, control generally is presumed to exist through the direct or indirect ownership of 10% or more of the voting securities of an insurance company. Any purchase of Unitrins shares that would result in the purchaser owning 10% or more of Unitrins voting securities would be presumed to result in the acquisition of control of Unitrins insurance subsidiaries. Such an acquisition generally would require the prior approval of the insurance regulatory authorities in each state in which Unitrins insurance subsidiaries are domiciled or deemed to be commercially domiciled. In addition, many states require pre-acquisition notification to the state insurance regulators of a change of control of an insurance company licensed in that state if specific market concentration thresholds would be triggered by the acquisition. While those pre-acquisition notification statutes generally do not authorize the state insurance regulators to disapprove the change of control, they do authorize the issuance of a cease and desist order with respect to the insurance company if certain conditions, such as undue market concentration, would result from the acquisition. These insurance regulatory requirements may deter, delay or prevent transactions effecting control of the Company or the ownership of Unitrins voting securities, including transactions that could be advantageous to Unitrins shareholders.
17
Fireside Bank Regulation
Fireside Bank is an industrial bank regulated by the California Department of Financial Institutions (the CDFI). Under California banking law, Fireside Bank is permitted to engage in the activities of a commercial bank, except the activity of accepting demand deposits, and is generally subject to the same laws and regulations to which commercial banks are subject under the California banking law. In addition, since Fireside Banks deposits are insured by the FDIC, it is subject to a broad system of regulation under the Federal Deposit Insurance Act, FDIC regulations and other federal regulations. The regulations of these state and federal agencies govern most aspects of Fireside Banks business, and are generally intended to protect a banks depositors, creditors, borrowers and the deposit insurance fund. They impose reporting obligations, minimum capitalization requirements, limitations on dividends, investments, loans, borrowings, branching, mergers and acquisitions, reserves against deposits, and other requirements, including those relating to privacy, fairness in consumer credit, and prevention and detection of fraud and financial crime. Federal law also imposes certain restrictions on Fireside Banks transactions with the Company and other affiliates, and certain fair lending and reporting requirements involving consumer lending operations and Community Reinvestment Act activities.
Item 1A. | Risk Factors. |
Most issuers, including Unitrin, are exposed to numerous risks associated with the extremely volatile and disruptive nature of the current capital and credit markets. The following discussion details the significant factors affecting the other risks that are more specific to Unitrin.
Realized losses from investments may occur in the event that policyholders surrender life insurance policies or request policy loans at rates materially greater than assumed.
The Companys Life and Health Insurance segments principal market for life insurance consists of customers of modest incomes who desire basic protection for themselves and their families. These customers generally are families with annual incomes of less than $25,000. In a severe downturn in the economy with high unemployment rates, these customers may forgo basic insurance protection for themselves and their families in favor of basic daily necessities such as food and shelter. In such cases, customers might surrender their life insurance policies to receive the policies cash value or may request policy loans. While the Companys Life and Health Insurance segment maintains short-term liquidity to meet normal policy surrender and loan activity, a material, elevated level of policy surrender and loan activity could result in the Companys Life and Health Insurance segment selling impaired investments before unrealized losses have been fully recovered. The Companys premium revenues could also decline due to policy surrender activity which may adversely affect the Companys results of operations.
Catastrophe losses and reinsurance risks may adversely affect the Companys results of operations, liquidity and financial condition.
Property and casualty insurance companies are subject to claims arising out of catastrophes that may have a significant effect on their results of operations, liquidity and financial condition. Catastrophes can be caused by various events, including hurricanes, tornadoes, windstorms, earthquakes, hail storms, explosions, severe winter weather and wildfires and may include man-made events, such as the September 11, 2001 terrorist attacks. The incidence, frequency, and severity of catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event.
Unitrins insurance subsidiaries seek to reduce their exposure to catastrophe losses through underwriting strategies and the purchase of catastrophe reinsurance. Reinsurance does not relieve Unitrins insurance subsidiaries of their direct liability to their policyholders. As long as the reinsurers meet their obligations, the net liability for Unitrins insurance subsidiaries is limited to the amount of risk that they retain. However, the
18
Company cannot be certain that reinsurers will pay the amounts due from them either now, in the future, or on a timely basis, which could impact the Companys liquidity. A reinsurers insolvency, inability or unwillingness to make payments under the terms of its reinsurance agreement with Unitrins insurance subsidiaries could have a material adverse effect on the Companys financial position and results of operations.
In addition, market conditions beyond the Companys control determine the availability and cost of the reinsurance protection Unitrins insurance subsidiaries may purchase. A decrease in the amount of reinsurance that Unitrins insurance subsidiaries purchase generally should decrease their cost of reinsurance, but increase their risk of loss. An increase in the amount of reinsurance that Unitrins insurance subsidiaries purchase generally should increase their cost of reinsurance, but decrease their risk of loss. However, if the amount of reinsurance available is reduced, Unitrins insurance subsidiaries could pay more for the same level, or a lower level, of reinsurance coverage. Accordingly, the Company may be forced to incur additional expenses for reinsurance or may not be able to obtain sufficient reinsurance on acceptable terms, which could adversely affect Unitrins insurance subsidiaries ability to write future business or result in their retaining more risk with respect to their insurance policies.
Estimating property and casualty insurance reserves is inherently uncertain, and if the Companys loss reserves are insufficient, it will have an unfavorable impact on the Companys results.
The Company establishes loss and LAE reserves to cover estimated liabilities, which remain unpaid as of the end of each accounting period, and to investigate and settle all claims incurred under the property and casualty insurance policies that it has issued. Loss and LAE reserves are established for claims that have been reported to the Company as of the end of the accounting period, as well as for claims that have occurred but have not yet been reported to the Company. The estimates of loss and LAE reserves are based on the Companys assessment of the facts and circumstances known to it at the time, as well as estimates of the impact of future trends in the severity of claims, the frequency of claims and other factors.
As described more thoroughly above, the process of estimating loss reserves is complex and imprecise. The estimate of the ultimate cost of claims must take into consideration many factors that are dependent on the outcome of future events. The impact on the Companys loss reserves from these factors is difficult to estimate accurately. Such factors consist of, but are not limited to, the following:
|
Changes in the length of time between the actual occurrence of the event that gives rise to a claim, and the date on which the claim is reported; |
|
Changes in underwriting practices; |
|
Changes in claim handling procedures; |
|
Changes in medical care, including the impact of inflation, the extent of injuries and the utilization of medical services; |
|
Changes in the cost of home repair, including the impact of inflation and the availability of labor and materials; |
|
Changes in the judicial environment, including, but not limited to, the interpretation of policy provisions, the impact of jury awards and changes in case law; and |
|
Changes in state regulatory requirements; |
A change in any one or more of the foregoing factors is likely to result in a projected ultimate loss that is different from the previously estimated cost. Such changes may be material.
The Company uses informed, subjective professional judgment in estimating the ultimate cost of claims. The estimate of the ultimate cost at any particular valuation point may vary materially from the actual cost when claims are ultimately settled.
19
The Company continually reviews the adequacy of its reserve estimates in a regular and ongoing process as experience develops and further claims are reported and settled. The Company reflects any adjustments to reserves in the results of the periods in which such estimates are changed.
The Company estimates the reserves for each product line and coverage that it writes. The Company uses a variety of generally accepted actuarial loss reserving estimation methodologies that analyze experience trends and other relevant factors. These methodologies generally utilize analyses of historical patterns of the development of paid and reported losses by accident year, product lines and coverage. An accident year is the year in which the insured event that gave rise to the claim occurred. This process relies on the basic assumption that past experience, adjusted for the effects of current developments and likely trends, is an appropriate basis for predicting future outcomes. The expected ultimate losses are adjusted as claims mature and are eventually settled.
Using the various complex actuarial methods and different underlying assumptions, the Companys actuaries produce a number of point estimates for each class of business. After reviewing the appropriateness of the underlying assumptions, management selects the carried reserve for each product line and coverage.
The Company does have some exposure to construction defect and asbestos claims. The estimation of loss reserves relating to construction defect and asbestos are subject to greater uncertainty than other types of claims due to differing court decisions as well as judicial interpretations and legislative actions that in some cases have tended to broaden coverage beyond the original intent of the insurance policies.
Fireside Banks automobile loan receivable portfolio is subject to default risk.
The results of operations and financial condition of Fireside Bank depend, to a large extent, on the performance of its automobile loan receivable portfolio. Automobile loan borrowers may default during the terms of their loans. Fireside Bank bears the full risk of losses resulting from defaults. In the event of a default, the collateral value of the financed vehicle usually does not cover the outstanding loan balance and costs of recovery. A substantial portion of Fireside Banks automobile loan receivable portfolio is considered sub-prime. The risk of default for sub-prime loans is higher than for prime loans and has been accentuated by recent economic conditions. Approximately 65% of Fireside Banks automobile loan portfolio is concentrated in loans to borrowers residing in California. Present economic conditions in California appear to be worse than in other states.
Fireside Bank maintains an allowance for loan losses that represents managements best estimate of the inherent losses in Fireside Banks automobile loan receivable portfolio. If the allowance is inadequate, Fireside Bank would recognize the losses in excess of that allowance as an expense and the Companys results of operations would be adversely affected. A material increase to the allowance for loan losses could also result in Fireside Banks ratio of Tier 1 capital to total assets falling below 15%, the ratio level at which Fireside Bank has agreed with its regulators to maintain. In such a case, the Company would likely contribute additional amounts of capital to Fireside Bank. Such contributions could impact Unitrins liquidity and capital resources available for other corporate purposes.
The Unitrin Direct segment may not reach profitability
The Unitrin Direct segment reported significant operating losses in each of the last two years. While the Company has taken a number of actions intended to improve Unitrin Directs profitability including, but not limited to, implementing premium rate increases in most states, improving insurance risk selection, reducing marketing spending, modifying its direct marketing program to target a better response rate and the anticipated acquisition of Direct Response, there is no assurance that Unitrin Direct will become profitable in future years.
20
The insurance industry is highly competitive.
The Companys insurance businesses face significant competition. Competitive success is based on many factors, including:
|
Competitiveness of premiums charged; |
|
Underwriting discipline; |
|
Selectiveness of sales markets; |
|
Technological innovation; |
|
Ability to control expenses; |
|
Adequacy of ratings from A.M. Best and other ratings agencies; and |
|
Quality of services provided to agents and policyholders. |
The inability to compete effectively in any of the Companys business segments could materially reduce its customer base and revenues, and could adversely affect the financial condition of the Company.
See Competition in Item 1 of Part I beginning on pages 13 and 15, for more information on the competitive rankings in the property and casualty insurance markets and the life and health insurance markets, respectively, in the United States.
A significant downgrade in the ratings of Unitrins insurance subsidiaries could adversely affect their businesses.
Third party rating agencies assess and rate the claims-paying ability of insurance companies based upon criteria established by the rating agencies. Financial strength ratings are used by agents and clients as an important means of assessing the financial strength and quality of insurers. A significant downgrade by a recognized rating agency in the ratings of Unitrins insurance subsidiaries, particularly those that market their products through independent agents, could result in a substantial loss of business for that subsidiary if agents or policyholders move to other companies with higher claims paying and financial strength ratings. Any substantial loss of business could have a material adverse effect on the financial condition and results of operations of that subsidiary.
Unitrins subsidiaries are subject to significant regulation by state insurance departments and by the FDIC and state bank regulators.
Insurance . Unitrins insurance subsidiaries are subject to extensive regulation in the states in which they do business. Current regulations encompass a wide variety of matters, including policy forms, premium rates, licensing, trade practices, investment standards, statutory capital and surplus requirements, reserve and loss ratio requirements, restrictions on transactions among affiliates and consumer privacy.
Banking . Fireside Bank is regulated by the FDIC and the CDFI. These agencies regulate most aspects of Fireside Banks business and impose reporting obligations and a broad array of restrictions and requirements on such matters as capitalization, dividends, investments, loans and borrowings, and many requirements which relate to privacy and fairness in consumer credit or the detection and prevention of fraud and financial crime.
Effect on Operations. Insurance and banking regulatory agencies conduct periodic examinations of Unitrins subsidiaries and require the filing of annual and other reports relating to financial condition, holding company issues and other matters. If an insurance company fails to obtain required licenses or approvals, or if any of Unitrins subsidiaries fail to comply with other regulatory requirements, including banking regulations applicable to Fireside Bank, the regulatory agencies can suspend or delay their operations or licenses, require corrective action, and impose penalties or other remedies available under the applicable regulations.
21
These federal and state laws and regulations, and their interpretation by the various regulatory agencies and courts, are undergoing continual revision and expansion. The regulatory structures in the financial services industry have come under intense scrutiny as a result of the recent turmoil in the financial markets. It is not possible to predict how new legislation or regulations or new interpretations of existing laws and regulations may impact the operations of Unitrins subsidiaries. Significant changes in, or new interpretations of, these laws and regulations could make it more expensive for Unitrins subsidiaries to conduct their businesses and could materially affect the profitability of their operations and the Companys financial results.
For a more detailed discussion of the regulations applicable to Unitrins subsidiaries, see Insurance Regulation and Fireside Bank Regulation under Regulation in Item 1, beginning on page 16.
The effects of emerging claim and coverage issues on the Companys insurance businesses are uncertain.
As industry practices and regulatory, judicial, political, social and other environmental conditions change, unexpected and unintended issues related to insurance claims and coverages may emerge. These emerging practices, conditions and issues could adversely affect the Companys insurance businesses by either extending coverages beyond the Companys underwriting intent or by increasing the number or size of claims. The effects of such emerging claim and coverage issues are extremely hard to predict, but could harm the business of Unitrins insurance subsidiaries.
Legal and regulatory proceedings are unpredictable.
Unitrin and its subsidiaries are involved in lawsuits, regulatory inquiries, and other legal proceedings arising out of the ordinary course of its businesses. Many of these matters raise difficult and complicated factual and legal issues and are subject to uncertainties and complexities, and the outcomes of these matters are difficult to predict. For further information about the Companys pending litigation, see Item 3, Legal Proceedings, on page 24.
Unitrin is dependent on receiving dividends from its subsidiaries to service its debt and to pay dividends to its shareholders.
As a holding company with no business operations of its own, Unitrin depends upon the dividend income that it receives from its subsidiaries as the primary source of funds to pay interest and principal on its outstanding debt obligations and to pay dividends to its shareholders. Unitrins subsidiaries are subject to significant regulatory restrictions from state insurance and banking laws and regulations which limit their ability to declare and pay dividends. These regulations impose minimum solvency and liquidity requirements on dividends between affiliated companies and require prior notice to, and may require approval from, state insurance or bank regulators before dividends can be paid. The inability of one or more of Unitrins subsidiaries to pay sufficient dividends to Unitrin may materially affect Unitrins ability to timely pay its debt obligations or to pay dividends to its shareholders.
The Company has a large equity concentration in Intermec, Inc.
The fair value of the Companys investment in the common stock of its investee, Intermec, Inc. (Intermec), at December 31, 2008 was $168.1 million, or 43 percent of the fair value of the Companys total equity portfolio (reflecting its investee at fair value). The Companys investment in Intermec common stock is subject to a variety of risk factors under the umbrella of market risk. General economic swings influence Intermecs performance. A downturn in the economy could have a negative impact on Intermec. A downturn in the global supply chain solutions industry, in which Intermec competes, may have an adverse effect on the fair value of the Companys investment in Intermec common stock.
22
The Companys investments in limited liability investment companies and limited partnerships are concentrated in companies and partnerships that invest in distressed and mezzanine debt and secondary transactions.
At December 31, 2008, the Companys insurance subsidiaries had $242.3 million invested in limited liability investment companies and limited partnerships accounted for under the equity method of accounting, that invest in distressed and mezzanine debt of other companies and secondary transactions. In addition, the Companys insurance subsidiaries had unfunded commitments to invest an additional $129.0 million in such limited liability investment companies and limited partnerships. Such unfunded commitments generally may be used to fund other investments of such limited liability investment companies and limited partnerships, as well as to fund losses of such limited liability investment companies and limited partnerships. The underlying investments of such limited liability investment companies and limited partnerships and companies generally provide opportunities for higher returns, but at a higher risk than investment-grade investments. General economic swings influence the performance of the underlying investments in distressed and mezzanine debt and secondary transactions. The Company has also made direct investments in the same or similar distressed and mezzanine debt securities of certain issuers in which such limited liability investment companies and limited partnerships have made investments. A severe and continued downturn in the economy may result in deterioration in the business prospects of the issuers of the underlying investments that could adversely affect the Companys operating results and financial position.
The Company is subject to interest rate risk in its investment portfolio.
One of the Companys primary market risk exposures is to changes in interest rates. A decline in market interest rates could have an adverse effect on the Companys investment income as it invests cash in new investments that may yield less than the portfolios average rate. In a declining interest rate environment, borrowers may seek to refinance their borrowings at lower rates and, accordingly, prepay or redeem securities the Company holds more quickly than the Company initially expected. This action may cause the Company to reinvest the redeemed proceeds in lower yielding investments. An increase in market interest rates could also have an adverse effect on the value of the Companys investment portfolio, for example, by decreasing the fair values of the fixed income securities that comprise a substantial majority of its investment portfolio.
Fireside Bank receives interest on the loans it makes to its customers. Fireside Bank also pays interest on the certificates of deposits it accepts. Accordingly, it is exposed to interest rate changes.
Managing technology initiatives to address business developments and increasing data security regulations and risks present significant challenges to the Company.
While technological developments can streamline many business processes and ultimately reduce the cost of operations, technology initiatives can present short-term cost and implementation risks. In addition, projections of expenses, implementation schedules and utility of results may be inaccurate and can escalate over time. The Company faces rising costs and competing time constraints in meeting compliance requirements of new and proposed regulations. The expanding volume and sophistication of computer viruses, hackers and other external hazards may increase the vulnerability of the Companys data systems to security breaches. These increased risks and expanding regulatory requirements expose the Company to potential data loss and damages and significant increases in compliance and litigation costs.
Item 1B. | Unresolved Staff Comments. |
Not applicable.
23
Item 2. | Properties. |
Owned Properties
The Company owns the 41-story office building at One East Wacker Drive, Chicago, Illinois, that houses the executive offices of Unitrin. Unitrin and two of its subsidiaries occupy approximately 42,100 square feet of the 527,000 rentable square feet in the building. In addition, Unitrins subsidiaries together own and occupy 14 buildings located in 7 states consisting of approximately 50,700 square feet in the aggregate. Unitrin subsidiaries hold additional properties solely for investment purposes that are not utilized by Unitrin or its subsidiaries.
Leased Facilities
Kemper leases facilities with an aggregate square footage of approximately 285,000 at 9 locations in 7 states. The latest expiration date of the existing leases is in September of 2018.
Fireside Bank leases 16 facilities, of which 11 are occupied, with an aggregate square footage of approximately 152,000 in 5 states. The latest expiration date of the existing leases is in August of 2016.
Unitrin Specialty leases facilities with an aggregate square footage of approximately 148,000 at 3 locations in 3 states. The latest expiration date of the existing leases is in June of 2018.
Unitrin Direct leases facilities with an aggregate square footage of approximately 197,000 at 8 locations in 6 states. The latest expiration date of the existing leases is in February of 2018.
Unitrins Life and Health Insurance segment leases facilities with aggregate square footage of approximately 506,000 at 149 locations in 27 states. The latest expiration date of the existing leases is in October of 2017.
Unitrins corporate data processing operation occupies a facility with an aggregate square footage of approximately 30,000 square feet under a lease that expires in December 2014.
Kemper, Unitrin Specialty and Unitrin Direct share leased facilities with an aggregate square footage of approximately 58,000 at 4 locations in 3 states. The latest expiration date of the existing leases is in March of 2018.
The properties described above are in good condition. The properties utilized in the Companys operations consist of facilities suitable for general office space, call centers and data processing operations.
Item 3. | Legal Proceedings. |
Proceedings
In the ordinary course of their businesses, Unitrin and its subsidiaries are involved in a number of legal proceedings including lawsuits and regulatory examinations and inquiries. Some of these proceedings include matters particular to the Company or one or more of its subsidiaries, while others pertain to business practices in the industries in which Unitrin or its subsidiaries operate. Some lawsuits seek class action status that, if granted, could expose Unitrin or its subsidiaries to potentially significant liability by virtue of the size of the putative classes. These matters can raise complicated issues and may be subject to many uncertainties, including, but not limited to: (i) the underlying facts of the matter; (ii) unsettled questions of law; (iii) issues unique to the jurisdiction where the matter is pending; (iv) damage claims, including claims for punitive damages, that are disproportionate to the actual economic loss incurred; and (v) the legal, regulatory and political environment faced by large corporations generally and the insurance and banking sectors specifically. Accordingly, the outcomes of these matters are difficult to predict, and the amounts or ranges of potential loss at particular points in time are in most cases difficult or impossible to ascertain.
24
During the course of 2008, Unitrin and certain of its subsidiaries, like many property and casualty insurers, were forced to defend numerous individual lawsuits, mass actions and statewide putative class actions in Louisiana and Texas arising out of Hurricanes Katrina and Rita. In these matters, the plaintiffs seek compensatory and punitive damages, and equitable relief. The Company and its relevant subsidiaries believe they have meritorious defenses to these proceedings and are defending them vigorously.
Fireside Bank is defending two class action lawsuits in California state courts alleging that its post-repossession notices to defaulting borrowers failed to comply with certain aspects of California law. The plaintiffs seek: (i) compensatory damages, including a refund of deficiency balances collected from customers who received the allegedly defective notices; (ii) punitive damages; and (iii) equitable relief. Statewide classes have been certified in these matters and Fireside Bank successfully moved to have the two cases treated on a coordinated basis. Fireside Bank is contesting the allegations that its post-repossession notices were deficient and believes it has meritorious defenses to these lawsuits.
Financial Impact
The Company believes that resolution of its pending legal proceedings will not have a material adverse effect on the Companys financial position. However, given the unpredictability of the legal environment, there can be no assurance that one or more of these matters will not produce a loss which could have a material adverse effect on the Companys financial results for any given period.
Legal Environment
The legal and regulatory environment within which Unitrin and its subsidiaries conduct their business is often unpredictable. Industry practices that were considered legally-compliant and reasonable for years may suddenly be deemed unacceptable by virtue of an unexpected court or regulatory ruling. Anticipating such shifts in the law and the impact they may have on the Company and its operations is a difficult task and there can be no assurances that the Company will not encounter such shifts in the future.
Item 4. | Submission of Matters to a Vote of Security Holders. |
During the
PART II
Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Market Information
Unitrins common stock is traded on the New York Stock Exchange (the NYSE) under the symbol of UTR.
THREE MONTHS ENDED | YEAR ENDED | ||||||||||||||
DOLLARS PER SHARE |
MARCH 31,
2008 |
JUNE 30,
2008 |
SEPT. 30,
2008 |
DEC. 31,
2008 |
DEC. 31,
2008 |
||||||||||
Common Stock Market Prices: |
|||||||||||||||
High |
$ | 47.74 | $ | 40.00 | $ | 29.74 | $ | 28.00 | $ | 47.74 | |||||
Low |
32.60 | 27.54 | 20.73 | 13.05 | 13.05 | ||||||||||
Close |
35.34 | 27.57 | 24.94 | 15.94 | 15.94 | ||||||||||
THREE MONTHS ENDED | YEAR ENDED | ||||||||||||||
DOLLARS PER SHARE |
MARCH 31,
2007 |
JUNE 30,
2007 |
SEPT. 30,
2007 |
DEC. 31,
2007 |
DEC. 31,
2007 |
||||||||||
Common Stock Market Prices: |
|||||||||||||||
High |
$ | 52.92 | $ | 50.20 | $ | 51.70 | $ | 53.00 | $ | 53.00 | |||||
Low |
43.75 | 46.60 | 39.65 | 41.86 | 39.65 | ||||||||||
Close |
47.07 | 49.18 | 49.59 | 47.99 | 47.99 |
25
Holders
As of
Dividends
THREE MONTHS ENDED | YEAR ENDED | ||||||||||||||
DOLLARS PER SHARE |
MARCH 31,
2008 |
JUNE 30,
2008 |
SEPT. 30,
2008 |
DEC. 31,
2008 |
DEC. 31,
2008 |
||||||||||
Cash Dividends Paid to Shareholders (per share) |
$ | 0.47 | $ | 0.47 | $ | 0.47 | $ | 0.47 | $ | 1.88 | |||||
THREE MONTHS ENDED | YEAR ENDED | ||||||||||||||
DOLLARS PER SHARE |
MARCH 31,
2007 |
JUNE 30,
2007 |
SEPT. 30,
2007 |
DEC. 31,
2007 |
DEC. 31,
2007 |
||||||||||
Cash Dividends Paid to Shareholders (per share) |
$ | 0.455 | $ | 0.455 | $ | 0.455 | $ | 0.455 | $ | 1.82 | |||||
Unitrins insurance subsidiaries are subject to various state insurance laws that restrict the ability of these insurance subsidiaries to pay dividends without prior regulatory approval. In addition, Unitrins automobile finance subsidiary, Fireside Bank, is subject to certain risk-based capital regulations also having the effect of limiting the amount of dividends that may be paid by Fireside Bank and has agreed not to pay dividends without the prior approval of the FDIC and the CDFI. See MD&A, Letter to Shareholders and Liquidity and Capital Resources and Note 11, Shareholders Equity, to the Consolidated Financial Statements for information on Unitrins ability and intent to pay dividends.
Issuer Purchases of Equity Securities
The Companys stock repurchase program was first announced on August 8, 1990. The repurchase program was subsequently expanded several times, most recently in November 2006, when the Board of Directors expanded the Companys authority to repurchase the Companys common stock by an aggregate number of 6,000,000 shares (in addition to approximately 750,000 shares remaining under its prior authorization). A total of 1,378,454 shares remain available for repurchase under the repurchase program which does not have an expiration date.
The Company did not repurchase any shares in the fourth quarter of 2008.
During the quarter ended December 31, 2008, no shares were withheld or surrendered, either actually or constructively, to satisfy the exercise price and/or tax withholding obligations relating to the exercise of stock options or stock appreciation rights under the Companys four stock option plans or shares withheld to satisfy tax withholding obligations on the vesting of awards under the Companys restricted stock plan.
26
Unitrin Common Stock Performance Graph
The following graph assumes $100 invested on December 31, 2003 in (i) the Unitrin Common Stock, (ii) the S&P MidCap 400 Index, and (iii) the S&P Composite 1500 Insurance Index, in each case with dividends reinvested. The Company is a constituent of each of these two indices.
The comparisons in the graph below are based on historical data and are not intended to forecast the possible future performance of the Unitrin Common Stock.
Company / Index |
2003 | 2004 | 2005 | 2006 | 2007 | 2008 | ||||||||||||
Unitrin, Inc. |
$ | 100 | $ | 114.05 | $ | 117.14 | $ | 135.31 | $ | 134.73 | $ | 47.95 | ||||||
S&P MidCap 400 Index |
100 | 116.48 | 131.11 | 144.64 | 156.18 | 99.59 | ||||||||||||
S&P Composite 1500 Insurance Index |
100 | 108.69 | 124.72 | 138.20 | 128.87 | 60.26 |
27
Item 6. | Selected Financial Data. |
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS |
2008 | 2007 (a)(b) | 2006 (a)(c) | 2005 (a) | 2004 (a) | |||||||||||
FOR THE YEAR |
||||||||||||||||
Earned Premiums |
$ | 2,376.6 | $ | 2,286.9 | $ | 2,290.5 | $ | 2,287.7 | $ | 2,289.2 | ||||||
Automobile Finance Revenues |
242.3 | 260.2 | 245.0 | 217.6 | 198.5 | |||||||||||
Net Investment Income |
212.9 | 289.9 | 286.0 | 258.4 | 241.2 | |||||||||||
Other Income |
4.1 | 3.5 | 14.4 | 9.5 | 13.1 | |||||||||||
Net Realized Investment Gains (Losses) |
(93.7 | ) | 62.5 | 26.5 | 56.9 | 78.5 | ||||||||||
Total Revenues |
$ | 2,742.2 | $ | 2,903.0 | $ | 2,862.4 | $ | 2,830.1 | $ | 2,820.5 | ||||||
Net Income (Loss): |
||||||||||||||||
From Continuing Operations |
$ | (38.0 | ) | $ | 178.1 | $ | 267.6 | $ | 237.2 | $ | 219.9 | |||||
From Discontinued Operations |
8.4 | 27.3 | 19.4 | 18.9 | 21.4 | |||||||||||
Net Income (Loss) |
$ | (29.6 | ) | $ | 205.4 | $ | 287.0 | $ | 256.1 | $ | 241.3 | |||||
Net Income (Loss) Per Share: |
||||||||||||||||
From Continuing Operations |
$ | (0.60 | ) | $ | 2.71 | $ | 3.94 | $ | 3.44 | $ | 3.22 | |||||
From Discontinued Operations |
0.13 | 0.42 | 0.29 | 0.27 | 0.31 | |||||||||||
Net Income (Loss) Per Share |
$ | (0.47 | ) | $ | 3.13 | $ | 4.23 | $ | 3.71 | $ | 3.53 | |||||
Net Income (Loss) Per Share Assuming Dilution: |
||||||||||||||||
From Continuing Operations |
$ | (0.60 | ) | $ | 2.70 | $ | 3.92 | $ | 3.41 | $ | 3.19 | |||||
From Discontinued Operations |
0.13 | 0.42 | 0.28 | 0.27 | 0.31 | |||||||||||
Net Income (Loss) Per Share Assuming Dilution |
$ | (0.47 | ) | $ | 3.12 | $ | 4.20 | $ | 3.68 | $ | 3.50 | |||||
Dividends Paid to Shareholders (per share) |
$ | 1.88 | $ | 1.82 | $ | 1.76 | $ | 1.70 | $ | 1.66 | ||||||
AT YEAR END |
||||||||||||||||
Total Assets |
$ | 8,818.8 | $ | 9,394.4 | $ | 9,329.9 | $ | 9,200.9 | $ | 8,798.4 | ||||||
Insurance Reserves |
$ | 4,241.3 | $ | 3,855.9 | $ | 3,918.7 | $ | 3,936.4 | $ | 3,844.0 | ||||||
Unearned Premiums |
733.5 | 722.2 | 778.9 | 810.6 | 807.6 | |||||||||||
Certificates of Deposits |
1,110.8 | 1,274.3 | 1,162.7 | 1,074.3 | 922.4 | |||||||||||
Notes Payable |
560.8 | 560.1 | 504.5 | 503.6 | 502.8 | |||||||||||
All Other Liabilities |
523.8 | 690.9 | 675.5 | 716.6 | 681.8 | |||||||||||
Total Liabilities |
7,170.2 | 7,103.4 | 7,040.3 | 7,041.5 | 6,758.6 | |||||||||||
Shareholders Equity |
1,648.6 | 2,291.0 | 2,289.6 | 2,159.4 | 2,039.8 | |||||||||||
Total Liabilities and Shareholders Equity |
$ | 8,818.8 | $ | 9,394.4 | $ | 9,329.9 | $ | 9,200.9 | $ | 8,798.4 | ||||||
Book Value Per Share |
$ | 26.46 | $ | 35.65 | $ | 34.18 | $ | 31.52 | $ | 29.64 | ||||||
(a) | Adjusted for the retrospective application of a change in accounting principle for the elimination of a reporting lag for certain investments accounted for under the equity method of accounting. See Note 2, Summary of Accounting Policies and Accounting Changes , to the Consolidated Financial Statements. |
(b) | The Companys investee, Intermec, recognized the financial impact of Statement of Financial Accounting Standards (SFAS) No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, in its financial statements at December 31, 2006. Intermec initially applied the provisions of Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes , on January 1, 2007. The Company accounts for its investment in Intermec under the equity method of accounting on a three-month-delay basis. Accordingly, the Company recognized a decrease of $2.3 million to its Shareholders Equity in 2007 for its pro rata share of the impact of Intermecs adoption of SFAS No. 158 and recognized a decrease of $0.9 million to the Companys Shareholders Equity in the second quarter of 2007 for its pro rata share of the impact of Intermecs adoption of FIN 48. |
(c) | Shareholders Equity decreased by $ 7.3 million at December 31, 2006, as a result of the Companys initial application of the recognition provisions of SFAS No. 158 for the Companys postretirement benefit plans. |
28
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
Index to
Managements Discussion and Analysis of
Financial Condition and Results of Operations
Letter to Shareholders |
Incorporated
by reference to Exhibit 13 |
|
30 | ||
30 | ||
40 | ||
42 | ||
46 | ||
49 | ||
52 | ||
56 | ||
59 | ||
62 | ||
Securities Lending, Credit Default Swaps and Hedging Activities |
67 | |
Distressed and Mezzanine Debt and Secondary Transactions Investments |
68 | |
68 | ||
69 | ||
69 | ||
73 | ||
74 | ||
75 |
29
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations
Net Loss was $29.6 million ($0.47 per common share) for the year ended December 31, 2008, compared to Net Income of $205.4 million ($3.13 per common share) for the year ended December 31, 2007. Net Loss from Continuing Operations was $38.0 million ($0.60 per common share) in 2008, compared to Net Income from Continuing Operations of $178.1 million ($2.71 per common share) for same period in 2007. As discussed throughout this MD&A results from continuing operations decreased for the year ended December 31, 2008 due primarily to lower operating results in the aggregate, including higher catastrophe losses, lower Net Investment Income and higher losses arising from other than temporary declines in fair value of investments and realized investment losses from sales of stocks of financial institutions. Catastrophe losses from continuing operations were $144.9 million before tax for the year ended December 31, 2008, compared to $39.4 million for the same period in 2007. The Company reported Income from Discontinued Operations of $8.4 million and $27.3 million for the years ended December 31, 2008 and 2007, respectively.
Earned Premiums were $2,376.6 million in 2008, compared to $2,286.9 million in 2007. Earned premium increased primarily in the Unitrin Specialty and Unitrin Direct segments and to a lesser extent the Life and Health Insurance and Kemper segments.
Automobile Finance Revenues decreased by $17.9 million in 2008, compared to 2007, due to both a lower level of loans outstanding and lower interest rates.
Net Investment Income decreased by $77.0 million in 2008 due primarily to lower net investment income from certain investments in limited liability investment companies and limited partnerships, lower short-term investment income and lower dividend income from the Companys investment in Northrop, partially offset by higher net investment income from acquired businesses.
Net Realized Investment Gains (Losses), which are reported in the Statement of Operations, was a loss of $93.7 million in 2008, compared to a gain of $62.5 million in 2007. Net Realized Gains (Losses) for the years ended December 31, 2008 and 2007, include pretax losses of $152.9 million and $33.0 million, respectively, from other than temporary declines in the fair values of investments.
Other Comprehensive Investment Gains (Losses), which are not reported in the Statement of Operations, but rather are reported in the Statement of Comprehensive Income (Loss), was a loss of $595.6 million in 2008, compared to a gain of $69.2 million in 2007. The net comprehensive investment loss for the year ended December 31, 2008 was due primarily to a $281.3 million decline in the value of the Companys investment in Northrop stock and the general decline in value of most of the Companys investments in fixed maturities and equity securities due to the overall decline in the economy and stock market in the fourth quarter of 2008. The Companys investments in the financial sector declined in value over $125 million for the year ended December 31, 2008.
Unitrins subsidiaries conduct their businesses in three industries: property and casualty insurance, life and health insurance and automobile finance. Accordingly, the Company is subject to several industry-specific accounting principles under accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in accordance with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The process of estimation is inherently uncertain. Accordingly, actual results could ultimately differ materially from the estimated amounts reported in a companys financial statements. Different assumptions are likely to result in
30
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
CRITICAL ACCOUNTING ESTIMATES (Continued)
different estimates of reported amounts. The Companys critical accounting policies most sensitive to estimates include the valuation of investments, the valuation of property and casualty insurance reserves for losses and LAE, the valuation of the reserve for loan losses, the assessment of recoverability of goodwill and the valuation of pension benefit obligations.
Valuation of Investments
Except for the Companys investments accounted for under the equity method of accounting, and certain mutual funds classified as trading securities, the Companys investments in fixed maturities, preferred stocks and common stocks are classified as available for sale and are reported at fair value determined in accordance with SFAS No. 157, Fair Value Measurements . The Company has no investments for which it has elected to account for under the fair value option prescribed by SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities Including an amendment of FASB Statement No. 115 .
Except for investments accounted for under the equity method of accounting or under the fair value option of SFAS No. 159, under the provisions of GAAP a company is generally required to classify its investments in fixed maturities, preferred stocks and common stocks into one of the following three investment categories based on the its intent with respect to a particular investment at the time of acquisition:
a) | Trading; |
b) | Held to maturity; or |
c) | Available for sale. |
The classification of the investment may affect a companys reported results. For investments classified as trading or for which a company elects the fair value option, a company is required to recognize changes in the fair values into income for the period reported. For investments in fixed maturities classified as held to maturity, a company is required to carry the investment at amortized cost, with only the amortization occurring during the period recognized into income. Changes in the fair value of investments classified as available for sale are not recognized to income during the period, but rather are recognized as a separate component of equity until realized. Investments accounted for under the equity method of accounting are valued at cost plus cumulative undistributed earnings and not at fair value. Had the Company reported all the changes in the fair values of its investments in fixed maturities, preferred stock and common stock, including its investment in Intermec, and other equity securities into income, the Companys reported net income for the year ended December 31, 2008, would have decreased by $448.2 million.
The Company regularly reviews its investments for factors that may indicate that a decline in the fair value of an investment below its cost or amortized cost is other than temporary. Some factors considered in evaluating whether or not a decline in fair value is other than temporary include:
a) | The Companys ability and intent to retain the investment for a period of time sufficient to allow for a recovery in value; |
b) | The duration and extent to which the fair value has been less than cost; and |
c) | The financial condition and prospects of the issuer. |
Such reviews are inherently uncertain in that the value of the investment may not fully recover or may decline further in future periods resulting in realized losses.
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Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
CRITICAL ACCOUNTING ESTIMATES (Continued)
Property and Casualty Insurance Reserves for Losses and Loss Adjustment Expenses
The Companys Property and Casualty Insurance Reserves are reported using the Companys 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. The Company had $1,268.7 million and $1,322.9 million of gross loss and LAE reserves at December 31, 2008 and 2007, respectively. Property and Casualty Insurance Reserves for the Companys business segments at December 31, 2008 and 2007 were:
Dollars in Millions |
2008 | 2007 | ||||
Business Segments: |
||||||
Kemper |
$ | 476.1 | $ | 502.4 | ||
Unitrin Specialty |
293.1 | 278.6 | ||||
Unitrin Direct |
163.1 | 142.6 | ||||
Life and Health Insurance |
23.0 | 11.4 | ||||
Total Business Segments |
955.3 | 935.0 | ||||
Discontinued Operations |
280.0 | 342.2 | ||||
Unallocated Ceded Reserves |
33.4 | 45.7 | ||||
Total Property and Casualty Insurance Reserves |
$ | 1,268.7 | $ | 1,322.9 | ||
The Unallocated Ceded Reserves were acquired in connection with a business acquisition from SCOR in 2002 and are reinsured by an insurance subsidiary of SCOR (see Note 8, Property and Casualty Insurance Reserves, to the Consolidated Financial Statements). The Company does not allocate these reserves to its business segments or Unitrin Business Insurance.
In estimating the Companys Property and Casualty Insurance Reserves, the Companys actuaries exercise professional judgment and must consider, and are influenced by, many variables that are difficult to quantify. Accordingly, the process of estimating and establishing the Companys Property and Casualty Insurance Reserves is inherently uncertain and the actual ultimate net cost 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 Companys 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 Companys actuaries use a variety of generally accepted actuarial loss reserving estimation methodologies including, but not limited to, the following:
|
Incurred Loss Development Methodology; |
|
Paid Loss Development Methodology; |
|
Bornhuetter-Ferguson Incurred Loss Methodology; |
|
Bornhuetter-Ferguson Paid Loss Methodology; and |
|
Frequency and Severity Methodology. |
The Companys actuaries generally review the results of at least four of these estimation methodologies, two based on paid data and two based on incurred data, to initially estimate loss and LAE reserves and to determine 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
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Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
CRITICAL ACCOUNTING ESTIMATES (Continued)
and wider bands of indicated possible outcomes. However, such bands do not necessarily constitute a range of outcomes, nor does the Companys management or the Companys actuaries calculate a range of outcomes.
At a minimum, the Companys actuaries analyze 45 product and/or coverage levels for over 40 separate current and prior accident quarters for both losses and LAE using many of the loss reserving estimation methodologies identified above as well as other generally accepted actuarial estimation methodologies. In all, there are over 10,000 combinations of accident quarters, coverage levels, and generally accepted actuarial estimation methodologies used to estimate the Companys unpaid losses and LAE. In some cases, the Companys actuaries make adjustments to the loss reserving estimation methodologies identified above or use additional generally accepted actuarial estimation methodologies to estimate ultimate losses and LAE.
For each accident quarter, the point estimate selected by the Companys actuaries is not necessarily one of the points produced by any particular one of the methodologies utilized, but often is another point selected by the Companys actuaries, using their professional judgment, that takes into consideration each of the points produced by the several loss reserving estimation methodologies used. In some cases, for a particular product, the current accident quarter may not have enough paid claims data to rely upon, leading the Companys actuaries to conclude that the incurred loss development methodology provides a better estimate than the paid loss development methodology. Therefore, the Companys actuaries may give more weight to the incurred loss development methodology for that particular accident quarter. As an accident quarter ages for that same product, the actuary may gain more confidence in the paid loss development methodology and begin to give more weight to the paid loss development methodology. The Companys actuaries quarterly selections are summed by product and/or coverage levels to create the actuarial indication of the ultimate losses. More often than not, the actuarial indication for a particular product line and accident quarter is most heavily weighted towards the incurred loss development methodology, particularly for short-tail lines such as personal automobile insurance. Historically, the incurred loss development methodology has been more reliable in predicting ultimate losses for these lines, especially in the more recent accident quarters, when compared with the paid loss development methodology. However, in some circumstances changes can occur which impact numerous variables including, but not limited to, those variables identified below that are difficult to quantify and/or impact the predictive value of prior development patterns relied upon in the incurred loss development methodology and paid loss development methodology. In those circumstances, the Companys actuaries must make adjustments to these loss reserving estimation methodologies or use additional generally accepted actuarial estimation methodologies. In those circumstances, the Companys actuaries, using their professional judgment, may place more weight on the adjusted loss reserving estimation methodologies or other generally accepted actuarial estimation methodologies until the newer development patterns fully emerge and the Companys actuaries can fully rely on the unadjusted loss reserving estimation methodologies. In the event of a wide variation among results generated by the different projection methodologies, the Companys actuaries further analyze the data using additional techniques.
In estimating reserves, the Companys actuaries exercise professional judgment and must consider, and are influenced by, many variables that are difficult to quantify, such as:
|
Changes in the level of minimum case reserves, and the automatic aging of those minimum case reserves; |
|
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; |
|
Changes in underwriting practices; |
|
Changes in the mix of business by state, class and policy limit within product line; |
|
Growth in new lines of business; |
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Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
CRITICAL ACCOUNTING ESTIMATES (Continued)
|
Changes in the attachment points of the Companys reinsurance programs; |
|
Medical costs including, but not limited to, the ability to assess the extent of injuries and the impact of inflation; |
|
Repair costs including, but not limited to, the impact of inflation and the availability of labor and materials; |
|
Changes in the judicial environment including, but not limited to, the interpretation of policy provisions, the impact of jury awards and changes in case law; and |
|
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 Companys 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, there may be additional uncertainty in estimating the ultimate losses and LAE. The contributing factors of this potential risk are changes in the Companys 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 procedures 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 procedures, actual claims are settled more rapidly than they were settled historically, the estimate produced by the paid loss development methodology would tend to be overstated if the actuary did not identify and adjust for the impact of the changes in claims handling procedures. Similarly, if, due to changes in claims handling procedures, actual claim reserves are set at levels higher than past experience, the estimate produced by the incurred loss development methodology would tend to be overstated if the actuary did not identify and adjust for the impact of the changes in claims handling procedures.
The final step in the quarterly loss and LAE reserving process involves a comprehensive review of the actuarial indications by the Companys senior actuary and senior management who apply their collective judgment and determine the appropriate estimated level of reserves to record. Numerous factors are considered in this determination process, including, but not limited to, the assessed reliability of key loss trends and assumptions that may be significantly influencing the current actuarial indications, changes in claim handling practices or other changes that affect the timing of payment or development patterns, changes in the mix of business, the maturity of the accident year, pertinent trends observed over the recent past, the level of volatility within a particular line of business, the improvement or deterioration of actuarial indications in the current period as compared to prior periods, and the amount of reserves related to third party pools for which the Company does not have access to the underlying data and, accordingly, relies on calculations provided by such pools. Total recorded reserves for property and casualty insurance losses and LAE were 1.2%, 2.0% and 3.9% higher than the actuarial indication of reserves at December 31, 2008, 2007 and 2006, respectively. Total recorded reserves for property and casualty insurance losses and LAE as a percentage of the actuarial indication of reserves decreased in 2008 and 2007 due primarily to the Companys senior actuary and senior management placing greater reliance
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Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
CRITICAL ACCOUNTING ESTIMATES (Continued)
on the actuarial indications in determining the appropriate estimated level of reserves, due in part to the continued improvement in the actuarial indications in some product lines.
The Companys goal is to ensure its total reserves for property and casualty insurance losses and LAE are adequate to cover all costs, while sustaining minimal variation from the time reserves for losses and LAE are initially estimated until losses and LAE are fully developed. Changes in the Companys estimates of these losses and LAE over time, also referred to as development, will occur and may be material. Favorable development is recognized when the Company decreases its estimate of previously reported losses and LAE and results in an increase in net income in the period recognized, whereas adverse development is recognized when the Company increases its estimate of previously reported losses and LAE and results in a decrease in net income. The Company recognized total favorable development of $79.3 million, $101.1 million and $91.6 million before tax for the years ended December 31, 2008, 2007 and 2006, respectively. Development for each of the Companys continuing business segments and Unitrin Business Insurance for the years ended December 31, 2008, 2007 and 2006, was:
Favorable (Adverse) Development | ||||||||||||
Dollars in Millions |
2008 | 2007 | 2006 | |||||||||
Continuing Operations: |
||||||||||||
Kemper |
$ | 61.0 | $ | 54.2 | $ | 68.2 | ||||||
Unitrin Specialty |
5.5 | 15.3 | 8.9 | |||||||||
Unitrin Direct |
(3.2 | ) | (5.5 | ) | (4.5 | ) | ||||||
Life and Health Insurance |
(13.7 | ) | (8.6 | ) | (6.8 | ) | ||||||
Total Favorable Development, Net from Continuing Operations |
$ | 49.6 | $ | 55.4 | $ | 65.8 | ||||||
Discontinued Operations: |
||||||||||||
Unitrin Business Insurance, Net |
29.7 | 45.7 | 25.8 | |||||||||
Total Favorable Development, Net |
$ | 79.3 | $ | 101.1 | $ | 91.6 | ||||||
Development in the Companys Kemper segment comprised a substantial portion of the Companys development reported in continuing operations in 2008, 2007 and 2006. Development in Unitrin Business Insurance comprised all of the Companys development reported in discontinued operations. Together these two operations comprised a substantial portion of the Companys favorable development in 2008, 2007 and 2006. Additional information regarding this development follows.
Kemper Development
In June of 2002, the Company acquired the personal lines property and casualty insurance business of KIC in a renewal rights transaction. Pursuant to the agreements among the parties, KIC retained all liabilities for policies issued by KIC prior to the closing, while the Company is entitled to premiums written for substantially all personal lines property and casualty insurance policies issued or renewed after the closing and is liable for losses and LAE incurred thereon. The Kemper segment did not complete a full calendar year underwriting cycle after the acquisition date until 2004. Accordingly, the Companys results for 2002 and 2003 did not represent 100% of the acquired business. For example, for the 2002 calendar year, the Companys share of earned premiums for the KIC personal lines business was approximately 20% of the entire KIC personal lines business. For the 2003 calendar year, the Companys share of earned premiums was approximately 90% of the entire KIC personal lines business.
The Companys actuaries use various generally accepted actuarial incurred and paid loss development methodologies to estimate unpaid losses and LAE. The key assumption in these estimation methodologies is that
35
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
CRITICAL ACCOUNTING ESTIMATES (Continued)
patterns observed in prior periods are indicative of how losses and LAE are expected to develop in the future and that such historical data can be used to predict and estimate ultimate losses and LAE. Initially, the Companys actuaries had to rely solely on the historical data of KIC (the KIC Data) to predict how losses for business written by the Company after the acquisition would develop. As the Company continued to renew policies, the paid loss and incurred loss data related to the Companys share of the entire KIC personal lines business gradually increased. Immediately after the acquisition, the Company began accumulating incurred and paid loss and LAE data for its share of the KIC personal lines business (the Unitrin Data). In 2003, and throughout 2004, the Companys actuaries began to review the Unitrin Data and began comparing development factors for it with the development factors for the KIC Data. These initial reviews indicated that the Unitrin Data was producing lower development factors than the factors produced by the KIC Data. However, the amount of Unitrin Data available for analysis was still limited, and the Companys actuaries could not be confident that the observed changes in development were anything but random fluctuations and, therefore, placed less weight on the most recent development patterns.
Since the acquisition, the Companys actuaries have gained increasing confidence that the development patterns from the Unitrin Data were not only different from the KIC Data, but that these patterns were also sustainable. As the Companys actuaries gave more weight, and continued to give more weight each quarter, to the improved development patterns from the Unitrin Data in the selection of their incremental development factors throughout 2005 and 2006 and into 2007, the Kemper segment has recognized favorable development each quarter as appropriate.
The lower development factors for the Unitrin Data primarily resulted from improvements in the claim handling procedures on this book of business. In 2002, Kemper began to place special emphasis on reporting claims directly to the Company. Prior to that time, a policyholders agent usually was the primary contact to report a claim. In July of 2002, approximately one-third of all claims were reported directly to Kemper compared to approximately 70% at the end of both 2006 and 2007. Direct reporting of losses has enabled the Company not only to reduce claim cycle times, but also to better respond to and control loss costs. Kemper has also focused on reducing the number of days from when a loss is reported until the related claim is closed, while also controlling the overall loss and LAE costs. Specifically, Kemper has implemented several claims handling loss mitigation programs, including:
|
Increased its utilization of alternative dispute resolution processes, such as mediation and arbitration, to facilitate settlements and reduce defense and legal costs; |
|
Increased its in-house legal expertise to better manage the litigation processes and expenses, including managing the external lawyers with whom Kemper contracts to defend claims; and, |
|
Increased its emphasis on attempting to settle third-party claims earlier in the claims process in an effort to reduce the ultimate claim and LAE payouts. |
In 2005, a second wave of new claims handling procedures, which emphasized greater case reserve adequacy earlier in the lifecycle of a claim, began to occur in Kempers claims organization. The impact of this second wave of new claims handling procedures became visible in Kempers reserving data in late 2006 and early 2007 as evidenced by a dramatic rise in individual case loss reserve changes in excess of $100,000 at early claims maturity valuation points. The second wave of new claims handling procedures had the effect of producing higher average paid and incurred loss amounts for recent accident quarters than historical averages would otherwise indicate. This second wave of new claims handling procedures compounded the effects of the improvements from the first wave of changes in claims handling procedures on the emerging loss development patterns.
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Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
CRITICAL ACCOUNTING ESTIMATES (Continued)
Kempers actuaries typically use a variety of five generally accepted actuarial loss reserving estimation methodologiesthe incurred loss development methodology, the paid loss development methodology, the Bornhuetter-Ferguson incurred loss development methodology, Bornhuetter-Ferguson paid loss development methodology and the frequency and severity methodology. Kemper continues to experience various changes which impact numerous variables that are difficult to quantify and/or impact the predictive value of prior development patterns. Accordingly, in some cases, Kempers actuaries must make adjustments to these loss reserving estimation methodologies or use additional generally accepted actuarial loss reserving estimation methodologies until the development patterns fully emerge and Kempers actuaries can fully rely on the unadjusted methodologies. These changes have occurred over several years and the impact of some changes is more fully developed than it is for other changes. Accordingly, Kempers actuaries in some cases continue to place greater weight on certain emerging loss development trends, while in other cases placed greater weight on the adjusted loss reserving estimation methodologies or additional generally accepted actuarial loss reserving estimation methodologies in their actuarial indications. Beginning in 2007, the Companys senior actuary and senior management began placing greater reliance on the actuarial indications in determining the appropriate estimated level of reserves.
In 2005, the personal lines claims function of Multilines Insurance (MLI) was combined into the Kemper segments claims function. In September 2005, Kemper converted all open MLI personal lines claims to its claims system and began including new claims from the MLI business in its claim system.
All of these changes have impacted the development patterns for Kempers loss reserving data. Although the Companys actuaries were aware of, and gave consideration to, the changes in the Companys claims handling processes, including the merging of the Kemper and MLI claims functions, it takes several years to ascertain whether such changes in claims handling procedures will ultimately result in lower ultimate paid losses and LAE. Accordingly, the effects of the improvements and the changes in the claims handling processes have emerged and have been recognized over several years as the Companys actuaries have become more convinced that lower losses and LAE have in fact been realized. However, the Company cannot make any assurances that all such improvements and effects have fully emerged or will continue to emerge.
Unitrin Business Insurance Development
The Company attributes favorable development in its discontinued operations primarily to changes in its claims handling processes and the re-underwriting of its underlying book of business over the past several years.
Although the Companys actuaries were aware of, and gave consideration to, the changes in the Companys claims handling processes and the re-underwriting in estimating unpaid losses and LAE for Unitrin Business Insurance, it takes several years to ascertain whether such changes in claims handling procedures and re-underwriting will ultimately result in lower ultimate paid losses and LAE. Accordingly, the improvements have emerged and have been recognized over several years as the Companys actuaries have become more convinced that lower losses and LAE have in fact been realized. Due to the long-tail nature of some of Unitrin Business Insurances liabilities, it may take 10 or more years to fully determine the impact of these actions. Accordingly, the Company cannot make any assurances that all such improvements have fully emerged or will continue to emerge.
In addition, the Company has experienced favorable development in some particularly long-tail lines such as asbestos, environmental and construction defect. The Companys reserves for asbestos, environmental and construction defects were $13 million, $5 million and $53 million, respectively, at December 31, 2008. Development in these lines emerge over a longer period of time and thus are more difficult to ascertain. In 2008, the Company updated certain analyses for these long-tail lines using industry analyses as well as its own experience. See Note 8, Property and Casualty Insurance Reserves, to the Consolidated Financial Statements.
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Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
CRITICAL ACCOUNTING ESTIMATES (Continued)
Estimated Variability of Property and Casualty Insurance Reserves
The Company believes that its historical loss and LAE reserve development recognized to income illustrates the potential variability of the Companys estimate of Property and Casualty Insurance Reserves. Based on development recorded in the Companys consolidated financial statements through the application of its reserving methodologies over the past five years, the Company estimates that its Property and Casualty Insurance Reserves could vary from the amounts carried on the balance sheet as follows:
DOLLARS IN MILLIONS |
DEC. 31, 2008 |
ESTIMATED
VARIABILITY |
||||
Personal Lines |
$ | 837.9 | ±18 | % | ||
Commercial Lines |
397.4 | ±20 | % | |||
Unallocated Ceded Reserves |
33.4 | NA | ||||
Total Property and Casualty Insurance Reserves |
$ | 1,268.7 | ±19 | % | ||
The estimated variability shown above does not constitute a statistical range of actuarially determined probable outcomes, nor does it constitute a range of all possible outcomes. Rather, it is based solely on the Companys historical experience over the last five full years, which may not necessarily be indicative of future variability due to a number of factors including, but not limited to, changes in claims handling procedures, underwriting, mix of business by class and policy limit, growth in new lines of business or geographical areas, and the legal environment. The impact of changes in these factors is difficult to quantify and predict. Accordingly, the Companys actuaries must exercise considerable professional judgment in making their actuarial indications in light of these factors. Reserves in the Companys Kemper segment account for 38% of the Companys reserves for property and casualty insurance losses and LAE. Accordingly, the indicated estimated variability is more likely to result from changes in the reserves for the Kemper segment.
Although development will emerge in all of Unitrins personal lines product lines, development in Kempers personal automobile insurance product line could have the most significant impact. To further illustrate the sensitivity of Kempers reserves for automobile insurance losses and LAE to changes in the cumulative development factors, the Companys actuaries estimated the impact of decreases in the cumulative development factors used in the incurred loss development methodology. For the most recent quarterly evaluation period, the Company assumed an average decrease of 11.1% in the cumulative development factor, gradually declining to an average decrease of 3.2% over the next 8 older evaluation quarters, gradually declining to average decrease of 0.4% over the next 15 older evaluation quarters and then gradually declining to 0% thereafter. Assuming that Kempers automobile insurance loss and LAE reserves were based solely on the incurred loss development methodology and such assumed decreases in the cumulative development factors, the Company estimates that Kempers automobile insurance loss and LAE reserves would have decreased by $72 million at December 31, 2008 for all accident years combined.
To further illustrate the sensitivity of Kempers reserves for automobile insurance losses and LAE to changes in the cumulative development factors, the Companys actuaries also estimated the impact of increases in the cumulative development factors used in the incurred loss development methodology. For the most recent quarterly evaluation period, the Company assumed an average increase of 11.1% in the cumulative development factor, gradually declining to an average increase of 3.2% over the next 8 older evaluation quarters, gradually declining to an average increase of 0.4% over the next 15 older evaluation quarters and then gradually declining to 0% thereafter. Assuming that Kempers automobile insurance loss and LAE reserves were based solely on the incurred loss development methodology and such assumed increases in the cumulative development factors, the Company estimates that Kempers automobile insurance loss and LAE reserves would have increased by $72 million at December 31, 2008 for all accident years combined.
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Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
CRITICAL ACCOUNTING ESTIMATES (Continued)
In addition to the factors described above, other factors may also impact loss reserve development in future periods. These factors include governmental actions, including court decisions interpreting existing laws, regulations or policy provisions, developments related to insurance policy claims and coverage issues, adverse or favorable outcomes in pending claims litigation, the number and severity of insurance claims, the impact of inflation on insurance claims and the impact of residual market assessments. Although the Companys actuaries do not make specific numerical assumptions about these factors, changes in these factors from past patterns will impact historical loss development factors and in turn future loss reserve development. Significant positive changes in one or more factors will lead to positive future loss reserve development, which could result in the actual loss developing closer to, or even below, the lower end of the Companys estimated reserve variability. Significant negative changes in one or more factors will lead to negative loss reserve development, which could result in the actual loss developing closer to, or even above, the higher end of the Companys estimated reserve variability. Accordingly, due to these factors and the other factors enumerated throughout the MD&A and the inherent limitations of the loss reserving estimation methodologies, the estimated and illustrated reserve variability may not necessarily be indicative of the Companys future reserve variability, which could ultimately be greater than the estimated and illustrated variability. In addition, as previously noted, development will emerge in all of Unitrins product lines over time. Accordingly, the Companys future reserve variability could ultimately be greater than the illustrated variability.
Unallocated Ceded Reserves are reinsured by an insurance subsidiary of SCOR (see Note 8, Property and Casualty Insurance Reserves, to the Consolidated Financial Statements). The Company does not anticipate that any variability of these reserves will have a financial impact on the Companys reported results of operations or liquidity and, accordingly, has not estimated any potential variability to these reserves. The Company does not allocate these reserves to its business segments.
Additional information pertaining to the estimation of and development of the Companys Property and Casualty Insurance Reserves is contained in Item 1 of Part I of this 2008 Annual Report on Form 10-K under the heading Property and Casualty Loss and Loss Adjustment Expense Reserves.
Reserve for Loan Losses
The Reserve for Loan Losses is estimated using the Companys estimate of ultimate charge-offs and recoveries of loans based on past experience adjusted for current economic conditions. Such charge-offs and recoveries emerge over a period of years. Accordingly, the Companys actual ultimate net charge-offs could differ materially from the Companys estimate due to a variety of factors including, but not limited to, trends and future conditions in the macroeconomic, socioeconomic and regulatory environment, the timing of charge-offs and recoveries, the value of collateral and changes in the overall credit quality of the loan portfolio. Actual net charge-off patterns may also differ materially from historical net charge-off patterns if there is a change in collection practices, the mix of loans or the credit quality of borrowers. For example, net charge-off patterns may differ in Fireside Banks expansion states from Fireside Banks historical experience. A 100basis point increase in the Companys estimated ultimate rate of net charge-off would increase the Companys Reserve for Loan Losses at December 31, 2008 by $21.6 million.
Goodwill Recoverability
The process of determining whether or not an asset, such as Goodwill, is impaired or recoverable relies on projections of future cash flows, operating results and market conditions. Such projections are inherently uncertain and, accordingly, actual future cash flows may differ materially from projected cash flows. In evaluating the recoverability of Goodwill, the Company performs a discounted cash flow analysis of the Companys reporting units. The discounted cash value may be different from the fair value that would result from an actual transaction between a willing buyer and a willing seller. Such analyses are particularly sensitive to
39
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
CRITICAL ACCOUNTING ESTIMATES (Continued)
changes in discount rates and investment rates. Changes to these rates might result in material changes in the valuation and determination of the recoverability of Goodwill. For example, an increase in the interest rate used to discount cash flows will decrease the discounted cash value. There is likely to be a similar, but not necessarily as large as, increase in the investment rate used to project the cash flows resulting from investment income earned on the Companys investments. Accordingly, an increase in the investment rate would increase the discounted cash value.
Pension Benefit Obligations
The process of estimating the Companys pension benefit obligations and pension benefit costs is inherently uncertain and the actual cost of benefits may vary materially from the estimates recorded. These liabilities are particularly volatile due to their long-term nature and are based on several assumptions. The main assumptions used in the valuation of the Companys pension benefit obligations are:
a) | Estimated mortality of the employees and retirees eligible for benefits; |
b) | Estimated expected long-term rates of returns on investments; |
c) | Estimated compensation increases; |
d) | Estimated employee turnover; and |
e) | Estimated rate used to discount the ultimate estimated liability to a present value. |
A change in any one or more of these assumptions is likely to result in an ultimate liability different from the original actuarial estimate. Such changes in estimates may be material. For example, a onepercentage point decrease in the Companys estimated discount rate would increase the pension benefit obligation at December 31, 2008 by $52.9 million, while a onepercentage point increase in the rate would decrease the pension benefit obligation at December 31, 2008 by $44.8 million. A onepercentage point decrease in the Companys estimated long-term rate of return on plan assets would increase the pension expense for the year ended December 31, 2008 by $3.6 million, while a onepercentage point increase in the rate would decrease pension expense by $3.6 million for the same period.
The Company manages its exposure to catastrophes and other natural disasters through a combination of geographical diversification, restrictions on the amount and location of new business production in such regions, and reinsurance. To limit its exposures to catastrophic events, the Company maintains various primary catastrophe reinsurance programs for its property and casualty insurance businesses. Coverage for each primary catastrophe reinsurance program is provided in various layers (see Note 20, Catastrophe Reinsurance, to the Consolidated Financial Statements for further discussion of these programs). In addition to these programs, the Company purchases reinsurance from the FHCF for hurricane losses in Florida at retentions lower than those described below for the Companys primary catastrophe reinsurance programs.
Catastrophe reinsurance premiums for the Companys primary reinsurance programs and the FHCF reduced earned premiums for the years ended December 31, 2008, 2007 and 2006, by the following:
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | ||||||
Kemper |
$ | 19.6 | $ | 19.4 | $ | 15.7 | |||
Unitrin Specialty |
0.3 | 0.2 | 0.2 | ||||||
Unitrin Direct |
0.2 | 1.1 | 0.5 | ||||||
Life and Health Insurance |
10.5 | 8.5 | 6.1 | ||||||
Total Ceded Catastrophe Reinsurance Premiums |
$ | 30.6 | $ | 29.2 | $ | 22.5 | |||
40
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
CATASTROPHES (Continued)
The Life and Health Insurance segment presented above includes reinsurance reinstatement premiums of $4.4 million for the year ended December 31, 2008 to reinstate coverage following Hurricanes Dolly, Gustav and Ike.
Total catastrophe losses and LAE (including development), net of reinsurance recoveries, reported in continuing operations were $144.9 million, $39.4 million and $56.9 million for the years ended December 31, 2008, 2007 and 2006, respectively. The Company reported the following catastrophe reserve development: adverse $4.8 million, favorable $4.6 million and adverse $4.0 million in 2008, 2007 and 2006, respectively. Catastrophe losses and LAE (including development), net of reinsurance recoveries, for the years ended December 31, 2008, 2007 and 2006 are presented below.
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | ||||||
Kemper |
$ | 97.4 | $ | 27.8 | $ | 44.2 | |||
Unitrin Specialty |
2.9 | 0.5 | 0.8 | ||||||
Unitrin Direct |
3.1 | 0.6 | 1.1 | ||||||
Life and Health Insurance |
41.5 | 10.5 | 10.8 | ||||||
Total Catastrophe Losses and LAE |
$ | 144.9 | $ | 39.4 | $ | 56.9 | |||
In the third quarter of 2008, three major hurricanes that significantly impacted the Company (Dolly, Gustav and Ike) made landfall in the United States. A summary of the Companys estimated losses and LAE, net of reinsurance recoveries of $65.4 million, from Hurricanes Dolly, Gustav and Ike reported in the Companys Consolidated Statements of Operations for the year ended December 31, 2008 by business segment were:
DOLLARS IN MILLIONS |
Dolly | Gustav | Ike | Total | ||||||||
Kemper |
$ | 0.6 | $ | 12.1 | $ | 27.9 | $ | 40.6 | ||||
Unitrin Specialty |
| 0.5 | 1.0 | 1.5 | ||||||||
Unitrin Direct |
| | 0.5 | 0.5 | ||||||||
Life and Health Insurance |
6.8 | 7.3 | 8.7 | 22.8 | ||||||||
Total Loss and LAE, Net of Reinsurance |
$ | 7.4 | $ | 19.9 | $ | 38.1 | $ | 65.4 | ||||
The estimated losses presented above by the Life and Health Insurance segment are net of reinsurance recoveries of $2.9 million, $6.0 million and $37.2 million related to Hurricanes Dolly, Gustav and Ike, respectively. In addition to the losses presented above, Insurance Expenses for the year ended December 31, 2008 includes an expense of $3.9 million related to the Kemper segments estimate of its share of assessments from the Texas Windstorm Insurance Association (TWIA). The Companys estimates for Hurricanes Dolly, Gustav and Ike include estimates for both direct losses and LAE and indirect losses from residual market assessments, such as TWIA. The process of estimating and establishing reserves for catastrophe losses is inherently uncertain and the actual ultimate cost of a claim, net of actual reinsurance recoveries, may vary materially from the estimated amount reserved. The Companys estimates of direct catastrophe losses are generally based on inspections by claims adjusters and historical loss development experience for areas that have not been inspected or for claims that have not yet been reported. The Companys estimates of direct catastrophe losses are based on the coverages provided by its insurance policies. The Companys homeowners and dwellings insurance policies do not provide coverage for losses caused by floods, but generally provide coverage for physical damage caused by wind or wind driven rain. Accordingly, the Companys estimates of direct losses for homeowners and dwellings insurance do not include losses caused by flood. Depending on the policy, automobile insurance may provide coverage for losses caused by flood. Estimates of the number and severity of claims ultimately reported are influenced by many variables including, but not limited to, repair or reconstruction costs and determination of cause of loss, that are difficult to quantify and will influence the final amount of claim settlements. All these factors, coupled with the impact of the availability of labor and material on costs, require significant judgment in
41
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
CATASTROPHES (Continued)
the reserve setting process. A change in any one or more of these factors is likely to result in an ultimate net claim cost different from the estimated reserve. The Companys estimates of indirect losses from residual market assessments are based on a variety of factors including, but not limited to, actual or estimated assessments provided by or received from the assessing entity, insurance industry estimates of losses, and estimates of the Companys market share in the assessable states. Actual assessments may differ materially from these estimated amounts.
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | |||||||||
Earned Premiums: |
||||||||||||
Automobile |
$ | 590.0 | $ | 594.4 | $ | 611.6 | ||||||
Homeowners |
288.8 | 283.7 | 284.7 | |||||||||
Other Personal |
51.9 | 48.2 | 48.3 | |||||||||
Total Earned Premiums |
930.7 | 926.3 | 944.6 | |||||||||
Net Investment Income |
19.1 | 44.0 | 50.4 | |||||||||
Other Income |
0.5 | 0.5 | 0.4 | |||||||||
Total Revenues |
950.3 | 970.8 | 995.4 | |||||||||
Incurred Losses and LAE |
673.8 | 618.1 | 586.2 | |||||||||
Insurance Expenses |
268.9 | 264.5 | 275.8 | |||||||||
Operating Profit |
7.6 | 88.2 | 133.4 | |||||||||
Income Tax Benefit (Expense) |
5.8 | (21.7 | ) | (38.0 | ) | |||||||
Net Income |
$ | 13.4 | $ | 66.5 | $ | 95.4 | ||||||
RATIOS BASED ON EARNED PREMIUMS | ||||||||||||
Incurred Loss and LAE Ratio (excluding Catastrophes) |
61.9 | % | 63.7 | % | 57.4 | % | ||||||
Incurred Catastrophe Loss and LAE Ratio |
10.5 | 3.0 | 4.7 | |||||||||
Total Incurred Loss and LAE Ratio |
72.4 | 66.7 | 62.1 | |||||||||
Incurred Expense Ratio |
28.9 | 28.6 | 29.2 | |||||||||
Combined Ratio |
101.3 | % | 95.3 | % | 91.3 | % | ||||||
INSURANCE RESERVES
DOLLARS IN MILLIONS |
DEC. 31, 2008 | DEC. 31, 2007 | ||||
Insurance Reserves: |
||||||
Personal Automobile |
$ | 336.3 | $ | 378.8 | ||
Homeowners |
103.0 | 91.1 | ||||
Other |
36.8 | 32.5 | ||||
Total Insurance Reserves |
$ | 476.1 | $ | 502.4 | ||
42
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
KEMPER (Continued)
DOLLARS IN MILLIONS |
DEC. 31, 2008 | DEC. 31, 2007 | ||||||
Loss Reserves: |
||||||||
Case |
$ | 273.3 | $ | 274.1 | ||||
Incurred but Not Reported |
125.9 | 145.3 | ||||||
Total Loss Reserves |
399.2 | 419.4 | ||||||
LAE Reserves |
76.9 | 83.0 | ||||||
Total Insurance Reserves |
$ | 476.1 | $ | 502.4 | ||||
For The Year Ended |
||||||||
Favorable Loss and LAE Reserve Development, Net (excluding Catastrophes) |
$ | 55.2 | $ | 42.6 | ||||
Favorable Catastrophe Loss and LAE Reserve Development, Net |
5.8 | 11.6 | ||||||
Total Favorable Loss and LAE Reserve Development, Net |
$ | 61.0 | $ | 54.2 | ||||
Loss and LAE Reserve Development as a Percentage of Insurance Reserves at Beginning of Year |
12.1 | % | 10.1 | % | ||||
2008 Compared with 2007
Earned Premiums in the Kemper segment increased by $4.4 million for the year ended December 31, 2008, compared to the same period in 2007, due primarily to higher earned premiums on homeowners and other personal lines, partially offset by lower earned premiums on automobile insurance. Earned premiums on homeowners insurance increased by $5.1 million due primarily to higher average premium rates and, to a lesser extent, higher volume. Earned premiums on other personal insurance increased by $3.7 million due primarily to higher volume. Earned premiums on automobile insurance decreased by $4.4 million due primarily to lower average premium rates and lower volume from involuntary premium assignments.
Net Investment Income decreased by $24.9 million for the year ended December 31, 2008, compared to the same period in 2007, due primarily to lower net investment income from certain investments in limited liability investment companies and limited partnerships which the Company accounts for under the equity method of accounting. The Kemper segment reported a net investment loss of $17.4 million from these investments for year ended December 31, 2008, compared to net investment income of $2.4 million for the same period in 2007.
Operating Profit in the Kemper segment decreased by $80.6 million for the year ended December 31, 2008, compared to the same period in 2007, due primarily to higher incurred losses and LAE and the lower Net Investment Income.
Incurred Losses and LAE increased for the year ended December 31, 2008, compared to the same period in 2007, due primarily to higher catastrophe losses and LAE, partially offset by lower non-catastrophe losses and LAE and higher favorable loss and LAE reserve development (which recognizes changes in estimates of prior year loss and LAE reserves in the current period). Catastrophe losses and LAE (including development) were $97.4 million for the year ended December 31, 2008, compared to $27.8 million for the same period in 2007. The Kemper segment recognized catastrophe losses, totaling $40.6 million, from Hurricanes Dolly, Gustav and Ike in 2008. See MD&A, Catastrophes, for additional information on Hurricanes Dolly, Gustav and Ike and the Companys catastrophe reinsurance programs. There were no major hurricane catastrophe losses in 2007. Catastrophe losses for the year ended December 31, 2008 also increased due to higher frequency and severity of wind and hail storms in the first half of 2008, compared to the same period in 2007. Loss and LAE reserve development had a favorable effect of $61.0 million (including favorable development of $5.8 million for catastrophes for the year ended December 31, 2008), compared to a favorable effect of $54.2 million (including favorable development of $11.6 million for catastrophes) for the same period in 2007.
43
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
KEMPER (Continued)
Homeowners insurance incurred losses and LAE increased due primarily to higher catastrophe losses and LAE and to a lesser extent the impact of lower favorable loss and LAE reserve development, due largely to lower favorable catastrophe loss and LAE reserve development. Catastrophe losses and LAE (excluding development) on homeowners insurance were $90.4 million for the year ended December 31, 2008, compared to $35.5 million for the same period in 2007. Catastrophe losses and LAE increased for the year ended December 31, 2008 due primarily to the aforementioned hurricanes and increased frequency and severity of wind and hail storms.
Loss and LAE reserve development on homeowners insurance had a favorable effect of $13.5 million (including favorable development of $5.2 million for catastrophes) for the year ended December 31, 2008, compared to a favorable effect of $22.5 million (including favorable development of $10.6 million for catastrophes) in 2007.
Other personal insurance incurred losses and LAE increased due primarily to higher catastrophe losses and LAE and unfavorable loss and LAE development, compared to favorable loss and LAE development in 2007. Catastrophe losses and LAE (including development) on other personal insurance were $3.8 million for the year ended December 31, 2008, compared to $0.6 million in 2007. Unfavorable loss and LAE reserve development on other insurance was $0.7 million for the year ended December 31, 2008, compared to $2.8 million of favorable loss and LAE development for the same period in 2007.
Automobile insurance incurred losses and LAE decreased due primarily to the impact of higher favorable loss and LAE reserve development. Loss and LAE reserve development on automobile insurance had a favorable effect of $48.2 million for the year ended December 31, 2008, compared to a favorable effect of $28.9 million in 2007. Catastrophe losses and LAE (including development) on automobile insurance were $8.4 million for the year ended December 31, 2008, compared to $2.3 million in 2007.
See MD&A, Critical Accounting Estimates, for information pertaining to the Companys process of estimating property and casualty insurance reserves for losses and LAE, development of property and casualty insurance losses and LAE, estimated variability of property and casualty insurance reserves for losses and LAE, and a discussion of some of the variables that may impact development of property and casualty insurance losses and LAE and the estimated variability of property and casualty insurance reserves for losses and LAE.
Insurance Expenses increased by $4.4 million for the year ended December 31, 2008, compared to the same period in 2007, due primarily to assessments from TWIA related to Hurricane Ike.
Net Income in the Kemper segment decreased by $53.1 million for the year ended December 31, 2008, compared to the same period in 2007, due primarily to the changes in Operating Profit. The Kemper segments effective income tax rate differs from the federal statutory income tax rate due primarily to tax-exempt investment income and dividends received deductions. Tax-exempt investment income and dividends received deductions were $24.8 million in 2008, compared to $26.0 million in 2007.
2007 Compared with 2006
Earned Premiums in the Kemper segment decreased by $18.3 million for the year ended December 31, 2007, compared to the same period in 2006. Earned premiums on automobile insurance decreased by $17.2 million due primarily to lower volume. Earned premiums on homeowners insurance decreased by $1.0 million due primarily to lower volume and, to a lesser extent, the higher cost of reinsurance, partially offset by higher average premium rates.
Net Investment Income decreased by $6.4 million for the year ended December 31, 2007, compared to the same period in 2006, due primarily to lower yields on investments, due in part to lower yields on investments in
44
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
KEMPER (Continued)
limited liability investment companies and limited partnerships, and lower levels of investments. The Kemper segment reported a decrease in net investment income of $3.2 million from its investments in limited liability investment companies and limited partnerships for the year ended December 31, 2007, compared to the same period in 2006.
Operating Profit in the Kemper segment decreased by $45.2 million for the year ended December 31, 2007, compared to the same period in 2006, due primarily to higher incurred losses and LAE, partially offset by lower insurance expenses and the lower Net Investment Income.
Incurred losses and LAE increased for the year ended December 31, 2007 due primarily to higher non-catastrophe incurred losses and LAE, including the impact of lower favorable loss and LAE reserve development, partially offset by lower catastrophe losses and LAE, due largely to higher favorable catastrophe loss and LAE reserve development. Automobile insurance incurred losses and LAE increased due primarily to the impact of lower favorable loss and LAE reserve development and higher non-catastrophe losses and LAE as a percentage of earned premiums. Loss and LAE reserve development on automobile insurance had a favorable effect of $28.9 million for the year ended December 31, 2007, compared to a favorable effect of $49.1 million in 2006. Catastrophe losses and LAE (including development) on automobile insurance were $2.3 million for the year ended December 31, 2007, compared to $4.4 million in 2006. Homeowners insurance incurred losses and LAE increased due primarily to higher non-catastrophe losses and LAE, partially offset by the impact of higher favorable loss and LAE reserve development due largely to higher favorable catastrophe loss and LAE reserve development. Loss and LAE reserve development on homeowners insurance had a favorable effect of $22.5 million (including favorable development of $10.6 million for catastrophes) for the year ended December 31, 2007, compared to a favorable effect of $14.7 million (including favorable development of $0.9 million for catastrophes) in 2006. Favorable catastrophe loss and LAE reserve development for the year ended December 31, 2007 is due primarily to favorable development from catastrophes which occurred in the second half of 2006 and Hurricane Rita which occurred in 2005. Catastrophe losses and LAE (excluding development) on homeowners insurance were $35.5 million for the year ended December 31, 2007, compared to $38.4 million for the same period in 2006. Favorable loss and LAE reserve development on other insurance was $2.8 million for the year ended December 31, 2007, compared to $4.4 million for the same period in 2006.
Insurance Expenses decreased by $11.3 million for the year ended December 31, 2007, compared to the same period in 2006, due primarily to lower commissions due to the lower earned premiums, lower premium taxes and other licensing and regulatory fees and assessments, and lower other underwriting expenses.
Net Income in the Kemper segment decreased by $28.9 million for the year ended December 31, 2007, compared to the same period in 2006, due primarily to the changes in Operating Profit. The Kemper segments effective income tax rate differs from the federal statutory income tax rate due primarily to tax-exempt investment income and dividends received deductions. Tax-exempt investment income and dividends received deductions were $26.0 million in 2007, compared to $25.6 million in 2006.
45
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | |||||||||
Earned Premiums: |
||||||||||||
Personal Automobile |
$ | 414.0 | $ | 343.3 | $ | 326.1 | ||||||
Commercial Automobile |
80.0 | 106.0 | 118.3 | |||||||||
Total Earned Premiums |
494.0 | 449.3 | 444.4 | |||||||||
Net Investment Income |
8.6 | 19.2 | 22.4 | |||||||||
Other Income |
0.2 | 0.1 | | |||||||||
Total Revenues |
502.8 | 468.6 | 466.8 | |||||||||
Incurred Losses and LAE |
397.0 | 340.9 | 335.6 | |||||||||
Insurance Expenses |
95.6 | 92.4 | 92.0 | |||||||||
Operating Profit |
10.2 | 35.3 | 39.2 | |||||||||
Income Tax Expense |
(0.1 | ) | (8.3 | ) | (9.9 | ) | ||||||
Net Income |
$ | 10.1 | $ | 27.0 | $ | 29.3 | ||||||
RATIOS BASED ON EARNED PREMIUMS
|
|
|||||||||||
Incurred Loss and LAE Ratio (excluding Catastrophes) |
79.8 | % | 75.8 | % | 75.3 | % | ||||||
Incurred Catastrophe Loss and LAE Ratio |
0.6 | 0.1 | 0.2 | |||||||||
Total Incurred Loss and LAE Ratio |
80.4 | 75.9 | 75.5 | |||||||||
Incurred Expense Ratio |
19.4 | 20.6 | 20.7 | |||||||||
Combined Ratio |
99.8 | % | 96.5 | % | 96.2 | % | ||||||
INSURANCE RESERVES
DOLLARS IN MILLIONS |
DEC. 31, 2008 | DEC. 31, 2007 | ||||||
Insurance Reserves: |
||||||||
Personal Automobile |
$ | 175.7 | $ | 146.9 | ||||
Commercial Automobile |
107.2 | 116.8 | ||||||
Other |
10.2 | 14.9 | ||||||
Total Insurance Reserves |
$ | 293.1 | $ | 278.6 | ||||
Loss Reserves: |
||||||||
Case |
$ | 179.6 | $ | 160.0 | ||||
Incurred but Not Reported |
76.3 | 77.5 | ||||||
Total Loss Reserves |
255.9 | 237.5 | ||||||
LAE Reserves |
37.2 | 41.1 | ||||||
Total Insurance Reserves |
$ | 293.1 | $ | 278.6 | ||||
For The Year Ended |
||||||||
Favorable Loss and LAE Reserve Development, Net |
$ | 5.5 | $ | 15.3 | ||||
Loss and LAE Reserve Development as a Percentage of Insurance Reserves at Beginning of Year |
2.0 | % | 5.2 | % | ||||
46
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
UNITRIN SPECIALTY (Continued)
2008 Compared with 2007
Earned Premiums in the Unitrin Specialty segment increased by $44.7 million for the year ended December 31, 2008, compared to the same period in 2007, due to higher earned premiums on personal automobile insurance, partially offset by lower earned premiums on commercial automobile insurance. Personal automobile insurance earned premiums increased by $70.7 million for the year ended December 31, 2008, compared to the same period in 2007, due primarily to higher volume, partially offset by lower average earned premium rates. Personal automobile insurance volume increased due primarily to lower overall premium rates in the state of California. Commercial automobile insurance earned premiums decreased by $26.0 million for the year ended December 31, 2008, compared to the same period in 2007, due primarily to lower volume resulting from increased competition. In the fourth quarter of 2008, Unitrin Specialty implemented in certain key states several initiatives targeted to stabilize commercial automobile premium volume, including introducing a new commercial insurance product for light commercial vehicles, lowering down payment requirements for certain commercial automobile insurance risks and introducing improved internet-enabled commercial lines rating technology. In 2009, Unitrin Specialty intends to implement these initiatives in the remaining states where it writes commercial automobile insurance.
Net Investment Income decreased by $10.6 million for the year ended December 31, 2008, compared to the same period in 2007, due primarily to lower net investment income from certain investments in limited liability investment companies and limited partnerships which the Company accounts for under the equity method of accounting. The Unitrin Specialty segment reported net investment losses of $7.9 million from these investments for the year ended December 31, 2008, compared to net investment income of $1.0 million in 2007.
Operating Profit in the Unitrin Specialty segment decreased by $25.1 million for the year ended December 31, 2008, compared to 2007, due primarily to higher incurred losses and LAE as a percentage of earned premiums in both personal automobile insurance and commercial automobile insurance and the lower Net Investment Income. Unitrin Specialtys incurred losses related to Hurricanes Dolly, Gustav and Ike were $1.5 million. See MD&A, Catastrophes, for additional information on Hurricanes Dolly, Gustav and Ike and the Companys catastrophe reinsurance programs.
Personal automobile insurance incurred losses and LAE as a percentage of earned premiums increased due primarily to the significant growth in new personal automobile insurance volume in California and lower favorable loss and LAE reserve development (which recognizes changes in estimates of prior year loss and LAE reserves in the current period) for the year ended December 31, 2008, compared to the same period in 2007. Historically, incurred losses and LAE as a percentage of earned premiums for personal automobile insurance have been higher for new business than they have been for renewal business. As the newer California book of business matures, Unitrin Specialty anticipates that incurred losses and LAE as a percentage of earned premiums will decrease. Personal automobile insurance loss and LAE reserve development had a favorable effect of $1.7 million in 2008, compared to a favorable effect of $4.2 million in 2007. For the year ended December 31, 2008, commercial automobile insurance incurred losses and LAE as a percentage of earned premiums increased due primarily to lower favorable loss and LAE reserve development. Commercial automobile insurance loss and LAE reserve development had a favorable effect of $1.3 million in 2008, compared to a favorable effect of $10.1 million in 2007. Loss and LAE reserve development on certain reinsurance pools in run-off, included in other insurance, had a favorable effect of $2.5 million for the year ended December 31, 2008, compared to a favorable effect of $1.0 million for the same period in 2007. See MD&A, Critical Accounting Estimates, for additional information pertaining to the Companys process of estimating property and casualty insurance reserves for losses and LAE, development of property and casualty insurance losses and LAE and estimated variability of property and casualty insurance reserves for losses and LAE.
47
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
UNITRIN SPECIALTY (Continued)
Net Income in the Unitrin Specialty segment decreased by $16.9 million for the year ended December 31, 2008, compared to the same period in 2007, due primarily to the lower Operating Profit. The Unitrin Specialty segments effective tax rate differs from the statutory tax rate due primarily to tax-exempt investment income and dividends received deductions. Tax-exempt investment income and dividends received deductions were $11.2 million for the year ended December 31, 2008, compared to $11.4 million for the same period in 2007.
2007 Compared with 2006
Earned Premiums in the Unitrin Specialty segment increased by $4.9 million for the year ended December 31, 2007, compared to the same period in 2006, due primarily to higher earned premiums on personal automobile insurance, partially offset by lower earned premiums on commercial automobile insurance. Personal automobile insurance earned premiums increased by $17.2 million in 2007 due primarily to higher volume, partially offset, to a lesser extent, by lower average premium rates. Commercial automobile insurance earned premiums decreased by $12.3 million in 2007, due to lower volume and lower average premium rates. Average premium rates for commercial automobile insurance decreased primarily due to a change in the mix of business from heavier weight class vehicles with higher limits of liability insurance to lighter weight vehicles with lower limits of liability insurance.
Net Investment Income decreased by $3.2 million for the year ended December 31, 2007, compared to the same period in 2006, due to lower yields on investments, due in part to lower yields on investments in limited liability investment companies and limited partnerships, and lower levels of investments.
Operating Profit in the Unitrin Specialty segment decreased by $3.9 million for the year ended December 31, 2007, compared to 2006, due primarily to higher personal automobile insurance incurred losses and LAE and the lower Net Investment Income, partially offset by lower incurred losses and LAE in both commercial automobile insurance and certain reinsurance pools that are in run-off.
Personal automobile insurance loss and LAE as a percentage of earned premiums increased for the year ended December 31, 2007, compared to the same period in 2006, due primarily to a higher frequency of claims and lower favorable loss reserve development. Personal automobile insurance loss and LAE reserve development had a favorable effect of $4.2 million in 2007, compared to a favorable effect of $6.7 million in 2006. Commercial automobile insurance incurred losses and LAE as a percentage of earned premiums decreased in 2007 due primarily to higher favorable loss and LAE reserve development and, to a lesser extent, the change in the mix of lighter weight and heavier weight commercial vehicles insured by the Unitrin Specialty segment. Commercial automobile insurance loss and LAE reserve development had a favorable effect of $10.1 million in 2007, compared to a favorable effect of $2.2 million in 2006. Loss and LAE reserve development on certain reinsurance pools in run-off, included in other insurance, had a favorable effect of $1.0 million in 2007, compared to no reserve development in 2006.
Net Income in the Unitrin Specialty segment decreased by $2.3 million for the year ended December 31, 2007, compared to the same period in 2006. The Unitrin Specialty segments effective tax rate differs from the statutory tax rate due primarily to tax-exempt investment income and dividends received deductions. Tax-exempt investment income and dividends received deductions were $11.4 million in both 2007 and 2006.
48
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | |||||||||
Earned Premiums: |
||||||||||||
Automobile |
$ | 283.8 | $ | 254.6 | $ | 225.9 | ||||||
Homeowners |
6.4 | 2.9 | | |||||||||
Other Personal |
0.3 | 0.1 | | |||||||||
Total Earned Premiums |
290.5 | 257.6 | 225.9 | |||||||||
Net Investment Income |
4.6 | 8.9 | 9.3 | |||||||||
Other Income |
0.4 | 0.4 | 0.4 | |||||||||
Total Revenues |
295.5 | 266.9 | 235.6 | |||||||||
Incurred Losses and LAE |
246.7 | 219.3 | 182.3 | |||||||||
Insurance Expenses |
101.3 | 88.8 | 63.1 | |||||||||
Operating Loss |
(52.5 | ) | (41.2 | ) | (9.8 | ) | ||||||
Income Tax Benefit |
20.5 | 16.3 | 5.1 | |||||||||
Net Loss |
$ | (32.0 | ) | $ | (24.9 | ) | $ | (4.7 | ) | |||
RATIOS BASED ON EARNED PREMIUMS
|
|
|||||||||||
Incurred Loss and LAE Ratio (excluding Catastrophes) |
83.8 | % | 84.9 | % | 80.2 | % | ||||||
Incurred Catastrophe Loss and LAE Ratio |
1.1 | 0.2 | 0.5 | |||||||||
Total Incurred Loss and LAE Ratio |
84.9 | 85.1 | 80.7 | |||||||||
Incurred Expense Ratio |
34.9 | 34.5 | 27.9 | |||||||||
Combined Ratio |
119.8 | % | 119.6 | % | 108.6 | % | ||||||
INSURANCE RESERVES
DOLLARS IN MILLIONS |
DEC. 31, 2008 | DEC. 31, 2007 | ||||||
Insurance Reserves: |
||||||||
Personal Automobile |
$ | 159.3 | $ | 139.6 | ||||
Homeowners |
3.1 | 2.2 | ||||||
Other |
0.7 | 0.8 | ||||||
Total Insurance Reserves |
$ | 163.1 | $ | 142.6 | ||||
Loss Reserves: |
||||||||
Case |
$ | 97.9 | $ | 93.3 | ||||
Incurred but Not Reported |
37.5 | 23.4 | ||||||
Total Loss Reserves |
135.4 | 116.7 | ||||||
LAE Reserves |
27.7 | 25.9 | ||||||
Total Insurance Reserves |
$ | 163.1 | $ | 142.6 | ||||
For The Year Ended |
||||||||
Adverse Loss and LAE Reserve Development, Net |
$ | (3.2 | ) | $ | (5.5 | ) | ||
Loss and LAE Reserve Development as a Percentage of Insurance Reserves at Beginning of Year |
(2.2 | )% | (5.1 | )% | ||||
49
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
UNITRIN DIRECT (Continued)
Overall Business Condition and Initiatives
The Unitrin Direct segment reported Operating Losses of $52.5 million and $41.2 million for the years ended December 31, 2008 and 2007, respectively. The Operating Loss increased due primarily to higher volume of insurance in the underperforming Unitrin Direct stand-alone book of business, which excludes business from the Merastar acquisition, and lower Net Investment Income.
Loss and LAE as a percentage of Earned Premiums for the Unitrin Direct stand-alone book of business was significantly higher than that required to produce a profit in both 2008 and 2007. Loss and LAE as a percentage of earned premiums for the Merastar book of business were moderately higher than required to produce a profit in 2008. Direct marketing initiatives in 2007 and the first half of 2008 contributed to the Unitrin Direct segments relatively higher Insurance Expenses as a percentage of Earned Premiums in 2008 and 2007, compared to the Kemper and Unitrin Specialty segments which market their insurance products through independent agents. Direct marketing, as compared to independent agency marketing, initially results in higher expenses as a percentage of earned premiums because up-front marketing costs, to the extent they are not deferrable, are expensed as incurred, generally prior to when premiums are written and subsequently earned. Written premiums are recognized as earned premiums over the terms of the respective policies; therefore, sales of policies resulting from marketing spending typically take several months to result in earned premiums. The Unitrin Direct segments direct marketing initiatives were intended to accelerate the Unitrin Direct segments growth to achieve greater scale and have resulted in higher written premiums and a higher number of policies in force. However, such initiatives also resulted in poorer insurance risk selection than anticipated.
The Unitrin Direct segment has implemented and is continuing to implement several initiatives to improve its operating results. During the second half of 2008, Unitrin Direct began to moderate its marketing spending while modifying its direct mail marketing program to target a better response rate and placing greater emphasis on improving Losses and LAE as a percentage of Earned Premiums through improved premium rate adequacy and improved insurance risk selection. The Unitrin Direct segment has implemented and continues to implement rate increases in most states. The Unitrin Direct segment plans to continue to further reduce its marketing spending in 2009 and, accordingly, expects earned premiums, excluding the impact of the Direct Response acquisition described below, to decline in 2009. Typically, incurred losses and LAE as a percentage of earned premiums for personal automobile insurance are higher for new business than they are for renewal business. As the Unitrin Direct stand-alone book of business matures, the Company also expects losses and LAE as a percentage of Earned Premiums for the renewal book of business to decrease. Unitrin Direct anticipates its marketing spending to decrease in the range of $5 million to $10 million in 2009 due to the moderation of its marketing efforts. The Unitrin Direct segment also continues to improve operating scale by consolidating redundant back office operations and reducing staffing due to the moderation of its marketing efforts.
On August 29, 2008, Unitrins subsidiary, Trinity, entered into a definitive agreement to acquire Direct Response in a cash transaction initially valued at approximately $220 million, subject to certain purchase price adjustments. Such purchase price adjustments are currently estimated to reduce the purchase price to approximately $200 million. Except for one approval yet to be received from a state insurance regulator, the Company has received all federal and state regulatory approvals necessary to close the transaction. The Company anticipates closing the transaction in the first quarter of 2009, subject to timely approval by such insurance regulator and the satisfaction of other customary closing conditions. Direct Response specializes in the sale of personal automobile insurance through direct mail and the Internet through web insurance portals and its own websites, response.com and teachers.com . The results for Direct Response will be included in the Unitrin Direct business segment from the date of acquisition. Direct Response had earned premiums of approximately $153 million for the year ended December 31, 2008. The Company intends to consolidate its back office operations with those of Direct Response to further improve Unitrin Directs operating scale over time.
50
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
UNITRIN DIRECT (Continued)
While the Unitrin Direct segment anticipates that these initiatives, along with the acquisition of Direct Response, will significantly improve its operating results in 2009, given the level of improvement required to be profitable and the current economic conditions, the Company does not anticipate that Unitrin Direct will be profitable in 2009.
2008 Compared with 2007
Earned Premiums in the Unitrin Direct segment increased by $32.9 million for the year ended December 31, 2008, compared to the same period in 2007, due primarily to the June 29, 2007 acquisition of Merastar and higher volume from direct marketing initiatives. Earned Premiums in the Unitrin Direct segment for the year ended December 31, 2008 included earned premiums of $45.6 million from Merastar, compared to $22.5 million for the year ended December 31, 2007. See Note 3, Acquisitions of Businesses, to the Consolidated Financial Statements for additional information pertaining to the acquisition of Merastar.
Net Investment Income decreased by $4.3 million for the year ended December 31, 2008, compared to the same period in 2007, due primarily to lower net investment income from certain investments in limited liability investment companies and limited partnerships which the Company accounts for under the equity method of accounting, partially offset by higher levels of investments allocated to the Unitrin Direct segment, due in part to the acquisition of Merastar. The Unitrin Direct segment reported a net investment loss of $4.4 million from these investments for the year ended December 31, 2008, compared to net investment income of $0.5 million for the same period in 2007.
Losses and LAE as a percentage of earned premiums for Unitrin Directs stand-alone book of business increased from 85.5% for the year ended December 31, 2007 to 86.7% for the year ended December 31, 2008 due primarily to increased severity of automobile liability insurance losses, inadequate rates and higher catastrophe losses and LAE, partially offset by the impact of lower adverse loss and LAE reserve development (which recognizes changes in estimates of prior year reserves in the current period). Losses and LAE as a percentage of earned premiums for the Merastar book of business decreased from 80.6% for the year ended December 31, 2007 to 75.4% for the year ended December 31, 2008 due primarily to higher favorable loss and LAE development, partially offset by higher catastrophe losses and LAE. Adverse loss and LAE reserve development for the Unitrin Direct stand-alone book of business was $5.8 million for the year ended December 31, 2008, compared to adverse development of $6.9 million for the same period in 2007. Favorable development for the Merastar book of business was $2.6 million for the year ended December 31, 2008, compared to favorable development of $1.4 million in the same period in 2007. See MD&A, Critical Accounting Estimates, for additional information pertaining to the Companys process of estimating property and casualty insurance reserves for losses and LAE, development of property and casualty insurance losses and LAE and estimated variability of property and casualty insurance reserves for losses and LAE. Catastrophe losses and LAE for the Unitrin Direct stand-alone business were $1.3 million for the year ended December 31, 2008, compared to $0.4 million for the same period in 2007. Catastrophe losses and LAE for the Merastar book of business were $1.8 million for the year ended December 31, 2008, compared to $0.2 million in the same period in 2007. The Unitrin Direct segments total catastrophe losses and LAE related to Hurricanes Dolly, Gustav and Ike were $0.5 million for the year ended December 31, 2008. See MD&A, Catastrophes, for additional information on Hurricanes Dolly, Gustav and Ike and the Companys catastrophe reinsurance programs.
Insurance Expenses increased by $12.5 million in 2008 due primarily to the inclusion of a full year of expenses from the Merastar acquisition, costs associated with closing redundant back office operations and higher bad debt expense related to premium receivables.
Unitrin Direct reported a Net Loss of $32.0 million for the year ended December 31, 2008, compared to a Net Loss of $24.9 million for the same period in 2007. Unitrin Directs effective income tax rate differs from the
51
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
UNITRIN DIRECT (Continued)
federal statutory income tax rate due primarily to tax-exempt investment income and dividends received deductions. Tax-exempt investment income and dividends received deductions were $6.1 million in 2008, compared to $5.2 million in 2007.
2007 Compared with 2006
Earned Premiums in the Unitrin Direct segment increased by $31.7 million for the year ended December 31, 2007, compared to the same period in 2006, due primarily to direct marketing initiatives implemented in 2007 and the acquisition of Merastar. Earned Premiums in the Unitrin Direct segment in 2007 include earned premiums of $22.5 million from Merastar since the date of acquisition. Excluding the impact on Earned Premiums from the Merastar acquisition, Earned Premiums in the Unitrin Direct segment increased by $9.2 million for the year ended December 31, 2007, compared to the same period in 2006, due primarily to higher volume resulting from the direct marketing initiatives.
The Unitrin Direct segment reported an Operating Loss of $41.2 million for the year ended December 31, 2007, compared to an Operating Loss of $9.8 million for the same period in 2006. Operating results decreased due primarily to higher incurred losses and LAE as a percentage of earned premiums and higher marketing and other policy acquisition expenses as a percentage of earned premiums. Results for the Unitrin Direct segment in 2007 also included an operating loss of $1.4 million related to the Merastar acquisition. Losses and LAE as a percentage of earned premiums increased in the Unitrin Direct segment for the year ended December 31, 2007, compared to the same period in 2006, due primarily to inadequate rates and higher adverse loss and LAE development. Unitrin Direct recognized adverse loss and LAE reserve development of $5.5 million in 2007, compared to an adverse development of $4.5 million in 2006. Marketing and other policy acquisition expenses as a percentage of earned premiums, excluding Merastar, increased from 10.6% for the year ended December 31, 2006 to 14.8% for the same period in 2007 due primarily to increased spending on direct mail, web, and television advertising. Insurance expenses also increased due primarily to additional staffing to support the higher number of policies in force.
Unitrin Direct reported a Net Loss of $24.9 million for the year ended December 31, 2007, compared to a Net Loss of $4.7 million for the year ended
December 31, 2006. Unitrin Directs effective income tax rate differs from the federal statutory income tax rate due primarily to tax-exempt investment income and dividends received deductions. Tax-exempt investment income and dividends
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | |||||||||
Earned Premiums: |
||||||||||||
Life |
$ | 398.5 | $ | 387.8 | $ | 400.7 | ||||||
Accident and Health |
160.1 | 157.9 | 158.3 | |||||||||
Property |
102.8 | 108.0 | 116.6 | |||||||||
Total Earned Premiums |
661.4 | 653.7 | 675.6 | |||||||||
Net Investment Income |
162.1 | 181.0 | 181.3 | |||||||||
Other Income |
1.1 | 1.2 | 11.2 | |||||||||
Total Revenues |
824.6 | 835.9 | 868.1 | |||||||||
Policyholders Benefits and Incurred Losses and LAE |
447.7 | 393.9 | 404.5 | |||||||||
Insurance Expenses |
297.6 | 291.4 | 308.2 | |||||||||
Operating Profit |
79.3 | 150.6 | 155.4 | |||||||||
Income Tax Expense |
(27.5 | ) | (53.6 | ) | (53.9 | ) | ||||||
Net Income |
$ | 51.8 | $ | 97.0 | $ | 101.5 | ||||||
52
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
LIFE AND HEALTH INSURANCE (Continued)
INSURANCE RESERVES
DOLLARS IN MILLIONS |
DEC. 31, 2008 | DEC. 31, 2007 | ||||
Insurance Reserves: |
||||||
Future Policyholder Benefits |
$ | 2,912.5 | $ | 2,471.5 | ||
Incurred Losses and LAE: |
||||||
Life |
36.6 | 37.9 | ||||
Accident and Health |
23.6 | 23.5 | ||||
Property |
23.0 | 11.4 | ||||
Total Incurred Losses and LAE |
83.2 | 72.8 | ||||
Total Insurance Reserves |
$ | 2,995.7 | $ | 2,544.3 | ||
2008 Compared with 2007
On April 1, 2008, Unitrin completed its previously announced acquisition of Primesco in a cash merger transaction valued at $95.5 million, including transaction costs of $0.2 million. Primescos wholly-owned subsidiaries, Mutual Savings Life and Mutual Savings Fire, specialize in the sale of life, health and fire insurance products to persons of modest financial means in Alabama, Georgia, Mississippi and several other states in the Southeast. Results for Primesco and its subsidiaries are included in the Companys results of operations from the date of acquisition. See Note 3, Acquisition of Businesses, to the Consolidated Financial Statements for additional information pertaining to the acquisition of Primesco.
Earned Premiums in the Life and Health Insurance segment increased by $7.7 million for the year ended December 31, 2008, compared to the same period in 2007. Earned Premiums in the Life and Health Insurance segment for the year ended December 31, 2008, included earned premiums of $37.4 million resulting from the Primesco acquisition, of which $29.3 million was from life insurance, $5.4 million was from accident and health insurance and $2.7 million was from property insurance.
Excluding the impact of the Primesco acquisition, Earned Premiums in the Life and Health Insurance segment decreased by $29.7 million for the year ended December 31, 2008, compared to the same period in 2007. Earned premiums on life insurance decreased by $18.6 million for the year ended December 31, 2008 due primarily to lower volume. Earned premiums on accident and health insurance decreased by $3.2 million for the year December 31, 2008, as the volume of limited benefit medical and Medicare supplement products declined by $8.2 million, while higher average premium rates for those same products increased earned premiums by $5.0 million. Earned premiums on property insurance sold by the Life and Health Insurance segments career agents decreased by $7.9 million for the year ended December 31, 2008 due primarily to lower volume, due in part to the Companys strategy to reduce coastal exposures, and higher catastrophe reinsurance premiums. Catastrophe reinsurance premiums, which reduce the Life and Health Insurance segments earned premiums on property insurance, included a reinsurance premium of $4.4 million in 2008 to reinstate catastrophe reinsurance coverage following Hurricanes Dolly, Gustav and Ike. See MD&A, Catastrophes, for additional information on Hurricanes Dolly, Gustav and Ike and the Companys catastrophe reinsurance programs. Excluding the impact of the reinsurance reinstatement premium, catastrophe reinsurance premiums decreased by $2.7 million due primarily to the Companys strategy to reduce costal exposures.
The Life and Health Insurance segments property insurance products provide fire and allied lines coverage for modest value dwellings and personal property. Dwelling coverage represents approximately 43% of the segments property insurance premiums. In January 2006, the Life and Health Insurance segment halted new sales of dwelling coverage in coastal areas. In the third quarter of 2007, the Life and Health Insurance segment
53
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
LIFE AND HEALTH INSURANCE (Continued)
non-renewed dwelling coverage in certain coastal areas of the Gulf and southeastern United States. In the fourth quarter of 2008, the Life and Health Insurance segment halted new sales of dwelling coverage in all markets. The Life and Health Insurance segment believes that these actions have reduced its exposure to catastrophe risks and will continue to reduce its exposure to catastrophe risks over time. The Life and Health Insurance segment is also considering other actions to significantly reduce its exposure to catastrophe risks.
Net Investment Income decreased by $18.9 million for the year ended December 31, 2008, compared to the same period in 2007, due primarily to lower net investment income from investments in limited liability investment companies and limited partnerships which the Company accounts for under the equity method of accounting, partially offset by $16.6 million of net investment income from Primesco since the date of the acquisition. The Life and Health Insurance segment reported net investment losses of $38.3 million from these investments in limited liability investment companies and limited partnerships for the year ended December 31, 2008, compared to net investment income of $1.5 million for the same period in 2007.
Operating Profit in the Life and Health Insurance segment decreased by $71.3 million for the year ended December 31, 2008, compared to the same period in 2007, due primarily to higher catastrophe losses and LAE, net of reinsurance, on property insurance sold by the Life and Health Insurance segments career agents, the lower Net Investment Income and higher policyholders benefits as a percentage of earned premiums on life insurance and accident and health insurance, partially offset by operating profit from the Primesco acquisition. Operating Profit in the Life and Health Insurance segment included $7.9 million of operating profit for the year ended December 31, 2008 from the Primesco acquisition.
Catastrophe losses and LAE (including development), net of reinsurance, on property insurance were $41.5 million for the year ended December 31, 2008, compared to $10.5 million for the same period in 2007. Catastrophe losses and LAE for the year ended December 31, 2008 included $22.8 million, net of reinsurance, from Hurricanes Dolly, Gustav and Ike. Catastrophe losses for the year ended December 31, 2008 also included unfavorable development of $11.0 million due primarily to additional losses related to certain re-opened claims from Hurricane Rita. Catastrophe losses and LAE for the year ended December 31, 2007 included unfavorable development of $6.9 million, due primarily to development on Hurricanes Katrina and Rita. The Life and Health Insurance segment has a number of pending legal matters related to Hurricane Rita and could continue to report either favorable or unfavorable development in future periods depending on the resolution of these matters.
Excluding the increase in catastrophe losses and LAE, Policyholders Benefits and Incurred Losses and LAE increased in total for the year ended December 31, 2008, compared to the same period in 2007, due primarily to the inclusion of Primesco in 2008 and increased as a percentage of earned premiums due primarily to higher policyholders benefits on life insurance as a percentage of earned premiums, due in part to an increase in mortality, and higher Accident and Health benefits as a percentage of earned premiums on accident and health insurance due to an increase in reported claims. Policyholders Benefits and Incurred Losses and LAE from the Primesco acquisition were $25.3 million for the year ended December 31, 2008.
Insurance Expenses increased by $6.2 million for the year ended December 31, 2008, compared to the same period in 2007, due primarily to the inclusion of Primesco in 2008, partially offset by lower commission and other expenses. Insurance Expenses from the Primesco acquisition were $20.7 million for the year ended December 31, 2008. Excluding the impact of the Primesco acquisition, commission expense decreased by $11.1 million in 2008 due primarily to fewer career agents and the lower volume of insurance in-force.
Net Income in the Life and Health Insurance segment decreased by $45.2 million for the year ended December 31, 2008, compared to the same period in 2007, due primarily to the lower Operating Profit.
54
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
LIFE AND HEALTH INSURANCE (Continued)
Future Policyholder Benefit reserves increased by $441.0 million due primarily to the addition of insurance reserves related to the Primesco acquisition. Property Insurance reserves increased by $11.6 million due primarily to reserves related to Hurricanes Dolly, Gustav and Ike.
2007 Compared with 2006
Earned Premiums in the Life and Health Insurance segment decreased by $21.9 million for the year ended December 31, 2007, compared to the same period in 2006. Earned premiums on life insurance decreased by $12.9 million due primarily to lower volume. Earned premiums on property insurance sold by the Life and Health Insurance segments career agents decreased by $8.6 million due primarily to lower volume related to the Companys strategy to reduce coastal exposures and, to a lesser extent, an increase in the cost of catastrophe reinsurance. In the third quarter of 2007, the Life and Health Insurance segment non-renewed and suspended sales of its dwelling insurance policies in certain coastal areas of the Gulf and southeastern United States. The cost of catastrophe reinsurance coverage was $8.5 million for the year ended December 31, 2007, compared to $6.1 million for the same period in 2006 (see MD&A, Catastrophes).
In the fourth quarter of 2006, Reserve National entered into a reinsurance agreement whereby Reserve National assumed 100% of certain accident and health insurance business from a third party. The Life and Health Insurance segment reported earned premiums related to this reinsurance agreement of $4.0 million for the year ended December 31, 2007. Excluding the impact of the reinsurance agreement, earned premiums on accident and health insurance decreased by $4.4 million for the year ended December 31, 2007, compared to the same period in 2006, as lower volume of accident and health insurance, primarily limited benefit medical and Medicare supplement products, contributed $10.5 million to the decrease in accident and health insurance earned premiums, while higher average premium rates on those same products accounted for an increase of $6.1 million.
Net Investment Income decreased by $0.3 million for the year ended December 31, 2007, compared to the same period in 2006, due primarily to lower yields on investments in limited liability investment companies and limited partnerships, partially offset by higher yields on investments in fixed maturities and equity securities and higher levels of investments. The Life and Health Insurance segment reported net investment income of $1.5 million from its investments in limited liability investment companies and limited partnerships for the year ended December 31, 2007, compared to net investment income of $12.5 million for the same period in 2006. Yields on equity securities in 2007 included a special $5.2 million dividend on the Companys investment in IRI. Net Investment Income in 2006 did not include a corresponding dividend from the Companys investment in IRI.
Other Income decreased by $10.0 million for the year ended December 31, 2007, compared to the same period in 2006. Other Income in 2006 included a gain of $9.6 million, net of an initial deferred gain of $2.6 million, recognized on the sale and leaseback of Reserve Nationals home office building. The deferred gain is being amortized over the 36-month term of the leaseback. Amortization of the deferred gain included in Other Income was $0.8 million and $0.4 million in 2007 and 2006, respectively. Other Income in 2006 also included a gain of $1.0 million recognized on the sale of the Career Agency Companies Louisiana office building.
Operating Profit in the Life and Health Insurance segment decreased by $4.8 million for the year ended December 31, 2007, compared to the same period in 2006, due to the lower Other Income, partially offset by lower Insurance Expenses and lower Policyholders Benefits and Incurred Losses and LAE.
Insurance Expenses decreased by $16.8 million and also decreased as a percentage of earned premiums for the year ended December 31, 2007, compared to the same period in 2006, due primarily to lower commission expense and, to a lesser extent, lower administrative expenses. Commission expense was lower due primarily to lower volume, fewer active career agents, the continuing effects of changes in the Life and Health Insurance
55
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
LIFE AND HEALTH INSURANCE (Continued)
segments compensation plans and lower amortization of deferred policy acquisition costs, partially offset by the initial favorable impact in 2006 of the changes in the Life and Health Insurance segments compensation plans.
Policyholders Benefits and Incurred Losses and LAE declined for the year December 31, 2007, compared to the same period in 2006, due primarily to lower policyholders benefits on life insurance, partially offset by higher incurred losses on property insurance sold by the Life and Health Insurance segments career agents. Life insurance benefits decreased due primarily to improved mortality and a higher level of policy lapses in 2007. Incurred losses on property insurance increased due primarily to higher weather-related losses in 2007, compared to the same period in 2006, from events that were not severe enough to be classified as catastrophes by ISO.
Catastrophe losses and LAE (including development), net of reinsurance recoveries, on property insurance sold by the Life and Health Insurance segments career agents were $10.5 million and $10.8 million in 2007 and 2006, respectively (see MD&A, Catastrophes). Catastrophe losses and LAE for the year ended December 31, 2007 included adverse development of $4.2 million on Hurricane Rita related to the Companys estimate of the cost to settle certain legal matters that are not recoverable from reinsurance. Catastrophe losses and LAE for the years ended December 31, 2007 and 2006 included adverse development of $1.8 million and $4.4 million, net of reinsurance, respectively, on Hurricane Katrina.
Net Income in the Life and Health Insurance segment decreased by $4.5 million for the year ended December 31, 2007, compared to the same period in 2006, due
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | |||||||||
Interest, Loan Fees and Earned Discounts |
$ | 237.4 | $ | 251.2 | $ | 237.3 | ||||||
Other Automobile Finance Revenues |
4.9 | 9.0 | 7.7 | |||||||||
Total Automobile Finance Revenues |
242.3 | 260.2 | 245.0 | |||||||||
Net Investment Income |
4.5 | 4.9 | 3.9 | |||||||||
Total Revenues |
246.8 | 265.1 | 248.9 | |||||||||
Provision for Loan Losses |
110.0 | 166.8 | 62.4 | |||||||||
Interest Expense on Certificates of Deposits |
58.7 | 58.7 | 49.8 | |||||||||
General and Administrative Expenses |
94.2 | 105.6 | 91.9 | |||||||||
Write Off of Goodwill |
9.2 | | | |||||||||
Operating Profit (Loss) |
(25.3 | ) | (66.0 | ) | 44.8 | |||||||
Income Tax Benefit (Expense) |
3.0 | 27.2 | (18.7 | ) | ||||||||
Net Income (Loss) |
$ | (22.3 | ) | $ | (38.8 | ) | $ | 26.1 | ||||
Automobile Loan Originations |
$ | 546.1 | $ | 793.3 | $ | 806.9 | ||||||
Weighted-Average Yield on Certificates of DepositsEnd of Year |
4.8 | % | 4.9 | % | ||||||||
56
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
FIRESIDE BANK (Continued)
AUTOMOBILE LOAN RECEIVABLES
DOLLARS IN MILLIONS |
DEC. 31, 2008 | DEC. 31, 2007 | ||||||
Sales Contracts and Loans Receivable |
$ | 1,213.1 | $ | 1,390.8 | ||||
Unearned Discounts and Deferred Fees |
(14.4 | ) | (28.9 | ) | ||||
Net Automobile Loan Receivables Outstanding |
1,198.7 | 1,361.9 | ||||||
Reserve for Loan Losses |
(120.1 | ) | (148.4 | ) | ||||
Automobile Loan Receivables |
$ | 1,078.6 | $ | 1,213.5 | ||||
Percentage of Net Automobile Loan Receivables Outstanding: |
||||||||
Current Loan Balances |
61.6 | % | 61.2 | % | ||||
Delinquent Loan Balances: |
||||||||
Less than 30 Days Delinquent |
26.1 | 26.2 | ||||||
30 Days to 59 Days Delinquent |
8.6 | 8.1 | ||||||
60 Days to 89 Days Delinquent |
2.7 | 3.4 | ||||||
Delinquent 90 Days and Greater |
1.0 | 1.1 | ||||||
Total Delinquent Loan Balances |
38.4 | % | 38.8 | % | ||||
Ratio of Reserve for Loan Losses to Net Automobile Loan Receivables Outstanding |
10.0 | % | 10.9 | % | ||||
RESERVE FOR LOAN LOSSES
YEAR ENDED DEC. 31, | ||||||||
DOLLARS IN MILLIONS |
2008 | 2007 | ||||||
Reserve for Loan LossesBeginning of Year |
$ | 148.4 | $ | 68.8 | ||||
Provision for Loan Losses |
110.0 | 166.8 | ||||||
Net Charge-off: |
||||||||
Automobile Loan Receivables Charged Off |
(182.9 | ) | (139.4 | ) | ||||
Automobile Loan Receivables Recovered |
44.6 | 52.2 | ||||||
Net Charge-off |
(138.3 | ) | (87.2 | ) | ||||
Reserve for Loan LossesEnd of Year |
$ | 120.1 | $ | 148.4 | ||||
2008 Compared with 2007
The Fireside Bank segment reported an Operating Loss of $25.3 million in 2008, compared to an Operating Loss of $66.0 million in 2007. Automobile Finance Revenues decreased by $17.9 million for the year ended December 31, 2008 compared the same period in 2007. The Provision for Loan Losses was $110.0 million in 2008, compared to $166.8 million in 2007. General and Administrative Expenses decreased by $11.4 million in 2008, compared to 2007. Operating Loss in 2008 included a charge of $9.2 million to write off goodwill (see Note 7, Goodwill, to the Consolidated Financial Statements).
Interest, Loan Fees and Earned Discounts in the Fireside Bank segment decreased by $13.8 million for the year ended December 31, 2008, compared to the same period in 2007, due to both lower average loans outstanding and lower average yield on the loans outstanding. The yield on loans outstanding was 18.11% at December 31, 2008, compared to 18.66% at December 31, 2007. Fireside Bank only makes loans that are
57
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
FIRESIDE BANK (Continued)
secured by automobiles. Fireside Bank has no loans outstanding that are secured by real estate. Fireside Bank does not sell or securitize any portion of its loan portfolio.
The Provision of Loan Losses for the year ended December 31, 2008 included $77.7 million for loans originated in 2008 and a $32.3 million increase in the Banks estimated loss expectations for loans originated in previous years. The additions to the estimated loss expectations were primarily for loans originated in 2007 and 2006 and were caused primarily by a higher level of gross charge-off and lower recovery rates due to higher levels of unemployment, lower auction prices on repossessed vehicles and negative general economic conditions. Approximately 65% of Net Automobile Loan Receivables are concentrated in the state of California. Fireside Banks estimated loss expectations for automobile loans originated in 2008 are lower than its current estimated loss expectations for loans originated in 2007 due in large part to the implementation of an improved risk-based-pricing and credit-scoring model in early 2008 to aid in the underwriting process. The implementation of this model resulted in the prospective elimination of certain unprofitable segments of business written in prior years. The segments of business eliminated represent in excess of 25% of the loans originated by Fireside Bank in 2007.
Automobile Loan Originations declined from $793.3 million in 2007 to $546.1 million in 2008, due primarily to the segments of business eliminated and an overall decrease in automobile sales, partially offset by the effects of decreased competition. Fireside Bank has implemented and continues to implement a number of initiatives that it expects to improve its performance. In the second and third quarters of 2008, Fireside Bank implemented two proprietary scorecards. Additionally in the third quarter of 2008 Fireside Bank tightened the underwriting criteria for certain borrowers who have limited credit history. Fireside Bank anticipates Automobile Loan Originations will continue to decline in 2009 due to the overall decrease in the automobile market and the segments of business eliminated.
Effective July 1, 2008, Fireside Bank ceased the loan payment deferral program that it had begun in the fourth quarter of 2007. Under the former program, qualifying customers were allowed to move delinquent payments to the end of the loan. Loan deferrals were only available once in a twelve-month period and twice during the life of a loan and only to customers that had demonstrated a renewed ability to make their loan payments by either making three consecutive loan payments or the equivalent of three payments. Customer accounts with loan deferrals represented less than 1% of Net Automobile Loan Receivables Due at December 31, 2008.
General and Administrative costs, as a percentage of Interest, Loan Fees and Earned Discounts, decreased from 42.0% for the year ended December 31, 2007, to 39.6% for the year ended December 31, 2008. This decrease was primarily due to the consolidation of branch operations from 33 branches at December 31, 2007 to 9 branches at December 31, 2008, and the centralization of collection operations into two call centers. Fireside Bank incurred $5.5 million and $1.9 million of restructuring charges related to the consolidation of branches and centralization of collections for the years ended December 31, 2008 and 2007 respectively. General and Administrative Expenses, excluding these restructuring charges, as a percentage of Interest, Loan Fees and Earned Discounts, decreased from 41.3% for the year ended December 31, 2007, to 37.3% for the year ended December 31, 2008. General and Administrative costs, as a percentage of Interest, Loan Fees and Earned Discounts are anticipated to increase in 2009 due primarily to the lower Net Automobile Loan Receivables Due.
Net Loss in the Consumer Finance segment declined from $38.8 million in 2007 to $22.3 million in 2008 due to the reduced operating loss. The Consumer Finance segments effective tax rate differs from the Federal statutory tax rate due primarily to state income taxes and the charge to write off goodwill.
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Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
FIRESIDE BANK (Continued)
2007 Compared with 2006
Interest, Loan Fees and Earned Discounts in the Fireside Bank segment increased by $13.9 million for the year ended December 31, 2007, compared to the same period in 2006, due primarily to higher levels of loans outstanding, partially offset by lower yield.
The Provision for Loan Losses increased by $104.4 million for the year ended December 31, 2007, compared to the same period in 2006, due to higher net charge-off and an increase in the estimate of loan losses from prior years. The Provision for Loan Losses increased due to increased loss expectations driven by an increase in the amount of Automobile Loan Receivables charged off, a reduction in Automobile Loan Receivables Recovered as a percentage of Automobile Loan Receivables Charged Off, leading trends in the macroeconomic environment and, to a lesser extent, an increase in the level of Net Automobile Loan Receivables outstanding.
Interest Expense on Certificates of Deposits increased by $8.9 million for the year ended December 31, 2007 compared to the same period in 2006 due to higher interest rates on Certificates of Deposits and higher levels of deposits.
General and Administrative Expenses, as a percentage of Interest, Loan Fees and Earned Discounts, increased from 38.7% for the year ended December 31, 2006, to 42.0% for the year ended December 31, 2007, due primarily to an increase in the number of collectors and higher related collection costs in 2007.
Operating results in the Fireside Bank segment decreased by $110.8 million for the year ended December 31, 2007, compared to the same period in 2006, due primarily to the higher provision for loan losses.
Fireside Bank reported a Net Loss of $38.8 million for the year ended December 31, 2007, compared to Net Income of $26.1 million in 2006 due to the lower operating results. Fireside Banks effective tax rate differs from the Federal statutory tax rate due primarily to state income taxes. State income taxes were a benefit of $6.7 million in 2007, compared to expense of $4.6 million in 2006.
Net Investment Income was $212.9 million, $289.9 million and $286.0 million for the years ended December 31, 2008, 2007 and 2006, respectively. Net Investment Income decreased by $77.0 million in 2008, compared to 2007, due primarily to lower net investment income from certain investments in limited liability investment companies and limited partnerships which the Company accounts for under the equity method of accounting, lower short-term investment income and lower dividend income from Northrop and IRI, partially offset by higher investment income related to the acquisitions of businesses. Net Investment Income increased by $3.9 million in 2007, compared to 2006, due primarily to higher dividend income from the Companys investments in Northrop preferred and common stock and IRI common stock and higher levels of investments, partially offset by lower net investment income from investments in limited liability investment companies and limited partnerships. The Company reported net investment losses of $76.3 million from investments in limited liability investment companies and limited partnerships for the year ended December 31, 2008, compared to net investment income of $6.7 million for the same period in 2007. Investment income from limited liability investment companies and limited partnerships decreased in 2008, compared to 2007, due primarily to the Companys pro rata share of unrealized losses from investments recognized in operations by certain of the limited liability investment companies and limited partnerships. The Company reported net investment income of $6.7 million from investments in limited liability investment companies and limited partnerships for the year ended December 31, 2007, compared to net investment income of $24.8 million for the same period in 2006. Investment income from limited liability investment companies and limited partnerships decreased in 2007,
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Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
INVESTMENT RESULTS (Continued)
compared to 2006, due primarily to the Companys pro rata share of unrealized losses from investments recognized in operations by certain of the limited liability investment companies and limited partnerships. Dividend income from the Companys investments in Northrop preferred and common stock decreased by $14.2 million for the year ended December 31, 2008, compared to the same period in 2007, due primarily to the conversion of the higher yielding Northrop preferred stock into Northrop common stock during 2008 and to a lesser extent the sales of the Northrop common stock throughout the year and the timing of the Northrop preferred stock ex-dividend dates in 2007. Dividend income from the Companys investment in Northrop preferred stock increased by $6.2 million for year ended December 31, 2007, compared to the same period in 2006, due to the timing of ex-dividend dates. Dividend income from other equity securities increased by $6.8 million for the year ended December 31, 2007, compared to the same period in 2006, due primarily to a special dividend of $5.2 million from the Companys equity investment in IRI. The Company cannot anticipate when or if similar dividends from its equity investments in IRI may occur in the future. Short-term investment income increased by $6.8 million for the year ended December 31, 2007, compared to the same period in 2006, due primarily to higher levels of short-term investments. The Company invested the proceeds from the issuance of its 6.00% senior notes in short-term investments until the principal on its 5.75% senior notes was repaid in the third quarter of 2007 (see Note 9, Notes Payable, to the Consolidated Financial Statements.
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Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
INVESTMENT RESULTS (Continued)
Net Comprehensive Investment Gains (Losses) are comprised of realized investment gains and losses reported in the Statement of Operations and unrealized investment gains and losses that are not reported in the Statement of Operations, but rather are reported in the Statement of Comprehensive Income (Loss). The components of Net Comprehensive Investment Gains (Losses) for the years ended December 31, 2008, 2007 and 2006 were:
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | |||||||||
Fixed Maturities: |
||||||||||||
Recognized in Statement of Operations: |
||||||||||||
Gains on Dispositions |
$ | 4.8 | $ | 5.1 | $ | 5.0 | ||||||
Losses on Dispositions |
(6.8 | ) | (4.0 | ) | (4.4 | ) | ||||||
Losses from Write-downs |
(65.9 | ) | (10.4 | ) | | |||||||
Total Recognized in Statement of Operations |
(67.9 | ) | (9.3 | ) | 0.6 | |||||||
Recognized in Other Comprehensive Income (Loss) |
(117.7 | ) | 26.5 | (45.3 | ) | |||||||
Total Comprehensive Investment Gains (Losses) on Fixed Maturities |
(185.6 | ) | 17.2 | (44.7 | ) | |||||||
Northrop Preferred and Common Stock: |
||||||||||||
Recognized in Statement of Operations: |
||||||||||||
Gains on Dispositions |
53.1 | 58.6 | 5.6 | |||||||||
Losses on Dispositions |
(13.1 | ) | | | ||||||||
Total Recognized in Statement of Operations |
40.0 | 58.6 | 5.6 | |||||||||
Recognized in Other Comprehensive Income (Loss) |
(281.3 | ) | 43.0 | 61.8 | ||||||||
Total Comprehensive Investment Gains (Losses) on Northrop Preferred and Common Stock |
(241.3 | ) | 101.6 | 67.4 | ||||||||
Other Equity Securities: |
||||||||||||
Recognized in Statement of Operations: |
||||||||||||
Gains on Dispositions |
67.9 | 30.6 | 23.2 | |||||||||
Losses on Dispositions |
(46.1 | ) | (5.1 | ) | (1.1 | ) | ||||||
Losses from Write-downs |
(83.3 | ) | (22.6 | ) | (2.8 | ) | ||||||
Total Recognized in Statement of Operations |
(61.5 | ) | 2.9 | 19.3 | ||||||||
Recognized in Other Comprehensive Income (Loss) |
(196.6 | ) | (0.3 | ) | 51.8 | |||||||
Total Comprehensive Investment Gains (Losses) on Other Equity Securities |
(258.1 | ) | 2.6 | 71.1 | ||||||||
Real Estate: |
||||||||||||
Recognized in Statement of Operations: |
||||||||||||
Gains on Dispositions |
1.5 | 4.8 | 0.9 | |||||||||
Losses from Write-downs |
| | (0.1 | ) | ||||||||
Total Recognized in Statement of Operations |
1.5 | 4.8 | 0.8 | |||||||||
Other Investments: |
||||||||||||
Recognized in Statement of Operations: |
||||||||||||
Gains on Dispositions |
0.1 | 1.2 | | |||||||||
Losses on Dispositions |
(0.2 | ) | (0.2 | ) | (0.2 | ) | ||||||
Losses from Write-downs |
(3.7 | ) | | | ||||||||
Trading Securities Net Gains (Losses) |
(2.0 | ) | 0.5 | 0.4 | ||||||||
Total Recognized in Statement of Operations |
(5.8 | ) | 1.5 | 0.2 | ||||||||
Southern States: |
||||||||||||
Gain on Disposition of Southern States Recognized in Statement of Operations |
| 4.0 | | |||||||||
Total Comprehensive Investment Gains (Losses) |
$ | (689.3 | ) | $ | 131.7 | $ | 94.8 | |||||
Recognized in Statement of Operations |
$ | (93.7 | ) | $ | 62.5 | $ | 26.5 | |||||
Recognized in Other Comprehensive Income (Loss) |
(595.6 | ) | 69.2 | 68.3 | ||||||||
Total Comprehensive Investment Gains (Losses) |
$ | (689.3 | ) | $ | 131.7 | $ | 94.8 | |||||
61
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
INVESTMENT RESULTS (Continued)
Total Comprehensive Investment Gains (Losses) for the year ended December 31, 2008 included unrealized losses of $593.6 million before tax and foreign currency translation adjustments on investments of $2.0 million before tax. The unrealized losses on Northrop Preferred and Common Stock and Other Equity Securities were due primarily to the overall decline in the stock market in the fourth quarter of 2008. Total Comprehensive Investment Gains (Losses) for the year ended December 31, 2008 include realized gains on dispositions of $127.4 million and realized losses on dispositions of $66.2 million.
During the first nine months of 2008, the Company sold 2,713,800 shares of Northrop common stock at a realized gain of $47.5 million and sold investments in other preferred and common stocks at a net realized gain of $18.4 million, which included a realized gain of $13.6 million from sales of the Companys investment in Baker Hughes, Inc. common shares. In the fourth quarter of 2008, the Company sold an additional 5,315,107 shares of Northrop common stock at a net realized loss of $7.5 million and most of its investments in other common stocks at a net realized gain of $3.4 million to limit its continued exposure to further declines in the stock market.
The Company regularly reviews its investment portfolio for factors that may indicate that a decline in the fair value of an investment is other than temporary. Losses arising from other than temporary declines in fair value are reported in the Consolidated Statements of Operations in the period that the decline was determined to be other than temporary. Total Comprehensive Investment Gains (Losses) for the years ended December 31, 2008, 2007 and 2006, include losses recognized in the Statement of Operations of $152.9 million, $33.0 million and $2.8 million, respectively, from other than temporary declines in the fair values of investments. Pretax losses from write-downs of fixed maturities for the year ended December 31, 2008 included a pretax loss of $33.5 million related to a single issuer that had previously defaulted and subsequently recapitalized. Pretax losses from write-downs of fixed maturities for the year ended December 31, 2007, included a pretax loss of $8.3 million related to the same issuer. In addition, pretax losses from write-downs of fixed maturities for the year ended December 31, 2008 included a loss of $18.8 million for another issuer that required recapitalization due to deteriorating economic conditions in the mobile home industry. Pretax losses from write-downs of other equity securities for the year ended December 31, 2008 included pretax losses of $35.6 million as a result of the U.S. Government placing Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) into conservatorship and their deteriorating financial condition. Given the market conditions at the end of the third quarter of 2008, the Company concluded that it no longer had the intent at September 30, 2008 to hold certain common stocks until recovery and, accordingly, wrote down these common stocks by $12.5 million in the third quarter of 2008. Additional pretax losses from write-downs of other equity securities for the year ended December 31, 2008 were primarily due to the deteriorating financial conditions of issuers in the financial services industry. Pretax losses from write-downs of other equity securities for the year ended December 31, 2007 were precipitated in part to the overall decline in the stock market in the second half of 2007. The Company wrote down the value of various holdings of equity securities. The Company cannot anticipate when or if similar investment losses may occur in the future.
On July 9, 2007, Republic Companies purchased Southern States General Agency, Inc. (Southern States), a subsidiary of Unitrin, from the Company. Net Realized Investment Gains for the year ended December 31, 2007, includes a pretax gain of $4.0 million for the year ended December 31, 2007 resulting from this sale.
INVESTMENT QUALITY AND CONCENTRATIONS
The Companys fixed maturity investment portfolio is comprised primarily of high-grade municipal, corporate and agency bonds. At December 31, 2008, nearly 95% of the Companys fixed maturity investment portfolio was rated investment grade, which is defined as a security having a rating of AAA, AA, A or BBB from Standard &
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Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
INVESTMENT QUALITY AND CONCENTRATIONS (Continued)
Poors; a rating of Aaa, Aa, A or Baa from Moodys; or a rating from the NAIC of 1 or 2. The Company has not made significant investments in securities that are directly or indirectly related to sub-prime mortgage loans including, but not limited to, collateralized debt obligations and structured investment vehicles.
The following table summarizes the credit quality of the fixed maturity investment portfolio at December 31, 2008 and 2007:
2008 | 2007 | |||||||||||||
NAIC
|
Standard & Poors Equivalent Rating |
Fair Value
in Millions |
Percentage
of Total |
Fair Value
in Millions |
Percentage
of Total |
|||||||||
1 |
AAA, AA, A |
$ | 3,464.5 | 83.7 | % | $ | 3,339.1 | 90.6 | % | |||||
2 |
BBB |
449.5 | 10.9 | 220.8 | 6.0 | |||||||||
3 |
BB |
89.3 | 2.2 | 26.2 | 0.7 | |||||||||
4 |
B |
42.9 | 1.0 | 7.7 | 0.2 | |||||||||
5 |
CCC |
76.9 | 1.9 | 49.2 | 1.3 | |||||||||
6 |
In or Near Default |
12.8 | 0.3 | 43.7 | 1.2 | |||||||||
Total Investments in Fixed Maturities |
$ | 4,135.9 | 100.0 | % | $ | 3,686.7 | 100.0 | % | ||||||
Gross unrealized losses on the Companys investments in below-investment grade fixed maturities were $33.4 million and $1.3 million at December 31, 2008 and 2007, respectively. At December 31, 2008, the Company had $1,308.5 million of investments in municipal bonds, of which $591.4 million were enhanced with insurance from monoline bond insurers. The Companys municipal bond investment credit-risk strategy is to focus on the underlying credit rating of the issuer and not to rely upon the credit enhancement provided by the monoline bond insurer when making investment decisions. To that end, the average underlying rating of the Companys entire municipal bond portfolio is AA, the majority of which are direct obligations of a state.
The following table summarizes the credit enhanced ratings and underlying ratings of the Companys investments in obligations of states, municipalities and political subdivisions, which are included in the preceding table of the credit quality of the Companys entire portfolio of investments in fixed maturities, at December 31, 2008:
Credit Enhanced Rating | Underlying Rating | |||||||||||
Standard & Poors Equivalent Rating |
Fair Value
in Millions |
Percentage of
Total |
Fair Value
in Millions |
Percentage of
Total |
||||||||
AAA |
$ | 262.4 | 20.1 | % | $ | 257.5 | 19.7 | % | ||||
AA |
919.2 | 70.2 | 907.2 | 69.3 | ||||||||
A |
113.6 | 8.7 | 130.5 | 10.0 | ||||||||
BBB |
11.5 | 0.9 | 8.3 | 0.6 | ||||||||
Below Investment Grade |
1.8 | 0.1 | 5.0 | 0.4 | ||||||||
Total Investments in State, Municipalities and Political Subdivisions |
$ | 1,308.5 | 100.0 | % | $ | 1,308.5 | 100.0 | % | ||||
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Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
INVESTMENT QUALITY AND CONCENTRATIONS (Continued)
The following table summarizes the fair value of the Companys investments in Fixed Maturities by industry at December 31, 2008 and 2007:
DOLLARS IN MILLIONS |
2008 | 2007 | ||||
States, Municipalities and Political Subdivisions |
$ | 1,308.5 | $ | 1,364.1 | ||
U.S. Government and Government Agencies and Authorities |
979.1 | 1,108.7 | ||||
Manufacturing |
877.2 | 626.2 | ||||
Finance, Insurance and Real Estate |
546.6 | 457.4 | ||||
Transportation, Communication and Utilities |
193.0 | 67.2 | ||||
Services |
119.6 | 37.0 | ||||
Mining |
44.3 | 4.9 | ||||
Wholesale Trade |
30.5 | 13.9 | ||||
Retail Trade |
25.4 | 7.3 | ||||
Agriculture, Forestry and Fishing |
10.3 | | ||||
Construction |
1.4 | | ||||
Total Investments in Fixed Maturities |
$ | 4,135.9 | $ | 3,686.7 | ||
Forty-nine companies comprised over 75% of the Companys fixed maturity exposure to the Manufacturing industry at December 31, 2008, with the largest single exposure, Celerity, Inc., comprising 2.8%, or $24.5 million, of the Companys fixed maturity exposure to such industry. Twenty-three companies comprised over 75% of the Companys exposure to the Finance, Insurance and Real Estate industry at December 31, 2008, with the largest single exposure, Special Value Opportunity Fund auction rate preferred stocks, comprising 11.8%, or $64.7 million, of the Companys exposure to such industry.
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Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
INVESTMENT QUALITY AND CONCENTRATIONS (Continued)
The following table summarizes the fair value of the Companys ten largest investment exposures at December 31, 2008:
DOLLARS IN MILLIONS |
Fair
Value |
||
Government National Mortgage Association: |
|||
Fixed Maturities |
$ | 415.6 | |
U.S. Treasury Bonds, Notes and Bills: |
|||
Fixed Maturities |
245.0 | ||
Short Term |
116.0 | ||
Total U.S. Treasuries |
361.0 | ||
Tennebaum Capital Partners Sponsored Entities: |
|||
Fixed Maturities Redeemable Preferred Stocks |
64.7 | ||
Limited Liability Investment Companies and Limited Partnerships |
132.3 | ||
Total Tennebaum Capital Partners Sponsored Entities |
197.0 | ||
Intermec: |
|||
Investment in Investee |
168.1 | ||
State of Louisiana and Political Subdivisions Thereof: |
|||
Fixed Maturities |
140.1 | ||
Fannie Mae: |
|||
Fixed Maturities |
107.5 | ||
Federal Home Loan Banks: |
|||
Fixed Maturities |
87.0 | ||
Freddie Mac: |
|||
Fixed Maturities |
84.9 | ||
Goldman Sachs and its Sponsored Entities: |
|||
Fixed Maturities |
7.4 | ||
Equity Securities Preferred and Common Stocks |
2.9 | ||
Equity Securities Other Equity Interests |
14.5 | ||
Mutual Funds |
0.2 | ||
Limited Liability Investment Companies and Limited Partnerships |
53.4 | ||
Total Goldman Sachs and its Sponsored Entities |
78.4 | ||
State of Georgia and Political Subdivisions Thereof: |
|||
Fixed Maturities |
67.4 | ||
Total |
$ | 1,707.0 | |
The Company has exposure to the residential mortgage industry primarily by virtue of its investments in Government National Mortgage Association (Ginnie Mae), Fannie Mae, Federal Home Loan Banks (FHLB) and Freddie Mac. Fannie Mae, FHLB and Freddie Mac are each U.S. government sponsored and federally chartered entities, which are privately capitalized, whereas Ginnie Mae is a U.S. government-owned corporation. Securities issued by Ginnie Mae are backed by the full faith and credit of the U.S. government. On September 7, 2008, Fannie Mae and Freddie Mac were placed in conservatorship. In connection with their conservatorship, Fannie Mae and Freddie Mac obtained additional capitalization from the U.S. Government in transactions in which, among other things, they issued senior preferred stock to the U.S. Government. Approximately 82% of the Companys investments in the fixed maturities of Fannie Mae, FHLB and Freddie Mac are in general obligations issued by Fannie Mae, FHLB and Freddie Mac, with the balance invested in various mortgage- backed securities (MBS). While each general obligation is fixed in its maturity, 98% of the Companys investments in these general obligations are callable by the issuer prior to their maturity. In contrast, principal
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Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
INVESTMENT QUALITY AND CONCENTRATIONS (Continued)
payments of MBS securities vary with the underlying mortgages associated with them. The Company has no exposures to interest-only or principal-only investment strips. The Companys investments in Ginnie Mae securities consist of various mortgage pools and pass-through certificates. Ginnie Mae guarantees the payment of principal and interest on these securities, which vary with the underlying mortgages. In addition to the Companys investments in Fannie Mae, Ginnie Mae, FHLB and Freddie Mac securities, the Company had investments in other U.S. government sponsored or owned corporations totaling $39.1 million at December 31, 2008. At December 31, 2008, the Company also owned $6.2 million of MBS issued by private companies, of which $3.4 million may be considered sub-prime.
At December 31, 2008, the Companys fixed maturity investments in U.S. Treasury securities consisted of various maturities principally ranging from less than one year to 22 years with an effective duration of approximately 5 years. The Companys short-term investments in U.S. Treasury securities consisted of $78.6 million of U.S. Treasury Bills typically with maturities of less than one week and $37.4 million of U.S. Treasury Bonds and Notes with a maturity of less than one year at the date of purchase. In addition to these investments, the Company had $270.6 million invested in overnight repurchase agreements primarily collateralized by securities issued by the U.S. government and $141.6 million invested in money market funds which primarily invest in U.S. Treasury securities. At the time of borrowing, the repurchase agreements generally require the borrower to provide to the Company collateral at least equal to the amount borrowed. The Company bears some investment risk in the event that a borrower defaults and the value of collateral falls below the amount borrowed. While money market fund managers strive to maintain a stable fund price equal to the amounts invested in their funds, investors in such funds bear investment risk in the event that the funds investments decline in value. The money market funds in which the Company has invested have applied for insurance coverage under the U.S. Treasury Department Temporary Guarantee Program for Money Market Funds.
The Company had $286.4 million invested in various limited liability investment companies and limited partnerships at December 31, 2008, of which $44.1 million was included in the Companys Investments in Other Equity Securities and $242.3 million was included in Other Investments. As limited liability investment companies and limited partnerships, these entities are required to follow certain specialized industry accounting which requires that unrealized gains and losses be reported in their statements of operations. The Company is required to account for some of its investments in these entities, namely those entities in which the Companys interest is not deemed minor, under the equity method of accounting. This specialized accounting requiring income or loss recognition, as the case may be, of unrealized gains and losses, along with the requirement to account for some of these investments under the equity method of accounting, adds a degree of volatility to the Companys net investment income. The Company had ownership interests totaling $132.3 million in such entities sponsored by Tennenbaum Capital Partners, LLC (TCP) included in Other Investments at December 31, 2008. The Company also had a $10.0 million unfunded, future capital commitment to these TCP-sponsored entities to fund future investments at December 31, 2008. Such capital commitment was funded in January of 2009. The Companys Investments in Fixed Maturities included an investment of $64.7 million in two redeemable, auction rate preferred stocks, rated AA by S&P and issued by one of the TCP-sponsored entities at December 31, 2008. The Company owns no other auction rate preferred stocks. TCP is a private investment firm that specializes in investing in companies undergoing change due to industry trends, economic cycles or specific company circumstances. As such, the TCP-sponsored entities in which the Company invests employ a long-term investment strategy focused on opportunities investments that may include holdings in illiquid securities such as distressed debt or leveraged loans. From time to time, the Company may also invest directly in some of the companies in which the TCP sponsored entities invest. Such direct investments had a fair value of $36.1 million at December 31, 2008. Goldman Sachs Group, Inc. (Goldman Sachs), a bank holding company and a leading global investment banking, securities and investment management firm, sponsors certain limited partnerships in
66
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
INVESTMENT QUALITY AND CONCENTRATIONS (Continued)
which the Company invests. The Companys investments in Goldman Sachs-sponsored entities focus on two distinct investment strategies. One strategy focuses on providing liquidity or partnering solutions for investors in existing private equity assets and providing capital or partnering solutions for portfolio managers, commonly referred to as secondary transactions. The other strategy focuses on investments in mezzanine securities, which principally include fixed income securities, such as debt and preferred stock, and may also include an equity component, such as warrants, options or common stock. Other Equity Securities and Other Investments include $14.5 million and $53.4 million, respectively, related to the Companys investments in Goldman Sachs-sponsored entities at December 31, 2008. The Company is also committed to making future contributions of $65.1 million to Goldman Sachs-sponsored entities to fund future investments. In addition, Other Equity Securities includes $2.9 million related to the Companys investments in Goldman Sachs preferred and common stock at December 31, 2008.
The Company has significant exposure to changes in the fair value of one public company, Intermec, by virtue of its investments in the common stock of this company. Intermec has described itself as a leader in global supply chain solutions and in the design, development, manufacture and integration of wired and wireless automated data collection, mobile computing systems, bar code printers, label media and RFID (radio frequency identification). Intermecs products and services are used by customers in many industries to improve productivity, quality and responsiveness of business operations, from supply chain management and enterprise resource planning to field sales and service. Intermecs products and services are sold globally to a diverse set of customers in markets such as manufacturing, warehousing, direct store delivery, retail, consumer goods, field services, government, security, healthcare, transportation and logistics. Based on shares outstanding reported in Intermecs quarterly report on Form 10-Q for the quarter ended September 30, 2008, the Company owned 20.5% of Intermecs common stock at December 31, 2008. Accordingly, the Company accounts for its investment in Intermec under the equity method of accounting. The Company reports its investment in Intermec at cost plus accumulated undistributed earnings, rather than fair value, in the Consolidated Balance Sheet. The fair value of the Companys investment in Intermec exceeded this carrying value by $65.9 million at December 31, 2008.
The Companys Investments in Fixed Maturities included investments in the obligations of 46 states, and municipalities and political subdivisions thereof, with a fair value of $1,308.5 million at December 31, 2008, of which $1,264.2 million are callable prior to their maturity at or above par. Certain states provide premium tax incentives to insurance companies that invest in their states. The Company has large investment concentrations in Louisiana and Georgia, in particular, as a result of premium tax incentives.
SECURITIES LENDING, CREDIT DEFAULT SWAPS AND HEDGING ACTIVITIES
The Company does not directly participate, as either a lender or borrower of securities, in any securities lending program. The Company does not participate directly in credit default swaps. The Company does not engage directly in hedging activities including, but not limited to, activities involving interest rate swaps, forward foreign currency contracts, commodities contracts, exchange traded and over-the-counter options or warrants. The Company has limited exposure to such programs and activities by virtue of its investments in Highbridge Capital LP (Highbridge).
Highbridge is a limited partnership that specializes in arbitrage and absolute return investment strategies in the global equity and corporate debt securities markets and indirectly invests in funds that purchase and sell equities, futures, swaps, forward currency contracts, exchange traded and over-the-counter options, warrants, and both convertible and non-convertible corporate bonds. The Companys investment in Highbridge, which is reported in Other Equity Securities in the Consolidated Balance Sheet, was $17.7 million at December 31, 2008. On October 23, 2008, the Company submitted a full redemption notice to the Highbridge general partner. On
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Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
SECURITIES LENDING, CREDIT DEFAULT SWAPS AND HEDGING ACTIVITIES (Continued)
November 21, 2008, the general partner notified the Company that the general partner was imposing a restriction on the redemption of certain assets representing 70% of the Companys investment in Highbridge and that such assets would not be redeemed currently, but rather would be redeemed over several periods.
DISTRESSED AND MEZZANINE DEBT AND SECONDARY TRANSACTIONS INVESTMENTS
The Company owns investments in various limited liability investment companies and limited partnerships that primarily invest in distressed debt, mezzanine debt and secondary transactions. The Companys investments in these limited liability investment companies and limited partnerships, which are accounted for under the equity method of accounting and reported in Other Investments at December 31, 2008 and December 31, 2007, are summarized below:
DOLLARS IN MILLIONS |
ASSET CLASS |
UNFUNDED
COMMITMENT DEC. 31, 2008 |
CARRYING VALUE |
STATED
FUND DATE |
|||||||||
DEC. 31, 2008 | DEC. 31, 2007 | ||||||||||||
Special Value Opportunity Fund, LLC |
Distressed Debt | $ | | $ | 69.9 | $ | 94.1 | 7/13/2014 | |||||
Tennenbaum Opportunities Fund V, LLC |
Distressed Debt | 10.0 | 43.3 | 42.8 | 10/10/2016 | ||||||||
Goldman Sachs Vintage Fund IV, L.P. |
Secondary Transactions | 28.8 | 53.4 | 33.3 | 12/31/2016 | ||||||||
Special Value Continuation Fund, LLC |
Distressed Debt | | 19.1 | 37.0 | 6/30/2016 | ||||||||
NY Life Investment Management |
|||||||||||||
Mezzanine Partners II, LP |
Mezzanine Debt | 6.5 | 18.9 | 10.3 | 7/31/2016 | ||||||||
BNY Mezzanine Partners L.P. |
Mezzanine Debt | 5.3 | 12.7 | 7.9 | 4/17/2016 | ||||||||
Other Funds |
11.3 | 25.0 | 29.2 | 2015-2018 | |||||||||
Total |
$ | 61.9 | $ | 242.3 | $ | 254.6 | |||||||
In addition, at December 31, 2008 the Company has unfunded commitments of $67.1 million for investments in limited liability investment companies and limited partnerships that are not accounted for under the equity method of accounting.
Interest and Other Expenses was $58.5 million, $66.9 million and $62.5 million in 2008, 2007 and 2006, respectively. Interest expense, excluding interest on a mortgage note payable included in real estate investment expense, was $32.2 million, $33.2 million and $28.5 million in 2008, 2007 and 2006, respectively. Interest expense increased in 2007 due primarily to higher levels of debt outstanding resulting from the issuance of the Companys 6.00% senior notes due May 15, 2017 (the 6.00% Senior Notes), partially offset by repayment of the Companys 5.75% senior notes due July 1, 2007 (the 5.75% Senior Notes). Other Corporate Expenses were $26.3 million, $33.7 million and $34.0 million in 2008, 2007 and 2006, respectively. Other Corporate Expenses decreased by $7.4 million for the year ended December 31, 2008, compared to the same period in 2007, due primarily to lower compensation and employee benefit costs.
68
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
The Companys effective income tax rate from continuing operations differs from the Federal statutory income tax rate due primarily to tax-exempt investment income and dividends received deductions, state income taxes and the write-off of Goodwill. Tax-exempt investment income and dividends received deductions were $57.1 million, $61.7 million and $55.0 million in 2008, 2007 and 2006, respectively. In 2008, state income tax expense, net of federal benefit, was $2.6 million, including $3.6 million to establish a valuation allowance for deferred state income taxes. In 2007, state income tax benefit, net of federal expense, was $8.9 million, including a benefit of $5.3 million resulting from the expiration of a states statute of limitations. State income tax expense, net of federal benefit, was $4.3 million in 2006. In 2008, the Company wrote off $9.2 million of Goodwill, which is not deductible for income taxes.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2008, there were approximately 1.4 million shares of the Companys outstanding common stock that could be repurchased under the Companys outstanding repurchase authorization. Common stock may be repurchased in the open market or in privately negotiated transactions from time to time subject to market conditions and other factors. The Company repurchased and retired 2,045,100 shares of its common stock in 2008 at a cost of $69.0 million. The Company repurchased and retired 3,042,100 shares of its common stock in 2007 at a cost of $139.5 million. The Company has repurchased and retired approximately 62.8 million shares of its common stock in open market transactions at an aggregate cost of approximately $1.8 billion since 1990.
On June 24, 2005, the Company entered into a five-year, $325 million, unsecured, revolving credit agreement, expiring June 30, 2010, with a group of financial institutions. The agreement provides for fixed and floating rate advances for periods up to one year at various interest rates. The agreement also contains various financial covenants, including limits on total debt to total capitalization and minimum risk-based capital ratios for the Companys largest insurance subsidiaries. The proceeds from advances under the revolving credit facility may be used for general corporate purposes. The Company had no outstanding advances under its unsecured, revolving credit agreement at December 31, 2008 or December 31, 2007. Undrawn letters of credit issued pursuant to the unsecured, revolving credit agreement were $13.1 million at both December 31, 2008 and December 31, 2007. Accordingly, the amounts available for future borrowing were $311.9 million at both December 31, 2008 and 2007. The agreement contains various financial and other covenants and minimum risk-based capital ratios for Unitrins two largest insurance subsidiaries, United and Trinity. Management estimates that it could borrow the full amount under the agreement and still meet the financial covenants contained in the agreement.
69
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
The lenders participating in the Companys unsecured, revolving credit agreement and their aggregate commitments are presented below:
Lender |
Commitment
in Millions |
||
JPMorgan Chase Bank, N.A |
$ | 65.0 | |
Wells Fargo Bank, National Association |
65.0 | ||
Wachovia Bank, National Association |
50.0 | ||
The Bank of New York |
30.0 | ||
The Northern Trust Company |
30.0 | ||
Union Bank of California, N.A |
30.0 | ||
Fifth Third Bank (Chicago), a Michigan Banking Corporation |
15.0 | ||
U.S. Bank, N.A |
15.0 | ||
Regions Bank |
10.0 | ||
William Street Commitment Corporation |
10.0 | ||
UMB Bank, N.A. |
5.0 | ||
Total Commitment |
$ | 325.0 | |
On May 11, 2007, the Company issued $360 million of its 6.00% Senior Notes due May 15, 2017 for an effective yield of 6.19%. The 6.00% Senior Notes are unsecured and may be redeemed in whole at any time or in part from time to time at the Companys option at specified redemption prices. The Company used the proceeds from the sale of the notes to repay the $300 million principal aggregate amount of its 5.75% Senior Notes which were due on July 1, 2007 and for general corporate purposes. Interest expense under the 6.00% Senior Notes was $22.0 million and $14.1 million for the years ended December 31, 2008 and 2007, respectively.
In 2003, the Company issued $200 million of its 4.875% senior notes due November 1, 2010 (the 4.875% Senior Notes) for an effective yield of 5.04%. The 4.875% Senior Notes are unsecured and may be redeemed in whole at any time or in part from time to time at the Companys option at specified redemption prices. Interest expense under the 4.875% Senior Notes was $10.0 million for each of the years ended December 31, 2008, 2007 and 2006.
In 2002, the Company issued $300 million of its 5.75% Senior Notes for an effective yield of 5.99%. The 5.75% Senior Notes were retired in 2007. Interest expense under the 5.75% Senior Notes was $9.0 million and $18.0 million for the years ended December 31, 2007 and 2006, respectively.
Unitrin directly held cash and investments totaling $23.3 million at December 31, 2008, compared to $416.1 million at December 31, 2007. Investments at December 31, 2007 included investments in Northrop preferred and common stocks totaling $341.8 million. Unitrin sold its remaining Northrop holdings in 2008, generating gross proceeds of $296.4 million. Unitrins subsidiary, Trinity, held 895,674 shares of Northrop common stock with a fair value of $40.3 million at December 31, 2008. Due in part to its sales of Northrop common stock, the Company anticipates that Unitrin will be required to make federal income tax payments of approximately $43 million in the first quarter of 2009. Unitrin made a capital contribution of $25 million to United in January of 2009. Unitrin borrowed $25 million under its revolving credit facility to fund the contribution.
Unitrin does not anticipate making significant changes to its capital structure in 2009. Sources available for future shareholder dividend payments, capital contributions to subsidiaries, income tax payments and the payment of interest on Unitrins senior notes include the receipt of dividends from Unitrins subsidiaries and borrowings under Unitrins revolving credit agreement. Various state insurance laws restrict the ability of Unitrins insurance subsidiaries to pay dividends without regulatory approval. Such insurance laws generally
70
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
restrict the amount of dividends paid in an annual period to the greater of statutory net income from the previous year or 10% of statutory capital and surplus. Unitrins direct insurance subsidiaries paid dividends consisting of $84.2 million in cash and 819,159 shares of Northrop common stock with a fair value of $51.0 million to Unitrin during 2008. In 2009, Unitrin estimates that its direct insurance subsidiaries would be able to pay $120 million in dividends to Unitrin without prior regulatory approval. Fireside Bank has agreed not to pay dividends without the prior approval of the FDIC and CDFI. The Company does not expect Fireside Bank to pay a dividend in 2009.
Given the decline in shareholders equity in 2008, the decline in cash and other securities held at the Unitrin Parent Company level, the capital contributions made to all of Unitrins businesses during 2008 and in January 2009, the potential capital funding requirement associated with the Direct Response acquisition as discussed below, and the potential for additional realized or unrealized investment losses in the Companys investment portfolio, there can be no assurance that Unitrin will continue the payment of dividends to its shareholders at the level paid in 2008.
On April 1, 2008, the Company completed its acquisition of Primesco in a cash merger transaction valued at $95.5 million, including transaction costs of $0.2 million. The Company funded the acquisition primarily through borrowings under its revolving credit agreement which were repaid during the third quarter of 2008.
On August 29, 2008 Unitrins subsidiary, Trinity, entered into a definitive agreement to acquire Direct Response in a cash transaction initially valued at approximately $220 million, subject to certain purchase price adjustments. Such purchase price adjustments are currently estimated to reduce the purchase price to approximately $200 million. At December 31, 2008 Trinity maintained cash and short-term investments sufficient to fund the acquisition price. Except for one approval yet to be received from a state insurance regulator, the Company has received all federal and state regulatory approvals necessary to close the transaction. The Company anticipates closing the transaction in the first quarter of 2009, subject to timely approval by such insurance regulator and the satisfaction of other customary closing conditions. Unitrin made a capital contribution of $65.0 million to Trinity during the fourth quarter of 2008. Unitrin may make an additional capital contribution to Trinity in 2009 to maintain Trinitys risk-based capital at appropriate levels considering the addition of the Direct Response business. Unitrin would likely fund such a contribution through borrowings under its revolving credit agreement or the receipt of dividends from its other insurance subsidiaries. The amount of such contribution, if any, is dependent on Trinitys operating and investment results in 2009.
Quantitative measures established by bank regulations to ensure capital adequacy require Fireside Bank to maintain minimum amounts of capital. Bank regulations define capital calculations for Tier 1 capital, total risk-weighted assets and total risk-based capital. To be well-capitalized a financial institution must maintain a ratio of total capital to total risk-weighted assets of 10% or greater, a ratio of Tier 1 capital to total risk-weighted assets of 6% or greater and a ratio of Tier 1 capital to total average assets of 5% or greater. Fireside Bank had ratios of total capital to total risk-weighted assets of 20.3% at December 31, 2008 and 13.9% at December 31, 2007; a ratio of Tier 1 capital to total risk-weighted assets of 18.4% at December 31, 2008 and 13.0% at December 31, 2007; and a ratio of Tier 1 capital to total average assets of 15.6% at December 31, 2008 and 12.0% at December 31, 2007. Higher levels of capital, while undefined, are generally more prudent for Fireside Banks sub-prime automobile loan business than would be required for lower risk businesses. Fireside Bank has agreed with its regulators to maintain a ratio of Tier 1 capital to total average assets of 15% or greater. During the third quarter of 2008, Unitrin made a capital contribution of $60.0 million to its subsidiary, Fireside Securities Corporation (FSC), which, in turn, contributed the same amount to its subsidiary, Fireside Bank. The capital contributions were made to increase Fireside Banks ratio of Tier 1 capital to total average assets above 15%. During the second half of 2007, Unitrin also made capital contributions totaling $52.0 million to FSC, which, in turn, contributed the same amount to Fireside Bank. The capital contributions were made to replenish Fireside Banks capital position.
71
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
The primary sources of funds for Unitrins insurance subsidiaries are premiums and investment income. The primary uses of funds are the payment of policyholder benefits under life insurance contracts, claims under property and casualty insurance contracts and accident and health insurance contracts, the payment of commissions and general expenses and the purchase of investments. Generally, there is a time lag between when premiums are collected and when policyholder benefits and insurance claims are paid. Accordingly, during periods of growth, insurance companies typically experience positive operating cash flows and are able to invest a portion of their operating cash flows to fund future policyholder benefits and claims. During periods in which premium revenues decline, insurance companies may experience negative cash flow from operations and may need to sell investments to fund payments to policyholders and claimants. In addition, if Unitrins property and casualty insurance subsidiaries experience several significant catastrophic events over a relatively short period of time, investments may have to be sold in advance of their maturity dates to fund payments, which could result in either investment gains or losses. The Company believes that Unitrins property and casualty insurance subsidiaries have sufficient short-term liquidity to fund the payment of losses from Hurricanes Ike, Gustav and Dolly without the additional sale of investments. Management believes that its insurance subsidiaries maintain adequate levels of liquidity in the event that its property and casualty insurance subsidiaries experience several future catastrophic events over a relatively short period of time.
The primary sources of funds for Fireside Bank are customer deposits, repayments of automobile loans, interest on automobile loans and investment income. The primary uses of funds by Fireside Bank are automobile loans made to consumers, repayment of customer deposits, interest paid to depositors and general expenses.
Net Cash Provided by Operating Activities decreased by $182.9 million for the year ended December 31, 2008, compared to the same period in 2007, due primarily to the lower operating results. Net Cash Provided by Operating Activities decreased by $54.3 million for the year ended December 31, 2007, compared to the same period in 2006, due primarily to higher property and casualty claims paid.
Net Cash Used by Financing Activities increased by $263.1 million for the year ended December 31, 2008, compared to the same period in 2007. During 2008, the Company borrowed and repaid $232.0 million under its revolving credit agreement. During the second quarter of 2007, the Company issued its $360 million senior secured notes for net proceeds of $354.8 million. The Company repaid its $300 million senior secured notes in the third quarter of 2007. The Company funds its Automobile Loan Receivables through the issuance of Certificates of Deposit. Automobile Loan Receivables declined by $134.9 million in 2008. Net cash used by Certificates of Deposits withdrawals, net of Certificates of Deposits issued, was $163.5 million for the year ended December 31, 2008, compared to net cash provided of $111.6 million for the same period in 2007. The Company used $69.0 million of cash during 2008 to repurchase shares of its common stock, compared to $139.5 million of cash used to repurchase shares of its common stock for the same period in 2007.
Net Cash Used by Financing Activities decreased by $24.3 million for the year ended December 31, 2007, compared to the same period in 2006. In 2007, the Company received $354.8 million in net proceeds from the issuance of the 6.00% Senior Notes. Additionally, in 2007, the Company paid $300.0 million to retire the 5.75% Senior Notes. There was no similar debt activity in 2006. Cash Provided by Financing Activities related to issuing certificates of deposits, net of withdrawals, increased by $23.2 million in 2007, compared to the same period in 2006. The Company used $139.5 million of cash in 2007 to repurchase shares of its common stock, compared to $89.9 million of cash used to repurchase shares of its common stock in the same period in 2006.
Cash available for investment activities in total is dependent on cash flow from Operating Activities and Financing Activities and the level of cash the Company elects to maintain at the end of the year. Net Cash Provided by Investing Activities was $356.2 million for the year ended December 31, 2008, compared to Net Cash Used by Investing Activities of $222.9 million for the same period in 2007. Purchases of Fixed Maturities
72
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
exceeded Sales of Fixed maturities by $237.6 million in 2008, while Sales and Maturities of Fixed Maturities exceeded purchases of fixed maturities by $179.0 million in 2007. Net cash provided by dispositions of short-term investments was $132.3 million for the year ended December 31, 2008, compared to net cash used to acquire short-term investments of $184.0 million for the same period in 2007. Cash used to acquire investments in limited liability investment companies and limited partnerships decreased by $17.9 million in 2008, compared to 2007. Automobile Loan Originations decreased by $247.2 million in 2008, compared to 2007. The repayment of automobile loan receivables decreased by $72.8 million in 2008, compared to 2007. Cash provided by sales of Northrop common stock increased by $292.3 million in 2008, compared to 2007, as the Company reduced its risk to further declines in the stock market in 2008. Cash received from dispositions of other equity securities, net of cash paid to acquire other equity securities was $169.5 million in 2008, compared to net cash paid to acquire other equity securities, net of cash received from dispositions, of $29.0 million in 2007, as the Company reduced its risk to further declines in the stock market in 2008. The Company received proceeds of $68.8 million related to the disposition of its Unitrin Business Insurance operations in 2008. The Company used $95.4 million of cash to acquire businesses in 2008, compared to $46.9 million in 2007.
Net Cash Used by Investing Activities increased by $136.8 million for the year ended December 31, 2007, compared to the same period in 2006. Net cash used to acquire short-term investments was $184.0 million in 2007, compared to net cash provided by sales of short-term investments of $63.3 million in 2006. The Company used $46.9 million of cash to fund the acquisition of Merastar in 2007. Purchases of other equity securities, net of cash received from dispositions of other equity securities was $29.0 million in 2007, compared to $85.6 million in 2006. Cash used to acquire investments in limited liability investment companies and limited partnerships increased by $32.2 million in 2007. The acquisition of automobile loan receivables, net of automobile loans repaid, used $30.2 million less cash in 2007, compared to 2006. Cash provided by the sales and maturities of fixed maturities, net of purchases, decreased by $25.4 million. Sales of Northrop Common Stock provided $114.5 million more cash in 2007 than in 2006.
Cash increased by $79.7 million from December 31, 2007 to December 31, 2008, due primarily to cash provided by operating activities. Cash decreased by $53.4 million from December 31, 2006 to December 31, 2007. At the end of 2006, the Company temporarily did not fully invest its available funds due primarily to the implementation of certain premium tax strategies. The Company implemented similar premium tax strategies at the end of 2007, while maintaining a lower level of cash.
Unitrin and its subsidiaries have not formed special purpose entities or similar structured financing vehicles to access capital and/or manage risk or for any other purpose. The Companys retained earnings includes $61.8 million and $54.4 million representing the undistributed equity in net income and accumulated other comprehensive income of investee at December 31, 2008 and 2007, respectively.
OFFBALANCE SHEET ARRANGEMENTS
The Company has no material obligations under a guarantee contract meeting the characteristics identified in paragraph 3 of FIN 45, Guarantors Accounting and Disclosure Requirements, Including Indirect Guarantees of Indebtedness of Others . The Company has no material retained or contingent interests in assets transferred to an unconsolidated entity. The Company has no material obligations, including contingent obligations, under contracts that would be accounted for as derivative instruments. The Company has no obligations, including contingent obligations, arising out of a variable interest in an unconsolidated entity held by, and material to, the Company, where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with the Company. Accordingly, the Company has no material offbalance sheet arrangements.
73
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Estimated cash disbursements pertaining to the Companys contractual obligations at December 31, 2008, are as follows:
DOLLARS IN MILLIONS |
JAN. 1, 2009
TO DEC. 31, 2009 |
JAN. 1, 2010
TO DEC. 31, 2011 |
JAN. 1, 2012
TO DEC. 31, 2013 |
AFTER
DEC. 31, 2013 |
TOTAL | ||||||||||
Long Term Debt Obligations |
$ | 0.5 | $ | 200.9 | $ | 6.3 | $ | 360.0 | $ | 567.7 | |||||
Certificates of Deposits |
449.0 | 449.1 | 212.7 | | 1,110.8 | ||||||||||
Operating Lease Obligations |
29.6 | 49.3 | 32.9 | 50.7 | 162.5 | ||||||||||
Purchase Obligations |
4.4 | 2.5 | 0.3 | | 7.2 | ||||||||||
Life and Health Insurance Policy Benefits |
278.8 | 473.0 | 462.0 | 6,199.9 | 7,413.7 | ||||||||||
Property and Casualty Insurance Reserves |
624.3 | 407.8 | 134.3 | 102.3 | 1,268.7 | ||||||||||
Other Contractual Obligations Reflected in Long Term Liabilities on the Consolidated Balance Sheet under GAAP |
80.3 | 100.3 | 49.0 | 75.7 | 305.3 | ||||||||||
Total Contractual Obligations |
$ | 1,466.9 | $ | 1,682.9 | $ | 897.5 | $ | 6,788.6 | $ | 10,835.9 | |||||
Amounts included in Life and Health Insurance Policy Benefits within the contractual obligations table above represent the estimated cash payments to be made to policyholders and beneficiaries. Such cash outflows are based on the Companys current assumptions for mortality, morbidity and policy lapse, but are undiscounted with respect to interest. Policies must remain in force for the policyholder or beneficiary to receive the benefit under the policy. Depending on the terms of a particular policy, future premiums from the policyholder may be required for the policy to remain in force. The Company estimates that future cash inflows would total $4.6 billion using the same assumptions used to estimate the cash outflows.
The Companys Life Insurance Reserves in the Companys Consolidated Balance Sheet are generally based on the historical assumptions for mortality and policy lapse and are on a discounted basis. Accordingly, the sum of the amounts presented above for Life and Health Insurance Policy Benefits significantly exceeds the amount of Life and Health Insurance Reserves reported on the Companys Consolidated Balance Sheet at December 31, 2008.
In addition to the purchase obligations included above, the Company had certain investment commitments totaling $129.0 million at December 31, 2008. The funding of such investment commitments is dependent upon a number of factors, the timing of which is indeterminate.
The contractual obligations reported above also exclude the Companys liability of $17.0 million for unrecognized tax benefits. The Company cannot make a reasonably reliable estimate of the amount and period of related future payments for such liability.
Other Contractual Obligations Reflected in Long Term Liabilities on the Consolidated Balance Sheet under GAAP primarily consist of interest obligations related to Long Term Debt Obligations and Certificates of Deposits.
74
Unitrin, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial Condition and Results of Operations(Continued)
In 2008, the Company changed its accounting for certain investments accounted for under the equity method of accounting to eliminate a reporting lag. The Companys financial statements have been adjusted for the retrospective application of a change in accounting principle pursuant to SFAS No. 154, Accounting Changes and Correction of Errors . See Note 2, Summary of Accounting Policies and Accounting Changes, to the Consolidated Financial Statements for the effect on the Companys Consolidated Financial Statements.
Changes in accounting standards that are most critical to the Company are discussed in Note 2, Summary of Accounting Policies and Accounting Changes, to the Consolidated Financial Statements under the heading Accounting Changes. The accounting changes discussed are:
|
SFAS No. 157, Fair Value Measurements ; |
|
SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans; |
|
SFAS No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115 ; |
|
SFAS No. 141(R), Business Combinations ; |
|
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 ; |
|
SFAS No. 161, Disclosure about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 ; |
|
SFAS No. 163, Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60 ; |
|
FIN 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109; |
|
FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities; and |
|
FSP SFAS 142-3, Determination of the Useful Life of Intangible Assets . |
75
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative Information About Market Risk
The Companys consolidated balance sheet includes five types of financial instruments subject to the material market risk disclosures required by the SEC:
1) | Investments in Fixed Maturities; |
2) | Investments in Equity Securities; |
3) | Automobile Loan Receivables; |
4) | Certificates of Deposits; and |
5) | Notes Payable. |
Investments in Fixed Maturities, Automobile Loan Receivables, Certificates of Deposits and Notes Payable are subject to material interest rate risk. The Companys Investments in Equity Securities include common and preferred stocks and, accordingly, are subject to material equity price risk and interest rate risk, respectively.
For purposes of this disclosure, market risk sensitive financial instruments are divided into two categories: financial instruments acquired for trading purposes and financial instruments acquired for purposes other than trading. The Companys market risk sensitive financial instruments are generally classified as held for purposes other than trading. The Company has no significant holdings of financial instruments acquired for trading purposes. The Company has no significant holdings of derivatives.
The Company measures its sensitivity to market risk by evaluating the change in its financial assets and liabilities relative to fluctuations in interest rates and equity prices. The evaluation is made using instantaneous changes in interest rates and equity prices on a static balance sheet to determine the effect such changes would have on the Companys market value at risk and the resulting pretax effect on Shareholders Equity. The changes chosen represent the Companys view of adverse changes which are reasonably possible over a one-year period. The selection of the changes chosen should not be construed as the Companys prediction of future market events, but rather an illustration of the impact of such events.
For the interest rate sensitivity analysis presented below, the Company assumed an adverse and instantaneous increase of 100basis points in the yield curve at December 31, 2008 and 2007, respectively, for Investments in Fixed Maturities. Such 100basis point increase in the yield curve may not necessarily result in a corresponding 100basis point increase in the interest rate for all investments in fixed maturities. For example, a 100basis point increase in the yield curve for risk-free, taxable investments in fixed maturities may not result in a 100basis point increase for tax-exempt investments in fixed maturities. For Investments in Fixed Maturities, the Company also anticipated changes in cash flows due to changes in the likelihood that investments would be called or prepaid prior to their contractual maturity. All other variables were held constant. For preferred stock equity securities and Automobile Loan Receivables, the Company assumed an adverse and instantaneous increase of 100basis points in market interest rates from their levels at December 31, 2008 and 2007, respectively. All other variables were held constant. For Certificates of Deposits and Notes Payable, the Company assumed an adverse and instantaneous decrease of 100basis points in market interest rates from their levels at December 31, 2008 and 2007, respectively. All other variables were held constant. The Company measured equity price sensitivity assuming an adverse and instantaneous 30% decrease and 10% decrease in the Standard and Poors Stock Index (the S&P 500) from its levels at December 31, 2008 and 2007, respectively, with all other variables held constant. The Companys investments in common stock equity securities were correlated with the S&P 500 using the portfolios weighted-average beta of 1.05 and 0.88 at December 31, 2008 and 2007, respectively. The portfolios weighted-average beta was calculated using each securitys beta for the five-year periods ended December 31, 2008 and 2007, respectively, and weighted on the fair value of such
76
securities at December 31, 2008 and 2007, respectively. For equity securities without observable market inputs the Company assumed a beta of 1.00 and 1.40 at December 31, 2008 and 2007, respectively. Beta measures a stocks relative volatility in relation to the rest of the stock market, with the S&P 500 having a beta coefficient of 1.00.
The estimated adverse effects on the market value of the Companys financial instruments at December 31, 2008, using these assumptions were:
PRO FORMA INCREASE (DECREASE) | |||||||||||||||
DOLLARS IN MILLIONS |
FAIR VALUE |
INTEREST
RATE RISK |
EQUITY
PRICE RISK |
TOTAL
MARKET RISK |
|||||||||||
ASSETS |
|||||||||||||||
Investments in Fixed Maturities |
$ | 4,135.9 | $ | (277.1 | ) | $ | | $ | (277.1 | ) | |||||
Investments in Equity Securities |
221.8 | (5.7 | ) | (33.8 | ) | (39.5 | ) | ||||||||
Automobile Loan Receivables |
1,099.6 | (13.5 | ) | | (13.5 | ) | |||||||||
LIABILITIES |
|||||||||||||||
Certificates of Deposits |
$ | 1,148.7 | $ | 19.3 | $ | | $ | 19.3 | |||||||
Notes Payable |
433.9 | 18.7 | | 18.7 |
The estimated adverse effects on the market value of the Companys financial instruments at December 31, 2007, using these assumptions were:
PRO FORMA INCREASE (DECREASE) | |||||||||||||||
DOLLARS IN MILLIONS |
FAIR VALUE |
INTEREST
RATE RISK |
EQUITY
PRICE RISK |
TOTAL
MARKET RISK |
|||||||||||
ASSETS |
|||||||||||||||
Investments in Fixed Maturities |
$ | 3,686.7 | $ | (248.1 | ) | $ | | $ | (248.1 | ) | |||||
Investments in Equity Securities |
1,303.6 | (3.9 | ) | (108.8 | ) | (112.7 | ) | ||||||||
Automobile Loan Receivables |
1,230.3 | (16.5 | ) | | (16.5 | ) | |||||||||
LIABILITIES |
|||||||||||||||
Certificates of Deposits |
$ | 1,269.7 | $ | 26.3 | $ | | $ | 26.3 | |||||||
Notes Payable |
550.3 | 30.9 | | 30.9 |
The market risk sensitivity analysis assumes that the composition of the Companys interest rate sensitive assets and liabilities, including, but not limited to, credit quality, and equity price sensitive assets existing at the beginning of the period remains constant over the period being measured. It also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the time to maturity. Interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Also, any future correlation, either in the near term or the long term, between the Companys common stock equity securities portfolio and the S&P 500 may differ from the historical correlation as represented by the weighted-average historical beta of the common stock equity securities portfolio. Accordingly, the market risk sensitivity analysis may not be indicative of, is not intended to provide, and does not provide, a precise forecast of the effect of changes of market rates on the Companys income or shareholders equity. Further, the computations do not contemplate any actions the Company may undertake in response to changes in interest rates or equity prices.
To the extent that any adverse 100basis point change occurs in increments over a period of time instead of instantaneously, the adverse impact on fair values would be partially mitigated because some of the underlying financial instruments would have matured. For example, proceeds from any maturing assets could be reinvested and any new liabilities would be incurred at the then current interest rates.
77
Qualitative Information About Market Risk
Market risk is a broad term related to economic losses due to adverse changes in the fair value of a financial instrument and is inherent to all financial instruments. SEC disclosure rules focus on only one element of market riskprice risk. Price risk relates to changes in the level of prices due to changes in interest rates, equity prices, foreign exchange rates or other factors that relate to market volatility of the rate, index, or price underlying the financial instrument. The Companys primary market risk exposures are to changes in interest rates and certain exposures to changes in equity prices.
The Company manages its interest rate exposures with respect to Investments in Fixed Maturities by investing primarily in investment-grade securities of moderate effective duration. The interest rate risks with respect to the fair value of Automobile Finance Receivables should be partially offset by the impact of interest rate movements on Certificates of Deposits which are issued to fund its receivables.
At December 31, 2008 and 2007, $40.3 million and $706.0 million, respectively, of the Companys Investments in Equity Securities, which exclude the Companys Investment in Investee (Intermec), was concentrated in the preferred and common stock of Northrop. Accordingly, the Companys Investments in Equity Securities are sensitive to the nature of Northrops industry segments. Northrop describes itself as a $32 billion global defense and technology company whose 120,000 employees provide innovative systems, products, and solutions in information and services, electronics, aerospace and shipbuilding to government and commercial customers worldwide.
78
Item 8. | Financial Statements and Supplementary Data. |
Index to
Consolidated Financial Statements of
Unitrin, Inc. and its Subsidiaries
80 | ||
Consolidated Statements of Operations for the Years Ended December 31, 2008, 2007 and 2006 |
81 | |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006 |
82 | |
83 | ||
84 | ||
Note 2Summary of Accounting Policies and Accounting Changes |
85 | |
95 | ||
96 | ||
98 | ||
Note 6Automobile Loan Receivables and Certificates of Deposits |
102 | |
103 | ||
104 | ||
106 | ||
107 | ||
108 | ||
109 | ||
112 | ||
113 | ||
114 | ||
115 | ||
115 | ||
Note 18Pension Benefits and Postretirement Benefits Other Than Pensions |
119 | |
123 | ||
126 | ||
129 | ||
130 | ||
133 | ||
134 | ||
136 | ||
138 |
79
Unitrin, Inc. and Subsidiaries
Consolidated Balance Sheets
DECEMBER 31, | |||||||
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS |
2008 | 2007 | |||||
ASSETS |
|||||||
Investments: |
|||||||
Fixed Maturities at Fair Value (Amortized Cost: 2008 $4,174.4; 2007 $3,608.9) |
$ | 4,135.9 | $ | 3,686.7 | |||
Northrop Preferred Stock at Fair Value (Cost: 2007 $177.5) |
| 258.5 | |||||
Northrop Common Stock at Fair Value (Cost: 2008 $38.6; 2007 $245.5) |
40.3 | 447.5 | |||||
Other Equity Securities at Fair Value (Cost: 2008 $216.8; 2007 $436.5) |
181.5 | 597.6 | |||||
Investee (Intermec) at Cost Plus Cumulative Undistributed Earnings (Fair Value: 2008 $168.1; 2007 $257.1) |
102.2 | 90.7 | |||||
Short-term Investments at Cost which Approximates Fair Value |
548.6 | 658.7 | |||||
Other |
714.9 | 696.1 | |||||
Total Investments |
5,723.4 | 6,435.8 | |||||
Cash |
184.2 | 103.1 | |||||
Automobile Loan Receivables at Cost (Fair Value: 2008 $1,099.6; 2007 $1,230.3) |
1,078.6 | 1,213.5 | |||||
Other Receivables |
686.5 | 634.8 | |||||
Deferred Policy Acquisition Costs |
489.2 | 437.4 | |||||
Goodwill |
334.6 | 314.7 | |||||
Current and Deferred Income Taxes |
201.4 | 17.2 | |||||
Other Assets |
120.9 | 109.9 | |||||
Assets of Discontinued Operations |
| 128.0 | |||||
Total Assets |
$ | 8,818.8 | $ | 9,394.4 | |||
LIABILITIES AND SHAREHOLDERS EQUITY |
|||||||
Insurance Reserves: |
|||||||
Life and Health |
$ | 2,972.6 | $ | 2,533.0 | |||
Property and Casualty |
1,268.7 | 1,322.9 | |||||
Total Insurance Reserves |
4,241.3 | 3,855.9 | |||||
Certificates of Deposits at Cost (Fair Value: 2008 $1,148.7; 2007 $1,269.7) |
1,110.8 | 1,274.3 | |||||
Unearned Premiums |
733.5 | 722.2 | |||||
Liabilities for Income Taxes |
68.2 | 258.7 | |||||
Notes Payable at Amortized Cost (Fair Value: 2008 $433.9; 2007 $550.3) |
560.8 | 560.1 | |||||
Accrued Expenses and Other Liabilities |
455.6 | 380.9 | |||||
Liabilities of Discontinued Operations |
| 51.3 | |||||
Total Liabilities |
7,170.2 | 7,103.4 | |||||
Shareholders Equity: |
|||||||
Common Stock, $0.10 Par Value Per Share, 100 Million Shares Authorized, 62,314,503 and 64,254,818 Shares Issued and Outstanding at December 31, 2008 and 2007 |
6.2 | 6.4 | |||||
Paid-in Capital |
764.7 | 781.3 | |||||
Retained Earnings |
985.8 | 1,178.5 | |||||
Accumulated Other Comprehensive Income (Loss) |
(108.1 | ) | 324.8 | ||||
Total Shareholders Equity |
1,648.6 | 2,291.0 | |||||
Total Liabilities and Shareholders Equity |
$ | 8,818.8 | $ | 9,394.4 | |||
The Notes to the Consolidated Financial Statements are an integral part of these financial statements.
80
Unitrin, Inc. and Subsidiaries
Consolidated Statements of Operations
FOR THE YEARS ENDED DECEMBER 31, | ||||||||||||
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS |
2008 | 2007 | 2006 | |||||||||
REVENUES |
||||||||||||
Earned Premiums |
$ | 2,376.6 | $ | 2,286.9 | $ | 2,290.5 | ||||||
Automobile Finance Revenues |
242.3 | 260.2 | 245.0 | |||||||||
Net Investment Income |
212.9 | 289.9 | 286.0 | |||||||||
Other Income |
4.1 | 3.5 | 14.4 | |||||||||
Net Realized Investment Gains (Losses) |
(93.7 | ) | 62.5 | 26.5 | ||||||||
Total Revenues |
2,742.2 | 2,903.0 | 2,862.4 | |||||||||
EXPENSES |
||||||||||||
Policyholders Benefits and Incurred Losses and Loss Adjustment Expenses |
1,765.2 | 1,572.3 | 1,508.7 | |||||||||
Insurance Expenses |
736.5 | 705.8 | 712.0 | |||||||||
Automobile Finance Expenses |
204.1 | 272.5 | 154.2 | |||||||||
Interest Expense on Certificates of Deposits |
58.7 | 58.7 | 49.8 | |||||||||
Goodwill |
9.2 | | | |||||||||
Interest and Other Expenses |
58.5 | 66.9 | 62.5 | |||||||||
Total Expenses |
2,832.2 | 2,676.2 | 2,487.2 | |||||||||
Income (Loss) from Continuing Operations before Income Taxes and Equity in Net Income of Investee |
(90.0 | ) | 226.8 | 375.2 | ||||||||
Income Tax Benefit (Expense) |
46.2 | (49.9 | ) | (116.8 | ) | |||||||
Income (Loss) from Continuing Operations before Equity in Net Income of Investee |
(43.8 | ) | 176.9 | 258.4 | ||||||||
Equity in Net Income of Investee |
5.8 | 1.2 | 9.2 | |||||||||
Income (Loss) from Continuing Operations |
(38.0 | ) | 178.1 | 267.6 | ||||||||
Discontinued Operations: |
||||||||||||
Income from Discontinued Operations Before Income Taxes |
18.2 | 34.8 | 22.0 | |||||||||
Income Tax Expense |
(9.8 | ) | (7.5 | ) | (2.6 | ) | ||||||
Income from Discontinued Operations |
8.4 | 27.3 | 19.4 | |||||||||
Net Income (Loss) |
$ | (29.6 | ) | $ | 205.4 | $ | 287.0 | |||||
Income (Loss) Per Share from Continuing Operations |
$ | (0.60 | ) | $ | 2.71 | $ | 3.94 | |||||
Income Per Share from Discontinued Operations |
0.13 | 0.42 | 0.29 | |||||||||
Net Income (Loss) Per Share |
$ | (0.47 | ) | $ | 3.13 | $ | 4.23 | |||||
Income (Loss) Per Share from Continuing Operations Assuming Dilution |
$ | (0.60 | ) | $ | 2.70 | $ | 3.92 | |||||
Income Per Share from Discontinued Operations Assuming Dilution |
0.13 | 0.42 | 0.28 | |||||||||
Net Income (Loss) Per Share Assuming Dilution |
$ | (0.47 | ) | $ | 3.12 | $ | 4.20 | |||||
Dividends Paid Per Share |
$ | 1.88 | $ | 1.82 | $ | 1.76 | ||||||
The Notes to the Consolidated Financial Statements are an integral part of these financial statements.
81
Unitrin, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
FOR THE YEARS ENDED DECEMBER 31, | ||||||||||||
DOLLARS IN MILLIONS |
2008 |
2007 |
2006 |
|||||||||
OPERATING ACTIVITIES |
||||||||||||
Net Income (Loss) |
$ | (29.6 | ) | $ | 205.4 | $ | 287.0 | |||||
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operations: |
||||||||||||
Policy Acquisition Costs Deferred |
(324.7 | ) | (325.0 | ) | (351.1 | ) | ||||||
Amortization of Deferred Policy Acquisition Costs |
324.6 | 330.3 | 342.6 | |||||||||
Equity in Net Income of Investee before Taxes |
(8.9 | ) | (2.0 | ) | (14.3 | ) | ||||||
Equity in Losses (Earnings) of Limited Liability Investment
|
77.1 | (6.4 | ) | (24.8 | ) | |||||||
Distribution of Accumulated Earnings of Limited Liability Investment Companies and Limited Partnerships |
1.0 | 27.1 | 12.9 | |||||||||
Amortization of Investment Securities and Depreciation of Investment Real Estate |
10.1 | 6.2 | 7.2 | |||||||||
Provision for Loan Losses |
110.0 | 166.8 | 62.4 | |||||||||
Depreciation of Property and Equipment |
18.8 | 20.9 | 22.2 | |||||||||
Goodwill |
9.2 | | | |||||||||
Decrease (Increase) in Other Receivables |
(5.6 | ) | 69.1 | 97.5 | ||||||||
Decrease in Insurance Reserves and Unearned Premiums |
(58.5 | ) | (110.2 | ) | (54.6 | ) | ||||||
Decrease in Liabilities for Income Taxes |
(132.1 | ) | (60.1 | ) | (4.3 | ) | ||||||
Decrease in Accrued Expenses and Other Liabilities |
(20.4 | ) | (11.7 | ) | (33.2 | ) | ||||||
Net Realized Investment Losses (Gains) |
93.7 | (62.5 | ) | (26.5 | ) | |||||||
Gain on Disposition of Business |
(8.1 | ) | | | ||||||||
Other, Net |
12.6 | 4.2 | (16.6 | ) | ||||||||
Net Cash Provided by Operating Activities |
69.2 | 252.1 | 306.4 | |||||||||
INVESTING ACTIVITIES |
||||||||||||
Sales and Maturities of Fixed Maturities |
956.7 | 614.1 | 559.1 | |||||||||
Purchases of Fixed Maturities |
(1,194.3 | ) | (435.1 | ) | (354.7 | ) | ||||||
Sales of Northrop Common Stock |
424.3 | 132.0 | 17.5 | |||||||||
Sales of Other Equity Securities |
344.6 | 103.5 | 84.5 | |||||||||
Purchases of Other Equity Securities |
(175.1 | ) | (132.5 | ) | (170.1 | ) | ||||||
Acquisitions and Improvements of Investment Real Estate |
(24.3 | ) | (24.2 | ) | (39.2 | ) | ||||||
Sales of Investment Real Estate |
3.2 | 8.7 | 1.8 | |||||||||
Acquisitions of Limited Liability Investment Companies and Limited Partnerships |
(80.0 | ) | (97.9 | ) | (65.7 | ) | ||||||
Change in Short-term Investments |
132.3 | (184.0 | ) | 63.3 | ||||||||
Repayments of Automobile Loan Receivables |
571.4 | 644.2 | 627.6 | |||||||||
Acquisitions of Automobile Loan Receivables |
(546.1 | ) | (793.3 | ) | (806.9 | ) | ||||||
Acquisition of Businesses, Net of Cash Acquired |
(95.4 | ) | (46.9 | ) | | |||||||
Disposition of Businesses, Net of Cash Disposed |
68.8 | 3.9 | | |||||||||
Other, Net |
(29.9 | ) | (15.4 | ) | (3.3 | ) | ||||||
Net Cash Provided (Used) by Investing Activities |
356.2 | (222.9 | ) | (86.1 | ) | |||||||
FINANCING ACTIVITIES |
||||||||||||
Certificates of Deposits Issued |
143.0 | 361.3 | 350.9 | |||||||||
Certificates of Deposits Withdrawals |
(306.5 | ) | (249.7 | ) | (262.5 | ) | ||||||
Notes Payable Proceeds |
232.0 | 354.8 | 40.0 | |||||||||
Notes Payable Payments |
(232.1 | ) | (300.0 | ) | (40.1 | ) | ||||||
Cash Dividends Paid |
(118.4 | ) | (119.9 | ) | (119.8 | ) | ||||||
Common Stock Repurchases |
(69.0 | ) | (139.5 | ) | (89.9 | ) | ||||||
Cash Exercise of Stock Options |
1.6 | 5.1 | 6.8 | |||||||||
Excess Tax Benefits from Share-based Awards |
0.3 | 1.3 | 3.4 | |||||||||
Other, Net |
3.4 | 4.0 | 4.3 | |||||||||
Net Cash Used by Financing Activities |
(345.7 | ) | (82.6 | ) | (106.9 | ) | ||||||
Increase (Decrease) in Cash |
79.7 | (53.4 | ) | 113.4 | ||||||||
Cash, Beginning of Year, Including Cash Reported in Discontinued Operations |
104.5 | 157.9 | 44.5 | |||||||||
Cash, End of Year, Including Cash Reported in Discontinued Operations |
$ | 184.2 | $ | 104.5 | $ | 157.9 | ||||||
Cash, End of Year, Reported in Discontinued Operations |
| (1.4 | ) | | ||||||||
Cash, End of Year |
$ | 184.2 | $ | 103.1 | $ | 157.9 | ||||||
The Notes to the Consolidated Financial Statements are an integral part of these financial statements.
82
Unitrin, Inc. and Subsidiaries
Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss)
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 | |||||||||||||||||||||||
DOLLARS AND SHARES IN
|
NUMBER OF
SHARES |
COMMON
STOCK |
PAID-IN
CAPITAL |
RETAINED
EARNINGS |
ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS) |
TOTAL
SHAREHOLDERS EQUITY |
|||||||||||||||||
BALANCE, DECEMBER 31, 2005 As Reported |
68.5 | $ | 6.9 | $ | 711.4 | $ | 1,188.2 | $ | 251.2 | $ | 2,157.7 | ||||||||||||
Cumulative Effect of Change in Accounting (notes 1 and 2) |
1.7 | 1.7 | |||||||||||||||||||||
BALANCE, DECEMBER 31, 2005 As Adjusted |
68.5 | $ | 6.9 | $ | 711.4 | $ | 1,189.9 | $ | 251.2 | $ | 2,159.4 | ||||||||||||
Net Income |
| | | 287.0 | | 287.0 | |||||||||||||||||
Other Comprehensive Income (note 14) |
| | | | 43.1 | 43.1 | |||||||||||||||||
Total Comprehensive Income |
330.1 | ||||||||||||||||||||||
Cash Dividends to Shareholders ($1.76 per share) |
| | | (119.8 | ) | | (119.8 | ) | |||||||||||||||
Repurchases of Common Stock |
(2.0 | ) | (0.2 | ) | (21.6 | ) | (68.1 | ) | | (89.9 | ) | ||||||||||||
Stock-based Compensation Cost (notes 2 and 12) |
| | 11.9 | | | 11.9 | |||||||||||||||||
Share-based Awards, |
|||||||||||||||||||||||
Net of Shares Exchanged (note 12) |
0.5 | | 57.6 | (52.2 | ) | | 5.4 | ||||||||||||||||
Adjustment to Initially Apply SFAS No. 158, Net of Tax (note 2) |
| | | | (7.3 | ) | (7.3 | ) | |||||||||||||||
Other |
| | (0.2 | ) | | | (0.2 | ) | |||||||||||||||
BALANCE, DECEMBER 31, 2006 |
67.0 | $ | 6.7 | $ | 759.1 | $ | 1,236.8 | $ | 287.0 | $ | 2,289.6 | ||||||||||||
Net Income |
| | | 205.4 | | 205.4 | |||||||||||||||||
Other Comprehensive Income (note 14) |
| | | | 40.1 | 40.1 | |||||||||||||||||
Total Comprehensive Income |
245.5 | ||||||||||||||||||||||
Cash Dividends to Shareholders ($1.82 per share) |
| | | (119.9 | ) | | (119.9 | ) | |||||||||||||||
Repurchases of Common Stock |
(3.0 | ) | (0.3 | ) | (35.6 | ) | (103.6 | ) | | (139.5 | ) | ||||||||||||
Stock-based Compensation Cost (notes 2 and 12) |
| | 15.7 | | | 15.7 | |||||||||||||||||
Share-based Awards, |
|||||||||||||||||||||||
Net of Shares Exchanged (note 12) |
0.3 | | 42.5 | (39.3 | ) | | 3.2 | ||||||||||||||||
Equity in Investees Adjustment to Initially Apply SFAS No. 158, Net of Tax (note 2) |
| | | | (2.3 | ) | (2.3 | ) | |||||||||||||||
Equity in Cumulative Effect of Investees Adoption of FIN 48 |
| | | (0.9 | ) | | (0.9 | ) | |||||||||||||||
Other |
| | (0.4 | ) | | | (0.4 | ) | |||||||||||||||
BALANCE, DECEMBER 31, 2007 |
64.3 | $ | 6.4 | $ | 781.3 | $ | 1,178.5 | $ | 324.8 | $ | 2,291.0 | ||||||||||||
Net Loss |
| | | (29.6 | ) | | (29.6 | ) | |||||||||||||||
Other Comprehensive Loss (note 14) |
| | | | (432.9 | ) | (432.9 | ) | |||||||||||||||
Total Comprehensive Loss |
(462.5 | ) | |||||||||||||||||||||
Cash Dividends to Shareholders ($1.88 per share) |
| | | (118.4 | ) | | (118.4 | ) | |||||||||||||||
Repurchases of Common Stock |
(2.0 | ) | (0.2 | ) | (24.9 | ) | (43.9 | ) | | (69.0 | ) | ||||||||||||
Stock-based Compensation Cost (notes 2 and 12) |
| | 7.4 | | | 7.4 | |||||||||||||||||
Share-based Awards, |
|||||||||||||||||||||||
Net of Shares Exchanged (note 12) |
| | 1.0 | (0.8 | ) | | 0.2 | ||||||||||||||||
Other |
| | (0.1 | ) | | | (0.1 | ) | |||||||||||||||
BALANCE, DECEMBER 31, 2008 |
62.3 | $ | 6.2 | $ | 764.7 | $ | 985.8 | $ | (108.1 | ) | $ | 1,648.6 | |||||||||||
The Notes to the Consolidated Financial Statements are an integral part of these financial statements.
83
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ESTIMATES
The Consolidated Financial Statements included herein have been prepared on the basis of GAAP and include the accounts of Unitrin, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.
In 2008, the Company changed its accounting for certain investments accounted for under the equity method of accounting to eliminate a reporting lag. The Consolidated Financial Statements have been adjusted for the retrospective application of a change in accounting principle pursuant to SFAS No. 154, Accounting Changes and Correction of Errors. See Note 2, Summary of Accounting Policies and Accounting Changes, to the Consolidated Financial Statements for the effect on the Consolidated Financial Statements.
The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates and assumptions.
The fair values of Investments in Fixed Maturities, Investments in Equity Securities and Senior Notes Payable are estimated pursuant to the hierarchy of fair value under SFAS No. 157, Fair Value Measurements . The fair values of the Companys Investment in Investee and Investments in Northrop Preferred Stock and Northrop Common Stock are based on quoted market prices. The fair value of Automobile Loan Receivables is estimated by discounting the estimated future cash flows using the current rates at which loans would be made to borrowers with similar credit ratings and the same remaining maturities. The fair values of Certificates of Deposits have been estimated by discounting the future cash flows using the rates currently offered for deposits with similar remaining maturities. The carrying amounts reported in the Consolidated Balance Sheets approximate fair value for Cash, Short-term Investments and certain other assets and other liabilities because of their short-term nature.
The actual value at which such financial instruments could actually be sold or settled with a willing buyer or seller may differ from such estimated fair values depending on a number of factors including, but not limited to, current and future economic conditions, the quantity sold or settled, the presence of an active market and the availability of a willing buyer or seller.
The Reserve for Loan Losses is estimated using the Companys estimate of ultimate charge-offs and recoveries of loans based on past experience adjusted for current economic conditions. Such charge-offs and recoveries emerge over several years. Accordingly, the Companys actual ultimate net charge-off could materially differ from the Companys estimate due to a variety of factors including, but not limited to, trends and future conditions in the macroeconomic, socioeconomic and regulatory environment, the timing of charge-offs and recoveries, the value of collateral and changes in the overall credit quality of the loan portfolio.
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 may vary materially from the estimated amount reserved. The reserving process is particularly imprecise for claims involving asbestos, environmental matters, mold, 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. Management considers a variety of factors including, but not limited to, past claims experience, current claim trends and relevant legal, economic and social conditions, in estimating reserves. A change in any one or more factors is likely to result in the ultimate net claim cost to differ from the estimated reserve. Such changes in estimates may be material.
The process of determining whether or not an asset is impaired or recoverable relies on projections of future cash flows, operating results and market conditions. Projections are inherently uncertain and, accordingly, actual
84
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ESTIMATES (Continued)
future cash flows may differ materially from projected cash flows. As a result, the Companys assessment of the impairment of long-lived assets or the recoverability of assets such as Goodwill and Deferred Policy Acquisition Costs is susceptible to the risk inherent in making such projections.
NOTE 2. SUMMARY OF ACCOUNTING POLICIES AND ACCOUNTING CHANGES
Investments
Investments in Fixed Maturities include bonds, notes and redeemable preferred stocks at fair value and are classified as available for sale. Investments in Other Equity Securities include common and non-redeemable preferred stocks and other equity interests at fair value and are classified as available for sale. Other equity interests consist of limited partnership interests in partnerships which the Companys interest is deemed minor under applicable accounting standards. Unrealized appreciation or depreciation, net of applicable deferred income taxes, on fixed maturities and equity securities is reported in Accumulated Other Comprehensive Income (Loss) included in Shareholders Equity. Short-term Investments include fixed maturities that mature within one year from the date of purchase, money market mutual funds, Federal funds sold and repurchase agreements at cost, which approximates fair value. Other Investments primarily include loans to policyholders, real estate, investments in certain limited liability investment companies and limited partnerships and mortgage loans. Loans to policyholders and mortgage loans are carried at unpaid principal balance. Real estate is carried at cost, net of accumulated depreciation. Investments in limited liability investment companies and limited partnerships in which the Companys interest is not deemed minor under applicable accounting standards are accounted for under the equity method of accounting. Gains and losses on sales of investments are computed on the specific identification method and are reported in the Consolidated Statements of Operations in the period in which the sales occur. The Company regularly reviews its investment portfolio for factors that may indicate that a decline in fair value of an investment is other than temporary. Losses arising from other than temporary declines in fair value are computed on the specific identification method and reported in the Consolidated Statements of Operations in the period that the decline is determined to be other than temporary.
Investment in Investee (Intermec) is accounted for under the equity method of accounting in the accompanying financial statements. The Companys voting percentage and share of earnings or losses of an investee is determined using the most recent and sufficiently timely publicly available audited financial statements and subsequent unaudited interim reports, which results in accounting on a three-month-delay basis. The Company recognizes into income its equity share of changes in an investees reported net assets resulting from an investees issuance of stock that is not part of a broader corporate reorganization.
Automobile Loan Receivables
Automobile Loan Receivables consists primarily of sub-prime loans to residents of California and other western and midwestern states. Automobile Loan Receivables is stated net of unearned discount, deferred loan fees and costs and reserve for loan losses. Unearned discount arises when the loan amount includes unearned pre-computed interest. The Reserve for Loan Losses is maintained at a level that considers such factors as actual and expected loan loss experience and economic conditions to provide for estimated loan losses. Additions to the Reserve for Loan Losses are charged to expense. Actual loan losses or recoveries are charged or added, respectively as the case may be, to the Reserve for Loan Losses when incurred or received.
Deferred Policy Acquisition Costs
Costs directly associated with the acquisition of business, principally commissions and certain premium taxes and policy issuance costs, are deferred. Costs deferred on property and casualty insurance products and health insurance products are amortized over the term of the related policies. Costs deferred on traditional life insurance
85
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 2. SUMMARY OF ACCOUNTING POLICIES AND ACCOUNTING CHANGES (Continued)
products are primarily amortized over the anticipated premium-paying period of the related policies in proportion to the ratio of the annual premiums to the total premiums anticipated, which is estimated using the same assumptions used in calculating policy reserves.
The Company accounts for the present value of the future profits embedded in life insurance in force acquired (VIF) based on actuarial estimates of the present value of estimated net cash flows. VIF is classified as Deferred Policy Acquisition Costs in the Consolidated Balance Sheets. VIF is amortized using the effective interest method using interest rates consistent with the rates in the underlying insurance contracts. The Company estimates that it will record VIF amortization, net of interest, of $2.7 million, $2.4 million, $2.2 million, $2.0 million and $1.8 million in each of the next five years.
Goodwill
The Company accounts for Goodwill pursuant to the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. Accordingly, Goodwill is not amortized, but rather is tested annually for recoverability or when certain triggering events require testing. The Company tests Goodwill in the first quarter of its fiscal year. In 2008, the Company determined that the Goodwill related to its investment in Fireside Bank was impaired and wrote off $9.2 million of Goodwill. See Note 7, Goodwill to the Consolidated Financial Statements.
Insurance Reserves
Reserves for losses and LAE on property and casualty coverage represent the estimated claim cost and loss adjustment expense necessary to cover the ultimate net cost of investigating and settling all losses incurred and unpaid. Such estimates are based on individual case estimates for reported claims and estimates for incurred but not reported losses. These estimates are adjusted in the aggregate for ultimate loss expectations based on historical experience patterns and current economic trends, with any change in the probable ultimate liabilities being reported in the Consolidated Statements of Operations in the period of change. Such changes in estimates may be material.
For traditional life insurance products, the reserves for future policy benefits are estimated on the net level premium method based on rates for expected mortality, lapse rates and interest rates, including provisions for adverse mortality. These assumptions vary by such characteristics as plan, age at issue and policy duration. Mortality assumptions are based on the Companys historical experience and industry standards. Interest rate assumptions principally range from 3% to 7%. Lapse rate assumptions are based on actual and industry experience. Benefit reserves for universal life-type products represent policy account balances before applicable surrender charges.
Other Receivables, Other Assets and Accrued Expenses and Other Liabilities
Other Receivables primarily include amounts due from policyholders, reinsurance recoverables and accrued investment income. Other Assets primarily include property and equipment, prepaid expenses and insurance licenses acquired. Accrued Expenses and Other Liabilities primarily include outstanding checks, accrued salaries and commissions, pension benefits, postretirement medical benefits and accrued taxes, licenses and fees.
Recognition of Earned Premiums and Related Expenses
Property and casualty insurance and health insurance premiums are recognized and earned ratably over the periods to which the premiums relate.
Traditional life insurance premiums are recognized as revenue when due. Policyholders benefits are associated with related premiums to result in recognition of profits over the periods for which the benefits are provided.
86
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 2. SUMMARY OF ACCOUNTING POLICIES AND ACCOUNTING CHANGES (Continued)
Premium revenues for universal life-type products consist of charges for the cost of insurance, policy administration and policy surrenders that have been assessed against policy account balances during the period.
Policyholders Benefits and Incurred Losses and Loss Adjustment Expenses include provisions for future policy benefits under life and certain accident and health insurance contracts and provisions for reported claims, estimates for claims incurred but not reported and loss adjustment expenses. Benefit payments in excess of policy account balances are expensed.
Reinsurance
In the normal course of business, Unitrins insurance subsidiaries reinsure certain risks above certain retention levels with other insurance enterprises. Amounts recoverable from reinsurers for benefits and losses for which Unitrins insurance subsidiaries have not been relieved of their legal obligations to the policyholder are included in Other Receivables.
Gains related to long-duration reinsurance contracts are deferred and amortized over the life of the underlying reinsured policies. Losses related to long-duration reinsurance contracts are recognized immediately. Any gain or loss associated with reinsurance agreements for which Unitrins insurance subsidiaries have been legally relieved of their obligations to the policyholder is recognized in the period of relief.
Automobile Finance Revenues and Expenses
Automobile Finance Revenues primarily include interest on Automobile Loan Receivables and miscellaneous revenues related to the loans. Interest income, including amortization of unearned discount and deferred loan fees, on Automobile Loan Receivables is recorded as interest is earned, using the effective yield method over the contractual life of the loans.
Automobile Finance Expenses includes Provisions for Loan Losses and General and Administrative Expenses.
Interest Expense on Certificates of Deposits is recorded using the effective yield method.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period in which the change is enacted.
The Company accounts for uncertain tax positions in accordance with FIN 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 . Accordingly, the Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken, or expected to be taken, in an income tax return. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Stock-based Compensation
Awards under the Companys stock-based compensation plans are accounted for under the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment .
87
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 2. SUMMARY OF ACCOUNTING POLICIES AND ACCOUNTING CHANGES (Continued)
Accounting Changes
At December 31, 2008, the Company determined that reliable financial information for certain investments in limited liability investment companies that the Company had accounted for under the equity method of accounting using a reporting lag of three months had consistently become available during 2008 on a sufficiently timely basis for the Company to report such investees results consistent with the Companys reporting date. When an investor that reports an investees results on a lag under Accounting Principles Board Opinion (APB) No. 18, The Equity Method of Accounting for Investments in Common Stock, subsequently has the ability to obtain reliable and timely financial statements for the investee as of, or more consistent with, the investors reporting date, the investor is required to change, or discontinue the use of, the reporting lag. Pursuant to Emerging Issues Task Force (EITF) 06-09, Reporting a Change in (or the Elimination of) a Previously Existing Difference between the Fiscal Year-End of a Parent Company and That of a Consolidated Entity or between the Reporting Period of an Investor and That of an Equity Method Investee , when an investor is required to change, or discontinue the use of, a reporting lag for an investee, it must account for the change, or elimination, of the lag as a change in accounting principle pursuant to SFAS No. 154, Accounting Changes and Correction of Errors . Under SFAS 154, changes in accounting principles are reported retrospectively as if the current accounting principle had been used in all periods presented. Accordingly, the Consolidated Financial Statements have been adjusted to eliminate the reporting lag for these investees.
The following individual line items in the Consolidated Balance Sheets at December 31, 2008 and 2007 were affected by the change in accounting principle:
DOLLARS IN MILLIONS |
As
Computed without Change in Accounting |
As
Reported with Change in Accounting |
Effect of
Change |
|||||||
Impact on Assets at December 31, 2008: |
||||||||||
Other Investments |
$ | 759.1 | $ | 714.9 | $ | (44.2 | ) | |||
Current and Deferred Income Taxes |
185.9 | 201.4 | 15.5 | |||||||
Impact on Liabilities and |
||||||||||
Shareholders Equity at December 31, 2008: |
||||||||||
Retained Earnings |
1,014.5 | 985.8 | (28.7 | ) | ||||||
DOLLARS IN MILLIONS |
As
Originally Reported |
As
Adjusted |
Effect of
Change |
|||||||
Impact on Assets at December 31, 2007: |
||||||||||
Other Investments |
$ | 706.7 | $ | 696.1 | $ | (10.6 | ) | |||
Impact on Liabilities and Shareholders Equity at December 31, 2007: |
||||||||||
Liabilities for Income Taxes |
262.5 | 258.7 | (3.8 | ) | ||||||
Retained Earnings |
1,185.3 | 1,178.5 | (6.8 | ) |
88
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 2. SUMMARY OF ACCOUNTING POLICIES AND ACCOUNTING CHANGES (Continued)
The following individual line items in the Consolidated Statement of Operations for the year ended December 31, 2008 were affected by the change in accounting principle:
Year Ended December 31, 2008 | ||||||||||||
DOLLARS IN MILLIONS |
As
Computed without Change in Accounting |
As
Reported with Change in Accounting |
Effect of
Change |
|||||||||
Earned Premiums |
$ | 2,376.6 | $ | 2,376.6 | $ | | ||||||
Automobile Finance Revenues |
242.3 | 242.3 | | |||||||||
Net Investment Income |
247.5 | 212.9 | (34.6 | ) | ||||||||
Other Income |
4.1 | 4.1 | | |||||||||
Net Realized Investment Gains (Losses) |
(93.7 | ) | (93.7 | ) | | |||||||
Total Revenues |
2,776.8 | 2,742.2 | (34.6 | ) | ||||||||
Total Expenses |
2,832.2 | 2,832.2 | | |||||||||
Income (Loss) from Continuing Operations before |
||||||||||||
Income Taxes and in Net Income of Investee |
(55.4 | ) | (90.0 | ) | (34.6 | ) | ||||||
Income Tax Benefit (Expense) |
34.1 | 46.2 | 12.1 | |||||||||
Income (Loss) form Continuing Operations before |
||||||||||||
Equity in Net Income of Investee |
(21.3 | ) | (43.8 | ) | (22.5 | ) | ||||||
Equity in Net Income of Investee |
5.8 | 5.8 | | |||||||||
Income (Loss) from Continuing Operations |
(15.5 | ) | (38.0 | ) | (22.5 | ) | ||||||
Discontinued Operations: |
||||||||||||
Income from Discontinued Operations Before |
17.2 | 18.2 | 1.0 | |||||||||
Income Taxes |
||||||||||||
Income Tax Expense |
(9.4 | ) | (9.8 | ) | (0.4 | ) | ||||||
Income from Discontinued Operations |
7.8 | 8.4 | 0.6 | |||||||||
Net Income (Loss) |
$ | (7.7 | ) | $ | (29.6 | ) | $ | (21.9 | ) | |||
Income (Loss) Per Share from Continuing Operations |
$ | (0.24 | ) | $ | (0.60 | ) | $ | (0.36 | ) | |||
Income Per Share from Discontinued Operations |
0.12 | 0.13 | 0.01 | |||||||||
Net Income (Loss) Per Share |
$ | (0.12 | ) | $ | (0.47 | ) | $ | (0.35 | ) | |||
Income (Loss) Per Share from Continuing |
||||||||||||
Operations Assuming Dilution |
$ | (0.24 | ) | $ | (0.60 | ) | $ | (0.36 | ) | |||
Income Per Share from |
||||||||||||
Discontinued Operations Assuming Dilution |
0.12 | 0.13 | 0.01 | |||||||||
Net Income (Loss) Per Share Assuming Dilution |
$ | (0.12 | ) | $ | (0.47 | ) | $ | (0.35 | ) | |||
89
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 2. SUMMARY OF ACCOUNTING POLICIES AND ACCOUNTING CHANGES (Continued)
The following individual line items in the Consolidated Statement of Operations for the year ended December 31, 2007 were affected by the change in accounting principle:
Year Ended December 31, 2007 | ||||||||||||
DOLLARS IN MILLIONS |
As
Originally Reported |
As
Adjusted |
Effect of
Change |
|||||||||
Earned Premiums |
$ | 2,286.9 | $ | 2,286.9 | $ | | ||||||
Automobile Finance Revenues |
260.2 | 260.2 | | |||||||||
Net Investment Income |
306.7 | 289.9 | (16.8 | ) | ||||||||
Other Income |
3.5 | 3.5 | | |||||||||
Net Realized Investment Gains (Losses) |
62.5 | 62.5 | | |||||||||
Total Revenues |
2,919.8 | 2,903.0 | (16.8 | ) | ||||||||
Total Expenses |
2,676.2 | 2,676.2 | | |||||||||
Income (Loss) from Continuing Operations before |
||||||||||||
Income Taxes and in Net Income of Investee |
243.6 | 226.8 | (16.8 | ) | ||||||||
Income Tax Benefit (Expense) |
(55.8 | ) | (49.9 | ) | 5.9 | |||||||
Income (Loss) form Continuing Operations before |
||||||||||||
Equity in Net Income of Investee |
187.8 | 176.9 | (10.9 | ) | ||||||||
Equity in Net Income of Investee |
1.2 | 1.2 | | |||||||||
Income (Loss) from Continuing Operations |
189.0 | 178.1 | (10.9 | ) | ||||||||
Discontinued Operations: |
||||||||||||
Income from Discontinued Operations Before |
||||||||||||
Income Taxes |
37.1 | 34.8 | (2.3 | ) | ||||||||
Income Tax Expense |
(8.3 | ) | (7.5 | ) | 0.8 | |||||||
Income from Discontinued Operations |
28.8 | 27.3 | (1.5 | ) | ||||||||
Net Income (Loss) |
$ | 217.8 | $ | 205.4 | $ | (12.4 | ) | |||||
Income (Loss) Per Share from Continuing Operations |
$ | 2.88 | $ | 2.71 | $ | (0.17 | ) | |||||
Income Per Share from Discontinued Operations |
0.44 | 0.42 | (0.02 | ) | ||||||||
Net Income (Loss) Per Share |
$ | 3.32 | $ | 3.13 | $ | (0.19 | ) | |||||
Income (Loss) Per Share from Continuing |
||||||||||||
Operations Assuming Dilution |
$ | 2.87 | $ | 2.70 | $ | (0.17 | ) | |||||
Income Per Share from |
||||||||||||
Discontinued Operations Assuming Dilution |
0.43 | 0.42 | (0.01 | ) | ||||||||
Net Income (Loss) Per Share Assuming Dilution |
$ | 3.30 | $ | 3.12 | $ | (0.18 | ) | |||||
90
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 2. SUMMARY OF ACCOUNTING POLICIES AND ACCOUNTING CHANGES (Continued)
The following individual line items in the Consolidated Statement of Operations for the year ended December 31, 2006 were affected by the change in accounting principle:
Year Ended December 31, 2006 | ||||||||||||
DOLLARS IN MILLIONS |
As Originally
Reported |
As Adjusted |
Effect of
Change |
|||||||||
Earned Premiums |
$ | 2,290.5 | $ | 2,290.5 | $ | | ||||||
Automobile Finance Revenues |
245.0 | 245.0 | | |||||||||
Net Investment Income |
280.8 | 286.0 | 5.2 | |||||||||
Other Income |
14.4 | 14.4 | | |||||||||
Net Realized Investment Gains (Losses) |
26.5 | 26.5 | | |||||||||
Total Revenues |
2,857.2 | 2,862.4 | 5.2 | |||||||||
Total Expenses |
2,487.2 | 2,487.2 | | |||||||||
Income (Loss) from Continuing Operations before
|
370.0 | 375.2 | 5.2 | |||||||||
Income Tax Benefit (Expense) |
(115.0 | ) | (116.8 | ) | (1.8 | ) | ||||||
Income (Loss) form Continuing Operations before
|
255.0 | 258.4 | 3.4 | |||||||||
Equity in Net Income of Investee |
9.2 | 9.2 | | |||||||||
Income (Loss) from Continuing Operations |
264.2 | 267.6 | 3.4 | |||||||||
Discontinued Operations: |
||||||||||||
Income from Discontinued Operations Before Income Taxes |
21.3 | 22.0 | 0.7 | |||||||||
Income Tax Expense |
(2.4 | ) | (2.6 | ) | (0.2 | ) | ||||||
Income from Discontinued Operations |
18.9 | 19.4 | 0.5 | |||||||||
Net Income (Loss) |
$ | 283.1 | $ | 287.0 | $ | 3.9 | ||||||
Income (Loss) Per Share from Continuing Operations |
$ | 3.89 | $ | 3.94 | $ | 0.05 | ||||||
Income Per Share from Discontinued Operations |
0.28 | 0.29 | 0.01 | |||||||||
Net Income (Loss) Per Share |
$ | 4.17 | $ | 4.23 | $ | 0.06 | ||||||
Income (Loss) Per Share from Continuing Operations Assuming Dilution |
$ | 3.87 | $ | 3.92 | $ | 0.05 | ||||||
Income Per Share from Discontinued Operations Assuming Dilution |
0.28 | 0.28 | | |||||||||
Net Income (Loss) Per Share Assuming Dilution |
$ | 4.15 | $ | 4.20 | $ | 0.05 | ||||||
91
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 2. SUMMARY OF ACCOUNTING POLICIES AND ACCOUNTING CHANGES (Continued)
The following individual line items in the Consolidated Statements of Cash Flows for years the years ended December 31, 2008, 2007 and 2006 were affected by the change in accounting principle:
Year Ended December 31, 2008 | ||||||||||||
DOLLARS IN MILLIONS |
As
Computed without Change in Accounting |
As
Reported with Change in Accounting |
Effect of
Change |
|||||||||
Impact on Operating Activities for the year ended December 31, 2008: |
||||||||||||
Net Income (Loss) |
$ | (7.7 | ) | $ | (29.6 | ) | $ | (21.9 | ) | |||
Equity in (Earnings) Losses of Limited Liability Investment Companies and Limited Partnerships |
43.5 | 77.1 | 33.6 | |||||||||
Decrease in Liabilities for Income Taxes |
(120.4 | ) | (132.1 | ) | (11.7 | ) | ||||||
Net Cash Provided by Operating Activities |
69.2 | 69.2 | |
Year Ended December 31, 2007 | ||||||||||||
DOLLARS IN MILLIONS |
As
Originally Reported |
As
Adjusted |
Effect of
Change |
|||||||||
Impact on Operating Activities for the year ended December 31, 2007: |
||||||||||||
Net Income (Loss) |
$ | 217.8 | $ | 205.4 | $ | (12.4 | ) | |||||
Equity in (Earnings) Losses of Limited Liability Investment Companies and Limited Partnerships |
(25.5 | ) | (6.4 | ) | 19.1 | |||||||
Decrease in Liabilities for Income Taxes |
(53.4 | ) | (60.1 | ) | (6.7 | ) | ||||||
Net Cash Provided by Operating Activities |
252.1 | 252.1 | |
Year Ended December 31, 2006 | ||||||||||||
As
Originally Reported |
As
Adjusted |
Effect of
Change |
||||||||||
DOLLARS IN MILLIONS |
||||||||||||
Impact on Operating Activities for the year ended December 31, 2006: |
||||||||||||
Net Income (Loss) |
$ | 283.1 | $ | 287.0 | $ | 3.9 | ||||||
Equity in (Earnings) Losses of Limited Liability Investment Companies and Limited Partnerships |
(18.9 | ) | (24.8 | ) | (5.9 | ) | ||||||
Decrease in Liabilities for Income Taxes |
(6.3 | ) | (4.3 | ) | 2.0 | |||||||
Net Cash Provided by Operating Activities |
306.4 | 306.4 | |
There was no effect on Investing Activities or Financing Activities reported in the Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006.
During 2008, 2007 and 2006, the following accounting guidance relevant to the Company has been issued by the FASB, and/or became effective.
In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 . FIN 48 clarifies the accounting for uncertainty in income taxes recognized under SFAS No. 109, Accounting for Income Taxes . FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on various related matters such as derecognition, interest and penalties, and disclosure. On January 1, 2007, the Company adopted FIN 48. The initial application of FIN 48 to the Companys tax positions had no effect on the Companys Shareholders Equity. The Company accounts for its investment in its investee, Intermec, under the equity method of accounting on a three-month-delay basis.
92
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 2. SUMMARY OF ACCOUNTING POLICIES AND ACCOUNTING CHANGES (Continued)
Accordingly, the Company recognized its pro rata share of the effect of Intermecs adoption of FIN 48 in the Companys consolidated financial statements in the second quarter of 2007. Based on Intermecs disclosure in its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2007, the impact of Intermecs initial application of FIN 48 resulted in the Company recognizing a reduction in the Companys Shareholders Equity of $0.9 million, which was net of a tax benefit of $0.5 million.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements . SFAS No. 157 defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements, but does not require any new fair value measurements. On January 1, 2008, the Company adopted SFAS No. 157. The initial application of SFAS No. 157 did not have a material effect on the fair values reported by the Company. The additional disclosures required by SFAS No. 157 are presented in Note 22, Fair Value Measurements. On October 10, 2008, the FASB issued FASB Staff Position (FSP) SFAS No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active . FSP SFAS No. 157-3 does not change the fair value measurement principles in SFAS No. 157, but rather provides guidance of the application of those measurement principles in the extreme inactive markets that currently exist.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans . SFAS No. 158 amends SFAS No. 87, Employers Accounting for Pensions , SFAS No. 88, Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and Termination Benefits , SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions , and SFAS No. 132(R), Employers Disclosure about Pensions and Other Postretirement Benefits . SFAS No. 158 requires the recognition of the funded status of a defined benefit postretirement plan (other than a multi-employer plan) as an asset or liability in the statement of financial position and the recognition of changes in the funded status through comprehensive income in the year in which such changes occur. The Company adopted the recognition provisions of SFAS No. 158 and initially applied them to the funded status of the Companys defined benefit postretirement plans and provided the required disclosures as of December 31, 2006. The initial recognition of the funded status of the Companys defined benefit postretirement plans resulted in a decrease in Shareholders Equity of $7.3 million, which was net of a tax benefit of $5.5 million. The Companys investee, Intermec, recognized the financial impact of SFAS No. 158 in its financial statements at December 31, 2006. The Company accounts for its investment in Intermec under the equity method of accounting on a three-month-delay basis. Accordingly, the Company recognized a decrease of $2.3 million, which was net of a tax benefit of $1.3 million, to its Shareholders Equity in the first quarter of 2007 for its pro rata share of the impact of Intermecs adoption of SFAS No. 158.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115 . SFAS No. 159 permits the choice of measuring financial instruments and certain other items at fair value. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. On January 1, 2008, the Company adopted SFAS No. 159 and elected not to apply the provisions of SFAS No. 159 to its eligible financial assets and financial liabilities on the date of adoption. Accordingly, the initial application of SFAS No. 159 had no effect on the Company.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations . SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree and recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase. SFAS No. 141(R) also sets forth the disclosures required to be made in the financial statements to evaluate the
93
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 2. SUMMARY OF ACCOUNTING POLICIES AND ACCOUNTING CHANGES (Continued)
nature and financial effects of the business combination. The Company is required to apply SFAS No. 141(R) prospectively to business combinations occurring on or after January 1, 2009.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 . SFAS No. 160 establishes accounting and reporting standards that require: that the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parents equity; the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of operations; and changes in a parents ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. SFAS No. 160 also requires that any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value when a subsidiary is deconsolidated. SFAS No. 160 also sets forth the disclosure requirements to identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. SFAS No. 160 must be applied prospectively as of the beginning of the fiscal year in which SFAS No. 160 is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements are applied retrospectively for all periods presented. The Company does not have a noncontrolling interest in one or more subsidiaries. Accordingly, the Company does not anticipate that the initial application of SFAS No. 160 will have an impact on the Company.
In March 2008, the FASB issued SFAS No. 161, Disclosure about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 . SFAS No. 161 establishes, among other things, the disclosure requirements for derivative instruments and for hedging activities. SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, with the intent to provide users of financial statements with enhanced understanding of: how and why an entity uses derivative securities; how derivatives and hedges are being accounted for under SFAS No. 133; and how derivatives and hedges affect an entitys financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008 with early adoption permitted. The Company estimates that the initial application of SFAS No. 161 will not be material.
In April 2008, the FASB issued FSP SFAS 142-3, Determination of the Useful Life of Intangible Assets . FSP SFAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. Previously, under the provisions of SFAS No. 142, an entity was precluded from using its own assumptions about renewal or extension of an arrangement where there was likely to be substantial cost or material modifications. FSP SFAS 142-3 removes the requirement of SFAS No. 142 for an entity to consider whether an intangible asset can be renewed without substantial cost or material modification to the existing terms and conditions and requires an entity to consider its own experience in renewing similar arrangements. FSP SFAS 142-3 also increases the disclosure requirements for a recognized intangible asset to enable a user of financial statements to assess the extent to which the expected future cash flows associated with the asset are affected by the entitys intent or ability to renew or extend the arrangement. FSP SFAS 142-3 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. Early adoption is prohibited. The guidance for determining the useful life of a recognized intangible asset is applied prospectively to intangible assets acquired after the effective date. Accordingly, the Company does not anticipate that the initial application of FSP SFAS No. 142-3 will have an impact on the Company. The disclosure requirements must be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date.
94
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 2. SUMMARY OF ACCOUNTING POLICIES AND ACCOUNTING CHANGES (Continued)
In May 2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60 . SFAS No. 163 clarifies how SFAS No. 60, Accounting and Reporting by Insurance Enterprises, applies to financial guarantee insurance contracts (GICs), including the recognition and measurement of premium revenue and claim liabilities and requires expanded disclosures about GICs. SFAS No. 163 does not apply to a GIC that is accounted for as a derivative instrument within the scope of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Except for certain disclosure requirements regarding insurance enterprise risk-management activities, SFAS No. 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and all interim periods within those fiscal years. Early adoption is generally not permitted. The Company estimates that the initial application of SFAS No. 163 will not be material.
In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities . FSP EITF 03-6-1 concluded that all outstanding share-based payment awards that contain a right to receive nonforfeitable dividends participate in the undistributed earnings with common shareholders, and therefore, the issuing entity is required to apply the two-class method of computing basic and diluted earnings per share, pursuant to SFAS No. 128, Earnings per Share . FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. Early adoption is prohibited. Upon adoption, all prior-period earnings per share data presented must be adjusted retrospectively to conform to FSP EITF 03-6-1. The Company estimates that its Basic Net Income per Share from Continuing Operations will decrease by no more than $0.01 per common share on an annual basis on the initial and retrospective application of FSP EITF 03-6-1.
NOTE 3. ACQUISITIONS OF BUSINESSES
On April 1, 2008, the Company completed its acquisition of Primesco, including its wholly owned subsidiaries, Mutual Savings Life and Mutual Savings Fire in a cash merger transaction for a total purchase price of $95.5 million, including transaction costs of $0.2 million. The results of the acquired companies are included in the Consolidated Financial Statements from the date of acquisition and are reported in the Companys Life and Health Insurance segment.
The Company has not yet completed the process of estimating the fair value of the value of Insurance In Force acquired and Insurance Reserves assumed. The Company expects to complete this process and finalize the allocation of the purchase price by March 31, 2009. Based on the Companys preliminary allocation of the purchase price, assets acquired and liabilities assumed at the date of acquisition of Primesco were:
DOLLARS IN MILLIONS |
||||
Investments |
$ | 399.1 | ||
Other Receivables |
12.5 | |||
Value of Insurance In Force (Reported in Deferred Policy Acquisition Costs) |
52.4 | |||
Goodwill |
29.1 | |||
Current and Deferred Income Taxes |
8.0 | |||
Other Assets |
3.7 | |||
Insurance Reserves |
(400.9 | ) | ||
Unearned Premiums |
(0.2 | ) | ||
Accrued Expenses and Other Liabilities |
(8.2 | ) | ||
Total Purchase Price |
$ | 95.5 | ||
On June 29, 2007, Trinity, a subsidiary of Unitrin, acquired Merastar in a cash transaction for a total purchase price of $47.9 million, including transaction costs of $0.7 million. Beginning with the Companys third quarter of
95
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 3. ACQUISITIONS OF BUSINESSES (Continued)
2007, the results of the acquisition have been included in the Consolidated Financial Statements from the date of acquisition and are reported in the Companys Unitrin Direct segment. Merastar provides automobile and homeowners insurance and is licensed in 48 states.
The Company finalized the allocation of the purchase price to the fair value of the assets acquired and the liabilities assumed in the fourth quarter of 2007. The fair value of the net assets acquired exceeded the purchase price. Accordingly, in accordance with SFAS No. 141, Business Combinations, such excess has been allocated to reduce the fair value of non-financial assets acquired. Based on the Companys allocation of the purchase price, assets acquired and liabilities assumed at the date of acquisition of Merastar were:
DOLLARS IN MILLIONS |
||||
Investments |
$ | 58.7 | ||
Cash |
1.0 | |||
Other Receivables |
11.5 | |||
Value of Insurance In Force (Reported in Deferred Policy Acquisition Costs) |
13.0 | |||
Value of Licenses Acquired (Reported in Other Assets) |
5.8 | |||
Other Assets |
0.6 | |||
Insurance Reserves |
(25.0 | ) | ||
Unearned Premiums |
(12.5 | ) | ||
Liabilities for Income Taxes |
(0.1 | ) | ||
Accrued Expenses and Other Liabilities |
(5.1 | ) | ||
Total Purchase Price |
$ | 47.9 | ||
NOTE 4. DISCONTINUED OPERATIONS
The Company accounts for its Unitrin Business Insurance operations as discontinued operations in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived Assets. On June 3, 2008, the Company completed its previously disclosed sale of its Unitrin Business Insurance operations to AmTrust for total consideration of $101.8 million. Total consideration consisted of cash, other receivables of $10.9 million, with an outstanding balance of $0.7 million at December 31, 2008, and a note receivable from AmTrust valued at $25.1 million. The note receivable is payable in four equal annual installments of $7.5 million and is non-interest bearing. Net proceeds were $94.5 million, including $7.3 million of early contract termination fees and other transaction related costs. AmTrust acquired the renewal rights to the Unitrin Business Insurance book of business, certain legal entities, selected other assets, and the workforce that the Company employed to underwrite and process its Unitrin Business Insurance products. The Company retained Property and Casualty Insurance Reserves for unpaid insured losses that occurred prior to June 1, 2008, the effective date of the sale. In accordance with SFAS No. 144, the Company is not permitted to report these liabilities as Liabilities of Discontinued Operations. Accordingly, Property and Casualty Insurance Reserves as reported in the Companys Consolidated Balance Sheets at December 31, 2008 and December 31, 2007 include $261.1 million and $342.2 million, respectively, for unpaid insured losses and LAE incurred by Unitrin Business Insurance. However, pursuant to the provisions of SFAS No. 144, changes in the Companys estimate of such retained liabilities after the sale are reported as a separate component of the results of discontinued operations.
96
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 4. DISCONTINUED OPERATIONS (Continued)
Summary financial information included in Income from Discontinued Operations before Income Taxes for the years ended December 31, 2008, 2007 and 2006, are presented below:
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | |||||||
Earned Premiums |
$ | 70.8 | $ | 171.5 | $ | 188.2 | ||||
Net Investment Income |
6.7 | 23.0 | 28.9 | |||||||
Other Income |
| | 1.9 | |||||||
Total Revenues Included in Discontinued Operations |
$ | 77.5 | $ | 194.5 | $ | 219.0 | ||||
Income from Discontinued Operations before Income Taxes: |
||||||||||
Results of Operations |
$ | (19.9 | ) | $ | 34.8 | $ | 22.0 | |||
Change in Estimate of Retained Liabilities Arising from Discontinued Operations |
30.0 | | | |||||||
Gain on Disposition |
8.1 | | | |||||||
Income from Discontinued Operations before Income Taxes |
$ | 18.2 | $ | 34.8 | $ | 22.0 | ||||
The effective income tax rate for discontinued operations differs from the federal statutory income tax rate due primarily to goodwill that is not deductible for tax purposes in 2008, and tax-exempt investment income and dividends received deductions in 2008, 2007 and 2006. Tax-exempt investment income and dividends received deductions were $5.4 million, $13.6 million and $14.7 million for the years ended December 31, 2008, 2007 and 2006, respectively.
The components of Assets of Discontinued Operations and Liabilities of Discontinued Operations at December 31, 2007 were:
DOLLARS IN MILLIONS |
|||
Assets: |
|||
Investments: |
|||
Fixed Maturities at Fair Value (Amortized Cost$29.7) |
$ | 31.1 | |
Short-term Investments at Cost which Approximates Fair Value |
5.3 | ||
Total Investments |
36.4 | ||
Cash |
1.4 | ||
Other Receivables |
39.5 | ||
Deferred Policy Acquisition Costs |
15.0 | ||
Goodwill |
30.0 | ||
Other Assets |
5.7 | ||
Total Assets of Discontinued Operations |
128.0 | ||
Liabilities: |
|||
Unearned Premiums |
50.8 | ||
Accrued Expenses and Other Liabilities |
0.5 | ||
Total Liabilities of Discontinued Operations |
51.3 | ||
Net Assets of Discontinued Operations |
$ | 76.7 | |
97
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
The amortized cost and estimated fair values of the Companys Investments in Fixed Maturities at December 31, 2008 were:
AMORTIZED
COST |
GROSS UNREALIZED | FAIR VALUE | |||||||||||
DOLLARS IN MILLIONS |
GAINS | LOSSES | |||||||||||
U.S. Government and Government Agencies and Authorities |
$ | 934.6 | $ | 44.9 | $ | (0.4 | ) | $ | 979.1 | ||||
States, Municipalities and Political Subdivisions |
1,295.6 | 34.2 | (21.3 | ) | 1,308.5 | ||||||||
Corporate Securities: |
|||||||||||||
Bonds and Notes |
1,765.0 | 47.0 | (129.5 | ) | 1,682.5 | ||||||||
Redeemable Preferred Stocks |
179.2 | 0.3 | (13.7 | ) | 165.8 | ||||||||
Investments in Fixed Maturities |
$ | 4,174.4 | $ | 126.4 | $ | (164.9 | ) | $ | 4,135.9 | ||||
The amortized cost and estimated fair values of the Companys Investments in Fixed Maturities at December 31, 2007 were:
AMORTIZED
COST |
GROSS UNREALIZED | FAIR VALUE | |||||||||||
DOLLARS IN MILLIONS |
GAINS | LOSSES | |||||||||||
U.S. Government and Government Agencies and Authorities |
$ | 1,099.8 | $ | 16.5 | $ | (7.6 | ) | $ | 1,108.7 | ||||
States, Municipalities and Political Subdivisions |
1,321.9 | 43.8 | (1.6 | ) | 1,364.1 | ||||||||
Corporate Securities: |
|||||||||||||
Bonds and Notes |
1,107.9 | 36.7 | (11.4 | ) | 1,133.2 | ||||||||
Redeemable Preferred Stocks |
79.3 | 1.5 | (0.1 | ) | 80.7 | ||||||||
Investments in Fixed Maturities |
$ | 3,608.9 | $ | 98.5 | $ | (20.7 | ) | $ | 3,686.7 | ||||
The amortized cost and estimated fair values of the Companys Investments in Fixed Maturities at December 31, 2008 by contractual maturity were:
DOLLARS IN MILLIONS |
AMORTIZED
COST |
FAIR VALUE | ||||
Due in One Year or Less |
$ | 148.1 | $ | 148.8 | ||
Due after One Year to Five Years |
412.3 | 399.1 | ||||
Due after Five Years to Fifteen Years |
1,848.0 | 1,841.2 | ||||
Due after Fifteen Years |
1,298.0 | 1,266.9 | ||||
Asset-backed Securities Not Due at a Single Maturity Date |
468.0 | 479.9 | ||||
Investments in Fixed Maturities |
$ | 4,174.4 | $ | 4,135.9 | ||
The expected maturities of the Companys Investments in Fixed Maturities may differ from the contractual maturities because debtors may have the right to call or prepay obligations with or without call or prepayment penalties. Investments in Asset-backed Securities Not Due at a Single Maturity Date at December 31, 2008 consisted of securities issued by Ginnie Mae with a fair value of $415.6 million, securities issued by Fannie Mae with a fair value of $48.2 million, securities issued by Freddie Mac with a fair value of $2.4 million and securities of other issuers with a fair value of $13.7 million.
98
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 5. INVESTMENTS (Continued)
Gross unrealized gains and gross unrealized losses on the Companys Investments in Northrop Common Stock and Other Equity Securities at December 31, 2008 were:
COST | GROSS UNREALIZED | FAIR VALUE | |||||||||||
DOLLARS IN MILLIONS |
GAINS | LOSSES | |||||||||||
Northrop Common Stock |
$ | 38.6 | $ | 1.7 | $ | | $ | 40.3 | |||||
Other Equity Securities: |
|||||||||||||
Preferred Stocks |
$ | 150.1 | $ | 2.1 | $ | (32.3 | ) | $ | 119.9 | ||||
Common Stocks |
15.8 | 2.6 | (0.9 | ) | 17.5 | ||||||||
Other Equity Interests |
50.9 | 0.4 | (7.2 | ) | 44.1 | ||||||||
Total Other Equity Securities |
$ | 216.8 | $ | 5.1 | $ | (40.4 | ) | $ | 181.5 | ||||
Gross unrealized gains and gross unrealized losses on the Companys Investments in Northrop Preferred Stock, Northrop Common Stock and Other Equity Securities at December 31, 2007 were:
COST | GROSS UNREALIZED | FAIR VALUE | |||||||||||
DOLLARS IN MILLIONS |
GAINS | LOSSES | |||||||||||
Northrop Preferred Stock |
$ | 177.5 | $ | 81.0 | $ | | $ | 258.5 | |||||
Northrop Common Stock |
$ | 245.5 | $ | 202.0 | $ | | $ | 447.5 | |||||
Other Equity Securities: |
|||||||||||||
Preferred Stocks |
$ | 82.2 | $ | 8.0 | $ | (2.8 | ) | $ | 87.4 | ||||
Common Stocks |
324.9 | 156.5 | (4.3 | ) | 477.1 | ||||||||
Other Equity Interests |
29.4 | 3.8 | (0.1 | ) | 33.1 | ||||||||
Total Other Equity Securities |
$ | 436.5 | $ | 168.3 | $ | (7.2 | ) | $ | 597.6 | ||||
On April 4, 2008, Northrop redeemed all of its series B convertible preferred stock outstanding at a redemption rate of 1.299246 shares of Northrop common stock for each share of Northrop preferred stock. The Company had the right to convert its holdings of Northrop preferred stock into Northrop common stock at a more favorable conversion ratio than provided for in Northrops redemption notice. Accordingly, in the first quarter of 2008, the Company converted its holdings of Northrop preferred stock into Northrop common stock at the rate of 1.822267 shares of Northrop common stock for each share of Northrop preferred stock. The Company received 3,234,181 shares of Northrop common stock in the conversion. As a result of the conversion, the Company was not entitled to receive a quarterly dividend on its investment in Northrop preferred stock, but was instead entitled to receive a dividend on the converted shares at a much lower dividend rate.
99
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 5. INVESTMENTS (Continued)
An aging of unrealized losses on the Companys Investments in Fixed Maturities and Other Equity Securities at December 31, 2008 is presented below:
LESS THAN 12 MONTHS | 12 MONTHS OR LONGER | TOTAL | |||||||||||||||||||
DOLLARS IN MILLIONS |
FAIR
VALUE |
UNREALIZED
LOSSES |
FAIR
VALUE |
UNREALIZED
LOSSES |
FAIR
VALUE |
UNREALIZED
LOSSES |
|||||||||||||||
Fixed Maturities: |
|||||||||||||||||||||
U.S. Government and Government Agencies and Authorities |
$ | 57.2 | $ | (0.4 | ) | $ | 4.0 | $ | | $ | 61.2 | $ | (0.4 | ) | |||||||
States, Municipalities and Political Subdivisions |
314.9 | (10.1 | ) | 102.5 | (11.2 | ) | 417.4 | (21.3 | ) | ||||||||||||
Corporate Securities: |
|||||||||||||||||||||
Bonds and Notes |
766.5 | (105.4 | ) | 145.7 | (24.1 | ) | 912.2 | (129.5 | ) | ||||||||||||
Redeemable Preferred Stocks |
132.4 | (13.7 | ) | | | 132.4 | (13.7 | ) | |||||||||||||
Total Fixed Maturities |
1,271.0 | (129.6 | ) | 252.2 | (35.3 | ) | 1,523.2 | (164.9 | ) | ||||||||||||
Other Equity Securities: |
|||||||||||||||||||||
Preferred Stocks |
87.3 | (30.8 | ) | 5.5 | (1.5 | ) | 92.8 | (32.3 | ) | ||||||||||||
Common Stocks |
4.1 | (0.9 | ) | | | 4.1 | (0.9 | ) | |||||||||||||
Other Equity Interests |
14.7 | (3.8 | ) | 3.9 | (3.4 | ) | 18.6 | (7.2 | ) | ||||||||||||
Total Other Equity Securities |
106.1 | (35.5 | ) | 9.4 | (4.9 | ) | 115.5 | (40.4 | ) | ||||||||||||
Total |
$ | 1,377.1 | $ | (165.1 | ) | $ | 261.6 | $ | (40.2 | ) | $ | 1,638.7 | $ | (205.3 | ) | ||||||
An aging of unrealized losses on the Companys Investments in Fixed Maturities and Other Equity Securities at December 31, 2007 is presented below:
LESS THAN 12 MONTHS | 12 MONTHS OR LONGER | TOTAL | |||||||||||||||||||
DOLLARS IN MILLIONS |
FAIR
VALUE |
UNREALIZED
LOSSES |
FAIR
VALUE |
UNREALIZED
LOSSES |
FAIR
VALUE |
UNREALIZED
LOSSES |
|||||||||||||||
Fixed Maturities: |
|||||||||||||||||||||
U.S. Government and Government Agencies and Authorities |
$ | 24.2 | $ | (0.1 | ) | $ | 536.0 | $ | (7.5 | ) | $ | 560.2 | $ | (7.6 | ) | ||||||
States, Municipalities and Political Subdivisions |
112.7 | (1.2 | ) | 22.2 | (0.4 | ) | 134.9 | (1.6 | ) | ||||||||||||
Corporate Securities: |
|||||||||||||||||||||
Bonds and Notes |
211.8 | (3.1 | ) | 161.9 | (8.3 | ) | 373.7 | (11.4 | ) | ||||||||||||
Redeemable Preferred Stocks |
3.8 | (0.1 | ) | | | 3.8 | (0.1 | ) | |||||||||||||
Total Fixed Maturities |
352.5 | (4.5 | ) | 720.1 | (16.2 | ) | 1,072.6 | (20.7 | ) | ||||||||||||
Other Equity Securities: |
|||||||||||||||||||||
Preferred Stocks |
15.0 | (2.8 | ) | 2.9 | | 17.9 | (2.8 | ) | |||||||||||||
Common Stocks |
38.8 | (4.2 | ) | 0.6 | (0.1 | ) | 39.4 | (4.3 | ) | ||||||||||||
Other Equity Interests |
5.2 | (0.1 | ) | | | 5.2 | (0.1 | ) | |||||||||||||
Total Other Equity Securities |
59.0 | (7.1 | ) | 3.5 | (0.1 | ) | 62.5 | (7.2 | ) | ||||||||||||
Total |
$ | 411.5 | $ | (11.6 | ) | $ | 723.6 | $ | (16.3 | ) | $ | 1,135.1 | $ | (27.9 | ) | ||||||
Unrealized losses on fixed maturities were $164.9 million at December 31, 2008, of which $35.3 million related to fixed maturities that have continued in an unrealized loss position for more than 12 months. These fixed maturities are concentrated in states, municipalities and political subdivisions and investment-grade corporate bonds and notes, which the Company fully expects to recover.
100
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 5. INVESTMENTS (Continued)
Unrealized losses on fixed maturities were $20.7 million at December 31, 2007, of which $16.2 million related to fixed maturities that have continued in an unrealized loss position for more than 12 months. These fixed maturities are concentrated in U.S. Government and Government Agencies and Authorities and investment-grade corporate bonds and notes, which the Company fully expects to recover.
The Company regularly reviews its investment portfolio for factors that may indicate that a decline in fair value of an investment is other than temporary. Declines in the fair values of investments that are determined to be other than temporary are reported as losses in the Consolidated Statement of Operations in the period when such determination is made. See Note 15, Income from Investments. Based on evaluations at December 31, 2008 and 2007, of the prospects of the issuers, including, but not limited to, the length of time and magnitude of the unrealized loss, and the credit ratings of the issuers of the investments in the above fixed maturities, and the Companys intentions to sell or ability to hold the investments, the Company concluded that the declines in the fair values of the Companys investments in fixed maturities presented on the preceding page were temporary at the respective evaluation dates.
The Company considers various factors when considering if a decline in the fair value of an equity security is other than temporary including, but not limited to:
a) | The length of time and magnitude of the unrealized loss; |
b) | The volatility of the investment; |
c) | Analyst recommendations and price targets; |
d) | Opinions of the Companys external investment managers; |
e) | Market liquidity; |
f) | Debt-like characteristics of perpetual preferred stocks and issuer ratings; and |
g) | The Companys intentions to sell or ability to hold the investments. |
The vast majority of the Companys equity securities at December 31, 2008 are perpetual preferred stocks of financial institutions. The Company considers the debt-like characteristics of these perpetual preferred stocks when evaluating impairment. The Company concluded that the declines in the fair values of the perpetual preferred stocks of these financial institutions were temporary in nature, largely driven by current market conditions, and since the Company intends to hold the securities until recovery, no impairments are necessary. Based on evaluations of factors above at December 31, 2008 and 2007, the Company concluded that the declines in the fair values of the Companys investments in equity securities presented on the preceding page were temporary at the respective evaluation dates.
The carrying value, fair value and approximate voting percentage for the Companys investment in the common stock of Intermec, which is accounted for under the equity method of accounting and reported as Investment in Investee in the Companys Consolidated Balance Sheets at December 31, 2008 and 2007 were:
DOLLARS IN MILLIONS |
2008 | 2007 | ||||||
Carrying Value |
$ | 102.2 | $ | 90.7 | ||||
Fair Value |
$ | 168.1 | $ | 257.1 | ||||
Approximate Voting Percentage |
20.5 | % | 20.7 | % |
Equity in Net Income of Investee was $5.8 million, $1.2 million and $9.2 million for the years ended December 31, 2008, 2007 and 2006, respectively. Intermec recognized the financial impact of SFAS No. 158 in its financial statements at December 31, 2006. Intermec initially applied the provisions of FIN 48 on January 1, 2007. The Company accounts for its investment in Intermec under the equity method of accounting on a three-month-delay basis. Accordingly, the Company recognized a decrease of $2.3 million, which was net of a tax
101
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 5. INVESTMENTS (Continued)
benefit of $1.3 million, to its Shareholders Equity in the first quarter of 2007 for its pro rata share of the impact of Intermecs adoption of SFAS No. 158 and recognized a decrease of $0.9 million, which was net of a tax benefit of $0.5 million, to the Companys Shareholders Equity in the second quarter of 2007 for its pro rata share of the impact of Intermecs adoption of FIN 48.
The carrying values of the Companys Other Investments at December 31, 2008 and 2007 were:
DOLLARS IN MILLIONS |
2008 | 2007 | ||||
Loans to Policyholders |
$ | 209.9 | $ | 191.4 | ||
Real Estate |
257.7 | 243.0 | ||||
Limited Liability Investment Companies and Limited Partnerships |
242.3 | 254.6 | ||||
Other |
5.0 | 7.1 | ||||
Total |
$ | 714.9 | $ | 696.1 | ||
NOTE 6. AUTOMOBILE LOAN RECEIVABLES AND CERTIFICATES OF DEPOSITS
Automobile Loan Receivables consists primarily of sub-prime loans, which are secured by automobiles, to residents of California and other western and midwestern states. Automobile Loan Receivables is stated net of unearned discount, loan fees and reserve for loan losses.
The components of Automobile Loan Receivables at December 31, 2008 and 2007 were:
DOLLARS IN MILLIONS |
2008 | 2007 | ||||||
Sales Contracts and Loans Receivables |
$ | 1,213.1 | $ | 1,390.8 | ||||
Unearned Discounts and Deferred Fees |
(14.4 | ) | (28.9 | ) | ||||
Net Automobile Loan Receivables Due |
1,198.7 | 1,361.9 | ||||||
Reserve for Loan Losses |
(120.1 | ) | (148.4 | ) | ||||
Automobile Loan Receivables |
$ | 1,078.6 | $ | 1,213.5 | ||||
An aging of Net Automobile Loan Receivables Outstanding at December 31, 2008 and 2007 is presented below:
AMOUNT |
AS A
PERCENTAGE OF NET AUTOMOBILE LOAN RECEIVABLES OUTSTANDING |
AMOUNT |
AS A
PERCENTAGE OF NET AUTOMOBILE LOAN RECEIVABLES OUTSTANDING |
|||||||||||
DOLLARS IN MILLIONS |
DEC. 31, 2008 | DEC. 31, 2007 | ||||||||||||
Current Loan Balances |
$ | 738.3 | 61.6 | % | $ | 833.1 | 61.2 | % | ||||||
Delinquent Loan Balances: |
||||||||||||||
Less than 30 Days Delinquent |
312.6 | 26.1 | 356.7 | 26.2 | ||||||||||
30 Days to 59 Days Delinquent |
103.0 | 8.6 | 111.1 | 8.1 | ||||||||||
60 Days to 89 Days Delinquent |
32.8 | 2.7 | 45.8 | 3.4 | ||||||||||
Delinquent 90 Days and Greater |
12.0 | 1.0 | 15.2 | 1.1 | ||||||||||
Net Automobile Loan Receivables Outstanding |
1,198.7 | 100.0 | % | 1,361.9 | 100.0 | % | ||||||||
Reserve for Loan Losses |
(120.1 | ) | (148.4 | ) | ||||||||||
Automobile Loan Receivables |
$ | 1,078.6 | $ | 1,213.5 | ||||||||||
102
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 6. AUTOMOBILE LOAN RECEIVABLES AND CERTIFICATES OF DEPOSITS (Continued)
Activity in the Reserve for Loan Losses for the years ended December 31, 2008, 2007 and 2006 was:
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | |||||||||
Reserve for Loan LossesBeginning of Year |
$ | 148.4 | $ | 68.8 | $ | 62.6 | ||||||
Provision for Loan Losses |
110.0 | 166.8 | 62.4 | |||||||||
Net Charge-off: |
||||||||||||
Automobile Loan Receivables Charged-off |
(182.9 | ) | (139.4 | ) | (105.6 | ) | ||||||
Automobile Loan Receivables Recovered |
44.6 | 52.2 | 49.4 | |||||||||
Net Charge-off |
(138.3 | ) | (87.2 | ) | (56.2 | ) | ||||||
Reserve for Loan LossesEnd of Year |
$ | 120.1 | $ | 148.4 | $ | 68.8 | ||||||
The weighted-average interest rates on Certificates of Deposits were 4.78% and 4.91% at December 31, 2008 and 2007, respectively. The range of interest rates on Certificates of Deposits was 0.05% to 5.85% at December 31, 2008 and 2.35% to 5.85% at December 31, 2007. Certificates of Deposits are generally fixed in maturity. The contractual maturities of Certificates of Deposits at December 31, 2008 and 2007 were:
DOLLARS IN MILLIONS |
2008 | 2007 | ||||
Due in One Year or Less |
$ | 449.0 | $ | 422.5 | ||
Due after One Year to Three Years |
449.2 | 414.9 | ||||
Due after Three Years to Five Years |
212.6 | 433.9 | ||||
Due after Five Years |
| 3.0 | ||||
Total Certificates of Deposits |
$ | 1,110.8 | $ | 1,274.3 | ||
Goodwill at December 31, 2008 and 2007 was:
DOLLARS IN MILLIONS |
2008 | 2007 | ||||
Kemper Segment |
$ | 49.6 | $ | 49.6 | ||
Unitrin Specialty Segment |
42.8 | 42.8 | ||||
Life and Health Insurance Segment |
242.2 | 213.1 | ||||
Fireside Bank |
| 9.2 | ||||
Total Goodwill |
$ | 334.6 | $ | 314.7 | ||
The Company tests goodwill for recoverability on an annual basis in the first quarter and between annual tests if circumstances or events indicate that the fair value of a reporting unit may have declined below its carrying value. The quoted value of Unitrins common stock was significantly below the per share carrying value of the Company at December 31, 2008. Accordingly, the Company tested goodwill for each of its reporting units for recoverability at December 31, 2008. The Company used discounted projections of future cash flows to estimate fair value of all reporting units except for Fireside Bank. In November 2008, the Company disclosed that it was pursuing strategic alternatives for Fireside Bank. In connection with its assessments of such strategic alternatives, the estimated fair value for Fireside Bank was based on discussions with and inquiries from third parties as well as the Companys own projections. For each reporting unit tested, except for Fireside Bank, the estimated fair value exceeded the carrying value of the reporting unit, and the Company concluded that the goodwill was recoverable. In the case of Fireside Bank, the carrying value exceeded the estimated fair value. Accordingly, pursuant to the provisions of SFAS No. 142, Goodwill and Other Intangible Assets , the Company was required to compute the implied fair value of Fireside Banks goodwill and compare it with carried goodwill to determine if goodwill was impaired at December 31, 2008. Pursuant
103
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 7. GOODWILL (Continued)
to SFAS No. 142, the implied fair value of goodwill is computed by allocating the estimated fair value of reporting unit to its assets and liabilities as if the reporting unit had been acquired in a business combination on the goodwill measurement date. Based on such allocation, the Company concluded that the Companys carrying value of goodwill for Fireside Bank exceeded the implied fair value of goodwill and that goodwill associated with Fireside Bank was impaired. Accordingly, the Company wrote off the entire carrying value of Goodwill for Fireside Bank.
Goodwill for the Life and Health Insurance segment increased in 2008 by $29.1 million due to the acquisition of Primesco. See Note 3, Acquisitions of Businesses, for additional information pertaining
NOTE 8. PROPERTY AND CASUALTY INSURANCE RESERVES
Property and Casualty Insurance Reserve activity for the years ended December 31, 2008, 2007 and 2006 was:
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | |||||||||
Beginning Property and Casualty Insurance Reserves: |
||||||||||||
Gross of Reinsurance at Beginning of Year |
$ | 1,322.9 | $ | 1,432.6 | $ | 1,531.5 | ||||||
Less Reinsurance Recoverables at Beginning of Year |
84.8 | 137.9 | 208.9 | |||||||||
Property and Casualty Insurance Reserves, |
||||||||||||
Net of Reinsurance at Beginning of Year |
1,238.1 | 1,294.7 | 1,322.6 | |||||||||
Property and Casualty Insurance Reserves Acquired, Net of Reinsurance |
0.3 | 24.7 | | |||||||||
Incurred Losses and LAE related to: |
||||||||||||
Current Year: |
||||||||||||
Continuing Operations |
1,456.0 | 1,290.6 | 1,221.3 | |||||||||
Discontinued Operations |
62.0 | 117.3 | 134.6 | |||||||||
Total Incurred Losses and LAE related to Current Year |
1,518.0 | 1,407.9 | 1,355.9 | |||||||||
Prior Years: |
||||||||||||
Continuing Operations |
(49.6 | ) | (55.4 | ) | (65.8 | ) | ||||||
Discontinued Operations |
(29.7 | ) | (45.7 | ) | (25.8 | ) | ||||||
Total Incurred Losses and LAE related to Prior Years |
(79.3 | ) | (101.1 | ) | (91.6 | ) | ||||||
Total Incurred Losses and LAE |
1,438.7 | 1,306.8 | 1,264.3 | |||||||||
Paid Losses and LAE related to: |
||||||||||||
Current Year: |
||||||||||||
Continuing Operations |
943.5 | 831.3 | 730.3 | |||||||||
Discontinued Operations |
31.2 | 42.2 | 53.7 | |||||||||
Total Paid Losses and LAE related to Current Year |
974.7 | 873.5 | 784.0 | |||||||||
Prior Years: |
||||||||||||
Continuing Operations |
439.0 | 433.6 | 431.2 | |||||||||
Discontinued Operations |
79.3 | 81.0 | 77.0 | |||||||||
Total Paid Losses and LAE related to Prior Years |
518.3 | 514.6 | 508.2 | |||||||||
Total Paid Losses and LAE |
1,493.0 | 1,388.1 | 1,292.2 | |||||||||
Property and Casualty Insurance Reserves, |
||||||||||||
Net of Reinsurance at End of Year |
1,184.1 | 1,238.1 | 1,294.7 | |||||||||
Plus Reinsurance Recoverables at End of Year |
84.6 | 84.8 | 137.9 | |||||||||
Property and Casualty Insurance Reserves, |
||||||||||||
Gross of Reinsurance at End of Year |
$ | 1,268.7 | $ | 1,322.9 | $ | 1,432.6 | ||||||
104
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 8. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)
Property and Casualty Insurance Reserves are estimated based on historical experience patterns and current economic trends. Actual loss experience and loss trends are likely to differ from these historical experience patterns and economic conditions. Loss experience and loss trends emerge over several years from the dates of loss inception. The Company monitors such emerging loss trends. Upon concluding, based on the data available, that an emerging loss trend will continue, the Company adjusts its property and casualty insurance reserves to recognize such trend. Changes in such estimates are included in the Consolidated Statements of Operations in the period of change.
In 2008, the Company reduced its property and casualty insurance reserves by $79.3 million to recognize favorable development of losses and LAE from prior accident years. Personal lines insurance losses and LAE reserves developed favorably by $45.8 million and commercial lines insurance losses and LAE reserves developed favorably by $33.5 million. The personal lines insurance losses and LAE reserves developed favorably due primarily to the emergence of more favorable loss trends than expected for the 2006 and 2005 accident years due to the improvements in the Companys claims handling procedures, partially offset by adverse development of $8.9 million related to certain re-opened claims from Hurricane Rita in the 2005 accident year. The commercial lines insurance losses and LAE reserves developed favorably primarily in the Companys discontinued operations. During the fourth quarter of 2008, the Companys actuaries conducted their regular reserve review of retained insurance reserves of discontinued operations for all traditional reserving groups. In addition, the Companys actuaries updated certain commercial property and liability analyses using A.M Bests latest industry study to re-estimate asbestos and environmental liabilities and a more detail review by peril of other general liabilities, including construction defect liabilities. These additional procedures, along with the actuaries regular reserve reviews during 2008, resulted in favorable reserve development of $29.7 million.
In 2007, the Company reduced its property and casualty insurance reserves by $101.1 million to record favorable development of losses and LAE from prior accident years. Personal lines insurance losses and LAE and commercial lines insurance losses and LAE developed favorably by $44.4 million and $56.7 million, respectively, in 2007. The reserve reductions were primarily due to the emergence of more favorable loss trends than expected for the 2006, 2005 and 2004 accident years, partially due to the improvements in the Companys claims handling procedures.
In 2006, the Company reduced its property and casualty insurance reserves by $91.6 million to record favorable development of losses and LAE from prior accident years. Personal lines insurance losses and LAE and commercial lines insurance losses and LAE developed favorably by $63.6 million and $28.0 million, respectively, in 2006. The reserve reductions were primarily due to the emergence of more favorable loss trends than expected for the 2005 and 2004 accident years, partially due to the improvements in the Companys claims handling procedures.
The Company cannot predict whether or not losses and LAE will develop favorably or unfavorably from the amounts reported in the Companys consolidated financial statements. However, the Company believes that such development will not have a material effect on the Companys consolidated financial position, but could have a material effect on the Companys consolidated financial results for a given period.
Reinsurance recoverables on property and casualty insurance reserves were $84.6 million and $84.8 million at December 31, 2008 and 2007, respectively. These reinsurance recoverables are concentrated with several reinsurers, the vast majority of which are highly rated by one or more of the principal investor and/or insurance company rating agencies. While most of the reinsurance recoverables were unsecured at December 31, 2008 and 2007, the agreements with the reinsurers generally provide for some form of collateralization upon the occurrence of certain events. The largest reinsurance recoverable on property and casualty insurance is from General Security National Insurance Company (GSNIC), a subsidiary of SCOR and is unsecured. In 2002, the
105
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 8. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)
Company acquired two insurance companies from SCOR. Under the agreement governing the acquisition of these insurance companies, SCOR and/or GSNIC are responsible for all liabilities of these insurance companies incurred prior to the acquisition. Reinsurance recoverables at December 31, 2008 and 2007 included $33.4 million and $45.7 million, respectively, from GSNIC.
Total debt outstanding at December 31, 2008 and 2007 was:
DOLLARS IN MILLIONS |
2008 | 2007 | ||||
Senior Notes Payable at Amortized Cost: |
||||||
6.00% Senior Notes due May 15, 2017 |
$ | 355.5 | $ | 355.0 | ||
4.875% Senior Notes due November 1, 2010 |
199.4 | 199.1 | ||||
Mortgage Note Payable at Amortized Cost |
5.9 | 6.0 | ||||
Total Debt Outstanding |
$ | 560.8 | $ | 560.1 | ||
Interest Expense, including facility fees and accretion of discount, for the years ended December 31, 2008, 2007 and 2006 was:
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | ||||||||
Notes Payable under Revolving Credit Agreements |
$ | 1.5 | $ | 0.4 | $ | 0.5 | |||||
Senior Notes Payable: |
|||||||||||
6.00% Senior Notes due May 15, 2017 |
22.0 | 14.1 | | ||||||||
4.875% Senior Notes due November 1, 2010 |
10.0 | 10.0 | 10.0 | ||||||||
5.75% Senior Notes due July 1, 2007 |
| 9.0 | 18.0 | ||||||||
Mortgage Note Payable |
0.4 | 0.4 | 0.4 | ||||||||
Interest Expense before Capitalization of Interest |
33.9 | 33.9 | 28.9 | ||||||||
Capitalization of Interest |
(1.3 | ) | (0.3 | ) | | ||||||
Total Interest Expense |
$ | 32.6 | $ | 33.6 | $ | 28.9 | |||||
Interest Paid, including facility fees, for the years ended December 31, 2008, 2007 and 2006 was:
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | ||||||
Notes Payable under Revolving Credit Agreements |
$ | 1.5 | $ | 0.2 | $ | 0.5 | |||
Senior Notes Payable: |
|||||||||
6.00% Senior Notes due May 15, 2017 |
21.6 | 11.1 | | ||||||
4.875% Senior Notes due November 1, 2010 |
9.8 | 9.8 | 9.8 | ||||||
5.75% Senior Notes due July 1, 2007 |
| 17.2 | 17.2 | ||||||
Mortgage Note Payable |
0.4 | 0.4 | 0.4 | ||||||
Total Interest Paid |
$ | 33.3 | $ | 38.7 | $ | 27.9 | |||
The Company has a five-year, $325 million, unsecured, revolving credit agreement, expiring June 30, 2010, with a group of financial institutions. The agreement provides for fixed and floating rate advances for periods up to one year at various interest rates. The agreement also contains various financial covenants, including limits on total debt to total capitalization and minimum risk-based capital ratios for the Companys largest insurance subsidiaries. The proceeds from advances under the revolving credit facility may be used for general corporate
106
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 9. NOTES PAYABLE (Continued)
purposes. The Company had no outstanding advances under its unsecured revolving credit agreements at December 31, 2008 and 2007. Undrawn letters of credit issued pursuant to the unsecured, revolving credit agreement were $13.1 million at both December 31, 2008 and 2007. Accordingly, the amounts available for future borrowing were $311.9 million at both December 31, 2008 and 2007.
On May 11, 2007, the Company issued $360 million of its 6.00% Senior Notes due May 15, 2017. The 6.00% Senior Notes are unsecured and may be redeemed in whole at any time or in part from time to time at the Companys option at specified redemption prices. The Company issued the 6.00% Senior Notes for proceeds of $354.8 million, net of transaction costs, for an effective yield of 6.19%. The Company used a portion of the proceeds from the sale of the 6.00% Senior Notes to repay the $300 million aggregate principal amount of its 5.75% Senior Notes which matured on July 1, 2007.
In 2003, the Company issued $200 million of its 4.875% Senior Notes due November 1, 2010 for an effective yield of 5.04%. The 4.875% Senior Notes are unsecured and may be redeemed in whole at any time or in part from time to time at the Companys option at specified redemption prices.
In 2002, the Company issued $300 million of its 5.75% Senior Notes due July 1, 2007 for an effective yield of 5.99%. The 5.75% Senior Notes were retired in 2007.
The Company leases certain office space under non-cancelable operating leases, with initial terms typically ranging from 1 to 10 years, along with options that permit renewals for additional periods. The Company also leases certain equipment under non-cancelable operating leases, with initial terms typically ranging from 1 to 5 years. Minimum rent is expensed on a straight-line basis over the term of the lease.
Net rental expense for operating leases for the years ended December 31, 2008, 2007 and 2006 was:
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | ||||||||
Minimum Rental Expense |
$ | 29.9 | $ | 26.8 | $ | 25.7 | |||||
Less Sublease Rental Income |
(0.3 | ) | | (0.1 | ) | ||||||
Net Rental Expense |
$ | 29.6 | $ | 26.8 | $ | 25.6 | |||||
Future minimum lease payments under operating leases at December 31, 2008 were:
DOLLARS IN MILLIONS |
OPERATING
LEASES |
||
2009 |
$ | 29.6 | |
2010 |
27.7 | ||
2011 |
21.6 | ||
2012 |
17.7 | ||
2013 |
15.2 | ||
2014 and Thereafter |
50.7 | ||
Total Future Payments |
$ | 162.5 | |
The total of minimum rentals to be received in the future under non-cancelable subleases was $1.0 million at December 31, 2008. Capital leases are not material.
107
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
The Company is authorized to issue 20 million shares of $0.10 par value preferred stock and 100 million shares of $0.10 par value common stock. No preferred shares were issued or outstanding at December 31, 2008 and 2007.
On August 4, 2004, the Board of Directors declared a dividend distribution of one preferred share purchase right for each outstanding share of common stock of Unitrin, pursuant to a shareholder rights plan. The rights have a term of 10 years. The description and terms of the rights are set forth in a rights agreement between Unitrin and Computershare Trust Company, N.A., as rights agent.
At December 31, 2008, there are approximately 1.4 million shares of the Companys outstanding common stock that can be repurchased under the outstanding repurchase authorization of the Companys Board of Directors. Common stock can be repurchased in the open market or in privately negotiated transactions from time to time subject to market conditions and other factors. The Company repurchased and retired 2.0 million shares of its common stock in open market transactions at an aggregate cost of $69.0 million in 2008. The Company repurchased and retired approximately 3.0 million shares of its common stock in open market transactions at an aggregate cost of $139.5 million in 2007. The Company repurchased and retired approximately 2.0 million shares of its common stock in open market transactions at an aggregate cost of $89.9 million in 2006. Common Stock, Paid-in Capital and Retained Earnings were reduced on a pro rata basis for the cost of the repurchased shares.
Various state insurance laws restrict the amount that an insurance subsidiary may pay in the form of dividends, loans or advances without the prior approval of regulatory authorities. Also, that portion of an insurance subsidiarys net equity which results from differences between statutory insurance accounting practices and GAAP would not be available for cash dividends, loans or advances. Unitrins subsidiaries paid dividends of $135.2 million in cash and securities to Unitrin in 2008. In 2009, Unitrins insurance subsidiaries would be able to pay approximately $120 million in dividends to Unitrin without prior regulatory approval. Fireside Bank has agreed not to pay dividends without the prior approval of the FDIC and CDFI. The Company does not expect Fireside Bank to pay a dividend in 2009. Retained Earnings at December 31, 2008, also includes $61.8 million representing the undistributed equity in the net income and accumulated other comprehensive income of investee (Intermec).
Unitrins insurance subsidiaries are required to file financial statements prepared on the basis of statutory insurance accounting practices which is a comprehensive basis of accounting other than GAAP. Statutory capital and surplus for the Companys life and health insurance subsidiaries was approximately $300 million and was $324.8 million at December 31, 2008 and 2007, respectively. Statutory capital and surplus for the Companys property and casualty insurance subsidiaries was approximately $830 million and was $1,145.4 million at December 31, 2008 and 2007, respectively. Statutory net income for the Companys life and health insurance subsidiaries was income of approximately $47 million, was income of $58.5 million and was income of $84.9 million for the years ended December 31, 2008, 2007 and 2006, respectively. Statutory net income for the Companys property and casualty insurance subsidiaries was loss of approximately $29 million, was income of $119.4 million and was income of $170.5 million for the years ended December 31, 2008, 2007 and 2006, respectively. Statutory capital and surplus and statutory net income exclude Fireside Bank and parent company operations.
108
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 12. LONG TERM EQUITY COMPENSATION
Unitrin has adopted a number of long-term equity-based compensation plans to attract, motivate and retain key employees and/or directors of the Company. The Companys stock option plans provide for the grant of stock options and stock settled stock appreciation rights (SARs). In addition, restricted stock and restricted stock units may be granted under the Companys 2005 Restricted Stock and Restricted Stock Unit Plan. Options outstanding and available for future grants under all of the Companys stock option plans at December 31, 2008, are:
OPTIONS
OUTSTANDING |
WEIGHTED-
AVERAGE EXERCISE PRICE |
OPTIONS
AVAILABLE FOR FUTURE GRANTS |
|||||
1995 Director Plan |
242,177 | $ | 42.97 | 80,000 | |||
2002 Option Plan |
2,949,300 | 45.86 | 1,395,468 | ||||
1997 Option Plan |
1,880,813 | 47.02 | | ||||
1990 Option Plan |
52,959 | 48.11 | | ||||
Total Stock Option Plans |
5,125,249 | $ | 46.17 | 1,475,468 | |||
The Company has four stock option plans, all of which have been approved by the Companys shareholders. Stock options to purchase the Unitrins common stock are granted to employees and directors at prices equal to the fair market value of Unitrins common stock on the date of grant. Employee options generally vest over a period of three and one-half years and expire ten years from the date of grant. The Compensation Committee of the Board of Directors, or the Boards authorized designee, has sole discretion to determine the persons to whom options are granted, the number of shares covered by such options and the exercise price, vesting and expiration dates of such options. Options are non-transferable and are exercisable in installments. Prior to 2003, only non-qualified stock options had been granted. However, beginning in 2003, non-qualified stock options granted to employees were coupled with tandem stock appreciation rights (Tandem SARs), settled in Unitrin common stock.
Under the 1995 Director Plan, each new member of the Board of Directors who is not employed by the Company receives an initial option to purchase 4,000 shares of Unitrin common stock immediately upon becoming a director. Thereafter, on the date of each of Unitrins annual meetings of shareholders, each such eligible director automatically receives an annual grant of options to purchase 4,000 shares of common stock for so long as they remain eligible directors. Options granted under the 1995 Director Plan are exercisable one year from the date of grant at an exercise price equal to the fair market value of the Unitrins common stock on the date of grant and expire 10 years from the date of grant.
The Companys four stock option plans include provisions, subject to certain limitations beginning in 2006 and 2009 as described below, to automatically grant restorative, or reload stock options (Restorative Options), to replace shares of previously owned Unitrin common stock that an exercising option holder surrenders, either actually or constructively, to satisfy the exercise price and/or tax withholding obligations relating to the exercise. Restorative Options are subject to the same terms and conditions as the original options, including the expiration date, except that the exercise price is equal to the fair market value of Unitrin common stock on the date of grant and cannot be exercised until six months after the date of grant. The grant of a Restorative Option does not result in an increase in the total number of shares and options held by an employee but changes the mix of the two.
For original awards granted beginning in 2006 and Restorative Options granted thereunder, Restorative Options will be granted only if, on the date of exercise of the option giving rise to the Restorative Option, the market price of Unitrin common stock exceeds such options exercise price by 15%. Further, Restorative Options will not be granted if the option giving rise to the Restorative Option is set to expire within twelve months. For original awards granted beginning in 2009, Restorative Options will not be granted upon the exercise of the original award.
109
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 12. LONG TERM EQUITY COMPENSATION (Continued)
In addition to the Companys four stock option plans, the Company has a restricted stock plan, which has been approved by Unitrins shareholders. Under this plan, restricted stock and restricted stock units may be granted to all eligible employees. Recipients of restricted stock are entitled to full dividend and voting rights, and all awards are subject to forfeiture until certain restrictions have lapsed. As of December 31, 2008, 345,400 shares of restricted stock having a weighted-average grant date fair value of $44.30 have been awarded, of which 42,638 shares were forfeited and 32,901 were tendered to satisfy tax withholding obligations. At December 31, 2008, there were 730,139 common shares available for future grants under the Companys restricted stock plan.
The Company uses the Black-Scholes option pricing model to estimate the fair value of each option on the date of grant. The expected terms of options are developed by considering the Companys historical share option exercise experience, demographic profiles, historical share retention practices of employees and assumptions about their propensity for early exercise in the future. Further, the Company aggregates individual awards into relatively homogenous groups that exhibit similar exercise behavior to obtain a more refined estimate of the expected term of options. Expected volatility is estimated using weekly historical volatility. The Company believes that historical volatility is currently the best estimate of expected volatility. The dividend yield used was the annualized yield on Unitrin common stock on the date of grant for original grants made in 2008, 2007 and 2006. For Restorative Options, the annualized yield on Unitrin common stock for the month prior to the grant of the Restorative Option was used for restorative grants made in 2008, 2007 and 2006. No assumption for future dividend rate changes was included in the expected dividend yield assumption. The risk free interest rate was the yield on the grant date of U.S. Treasury zero coupon issues with a maturity comparable to the expected term of the option. The assumptions used in the Black-Scholes pricing model for options granted during the years ended December 31, 2008, 2007 and 2006 were as follows:
2008 | 2007 | 2006 | ||||
RANGE OF VALUATION ASSUMPTIONS |
||||||
Expected Volatility |
22.36% 24.52% | 17.47% 22.55% | 18.79% 23.60% | |||
Risk Free Interest Rate |
2.18% 3.39% | 3.31% 4.94% | 4.30% 5.14% | |||
Expected Dividend Yield |
3.86% 5.49% | 3.51% 4.18% | 3.55% 4.25% | |||
WEIGHTED-AVERAGE EXPECTED LIFE |
||||||
Employee Grants |
2.5 7.5 years | 2 7 years | 2 7 years | |||
Director Grants |
4 6.5 years | 4 6 years | 4 6 years |
Option and SAR activity for the year ended December 31, 2008 is presented below:
SHARES
SUBJECT TO OPTIONS |
WEIGHTED-
AVERAGE EXERCISE PRICE PER SHARE |
WEIGHTED-
AVERAGE REMAINING CONTACTUAL LIFE (IN YEARS) |
AGGREGATE
INTRINSIC VALUE ($ IN MILLIONS) |
||||||||
Outstanding at Beginning of the Year |
5,275,958 | $ | 46.95 | ||||||||
Granted |
497,941 | 37.31 | |||||||||
Exercised |
(69,746 | ) | 32.76 | ||||||||
Forfeited or Expired |
(578,904 | ) | 47.28 | ||||||||
Outstanding at December 31, 2008 |
5,125,249 | $ | 46.17 | 4.65 | $ | | |||||
Vested and Expected to Vest at December 31, 2008 |
5,072,766 | $ | 46.24 | 4.58 | $ | | |||||
Exercisable at December 31, 2008 |
4,460,686 | $ | 46.70 | 4.08 | $ | | |||||
110
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 12. LONG TERM EQUITY COMPENSATION (Continued)
The weighted-average grant-date fair values of options granted during 2008, 2007 and 2006 were $4.81, $6.39 and $5.79, respectively. Total intrinsic value of stock options exercised was $0.4 million, $7.4 million and $14.3 million for the years ended December 31, 2008, 2007 and 2006, respectively. Cash received from option exercises was $1.6 million, $5.1 million and $6.8 million for the years ended December 31, 2008, 2007 and 2006, respectively. Total tax benefits realized for tax deductions from option exercises were $0.2 million, $2.6 million and $5.2 million for the years ended December 31, 2008, 2007 and 2006, respectively.
Activity related to nonvested restricted stock for the year ended December 31, 2008 is presented below:
RESTRICTED
SHARES |
WEIGHTED-
AVERAGE GRANT-DATE FAIR VALUE PER SHARE |
|||||
Nonvested Balance at Beginning of the Year |
177,489 | $ | 46.44 | |||
Granted |
93,900 | 37.14 | ||||
Vested |
(49,632 | ) | 44.76 | |||
Forfeited |
(25,450 | ) | 44.59 | |||
Nonvested Balance at December 31, 2008 |
196,307 | $ | 42.66 | |||
The total fair value of restricted stock that vested during the year ended December 31, 2008 was $1.2 million. Tax benefits for tax deductions realized from such vesting of restricted stock were $0.4 million.
For awards with a graded vesting schedule, the Company recognizes compensation expense on a straight-line basis over the requisite service period for each separately vesting portion of the awards as if each award were, in-substance, multiple awards. Compensation expense is recognized only for those awards expected to vest, with forfeitures estimated at the date of grant based on the Companys historical experience and future expectations. Share-based compensation expense for all of the Companys long-term equity based compensation plans was $7.4 million, $15.7 million and $11.9 million for the years ended December 31, 2008, 2007 and 2006, respectively. Total unamortized compensation expense related to nonvested awards of such plans at December 31, 2008 was $5.7 million, which is expected to be recognized over a weighted-average period of approximately 1.5 years.
111
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 13. NET INCOME (LOSS) PER SHARE
Net Income (Loss) Per Share and Net Income (Loss) Per Share Assuming Dilution for the years ended December 31, 2008, 2007 and 2006 were:
DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE AMOUNTS |
2008 | 2007 | 2006 | |||||||||
Income (Loss) from Continuing Operations |
$ | (38.0 | ) | $ | 178.1 | $ | 267.6 | |||||
Dilutive Effect on Income from Continuing Operations from Investees Equivalent Shares |
| (0.1 | ) | (0.2 | ) | |||||||
Income (Loss) from Continuing Operations Assuming Dilution |
$ | (38.0 | ) | $ | 178.0 | $ | 267.4 | |||||
Income from Discontinued Operations |
8.4 | 27.3 | 19.4 | |||||||||
Net Income (Loss) Assuming Dilution |
$ | (29.6 | ) | $ | 205.3 | $ | 286.8 | |||||
Weighted-Average Common Shares Outstanding |
62.7 | 65.6 | 67.9 | |||||||||
Dilutive Effect of Unitrin Share-based Compensation Plans |
| 0.3 | 0.3 | |||||||||
Weighted-Average Common Shares and Equivalent Shares Outstanding Assuming Dilution |
62.7 | 65.9 | 68.2 | |||||||||
Income (Loss) Per Share from Continuing Operations |
$ | (0.60 | ) | $ | 2.71 | $ | 3.94 | |||||
Income Per Share from Discontinued Operations |
0.13 | 0.42 | 0.29 | |||||||||
Net Income (Loss) Per Share |
$ | (0.47 | ) | $ | 3.13 | $ | 4.23 | |||||
Income (Loss) Per Share from Continuing Operations Assuming Dilution |
$ | (0.60 | ) | $ | 2.70 | $ | 3.92 | |||||
Income Per Share from Discontinued Operations Assuming Dilution |
0.13 | 0.42 | 0.28 | |||||||||
Net Income (Loss) Per Share Assuming Dilution |
$ | (0.47 | ) | $ | 3.12 | $ | 4.20 | |||||
At December 31, 2008, options outstanding to purchase 5.1 million shares of Unitrin common stock were excluded from the computation of Weighted-Average Common Shares and Equivalent Shares Outstanding Assuming Dilution for the year ended December 31, 2008 because the effect of inclusion would be anti-dilutive and because the exercise price exceeded the average market price. The computation of Weighted-Average Common Shares and Equivalent Shares Outstanding Assuming Dilution also excludes 0.2 million shares of restricted stock outstanding at December 31, 2008 because the effect of inclusion would be anti-dilutive.
Options outstanding at 2007 and 2006, to purchase 3.7 million and 1.2 million common shares, respectively, of Unitrin common stock were excluded from the computation of Net Income Per Share Assuming Dilution in 2007 and 2006, respectively, because the exercise price exceeded the average market price.
112
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 14. OTHER COMPREHENSIVE INCOME (LOSS)
Other Comprehensive Income for the years ended December 31, 2008, 2007 and 2006 was:
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | |||||||||
Other Comprehensive Income before Income Taxes: |
||||||||||||
Unrealized Holding Gains (Losses) Arising During the Year |
$ | (682.0 | ) | $ | 121.4 | $ | 93.8 | |||||
Reclassification Adjustment for Amounts Included in Net Income |
88.4 | (52.2 | ) | (25.5 | ) | |||||||
Unrealized Holding Gains (Losses) |
(593.6 | ) | 69.2 | 68.3 | ||||||||
Unrecognized Postretirement Benefit Costs Arising During the Year |
(73.4 | ) | (5.0 | ) | | |||||||
Amortization of Unrecognized Postretirement Benefit Costs |
(2.3 | ) | (2.0 | ) | | |||||||
Net Unrecognized Postretirement Benefit Costs |
(75.7 | ) | (7.0 | ) | | |||||||
Foreign Currency Translation Adjustments on Investments |
(2.0 | ) | | | ||||||||
Equity in Other Comprehensive Income (Loss) of Investee |
2.5 | 1.2 | (2.1 | ) | ||||||||
Other Comprehensive Income (Loss) before Income Taxes |
(668.8 | ) | 63.4 | 66.2 | ||||||||
Income Tax Benefit (Expense): |
||||||||||||
Unrealized Holding Gains and Losses Arising During the Year |
239.9 | (43.2 | ) | (32.8 | ) | |||||||
Reclassification Adjustment for Amounts Included in Net Income |
(30.9 | ) | 18.3 | 9.0 | ||||||||
Unrealized Holding Gains (Losses) |
209.0 | (24.9 | ) | (23.8 | ) | |||||||
Unrecognized Postretirement Benefit Costs Arising During the Year |
26.5 | 1.4 | | |||||||||
Amortization of Unrecognized Postretirement Benefit Costs |
0.6 | 0.6 | | |||||||||
Net Unrecognized Postretirement Benefit Costs |
27.1 | 2.0 | | |||||||||
Foreign Currency Translation Adjustments on Investments |
0.7 | | | |||||||||
Equity in Other Comprehensive (Income) Loss of Investee |
(0.9 | ) | (0.4 | ) | 0.7 | |||||||
Income Tax Benefit (Expense) |
235.9 | (23.3 | ) | (23.1 | ) | |||||||
Other Comprehensive Income (Loss) |
$ | (432.9 | ) | $ | 40.1 | $ | 43.1 | |||||
The components of Accumulated Other Comprehensive Income (Loss) at December 31, 2008 and 2007 were:
DOLLARS IN MILLIONS |
2008 | 2007 | ||||||
Net Unrealized Gains (Losses) on Investments, Net of Income Taxes |
$ | (45.5 | ) | $ | 338.2 | |||
Net Unrealized Gains on Assets of Discontinued Operations, Net of Income Taxes |
| 0.9 | ||||||
Foreign Currency Translation Adjustments on Investments, Net of Income Taxes |
(1.3 | ) | | |||||
Equity in Accumulated Other Comprehensive Loss of Investee, Net of Income Taxes |
(0.5 | ) | (2.1 | ) | ||||
Net Unrecognized Postretirement Benefit Costs, Net of Income Taxes |
(60.8 | ) | (12.2 | ) | ||||
Total Accumulated Other Comprehensive Income (Loss) |
$ | (108.1 | ) | $ | 324.8 | |||
113
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 15. INCOME FROM INVESTMENTS
Net Investment Income for the years ended December 31, 2008, 2007 and 2006 was:
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | |||||||||
Investment Income (Loss): |
||||||||||||
Interest and Dividends on Fixed Maturities |
$ | 234.8 | $ | 209.8 | $ | 213.6 | ||||||
Dividends on Northrop Preferred Stock |
| 15.5 | 9.3 | |||||||||
Dividends on Northrop Common Stock |
10.7 | 9.4 | 8.6 | |||||||||
Dividends on Other Equity Securities |
19.0 | 19.2 | 12.4 | |||||||||
Short-term Investments |
11.8 | 34.3 | 27.5 | |||||||||
Loans to Policyholders |
14.6 | 13.5 | 13.2 | |||||||||
Real Estate |
30.2 | 30.3 | 28.0 | |||||||||
Limited Liability Investment Companies and Limited Partnerships |
(76.3 | ) | 6.7 | 24.8 | ||||||||
Other |
| | 0.1 | |||||||||
Total Investment Income |
244.8 | 338.7 | 337.5 | |||||||||
Investment Expenses: |
||||||||||||
Real Estate |
23.8 | 24.0 | 21.1 | |||||||||
Other Investment Expenses |
1.4 | 1.8 | 1.5 | |||||||||
Total Investment Expenses |
25.2 | 25.8 | 22.6 | |||||||||
Net Investment Income Including Discontinued Operations |
219.6 | 312.9 | 314.9 | |||||||||
Net Investment Income Reported in Discontinued Operations |
(6.7 | ) | (23.0 | ) | (28.9 | ) | ||||||
Net Investment Income |
$ | 212.9 | $ | 289.9 | $ | 286.0 | ||||||
The components of Net Realized Investment Gains (Losses) for the years ended December 31, 2008, 2007 and 2006 were:
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | |||||||||
Fixed Maturities: |
||||||||||||
Gains on Dispositions |
$ | 4.8 | $ | 5.1 | $ | 5.0 | ||||||
Losses on Dispositions |
(6.8 | ) | (4.0 | ) | (4.4 | ) | ||||||
Losses from Write-downs |
(65.9 | ) | (10.4 | ) | | |||||||
Northrop Common Stock: |
||||||||||||
Gains on Dispositions |
53.1 | 58.6 | 5.6 | |||||||||
Losses on Dispositions |
(13.1 | ) | | | ||||||||
Other Equity Securities: |
||||||||||||
Gains on Dispositions |
67.9 | 30.6 | 23.2 | |||||||||
Losses on Dispositions |
(46.1 | ) | (5.1 | ) | (1.1 | ) | ||||||
Losses from Write-downs |
(83.3 | ) | (22.6 | ) | (2.8 | ) | ||||||
Real Estate: |
||||||||||||
Gains on Dispositions |
1.5 | 4.8 | 0.9 | |||||||||
Losses from Write-downs |
| | (0.1 | ) | ||||||||
Other Investments: |
||||||||||||
Gains on Dispositions |
0.1 | 1.2 | | |||||||||
Losses on Dispositions |
(0.2 | ) | (0.2 | ) | (0.2 | ) | ||||||
Losses from Write-downs |
(3.7 | ) | | | ||||||||
Trading Securities Net Gains (Losses) |
(2.0 | ) | 0.5 | 0.4 | ||||||||
Gain on Sale of Southern States |
| 4.0 | | |||||||||
Net Realized Investment Gains (Losses) |
$ | (93.7 | ) | $ | 62.5 | $ | 26.5 | |||||
114
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 15. INCOME FROM INVESTMENTS (Continued)
On July 9, 2007, Republic Companies purchased Southern States, a directly owned subsidiary of Unitrin, from the Company. Net Realized Investment Gains for the year ended December 31, 2007 includes a pretax gain of $4.0 million for the year ended December 31, 2007 resulting from this sale.
Insurance Expenses for the years ended December 31, 2008, 2007 and 2006 were:
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | |||||||||
Commissions |
$ | 377.4 | $ | 363.0 | $ | 389.4 | ||||||
General Expenses |
310.3 | 293.8 | 285.7 | |||||||||
Taxes, Licenses and Fees |
48.3 | 45.6 | 45.5 | |||||||||
Total Costs Incurred |
736.0 | 702.4 | 720.6 | |||||||||
Policy Acquisition Costs: |
||||||||||||
Deferred |
(311.0 | ) | (297.0 | ) | (316.8 | ) | ||||||
Amortized |
311.5 | 300.4 | 308.2 | |||||||||
Net Policy Acquisition Costs Amortized (Deferred) |
0.5 | 3.4 | (8.6 | ) | ||||||||
Insurance Expenses |
$ | 736.5 | $ | 705.8 | $ | 712.0 | ||||||
Commissions for servicing policies are expensed as incurred, rather than deferred and amortized.
The current and deferred income tax assets as presented in the Consolidated Balance Sheets at December 31, 2008 and 2007 were:
DOLLARS IN MILLIONS |
2008 | 2007 | |||||
Current and Deferred Income Taxes: |
|||||||
Current Income Tax Assets |
$ | 0.2 | $ | 1.5 | |||
Deferred Income Tax Assets |
204.8 | 15.7 | |||||
Valuation Allowance for State Income Taxes |
(3.6 | ) | | ||||
Current and Deferred Income Taxes |
$ | 201.4 | $ | 17.2 | |||
The components of Liabilities for Income Taxes as presented in the Consolidated Balance Sheets at December 31, 2008 and 2007 were:
DOLLARS IN MILLIONS |
2008 | 2007 | ||||
Liabilities for Income Taxes: |
||||||
Current Income Tax Liabilities |
$ | 51.2 | $ | 31.1 | ||
Deferred Income Tax Liabilities |
| 207.5 | ||||
Liability for Unrecognized Tax Benefits |
17.0 | 20.1 | ||||
Liabilities for Income Taxes |
$ | 68.2 | $ | 258.7 | ||
115
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 17. INCOME TAXES (Continued)
The tax effects of temporary differences that give rise to significant portions of the Companys Net Deferred Tax Asset at December 31, 2008 and Net Deferred Tax Liability at December 31, 2007 were:
DOLLARS IN MILLIONS |
2008 | 2007 | |||||
Deferred Tax Assets: |
|||||||
Insurance Reserves |
$ | 92.7 | $ | 94.9 | |||
Unearned Premium Reserves |
49.4 | 53.7 | |||||
Tax Capitalization of Policy Acquisition Costs |
74.5 | 70.5 | |||||
Reserve for Loan Losses |
50.5 | 61.8 | |||||
Net Operating Loss Carryforward |
15.3 | 5.6 | |||||
Payroll and Employee Benefit Accruals |
74.4 | 51.2 | |||||
Other Investments |
62.1 | | |||||
Other |
28.3 | 21.3 | |||||
Total Deferred Tax Assets |
447.2 | 359.0 | |||||
Deferred Tax Liabilities: |
|||||||
Deferred Policy Acquisition Costs |
171.3 | 158.3 | |||||
Northrop Preferred Stock |
| 88.2 | |||||
Northrop Common Stock |
13.0 | 153.5 | |||||
Investee (Intermec) |
30.6 | 28.5 | |||||
Other Investments |
| 98.0 | |||||
Other |
27.5 | 24.3 | |||||
Total Deferred Tax Liabilities |
242.4 | 550.8 | |||||
Valuation Allowance |
3.6 | | |||||
Net Deferred Tax Asset (Liability) |
$ | 201.2 | $ | (191.8 | ) | ||
Deferred Tax Assets include a Net Operating Loss Carryforward of $15.3 million at December 31, 2008 which included a federal net operating loss carryforward of $12.7 million and a state net operating loss carryforward of $2.6 million. The federal net operating loss carryforwards are scheduled to expire in years 2009 through 2026. At this time, the Company expects to fully utilize these federal net operating loss carryforwards. The state net operating loss carryforwards relate to Fireside Bank and the majority of which are scheduled to expire in 2029. A deferred tax asset valuation allowance of $3.6 million was required at December 31, 2008 and was related to state income taxes for Fireside Bank. A deferred tax asset valuation allowance was not required as of December 31, 2007.
Income taxes paid were $98.8 million and $116.9 million in 2008 and 2007, respectively.
The Company has not provided Federal income taxes on $14.7 million of Mutual Savings Lifes income earned prior to 1984 which is not subject to income taxes under certain circumstances. Federal income taxes of $5.1 million would be paid on such income if it is distributed to shareholders in the future or if it does not continue to meet certain limitations.
116
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 17. INCOME TAXES (Continued)
The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of adoption, current income taxes receivable increased by $9.2 million, current income taxes payable decreased $0.1 million, deferred income tax liabilities decreased $23.4 million and the liability for unrecognized tax benefits increased by $32.7 million. There was no effect on the Companys Shareholders Equity upon the Companys adoption of FIN 48. A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2008 and 2007 is as follows:
DOLLARS IN MILLIONS |
2008 | 2007 | ||||||
Beginning Balance |
$ | 20.1 | $ | 32.7 | ||||
Reductions for Tax Positions of Current Period |
(1.8 | ) | (9.7 | ) | ||||
Additions for Tax Positions of Prior Years |
27.9 | 28.4 | ||||||
Reduction for Expiration of State Statute of Limitations |
| (8.1 | ) | |||||
Reduction for Expiration of Federal Statute of Limitations |
(29.2 | ) | (23.2 | ) | ||||
Ending Balance |
$ | 17.0 | $ | 20.1 | ||||
For the year ended December 31, 2008, all of Unitrins subsidiaries, except for Mutual Savings Life and Mutual Savings Fire, are eligible to be included in a consolidated Federal income tax return with Unitrin. For the years ended December 31, 2007 and 2006, all of Unitrins subsidiaries, except for Primesco and its subsidiaries, were included in a consolidated Federal income tax return with Unitrin. The statute of limitations related to Unitrin and its eligible subsidiaries consolidated Federal income tax returns is closed for all tax years up to and including 2004. The statute of limitations related to Primesco and its subsidiaries is closed for all years up to and including 2004. The expiration of the statute of limitations related to the various state income tax returns that Unitrin and its subsidiaries file varies by state. Unitrins consolidated Federal income tax returns and Primescos consolidated Federal income tax returns are not currently under examination. During 2008, the Illinois Department of Revenue issued a tentative Notice of Audit Results related to its examination of the Companys 2005 and 2006 Illinois tax returns that indicate no changes to the returns as filed. The California Franchise Tax Board is conducting an audit of Fireside Banks 2004, 2005 and 2006 California tax returns. The Company does not expect any material modifications to the returns as filed to result from the audit.
Included in the balance of unrecognized tax benefits at December 31, 2008 and December 31, 2007 are tax positions of $10.6 million and $12.7 million, respectively, for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred income tax accounting, other than for interest and penalties, the disallowance of the shorter deductibility period would not affect the effective income tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.
The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense. The liability for unrecognized tax benefits included accrued interest of $6.0 million and $6.8 million at December 31, 2008 and December 31, 2007, respectively. Tax benefit for the year ended December 31, 2008 includes an interest benefit of $0.8 million, which is comprised of an interest benefit of $2.5 million resulting from the expiration of the statutes of limitations referred to above, and interest expense of $1.7 million on unrecognized tax benefits for prior years. Tax expense for the year ended December 31, 2007 includes an interest benefit of $0.3 million, which is comprised of an interest benefit of $4.0 million resulting from the expiration of the statutes of limitations referred to above, and interest expense of $3.7 million on unrecognized tax benefits for prior years.
117
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 17. INCOME TAXES (Continued)
The components of Income Tax Expense from Continuing Operations for the years ended December 31, 2008, 2007 and 2006 were:
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | |||||||||
Current Tax Benefit (Expense) |
$ | (115.1 | ) | $ | (151.2 | ) | $ | (110.1 | ) | |||
Deferred Tax Benefit (Expense) |
158.2 | 88.6 | (6.7 | ) | ||||||||
Unrecognized Tax Benefit (Expense) |
3.1 | 12.7 | | |||||||||
Income Tax Benefit (Expense) |
$ | 46.2 | $ | (49.9 | ) | $ | (116.8 | ) | ||||
A reconciliation of the Statutory Federal Income Tax Expense and Rate to the Companys Effective Income Tax Expense and Rate from Continuing Operations for the years ended December 31, 2008, 2007 and 2006 was:
2008 | 2007 | 2006 | |||||||||||||||||||
DOLLARS IN MILLIONS |
AMOUNT | RATE | AMOUNT | RATE | AMOUNT | RATE | |||||||||||||||
Statutory Federal Income Tax Benefit (Expense) and Rate |
$ | 31.5 | 35.0 | % | $ | (79.4 | ) | 35.0 | % | $ | (131.3 | ) | 35.0 | % | |||||||
Tax Exempt Income and Dividends Received Deduction |
20.0 | 22.2 | 21.6 | (9.5 | ) | 19.2 | (5.2 | ) | |||||||||||||
State Income Taxes |
(2.6 | ) | (2.9 | ) | 8.9 | (3.9 | ) | (4.3 | ) | 1.2 | |||||||||||
Other, Net |
(2.7 | ) | (2.9 | ) | (1.0 | ) | 0.4 | (0.4 | ) | 0.1 | |||||||||||
Effective Income Tax Benefit (Expense) and Rate |
$ | 46.2 | 51.4 | % | $ | (49.9 | ) | 22.0 | % | $ | (116.8 | ) | 31.1 | % | |||||||
During 2007, a benefit of $5.3 million was recorded for state income taxes related to the tax year that ended on December 31, 2002, due to the expiration of a states statute of limitations.
Comprehensive Income Tax Expense included in the Consolidated Financial Statements for the years ended December 31, 2008, 2007 and 2006 was:
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | |||||||||
Income Tax Benefit (Expense): |
||||||||||||
Continuing Operations |
$ | 46.2 | $ | (49.9 | ) | $ | (116.8 | ) | ||||
Discontinued Operations |
(9.8 | ) | (7.5 | ) | (2.6 | ) | ||||||
Equity in: |
||||||||||||
Net Income of Investee |
(3.1 | ) | (0.7 | ) | (5.1 | ) | ||||||
Other Comprehensive Income of Investee |
(0.9 | ) | (0.4 | ) | 0.7 | |||||||
Unrealized (Appreciation) Depreciation on Securities |
209.0 | (24.9 | ) | (24.0 | ) | |||||||
Foreign Currency Translation Adjustments on Investments |
0.7 | | | |||||||||
Tax Effects from Benefit Plans SFAS No. 158 |
27.1 | 2.0 | | |||||||||
Tax Effects from Long-Term Equity Compensation included in Paid-in Capital |
(0. 8 | ) | 0.6 | 3.0 | ||||||||
Other |
| 0.2 | | |||||||||
Comprehensive Income Tax Benefit (Expense) |
$ | 268.4 | $ | (80.6 | ) | $ | (144.8 | ) | ||||
118
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 18. PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company sponsored two qualified defined benefit pension plans in 2008 and one plan in 2007 (the Pension Plans) covering most of its employees. The Pension Plans are generally non-contributory, but participation in one of the Pension Plans requires or required some employees to contribute of 3% of pay, as defined, per year. Benefits for participants who are or were required to contribute to the Pension Plans are based on compensation during plan participation and the number of years of participation. Benefits for the vast majority of participants who are not required to contribute to the Pension Plans are based on years of service and final average pay, as defined. The Company funds the Pension Plans in accordance with the requirements of the Employee Retirement Income Security Act of 1974, as amended (ERISA).
The Company sponsors an other than pension postretirement employee benefit plan (OPEB) that provides medical, dental and/or life insurance benefits to approximately 900 retired and 700 active employees (the OPEB Plan). The Company generally is self-insured for the benefits under the OPEB Plan. The medical plan generally provides for a limited number of years of medical insurance benefits at retirement based on the participants attained age at retirement and number of years of service until specified dates and generally requires participant contributions, with most contributions adjusted annually.
Changes in Fair Value of Plan Assets and Changes in Benefit Obligations (the Projected Benefit Obligation in the case of the Pension Plans and the Accumulated Benefit Obligation in the case of the OPEB Plan) for the years ended December 31, 2008 and 2007 were:
PENSION
BENEFITS |
OTHER THAN
PENSION BENEFITS |
|||||||||||||||
DOLLARS IN MILLIONS |
2008 | 2007 | 2008 | 2007 | ||||||||||||
Fair Value of Plan Assets at Beginning of Year |
$ | 366.0 | $ | 363.7 | $ | | $ | | ||||||||
Fair Value of Plan Assets Acquired |
4.0 | | | | ||||||||||||
Actual Return on Plan Assets |
(69.8 | ) | 19.6 | | | |||||||||||
Employer Contributions |
| | 4.3 | 4.2 | ||||||||||||
Plan Participants Contributions |
0.1 | 0.1 | 1.3 | 1.3 | ||||||||||||
Benefits Paid |
(18.0 | ) | (17.4 | ) | (5.6 | ) | (5.5 | ) | ||||||||
Settlement Benefits |
(0.4 | ) | | | | |||||||||||
Fair Value of Plan Assets at End of Year |
281.9 | 366.0 | | | ||||||||||||
Benefit Obligation at Beginning of Year |
377.3 | 355.7 | 37.4 | 44.9 | ||||||||||||
Benefit Obligation Acquired |
3.1 | | | | ||||||||||||
Service Cost |
12.5 | 13.4 | 0.1 | 0.1 | ||||||||||||
Interest Cost |
20.9 | 20.0 | 2.0 | 2.1 | ||||||||||||
Plan Participants Contributions |
0.1 | 0.1 | 1.3 | 1.3 | ||||||||||||
Benefits Paid |
(18.0 | ) | (17.4 | ) | (5.6 | ) | (5.5 | ) | ||||||||
Modernization Act Subsidy Received |
| | 0.4 | | ||||||||||||
Settlement Benefits |
(0.4 | ) | | | | |||||||||||
Actuarial (Gains) Losses |
(20.4 | ) | 5.5 | (1.1 | ) | (5.5 | ) | |||||||||
Benefit Obligations at End of Year |
375.1 | 377.3 | 34.5 | 37.4 | ||||||||||||
Funded StatusBenefit Obligation in Excess of Plan Assets |
$ | (93.2 | ) | $ | (11.3 | ) | $ | (34.5 | ) | $ | (37.4 | ) | ||||
Amount Recognized in Accumulated Other Comprehensive Income (Loss): |
||||||||||||||||
Accumulated Actuarial Gain (Loss) |
$ | (122.5 | ) | $ | (48.0 | ) | $ | 26.3 | $ | 27.3 | ||||||
Prior Service Cost |
0.7 | 0.9 | | | ||||||||||||
Amount Recognized in Accumulated Other Comprehensive Income (Loss) |
$ | (121.8 | ) | $ | (47.1 | ) | $ | 26.3 | $ | 27.3 | ||||||
119
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 18. PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (Continued)
The Accumulated Benefit Obligation for the Pension Plans was $351.0 million and $350.7 million at December 31, 2008 and 2007, respectively. For the Companys pension plan with an accumulated benefit obligation in excess of plan assets at December 31, 2008, the Projected Benefit Obligation was $372.2 million, the Accumulated Benefit Obligation was $348.1 million and the Fair Value of Plan Assets was $278.2 million. For the Companys pension plan with an accumulated benefit obligation in excess of plan assets at December 31, 2007, the Projected Benefit Obligation was $377.3 million, the Accumulated Benefit Obligation was $350.7 million and the Fair Value of Plan Assets was $366.0 million.
The Company estimates that Pension Expense for the year ended December 31, 2009 will include expense of $1.0 million resulting from the amortization of the related accumulated actuarial loss included in Accumulated Other Comprehensive Income (Loss) at December 31, 2008.
The Company estimates that OPEB Expense for the year ended December 31, 2009 will include income of $2.2 million resulting from the amortization of the related accumulated actuarial gain included in Accumulated Other Comprehensive Income (Loss) at December 31, 2008.
The measurement dates of the assets and liabilities of all plans presented above for 2008 and 2007 were December 31, 2008 and December 31, 2007, respectively.
The assumed health care cost trend rate used in measuring the Accumulated Benefit Obligation for the OPEB Plan at December 31, 2008 was 7% for 2009, gradually declining to 5% in the year 2011 and remaining at that level thereafter for medical benefits and 9% for 2009, gradually declining to 5% in the year 2013 and remaining at that level thereafter for prescription drug benefits. The assumed health care cost trend rate used in measuring the Accumulated Benefit Obligation for the OPEB Plan at December 31, 2007 was 8% for 2008, gradually declining to 5% in the year 2011 and remaining at that level thereafter for medical benefits and 10% for 2008, gradually declining to 5% in the year 2013 and remaining at that level thereafter for prescription drug benefits.
A onepercentage point increase in the assumed health care cost trend rate for each year would increase the Accumulated Benefit Obligation for the OPEB Plan at December 31, 2008 by $2.3 million and 2008 OPEB expense by $0.1 million. A onepercentage point increase in the assumed health care cost trend rate for each year would increase the Accumulated Benefit Obligation for the OPEB Plan at December 31, 2007 by $2.7 million and 2007 OPEB expense by $0.2 million.
The OPEB Plan were unfunded at December 31, 2008 and 2007. Weighted-average asset allocations for the Pension Plans at December 31, 2008 and 2007 by asset category were:
ASSET CATEGORY |
2008 | 2007 | ||||
Cash and Short-term Investments |
20 | % | 8 | % | ||
U.S. Government and Government Agencies and Authorities |
| 19 | ||||
Corporate Bonds and Notes |
31 | 18 | ||||
Equity Securities |
36 | 42 | ||||
Other Assets |
13 | 13 | ||||
Total |
100 | % | 100 | % | ||
The investment objective of the Pension Plans is to produce current income and long-term capital growth through a combination of equity and fixed income investments which, together with appropriate employer contributions and any required employee contributions, is adequate to provide for the payment of the benefit obligations of the Pension Plans. The assets of the Pension Plans may be invested in both fixed income and equity investments.
120
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 18. PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (Continued)
Fixed income investments may include cash and short-term instruments, U.S. Government securities, corporate bonds, mortgages and other fixed income investments. Equity investments may include various types of stock, such as large-cap, mid-cap and small-cap stocks, and may also include investments in investment companies and Unitrin common stock (subject to Section 407 and other requirements of ERISA). The Pension Plans have not invested in Unitrin common stock.
The trust investment committee for the Pension Plans periodically reviews the performance of the Pension Plans investments and asset allocation. Several external investment managers, one of which is Fayez Sarofim & Co. (FS&C), manage the equity investments of the trust for the Pension Plans. One of Unitrins directors, Mr. Fayez Sarofim, is Chairman of the Board, President and the majority shareholder of FS&C, a registered investment advisory firm (see Note 24, Related Parties, to the Consolidated Financial Statements). Each manager is allowed to exercise investment discretion, subject to limitations, if any, established by the trust investment committee for the Pension Plans. All other investment decisions are made by the Company, subject to general guidelines as set by the trust investment committee for the Pension Plans.
The Company determines its Expected Long Term Rate of Return on Plan Assets based primarily on the Companys expectations of future returns for the Pension Plans investments, based on target allocations of the Pension Plans investments. Additionally, the Company considers historical returns on comparable fixed income investments and equity investments and adjusts its estimate as deemed appropriate.
The components of Pension Expense for the years ended December 31, 2008, 2007 and 2006 were:
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | |||||||||
Service Cost Benefits Earned During the Year |
$ | 12.5 | $ | 13.4 | $ | 14.1 | ||||||
Interest Cost on Projected Benefit Obligation |
20.9 | 20.0 | 18.9 | |||||||||
Expected Return on Plan Assets |
(25.2 | ) | (24.6 | ) | (22.7 | ) | ||||||
Net Amortization and Deferral |
(0.1 | ) | 0.5 | 1.8 | ||||||||
Pension Expense Recognized |
8.1 | 9.3 | 12.1 | |||||||||
Unrecognized Pension Loss Arising During the Year |
74.6 | 10.4 | | |||||||||
Amortization of Accumulated Unrecognized Pension Gain (Loss) |
0.1 | (0.5 | ) | | ||||||||
Comprehensive Pension Expense |
$ | 82.8 | $ | 19.2 | $ | 12.1 | ||||||
Total Pension Expense Recognized presented above includes service cost benefits earned and reported in discontinued operations of $0.7 million, $1.2 million and $1.5 million for the years ended December 31, 2008, 2007 and 2006, respectively.
The components of OPEB Expense for the years ended December 31, 2008, 2007 and 2006 were:
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | |||||||||
Service Cost Benefits Earned During the Year |
$ | 0.1 | $ | 0.1 | $ | 0.1 | ||||||
Interest Cost on Accumulated Benefit Obligation |
2.0 | 2.1 | 2.5 | |||||||||
Net Amortization and Deferral |
(2.2 | ) | (2.5 | ) | (1.9 | ) | ||||||
OPEB (Income) Expense Recognized |
(0.1 | ) | (0.3 | ) | 0.7 | |||||||
Unrecognized OPEB Gain Arising During the Year |
(1.2 | ) | (5.4 | ) | | |||||||
Amortization of Accumulated Unrecognized OPEB Gain |
2.2 | 2.5 | | |||||||||
Comprehensive OPEB (Income) Expense |
$ | 0.9 | $ | (3.2 | ) | $ | 0.7 | |||||
121
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 18. PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (Continued)
The actuarial assumptions used to develop the components of the Pension Expense for the years ended December 31, 2008, 2007 and 2006 were:
2008 | 2007 | 2006 | |||||||
Discount Rate |
5.75 | % | 5.75 | % | 5.50 | % | |||
Rate of Increase in Future Compensation Levels |
4.12 | 4.10 | 4.10 | ||||||
Expected Long Term Rate of Return on Plan Assets |
7.00 | 7.00 | 7.00 |
The actuarial assumptions used to develop the components of the OPEB Expense for the years ended December 31, 2008, 2007 and 2006, were:
2008 | 2007 | 2006 | |||||||
Discount Rate |
5.75 | % | 5.75 | % | 5.50 | % | |||
Rate of Increase in Future Compensation Levels |
1.50 | 3.30 | 4.10 |
The actuarial assumptions used to develop the components of the Pension Projected Benefit Obligation at December 31, 2008 and 2007 were:
2008 | 2007 | |||||
Discount Rate |
6.00 | % | 5.75 | % | ||
Rate of Increase in Future Compensation Levels |
4.07 | 4.12 |
The actuarial assumptions used to develop the components of the OPEB Accumulated Benefit Obligation at December 31, 2008 and 2007 were:
2008 | 2007 | |||||
Discount Rate |
6.00 | % | 5.75 | % | ||
Rate of Increase in Future Compensation Levels |
1.50 | 1.50 |
The Company does not expect to be required to contribute to its Pension Plans in 2009, but could make a voluntary contribution pursuant to the maximum funding limits under ERISA. The Company expects to contribute $4.3 million, net of expected Modernization Act Subsidy, to its OPEB Plan to fund benefit payments in 2009.
The following benefit payments (net of participant contributions), which consider expected future service, as appropriate, are expected to be paid:
YEARS ENDING DECEMBER 31, | ||||||||||||||||||||||||
DOLLARS IN MILLIONS |
2009 | 2010 | 2011 | 2012 | 2013 | 20142018 | ||||||||||||||||||
Pension Benefits |
$ | 17.8 | $ | 18.3 | $ | 18.9 | $ | 20.0 | $ | 21.0 | $ | 123.2 | ||||||||||||
OPEB Benefits: |
||||||||||||||||||||||||
Excluding Modernization Act Subsidy |
$ | 4.9 | $ | 4.8 | $ | 4.8 | $ | 4.7 | $ | 4.5 | $ | 19.3 | ||||||||||||
Expected Modernization Act Subsidy |
(0.6 | ) | (0.6 | ) | (0.6 | ) | (0.6 | ) | (0.6 | ) | (2.8 | ) | ||||||||||||
Net OPEB Benefits |
$ | 4.3 | $ | 4.2 | $ | 4.2 | $ | 4.1 | $ | 3.9 | $ | 16.5 | ||||||||||||
The Company also sponsors several defined contribution benefit plans covering most of its employees. The Company made contributions to those plans of $7.0 million, $6.8 million and $7.2 million in 2008, 2007 and 2006, respectively. Under these plans, the participants have several investment alternatives, including Unitrins
122
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 18. PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (Continued)
common stock and the Dreyfus Appreciation Fund. FS&C is a sub-investment advisor of the Dreyfus Appreciation Fund. One of Unitrins directors, Mr. Fayez Sarofim, is the Chairman of the Board, President and majority shareholder of FS&C (see Note 24, Related Parties, to the Consolidated Financial Statements). The fair value of participants investments in Unitrins common stock was $9.0 million, or 4.5% of the total investments in the defined contribution benefit plans at December 31, 2008. The fair value of participants investment in the Dreyfus Appreciation Fund was $14.7 million, or 7.4% of the total investments in the defined contribution benefit plans at December 31, 2008.
The Company is engaged, through its subsidiaries, in the property and casualty insurance, life and health insurance and automobile finance businesses. The Company conducts its operations through five operating segments: Kemper, Unitrin Specialty, Unitrin Direct, Life and Health Insurance and Fireside Bank.
The Kemper segment provides preferred and standard risk personal automobile insurance, homeowners insurance and other personal insurance through independent agents. The Unitrin Specialty segment provides automobile insurance to individuals and businesses in the non-standard and specialty market through independent agents. The non-standard automobile insurance market consists of individuals and companies that have difficulty obtaining standard or preferred risk insurance, usually because of their driving records. Unitrin Direct markets personal automobile insurance through direct mail and the Internet through web insurance portals, click-thrus and its own website. In addition, Merastar, which is included in the Unitrin Direct segment from the date of its acquisition (see Note 3, Acquisition of Businesses, to the Consolidated Financial Statements), specializes in the sale of personal automobile and homeowners insurance through employer-sponsored voluntary benefit programs. The Life and Health Insurance segment provides individual life, accident, health and hospitalization insurance. The Companys Life and Health Insurance employee-agents also market property insurance products under common management. The Fireside Bank segment makes sub-prime automobile loans primarily for the purchase of pre-owned automobiles and offers certificates of deposits.
The Companys earned premiums and automobile finance revenues are derived in the United States. The accounting policies of the segments are the same as those described in Note 2, Summary of Accounting Policies and Accounting Changes, to the Consolidated Financial Statements. Capital expenditures for long-lived assets by operating segment are immaterial.
The Company also does not allocate insurance reserves from its 2002 acquisition of certain insurance companies from SCOR (see Note 8, Property and Casualty Insurance Reserves, to the Consolidated Financial Statements). It is also the Companys management practice to allocate certain corporate expenses to its insurance operations. In accordance with SFAS No. 144, the Company is not permitted to allocate certain corporate expenses to discontinued operations. Accordingly, such amounts that the Company is not permitted to allocate to discontinued operations are reported in Other Expense, Net. The Company considers the management of certain investments, including Northrop preferred and common stock, Baker Hughes common stock and Intermec common stock, to be a corporate responsibility. Accordingly, the Company does not allocate dividend income from these investments to its operating segments. The Company does not allocate Net Realized Investment Gains (Losses) to its operating segments.
123
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 19. BUSINESS SEGMENTS (Continued)
Segment Assets at December 31, 2008 and 2007 were:
DOLLARS IN MILLIONS |
2008 | 2007 | ||||
SEGMENT ASSETS |
||||||
Kemper |
$ | 1,448.4 | $ | 1,454.6 | ||
Unitrin Specialty |
715.5 | 650.1 | ||||
Unitrin Direct |
380.8 | 317.5 | ||||
Life and Health Insurance |
4,270.5 | 3,905.3 | ||||
Fireside Bank |
1,383.0 | 1,450.3 | ||||
Corporate and Other, Net |
620.6 | 1,616.6 | ||||
Total Assets |
$ | 8,818.8 | $ | 9,394.4 | ||
Segment Revenues for the years ended December 31, 2008, 2007 and 2006 were:
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | |||||||
REVENUES |
||||||||||
Kemper: |
||||||||||
Earned Premiums |
$ | 930.7 | $ | 926.3 | $ | 944.6 | ||||
Net Investment Income |
19.1 | 44.0 | 50.4 | |||||||
Other Income |
0.5 | 0.5 | 0.4 | |||||||
Total Kemper |
950.3 | 970.8 | 995.4 | |||||||
Unitrin Specialty: |
||||||||||
Earned Premiums |
494.0 | 449.3 | 444.4 | |||||||
Net Investment Income |
8.6 | 19.2 | 22.4 | |||||||
Other Income |
0.2 | 0.1 | | |||||||
Total Unitrin Specialty |
502.8 | 468.6 | 466.8 | |||||||
Unitrin Direct: |
||||||||||
Earned Premiums |
290.5 | 257.6 | 225.9 | |||||||
Net Investment Income |
4.6 | 8.9 | 9.3 | |||||||
Other Income |
0.4 | 0.4 | 0.4 | |||||||
Total Unitrin Direct |
295.5 | 266.9 | 235.6 | |||||||
Life and Health Insurance: |
||||||||||
Earned Premiums |
661.4 | 653.7 | 675.6 | |||||||
Net Investment Income |
162.1 | 181.0 | 181.3 | |||||||
Other Income |
1.1 | 1.2 | 11.2 | |||||||
Total Life and Health Insurance |
824.6 | 835.9 | 868.1 | |||||||
Fireside Bank: |
||||||||||
Interest, Loan Fees and Earned Discounts |
237.4 | 251.2 | 237.3 | |||||||
Other Automobile Finance Revenues |
4.9 | 9.0 | 7.7 | |||||||
Automobile Finance Revenues |
242.3 | 260.2 | 245.0 | |||||||
Net Investment Income |
4.5 | 4.9 | 3.9 | |||||||
Total Fireside Bank |
246.8 | 265.1 | 248.9 | |||||||
Total Segment Revenues |
2,820.0 | 2,807.3 | 2,814.8 | |||||||
Unallocated Dividend Income |
10.8 | 25.2 | 18.2 | |||||||
Net Realized Investment Gains (Losses) |
(93.7 | ) | 62.5 | 26.5 | ||||||
Other |
5.1 | 8.0 | 2.9 | |||||||
Total Revenues |
$ | 2,742.2 | $ | 2,903.0 | $ | 2,862.4 | ||||
124
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 19. BUSINESS SEGMENTS (Continued)
Segment Operating Profit for the years ended December 31, 2008, 2007 and 2006 was:
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | |||||||||
SEGMENT OPERATING PROFIT (LOSS) |
||||||||||||
Kemper |
$ | 7.6 | $ | 88.2 | $ | 133.4 | ||||||
Unitrin Specialty |
10.2 | 35.3 | 39.2 | |||||||||
Unitrin Direct |
(52.5 | ) | (41.2 | ) | (9.8 | ) | ||||||
Life and Health Insurance |
79.3 | 150.6 | 155.4 | |||||||||
Fireside Bank |
(25.3 | ) | (66.0 | ) | 44.8 | |||||||
Total Segment Operating Profit |
19.3 | 166.9 | 363.0 | |||||||||
Unallocated Dividend Income |
10.8 | 25.2 | 18.2 | |||||||||
Net Realized Investment Gains (Losses) |
(93.7 | ) | 62.5 | 26.5 | ||||||||
Other Expense, Net |
(26.4 | ) | (27.8 | ) | (32.5 | ) | ||||||
Income (Loss) from Continuing Operations before Income Taxes and Equity in Net Income of Investee |
$ | (90.0 | ) | $ | 226.8 | $ | 375.2 | |||||
Segment Net Income for the years ended December 31, 2008, 2007 and 2006 was:
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | |||||||||
SEGMENT NET INCOME (LOSS) |
||||||||||||
Kemper |
$ | 13.4 | $ | 66.5 | $ | 95.4 | ||||||
Unitrin Specialty |
10.1 | 27.0 | 29.3 | |||||||||
Unitrin Direct |
(32.0 | ) | (24.9 | ) | (4.7 | ) | ||||||
Life and Health Insurance |
51.8 | 97.0 | 101.5 | |||||||||
Fireside Bank |
(22.3 | ) | (38.8 | ) | 26.1 | |||||||
Total Segment Net Income |
21.0 | 126.8 | 247.6 | |||||||||
Net Income (Loss) From: |
||||||||||||
Unallocated Dividend Income |
9.5 | 22.2 | 16.0 | |||||||||
Net Realized Investment Gains (Losses) |
(61.0 | ) | 40.5 | 17.2 | ||||||||
Other Expense, Net |
(13.3 | ) | (12.6 | ) | (22.4 | ) | ||||||
Income (Loss) from Continuing Operations before Equity in Net Income of Investee |
(43.8 | ) | 176.9 | 258.4 | ||||||||
Equity in Net Income of Investee |
5.8 | 1.2 | 9.2 | |||||||||
Income (Loss) from Continuing Operations |
$ | (38.0 | ) | $ | 178.1 | $ | 267.6 | |||||
Amortization of Deferred Policy Acquisition Costs by Operating Segment for the years ended December 31, 2008, 2007 and 2006 was:
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | ||||||
Kemper |
$ | 166.7 | $ | 163.5 | $ | 165.4 | |||
Unitrin Specialty |
65.1 | 56.6 | 60.9 | ||||||
Unitrin Direct |
7.5 | 11.0 | 10.4 | ||||||
Life and Health Insurance |
72.2 | 69.3 | 71.5 | ||||||
Total Amortization |
$ | 311.5 | $ | 300.4 | $ | 308.2 | |||
125
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 19. BUSINESS SEGMENTS (Continued)
Earned Premiums by product line for the years ended December 31, 2008, 2007 and 2006 were:
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | ||||||
EARNED PREMIUMS |
|||||||||
Life |
$ | 398.5 | $ | 387.8 | $ | 400.7 | |||
Accident and Health |
160.1 | 157.9 | 158.3 | ||||||
Property and Casualty: |
|||||||||
Personal Lines: |
|||||||||
Automobile |
1,287.8 | 1,192.3 | 1,163.6 | ||||||
Homeowners |
295.2 | 286.6 | 284.7 | ||||||
Other Personal |
155.0 | 156.3 | 164.9 | ||||||
Total Personal Lines |
1,738.0 | 1,635.2 | 1,613.2 | ||||||
Commercial Lines: |
|||||||||
Automobile |
80.0 | 106.0 | 118.3 | ||||||
Total Earned Premiums |
$ | 2,376.6 | $ | 2,286.9 | $ | 2,290.5 | |||
NOTE 20. CATASTROPHE REINSURANCE
Catastrophes and storms are inherent risks of the property and casualty insurance business. These catastrophic events and natural disasters include hurricanes, tornadoes, earthquakes, hailstorms, wildfires, high winds and winter storms. Such events result in insured losses that are, and will continue to be, a material factor in the results of operations and financial position of the Companys property and casualty insurance companies. Further, because the level of these insured losses occurring in any one year cannot be accurately predicted, these losses may contribute to material year-to-year fluctuations in the results of the operations and financial position of these companies. Specific types of catastrophic events are more likely to occur at certain times within the year than others. This factor adds an element of seasonality to property and casualty insurance claims. The Company has adopted the industry-wide catastrophe classifications of storms and other events promulgated by ISO to track and report losses related to catastrophes. ISO classifies a disaster as a catastrophe when the event causes $25.0 million or more in direct losses to property and affects a significant number of policyholders and insurers. ISO-classified catastrophes are assigned a unique serial number recognized throughout the insurance industry. The discussions that follow utilize ISOs definition of catastrophes.
126
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 20. CATASTROPHE REINSURANCE (Continued)
The Company manages its exposure to catastrophes and other natural disasters through a combination of geographical diversification, restrictions on the amount and location of new business production in such regions, and reinsurance. To limit its exposures to catastrophic events, the Company maintains various catastrophe reinsurance programs for its property and casualty insurance businesses. Coverage for each catastrophe reinsurance program effective January 1, 2008 is provided in various layers as presented below:
Catastrophe Losses and
LAE |
Percentage
of Coverage |
||||||||
(Dollars in Millions) |
In Excess of | Up to | |||||||
Kemper Segment |
|||||||||
Retained |
$ | | $ | 40.0 | 0.0 | % | |||
1st Layer of Coverage |
40.0 | 70.0 | 61.5 | % | |||||
2nd Layer of Coverage |
70.0 | 150.0 | 93.0 | % | |||||
3rd Layer of Coverage |
150.0 | 250.0 | 92.0 | % | |||||
Unitrin Direct and Unitrin Specialty Segments |
|||||||||
Retained |
$ | | $ | 2.0 | 0.0 | % | |||
1st Layer of Coverage |
2.0 | 15.0 | 100.0 | % | |||||
Life and Health SegmentProperty Insurance Operations |
|||||||||
Retained |
$ | | $ | 6.0 | 0.0 | % | |||
1st Layer of Coverage |
6.0 | 20.0 | 82.5 | % | |||||
2nd Layer of Coverage |
20.0 | 50.0 | 100.0 | % | |||||
3rd Layer of Coverage |
50.0 | 80.0 | 100.0 | % |
In the event that the Companys incurred catastrophe losses and LAE covered by any of its catastrophe reinsurance programs presented above exceed the retention for that particular layer, each of the programs above requires one reinstatement of such coverage. In such an instance, the Company is required to pay a reinstatement premium to the reinsurers to reinstate the full amount of reinsurance available under such layer. The reinstatement premium is a percentage of the original premium based on the ratio of the losses exceeding the Companys retention to the reinsurers coverage limit. In 2008, the Kemper segment and the Life and Health Insurance segment also participated in a catastrophe reinsurance program providing coverage of 40% of the sum of first $50 million of catastrophe losses of the Kemper segment in excess of $250 million and catastrophe losses of the Life and Health Insurance segment in excess of $80 million resulting from a single occurrence. Reinstatements are not permitted under this combined reinsurance program.
The catastrophe reinsurance program presented above for the Life and Health Insurance segment excludes business written by Mutual Savings Fire. Mutual Savings Fire participated in a separate reinsurance program in 2008 which provided reinsurance coverage of 95% of reinsured catastrophe losses of $3.5 million above retention of $0.5 million. The catastrophe reinsurance program for the Life and Health Insurance segment in 2008 also includes reinsurance coverage from FHCF for hurricane losses in Florida at retentions lower than those described above.
The annual reinsurance program covering the Kemper segment became effective on April 1, 2007 (the 2007 Kemper Program). The first layer of the 2007 Kemper Program provided coverage of approximately 62% of reinsured catastrophe losses of $30 million above retention of $40 million. The second layer of the 2007 Kemper Program provided coverage of approximately 90% of reinsured catastrophe losses of $80 million above retention of $70 million. The third layer of the 2007 Kemper Program provided coverage of approximately 90% of reinsured catastrophe losses of $100 million above retention of $150 million. Prior to the effective date of the 2007 Kemper program, reinsurance coverage was provided by an annual program that became effective July 1, 2006 (the 2006 Kemper Program), which was terminated effective with the Kemper 2007 Program. The
127
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 20. CATASTROPHE REINSURANCE (Continued)
first layer of reinsurance coverage under the 2006 Kemper Program provided coverage of approximately 65% of reinsured catastrophe losses of $30 million above retention of $40 million. The second layer of reinsurance coverage under the 2006 Kemper Program provided coverage of approximately 88% of reinsured catastrophe losses of $80 million above retention of $70 million. The third layer of reinsurance coverage under the 2006 Kemper Program provided coverage of approximately 80% of reinsured catastrophe losses of $100 million above retention of $150 million.
The annual program covering the Companys Unitrin Direct and Unitrin Specialty segments and Unitrin Business Insurance provided, effective January 1, 2007, reinsurance coverage of 100% of reinsured catastrophe losses of $36 million above retention of $4 million. In 2006, the annual program covering these segments also provided reinsurance coverage of 100% of reinsured catastrophe losses of $36 million above retention of $4 million. The 2007 and 2006 annual programs covering these segments did not include Merastar. The annual program covering Merastar was effective on March 31, 2007 and provided reinsurance coverage of 97.5% of reinsured catastrophe losses of $7.25 million above retention of $0.75 million.
The annual program covering the property insurance operations of the Companys Life and Health Insurance segment was changed to provide, effective January 1, 2007, reinsurance coverage of 100% of reinsured catastrophe losses of $120 million above retention of $10 million. In 2006, the annual program covering this segment provided reinsurance coverage of 100% of reinsured catastrophe losses of $90 million above retention of $10 million. The catastrophe reinsurance programs for the Life and Health Insurance segment in 2007 and 2006 also included reinsurance coverage from the FHCF for hurricane losses in Florida at retentions lower than those described above.
In addition, in the event that the Companys incurred catastrophe losses and LAE covered by any of the various reinsurance programs in 2007 and 2006 exceeded the retention for a particular layer, each of the programs in 2007 and 2006 required one reinstatement of such coverage. In such an instance, the Company is required to pay a reinstatement premium to the reinsurers to reinstate the full amount of reinsurance available under such program.
Catastrophe reinsurance premiums for the Companys primary reinsurance programs and the FHCF reduced earned premiums for the years ended December 31, 2008, 2007 and 2006 by the following:
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | ||||||
Kemper |
$ | 19.6 | $ | 19.4 | $ | 15.7 | |||
Unitrin Specialty |
0.3 | 0.2 | 0.2 | ||||||
Unitrin Direct |
0.2 | 1.1 | 0.5 | ||||||
Life and Health Insurance |
10.5 | 8.5 | 6.1 | ||||||
Total Ceded Catastrophe Reinsurance Premiums |
$ | 30.6 | $ | 29.2 | $ | 22.5 | |||
The Life and Health Insurance segment presented above includes reinsurance reinstatement premiums of $4.4 million for the year ended December 31, 2008 to reinstate coverage following Hurricanes Dolly, Gustav and Ike.
Total catastrophe losses and LAE (including development), net of reinsurance recoveries, reported in continuing operations were $144.9 million, $39.4 million and $56.9 million for the years ended December 31, 2008, 2007 and 2006, respectively. The Company reported the following catastrophe reserve development: adverse $4.8 million, favorable $4.6 million and adverse $4.0 million in 2008, 2007 and 2006, respectively. In the third quarter of 2008, three major hurricanes that significantly impacted the Company (Dolly, Gustav and Ike) made landfall in the United States. A summary of the Companys estimated losses and LAE, net of reinsurance
128
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 20. CATASTROPHE REINSURANCE (Continued)
recoveries of $65.4 million, from Hurricanes Dolly, Gustav and Ike reported in the Companys Consolidated Statements of Operations for the year ended December 31, 2008 by business segment were:
DOLLARS IN MILLIONS |
Dolly | Gustav | Ike | Total | ||||||||
Kemper |
$ | 0.6 | $ | 12.1 | $ | 27.9 | $ | 40.6 | ||||
Unitrin Specialty |
| 0.5 | 1.0 | 1.5 | ||||||||
Unitrin Direct |
| | 0.5 | 0.5 | ||||||||
Life and Health Insurance |
6.8 | 7.3 | 8.7 | 22.8 | ||||||||
Total Loss and LAE, Net of Reinsurance |
$ | 7.4 | $ | 19.9 | $ | 38.1 | $ | 65.4 | ||||
The estimated losses presented above by the Life and Health Insurance segment are net of reinsurance recoveries of $2.9 million, $6.0 million and $37.2 million related to Hurricanes Dolly, Gustav and Ike, respectively. In addition to the losses presented above, Insurance Expenses for the year ended December 31, 2008 includes an expense of $3.9 million related to the Kemper segments estimate of its share of assessments from TWIA. The Companys estimates for Hurricanes Dolly, Gustav and Ike include estimates for both direct losses and LAE and indirect losses from residual market assessments, such as TWIA. The process of estimating and establishing reserves for catastrophe losses is inherently uncertain and the actual ultimate cost of a claim, net of actual reinsurance recoveries, may vary materially from the estimated amount reserved. The Companys estimates of direct catastrophe losses are generally based on inspections by claims adjusters and historical loss development experience for areas that have not been inspected or for claims that have not yet been reported. The Companys estimates of direct catastrophe losses are based on the coverages provided by its insurance policies. The Companys homeowners and dwellings insurance policies do not provide coverage for losses caused by floods, but generally provide coverage for physical damage caused by wind or wind driven rain. Accordingly, the Companys estimates of direct losses for homeowners and dwellings insurance do not include losses caused by flood. Depending on the policy, automobile insurance may provide coverage for losses caused by flood. Estimates of the number and severity of claims ultimately reported are influenced by many variables including, but not limited to, repair or reconstruction costs and determination of cause of loss, that are difficult to quantify and will influence the final amount of claim settlements. All these factors, coupled with the impact of the availability of labor and material on costs, require significant judgment in the reserve setting process. A change in any one or more of these factors is likely to result in an ultimate net claim cost different from the estimated reserve. The Companys estimates of indirect losses from residual market assessments are based on a variety of factors including, but not limited to, actual or estimated assessments provided by or received from the assessing entity, insurance industry estimates of losses, and estimates of the Companys market share in the assessable states. Actual assessments may differ materially from these estimated amounts.
In addition to the reinsurance programs described in Note 20, Catastrophe Reinsurance, to the Consolidated Financial Statements, Unitrins insurance subsidiaries utilize other reinsurance arrangements to limit their maximum loss, provide greater diversification of risk and to minimize exposures on larger risks. The ceding of insurance does not discharge the primary liability of the original insurer. Accordingly, insurance reserve liabilities are reported gross of any estimated recovery from reinsurers in the Consolidated Balance Sheets. Amounts recoverable from reinsurers are estimated in a manner consistent with the insurance reserve liability and are included in Other Receivables in the Consolidated Balance Sheets.
Earned Premiums assumed and ceded on long-duration policies were not material for the years ended December 31, 2008, 2007 and 2006. Earned Premiums ceded on short-duration policies were not material for the years ended December 31, 2008, 2007 and 2006. Certain insurance subsidiaries assume business from other
129
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 21. OTHER REINSURANCE (Continued)
insurance companies and involuntary pools. Earned Premiums assumed on short-duration policies for the years ended December 31, 2008, 2007 and 2006 were:
DOLLARS IN MILLIONS |
2008 | 2007 | 2006 | ||||||
Earned Premiums Assumed From: |
|||||||||
Capitol |
$ | 50.9 | $ | 53.3 | $ | 56.2 | |||
ORCC |
10.6 | 10.8 | 11.3 | ||||||
Milwaukee Insurance Company |
| 0.6 | 3.0 | ||||||
Other |
5.4 | 2.5 | 2.3 | ||||||
Total Earned Premiums Assumed |
$ | 66.9 | $ | 67.2 | $ | 72.8 | |||
Effective January 1, 2007, Trinity, a subsidiary of Unitrin, and Milwaukee Insurance Company (MIC) entered into a new quota share reinsurance agreement whereby Trinity assumes 100% of policy liabilities occurring on MICs direct book of business on or after January 1, 2007, which business was administered by the Unitrin Business Insurance unit and the Kemper segment. Prior to January 1, 2007, Trinity and MIC were parties to a quota share reinsurance agreement whereby Trinity assumed 95% of the business written by MIC (administered by the Unitrin Business Insurance unit and the Kemper segment) and 95% of the business that MIC assumed from First NonProfit Insurance Company (FNP). The new quota share reinsurance agreement amended the 95% quota share reinsurance agreement so that policy liabilities occurring on MICs in-force direct book of business prior to January 1, 2007 remain ceded under the 95% agreement, as do FNP policy liabilities incurred prior to January 1, 2007. In connection with the new quota share reinsurance agreement, Trinity transferred to MIC the unearned premium reserves maintained by Trinity related to the FNP business, net of a ceding commission. MIC was owned by Mutual Insurers Holding Company (MIHC), which in turn was owned by MICs policyholders. Similarly, FNP was owned by First NonProfit Mutual Holding Company (FNMHC), which was owned by FNPs policyholders. In November 2007, MIHC and FNMHC merged, and, accordingly, MIC and FNP became subsidiaries of the merged company. In the past, certain employees of the Company and its subsidiaries have been members of the boards of directors of one or more of MIC, MIHC, FNP and FHMHC. Effective in November 2007 and prior to the merger, the last remaining representatives of the Company resigned such board memberships. Accordingly, the only relationship that currently exists among the Company and/or its employees and these companies is the relationship of Trinity as a reinsurer of certain business pursuant to the above mentioned quota reinsurance agreement between Trinity and MIC.
Trinity and Capitol are parties to a quota share reinsurance agreement whereby Trinity assumes 100% of the business written by Capitol. Capitol is a mutual insurance company and, accordingly, is owned by its policyholders. Five employees of the Company serve as directors of Capitols five member board of directors. Nine employees of the Company also serve as directors of Capitols wholly owned subsidiarys, ORCC, nine member board of directors. Trinity and ORCC are parties to a quota share reinsurance agreement whereby Trinity assumes 100% of the business written by ORCC. Reliable, a subsidiary of Unitrin, provides certain administrative services to Capitol and ORCC. In addition, agents appointed by Reliable and employed by Unitrins subsidiary, United Insurance, are also appointed by Capitol and ORCC to sell property insurance products. United Insurance also provides claims administration services to ORCC. The Company also provides certain investment services to Capitol and ORCC.
NOTE 22. FAIR VALUE MEASUREMENTS
Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, which, among other matters, requires enhanced disclosures about assets and liabilities that are measured and reported at fair value on a recurring basis. The Company classifies its Investments in Fixed Maturities, Investments in Northrop Common Stock and Investments in Other Equity Securities as available for sale and reports these investments at fair value.
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Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 22. FAIR VALUE MEASUREMENTS (Continued)
The Company classifies certain investments in mutual funds included in Other Investments as trading securities and reports these investments at fair value. The Company has no material liabilities that are measured and reported at fair value.
SFAS No. 157 defines fair value and establishes a hierarchal framework which prioritizes and ranks the market price observability used in fair value measurements. Market price observability is affected by a number of factors, including the type of asset or liability and the characteristics specific to the asset or liability being measured. Assets and liabilities with readily available, active, quoted market prices or for which fair value can be measured from actively quoted prices generally are deemed to have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. Under SFAS No. 157, the inputs used to measure fair value must be classified into one of three levels as follows:
Level 1 - |
Quoted prices in an active market for identical assets or liabilities; | |
Level 2 - |
Observable inputs other than Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable; and | |
Level 3 - |
Assets and liabilities whose significant value drivers are unobservable. |
Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Companys market assumptions. Unobservable inputs require significant management judgment or estimation. In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy. In those instances, the fair value measurement is required to be classified using the lowest level of input that is significant to the fair value measurement. Such determination requires significant management judgment. In accordance with SFAS No. 157, the Company is not permitted to adjust quoted market prices in an active market, even if the Company owns a large investment, the sale of which could reasonably impact the quoted price.
The valuation of assets measured at fair value in the Companys Consolidated Balance Sheet at December 31, 2008 is summarized below:
Fair Value Measurements | ||||||||||||
DOLLARS IN MILLIONS |
Fair Value
Dec. 31, 2008 |
Quoted Prices
in Active Markets for Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
||||||||
Available for Sale Securities: |
||||||||||||
Fixed Maturities |
$ | 4,135.9 | $ | 254.0 | $ | 3,677.1 | $ | 204.8 | ||||
Northrop Common Stock |
40.3 | 40.3 | | | ||||||||
Other Equity Securities |
181.5 | 7.5 | 114.6 | 59.4 | ||||||||
Total Available for Sale Securities |
4,357.7 | 301.8 | 3,791.7 | 264.2 | ||||||||
Trading Securities: |
||||||||||||
Other Investments: |
3.8 | 3.8 | | | ||||||||
Total |
$ | 4,361.5 | $ | 305.6 | $ | 3,791.7 | $ | 264.2 | ||||
The Companys investments in available for sale securities reported as Fixed Maturities and classified as Level 1 in the above table primarily consist of U.S. Treasury Bonds and Notes. The Companys investments in available for sale securities reported as Other Equity Securities and classified as Level 1 in the above table primarily
131
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 22. FAIR VALUE MEASUREMENTS (Continued)
consist of investments in publicly-traded common stocks. The Companys investments in available for sale securities reported as Fixed Maturities and classified as Level 2 in the above table primarily consist of investments in corporate bonds and redeemable preferred stocks, state and municipal bonds, and bonds and mortgage-backed securities of U.S. government agencies. The Companys investments in available for sale securities reported as Other Equity Securities and classified as Level 2 in the above table primarily consist of investments in preferred stocks. The Company uses a leading, nationally recognized provider of market data and analytics to price the vast majority of the Companys Level 2 measurements. The provider utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information. Because many fixed maturity securities do not trade on a daily basis, the providers evaluated pricing applications apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing to prepare evaluations. In addition, the provider uses model processes to develop prepayment and interest rate scenarios. The pricing providers models and processes also take into account market convention. For each asset class, teams of its evaluators gather information from market sources and integrate relevant credit information, perceived market movements and sector news into the evaluated pricing applications and models. The Company generally validates the measurements obtained from its primary pricing provider by comparing them with measurements obtained from one additional pricing provider that provides either prices from recent market transactions or quotes in inactive markets or evaluations based on its own proprietary models. The Company investigates significant differences related to the values provided. On completion of its investigation, management exercises judgment to determine the price selected and whether adjustments, if any, to the price obtained from the Companys primary pricing provider would warrant classification of the price as Level 3. In instances where a measurement cannot be obtained from either pricing provider, the Company generally will evaluate bid prices from one or more binding quotes obtained from market makers to value investments in inactive markets and classified by the Company as Level 2. The Company generally classifies securities when it receives non-binding quotes or indications as Level 3 securities unless the Company can validate the quote or indication against recent transactions in the market. For securities classified as Level 3, the Company either uses valuations provided by third party fund managers, third party appraisers or the Companys own internal valuations. These valuations typically employ valuation techniques including earning multiples based on comparable public securities, industry specific non-earnings based multiples, and discounted cash flow models. Valuations classified as Level 3 by the Company generally consist of investments in various private placement securities of non-rated entities. In rare cases, if the private placement security has only been outstanding for a short amount of time, the Company, after considering the initial assumptions used in acquiring an investment, will rely on the original purchase price as representative of the fair value.
Additional information pertaining to the Companys investments in Fixed Maturities and Other Equity Securities classified as Level 3 at December 31, 2008 is presented below:
DOLLARS IN MILLIONS |
Fair Value
Dec. 31, 2008 |
||
Fixed Maturities |
|||
Corporate Bonds and Notes Due at a Single Maturity Date |
$ | 134.2 | |
Redeemable Preferred Stocks |
70.6 | ||
Total Fixed Maturities Classified as Level 3 |
204.8 | ||
Other Equity Securities: |
|||
Common Stocks |
10.4 | ||
Preferred Stocks |
4.9 | ||
Other Equity Interests |
44.1 | ||
Total Other Equity Securities Classified as Level 3 |
59.4 | ||
Total Investments Classified as Level 3 |
$ | 264.2 | |
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Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 22. FAIR VALUE MEASUREMENTS (Continued)
Additional information pertaining to the changes in the fair value of the Companys investments classified as Level 3 for the year ended December 31, 2008 is presented below:
DOLLARS IN MILLIONS |
Year Ended
December 31, 2008 |
|||
Balance at Beginning of Period |
$ | 218.9 | ||
Total Gains (Losses): |
||||
Included in Statement of Operations |
(53.4 | ) | ||
Included in Other Comprehensive Income (Loss) |
(29.3 | ) | ||
Purchases, Sales and Settlements, Net |
126.5 | |||
Transfers in and/or out of Level 3 |
1.5 | |||
Balance at December 31, 2008 |
$ | 264.2 | ||
Included in the Statement of Operations for the year ended December 31, 2008 for investments classified as Level 3 is a net realized loss of $31.3 million related to the write down of subordinated fixed maturity obligations of a single issuer subsequent to a capital restructuring, net of a gain realized $2.2 million from the partial disposition of a subordinated fixed maturity obligation from the capital restructuring of the same issuer which the Company had previously written down due to an other than temporary decline in fair value. Losses Included in Statement of Operations for the year ended December 31, 2008 include a realized loss of $18.8 million to write down a subordinated fixed maturity obligation of a single issuer due to a capital restructuring. Other Comprehensive Income (Loss) for investments classified as Level 3 include an unrealized loss of $13.6 million for the year ended December 31, 2008 related to an overall decline in the fair value of the Companys investments in fifteen limited liability investment companies and limited partnerships in which the Companys ownership is considered minor and are therefore not accounted for under the equity method of accounting. Other Comprehensive Income (Loss) for investments classified as Level 3 includes an unrealized loss of $4.5 million for the year ended December 31, 2008 related to a decline in the fair value of two redeemable, auction rate preferred stocks of a single issuer. The Company attributes the unrealized loss related to these preferred stocks to liquidity issues in the market for auction rate preferred stocks, rather than credit issues related to the issuer of the securities. Accordingly, the Company expects to fully recover its investment on or before the date that the securities mature.
In the ordinary course of their businesses, Unitrin and its subsidiaries are involved in a number of legal proceedings including lawsuits and regulatory examinations and inquiries. Some of these proceedings include matters particular to the Company or one or more of its subsidiaries, while others pertain to business practices in the industries in which Unitrin or its subsidiaries operate. Some lawsuits seek class action status that, if granted, could expose Unitrin or its subsidiaries to potentially significant liability by virtue of the size of the putative classes. These matters can raise complicated issues and may be subject to many uncertainties, including but not limited to: (i) the underlying facts of the matter; (ii) unsettled questions of law; (iii) issues unique to the jurisdiction where the matter is pending; (iv) damage claims, including claims for punitive damages, that are disproportionate to the actual economic loss incurred; and (v) the legal, regulatory and political environment faced by large corporations generally and the insurance and banking sectors specifically. Accordingly, the outcomes of these matters are difficult to predict, and the amounts or ranges of potential loss at particular points in time are in most cases difficult or impossible to ascertain.
During the course of 2008, Unitrin and certain of its subsidiaries, like many property and casualty insurers, were forced to defend numerous individual lawsuits, mass actions and statewide putative class actions in Louisiana and Texas arising out of Hurricanes Katrina and Rita. In these matters, the plaintiffs seek compensatory and
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Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 23. CONTINGENCIES (Continued)
punitive damages, and equitable relief. The Company and its relevant subsidiaries believe they have meritorious defenses to these proceedings and are defending them vigorously.
Fireside Bank is defending two class action lawsuits in California state courts alleging that its post-repossession notices to defaulting borrowers failed to comply with certain aspects of California law. The plaintiffs seek: (i) compensatory damages, including a refund of deficiency balances collected from customers who received the allegedly defective notices; (ii) punitive damages; and (iii) equitable relief. Statewide classes have been certified in these matters and Fireside Bank successfully moved to have the two cases treated on a coordinated basis. Fireside Bank is contesting the allegations that its post-repossession notices were deficient and believes it has meritorious defenses to these lawsuits.
The Company believes that resolution of its pending legal proceedings will not have a material adverse effect on the Companys financial position. However, given the unpredictability of the legal environment, there can be no assurance that one or more of these matters will not produce a loss which could have a material adverse effect on the Companys financial results for any given period.
The legal and regulatory environment within which Unitrin and its subsidiaries conduct their business is often unpredictable. Industry practices that were considered legally-compliant and reasonable for years may suddenly be deemed unacceptable by virtue of an unexpected court or regulatory ruling. Anticipating such shifts in the law and the impact they may have on the Company and its operations is a difficult task and there can be no assurances that the Company will not encounter such shifts in the future.
One of Unitrins directors, Mr. Fayez Sarofim, is the Chairman of the Board, President and the majority shareholder of Fayez Sarofim & Co. (FS&C), a registered investment advisory firm. Certain of Unitrins insurance company subsidiaries and FS&C were parties to agreements under which FS&C provided investment management services to these subsidiaries. Under these investment advisory arrangements, FS&C was entitled to a fee calculated and payable quarterly based upon the fair market value of the assets under management. During 2008, FS&C sold all of the investments it managed for Unitrins insurance company subsidiaries. Accordingly, Unitrins insurance company subsidiaries had no investments managed by FS&C at December 31, 2008. Unitrins insurance company subsidiaries had $226.2 million and $208.2 million in assets invested with FS&C for investment management at December 31, 2007 and 2006, respectively. Unitrins insurance company subsidiaries paid, in the aggregate, $0.5 million per year to FS&C for the years ended 2008, 2007 and 2006.
In addition, FS&C continues to provide investment management services with respect to certain funds of the Companys pension plans. The Companys pension plans had $68.5 million, $99.6 million and $92.4 million, respectively, in assets with FS&C for investment management at December 31, 2008, 2007 and 2006, respectively. The Companys pension plans paid, in the aggregate, $0.2 million per year to FS&C for the years ended 2008, 2007 and 2006.
With respect to the Companys 401(k) Savings Plan, one of the alternative investment choices afforded to participating employees is the Dreyfus Appreciation Fund, an open-end, diversified managed investment fund. FS&C provides investment management services to the Dreyfus Appreciation Fund as a sub-investment advisor. According to published reports filed by FS&C with the SEC, the Dreyfus Appreciation Fund pays monthly fees to FS&C according to a graduated schedule computed at an annual rate based on the value of the Dreyfus Appreciation Funds average daily net assets. The Company does not compensate FS&C for services rendered to the Dreyfus Appreciation Fund. Participants in the Companys 401(k) Savings Plan had allocated $14.7 million, $25.3 million and $27.0 million for investment in the Dreyfus Appreciation Fund at December 31, 2008, 2007
134
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 24. RELATED PARTIES (Continued)
and 2006, respectively, representing 7%, 9% and 10% of the total amount invested in the Companys 401(k) Savings Plan at December 31, 2008, 2007 and 2006, respectively.
Unitrins Life and Health Insurance segment paid $0.5 million and $0.3 million to Intermec for the years ended December 31, 2008 and 2007, respectively for the maintenance of hand held computers previously purchased from Intermec.
The Company believes that the transactions described above have been entered into on terms no less favorable to the Company than could have been negotiated with non-affiliated third parties.
On October 3, 2008, Eric J. Draut, Unitrins Chief Financial Officer and a member of Unitrins Board of Directors, was elected a director of Intermec.
As described in Note 21, Other Reinsurance, to the Consolidated Financial Statements, the Company also has certain relationships with mutual insurance holding companies which are owned by the policy-holders of their insurance subsidiaries.
135
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 25. QUARTERLY FINANCIAL INFORMATION (Unaudited)
THREE MONTHS ENDED (UNAUDITED) | YEAR ENDED | |||||||||||||||||||
DOLLARS IN MILLIONS, EXCEPT PER
|
MARCH 31,
2008 |
JUNE 30,
2008 |
SEPT. 30,
2008 |
DEC. 31,
2008 |
DEC. 31,
2008 |
|||||||||||||||
Revenues: |
||||||||||||||||||||
Earned Premiums |
$ | 575.9 | $ | 596.3 | $ | 599.5 | $ | 604.9 | $ | 2,376.6 | ||||||||||
Automobile Finance Revenues |
63.4 | 62.1 | 60.1 | 56.7 | 242.3 | |||||||||||||||
Net Investment Income |
45.9 | 81.4 | 63.7 | 21.9 | 212.9 | |||||||||||||||
Other Income |
0.5 | 0.9 | 1.2 | 1.5 | 4.1 | |||||||||||||||
Net Realized Investment Gains (Losses) |
6.2 | 5.0 | (44.6 | ) | (60.3 | ) | (93.7 | ) | ||||||||||||
Total Revenues |
691.9 | 745.7 | 679.9 | 624.7 | 2,742.2 | |||||||||||||||
Expenses: |
||||||||||||||||||||
Policyholders Benefits and Incurred |
||||||||||||||||||||
Losses and Loss Adjustment Expenses |
410.7 | 448.2 | 494.3 | 412.0 | 1,765.2 | |||||||||||||||
Insurance Expenses |
172.3 | 182.8 | 190.8 | 190.6 | 736.5 | |||||||||||||||
Automobile Finance Expenses |
53.9 | 69.6 | 47.8 | 32.8 | 204.1 | |||||||||||||||
Interest Expense on Certificates of Deposit |
15.7 | 15.0 | 14.2 | 13.8 | 58.7 | |||||||||||||||
Goodwill |
| | | 9.2 | 9.2 | |||||||||||||||
Interest and Other Expenses |
16.7 | 15.0 | 14.6 | 12.2 | 58.5 | |||||||||||||||
Total Expenses |
669.3 | 730.6 | 761.7 | 670.6 | 2,832.2 | |||||||||||||||
Income (Loss) from Continuing Operations before Income Taxes and Equity in Net Income of Investee |
22.6 | 15.1 | (81.8 | ) | (45.9 | ) | (90.0 | ) | ||||||||||||
Income Tax Benefit (Expense) |
(4.1 | ) | 0.8 | 31.2 | 18.3 | 46.2 | ||||||||||||||
Income (Loss) from Continuing Operations before Equity in Net Income of Investee |
18.5 | 15.9 | (50.6 | ) | (27.6 | ) | (43.8 | ) | ||||||||||||
Equity in Net Income of Investee |
2.2 | 1.1 | 1.0 | 1.5 | 5.8 | |||||||||||||||
Income (Loss) from Continuing Operations |
20.7 | 17.0 | (49.6 | ) | (26.1 | ) | (38.0 | ) | ||||||||||||
Discontinued Operations: |
||||||||||||||||||||
Income (Loss) from Discontinued Operations Before Income Taxes |
(10.2 | ) | (1.6 | ) | 6.7 | 23.3 | 18.2 | |||||||||||||
Income Tax Benefit (Expense) |
4.7 | (4.4 | ) | (2.3 | ) | (7.8 | ) | (9.8 | ) | |||||||||||
Income (Loss) from Discontinued Operations |
(5.5 | ) | (6.0 | ) | 4.4 | 15.5 | 8.4 | |||||||||||||
Net Income (Loss) |
$ | 15.2 | $ | 11.0 | $ | (45.2 | ) | $ | (10.6 | ) | $ | (29.6 | ) | |||||||
Income (Loss) Per Share from Continuing Operations (a) |
$ | 0.33 | $ | 0.27 | $ | (0.79 | ) | $ | (0.42 | ) | $ | (0.60 | ) | |||||||
Income (Loss) Per Share from Discontinued Operations (a) |
(0.09 | ) | (0.09 | ) | 0.07 | 0.25 | 0.13 | |||||||||||||
Net Income (Loss) Per Share (a) |
$ | 0.24 | $ | 0.18 | $ | (0.72 | ) | $ | (0.17 | ) | $ | (0.47 | ) | |||||||
Income (Loss) Per Share from Continuing Operations |
||||||||||||||||||||
Assuming Dilution (a) |
$ | 0.33 | $ | 0.27 | $ | (0.79 | ) | $ | (0.42 | ) | $ | (0.60 | ) | |||||||
Income (Loss) Per Share from Discontinued Operations |
||||||||||||||||||||
Assuming Dilution |
(0.09 | ) | (0.09 | ) | 0.07 | 0.25 | 0.13 | |||||||||||||
Net Income (Loss) Per Share Assuming Dilution (a) |
$ | 0.24 | $ | 0.18 | $ | (0.72 | ) | $ | (0.17 | ) | $ | (0.47 | ) | |||||||
(a) | The sum of quarterly per share amounts does not equal per share amounts for the year due to differences in weighted-average shares and/or equivalent shares outstanding for each of the periods presented. |
136
Unitrin, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements(Continued)
NOTE 25. QUARTERLY FINANCIAL INFORMATION (Unaudited) (Continued)
THREE MONTHS ENDED (UNAUDITED) | YEAR ENDED | |||||||||||||||||||
DOLLARS IN MILLIONS, EXCEPT PER SHARE
|
MARCH 31,
2007 |
JUNE 30,
2007 |
SEPT. 30,
2007 |
DEC. 31,
2007 |
DEC. 31,
2007 |
|||||||||||||||
Revenues: |
||||||||||||||||||||
Earned Premiums |
$ | 562.5 | $ | 570.2 | $ | 579.9 | $ | 574.3 | $ | 2,286.9 | ||||||||||
Automobile Finance Revenues |
63.0 | 64.9 | 66.5 | 65.8 | 260.2 | |||||||||||||||
Net Investment Income |
74.7 | 80.4 | 77.0 | 57.8 | 289.9 | |||||||||||||||
Other Income |
1.0 | 1.2 | 0.5 | 0.8 | 3.5 | |||||||||||||||
Net Realized Investment Gains |
22.5 | 17.0 | 12.5 | 10.5 | 62.5 | |||||||||||||||
Total Revenues |
723.7 | 733.7 | 736.4 | 709.2 | 2,903.0 | |||||||||||||||
Expenses: |
||||||||||||||||||||
Policyholders Benefits and Incurred |
||||||||||||||||||||
Losses and Loss Adjustment Expenses |
387.2 | 397.2 | 383.6 | 404.3 | 1,572.3 | |||||||||||||||
Insurance Expenses |
171.6 | 174.2 | 179.6 | 180.4 | 705.8 | |||||||||||||||
Automobile Finance Expenses |
42.1 | 43.7 | 61.5 | 125.2 | 272.5 | |||||||||||||||
Interest Expense on Certificates of Deposit |
13.6 | 14.2 | 15.2 | 15.7 | 58.7 | |||||||||||||||
Interest and Other Expenses |
16.1 | 20.0 | 16.1 | 14.7 | 66.9 | |||||||||||||||
Total Expenses |
630.6 | 649.3 | 656.0 | 740.3 | 2,676.2 | |||||||||||||||
Income (Loss) from Continuing Operations before Income Taxes and Equity in Net Income (Loss) of Investee |
93.1 | 84.4 | 80.4 | (31.1 | ) | 226.8 | ||||||||||||||
Income Tax Benefit (Expense) |
(28.6 | ) | (25.0 | ) | (23.1 | ) | 26.8 | (49.9 | ) | |||||||||||
Income (Loss) from Continuing Operations before Equity in Net Income (Loss) of Investee |
64.5 | 59.4 | 57.3 | (4.3 | ) | 176.9 | ||||||||||||||
Equity in Net Income (Loss) of Investee |
0.4 | (0.6 | ) | 0.9 | 0.5 | 1.2 | ||||||||||||||
Income (Loss) from Continuing Operations |
64.9 | 58.8 | 58.2 | (3.8 | ) | 178.1 | ||||||||||||||
Discontinued Operations: |
||||||||||||||||||||
Income from Discontinued Operations Before Income Taxes |
5.2 | 3.8 | 8.9 | 16.9 | 34.8 | |||||||||||||||
Income Tax Benefit (Expense) |
(0.6 | ) | (0.2 | ) | (2.1 | ) | (4.6 | ) | (7.5 | ) | ||||||||||
Income from Discontinued Operations |
4.6 | 3.6 | 6.8 | 12.3 | 27.3 | |||||||||||||||
Net Income |
$ | 69.5 | $ | 62.4 | $ | 65.0 | $ | 8.5 | $ | 205.4 | ||||||||||
Income (Loss) Per Share from Continuing Operations (a) |
$ | 0.97 | $ | 0.89 | $ | 0.89 | $ | (0.06 | ) | $ | 2.71 | |||||||||
Income Per Share from Discontinued
|
0.07 | 0.06 | 0.11 | 0.19 | 0.42 | |||||||||||||||
Net Income Per Share (a) |
$ | 1.04 | $ | 0.95 | $ | 1.00 | $ | 0.13 | $ | 3.13 | ||||||||||
Income (Loss) Per Share from Continuing Operations |
||||||||||||||||||||
Assuming Dilution (a) |
$ | 0.96 | $ | 0.89 | $ | 0.89 | $ | (0.06 | ) | $ | 2.70 | |||||||||
Income Per Share from Discontinued
|
||||||||||||||||||||
Assuming Dilution |
0.07 | 0.05 | 0.11 | 0.19 | 0.42 | |||||||||||||||
Net Income Per Share Assuming Dilution (a) |
$ | 1.03 | $ | 0.94 | $ | 1.00 | $ | 0.13 | $ | 3.12 | ||||||||||
(a) | The sum of quarterly per share amounts does not equal per share amounts for the year due to differences in weighted-average shares and equivalent shares outstanding for each of the periods presented. |
137
Report of Independent Registered Public Accounting Firm
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF UNITRIN, INC.
We have audited the accompanying consolidated balance sheets of Unitrin, Inc. and subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders equity and comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedules listed in Item 15. We also have audited the Companys internal control over financial reporting as of December 31, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control. Our responsibility is to express an opinion on these financial statements and financial statement schedules and an opinion on the effectiveness of the Companys internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Unitrin, Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity
138
with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth herein. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for certain investments reported under the equity method of accounting in 2008.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 4, 2009
139
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
Not Applicable
Item 9A. | Controls and Procedures. |
Disclosure Controls and Procedures
The Companys management, with participation of the Companys Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Companys disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, the Companys Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Companys disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the SECs rules and forms, and accumulated and communicated to the Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls Over Financial Reporting
There have not been any changes in the Companys internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
Management Report on Internal Control Over Financial Reporting
We, as management of the Company, are responsible for establishing and maintaining adequate internal control over financial reporting. Pursuant to the rules and regulations of the SEC, internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
|
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; |
|
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and |
|
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the companys assets that could have a material effect on the financial statements. |
Management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2008, based on the control criteria established in a report entitled Internal ControlIntegrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation, we have concluded that the Companys internal control over financial reporting is effective as of December 31, 2008.
140
The independent registered public accounting firm of Deloitte & Touche LLP, as auditors of Unitrins consolidated financial statements, has issued an attestation report on the effectiveness of managements internal control over financial reporting based on criteria established in Internal ControlIntegrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/ S / D ONALD G. S OUTHWELL | / S / E RIC J. D RAUT | |||
Donald G. Southwell | Eric J. Draut | |||
President and Chief Executive Officer | Executive Vice President and Chief Financial Officer |
February 4, 2009
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
The attestation report of the independent registered public accounting firm, Deloitte & Touche LLP, on the Companys internal control over financial reporting is included in Item 8 under the heading Report of Independent Registered Public Accounting Firm, and is incorporated herein by reference.
Item 9B. | Other Information. |
None
PART III
Item 10. | Directors, Executive Officers and Corporate Governance. |
The information required by this Item is incorporated herein by reference to the sections captioned Election of Directors, Unitrin Executive Officers, Ownership of Unitrin Common Stock and Corporate Governance in the Proxy Statement for the 2009 Annual Meeting of Shareholders of Unitrin. Unitrin plans to file such proxy statement within 120 days after December 31, 2008, the end of Unitrins fiscal year.
The Companys code of ethics applicable to its chief executive officer, chief financial officer and principal accounting officer (Code of Ethics for Senior Financial Executives) is posted in the Governance section of the Companys website (unitrin.com). The Company also intends to disclose any future amendments to, and any waivers from (though none are anticipated), the Code of Ethics for Senior Financial Executives in the Governance section of its website.
Item 11. | Executive Compensation. |
The information required by this Item is incorporated herein by reference to the sections captioned Executive Compensation, Compensation Committee Interlocks and Insider Participation, and Compensation Committee Report in the Proxy Statement for the 2009 Annual Meeting of Shareholders of Unitrin. The Compensation Committee Report to be included in such Proxy Statement shall be deemed to be furnished in this report and shall not be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act as a result of such furnishing in this Item 11.
141
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The information required by this Item is set forth in the table below and incorporated herein by reference to the section captioned Ownership of Unitrin Common Stock in the Proxy Statement for the 2009
Equity Compensation Plan Information
Plan Category |
Number of Securities
to be Issued Upon Exercise of Outstanding Options, Warrants and Rights |
Weighted-Average
Exercise Price of Outstanding Options, Warrants and Rights |
Number of Securities
Remaining Available for Future Issuance Under Equity Compensation Plans or Programs (1) |
|||
Equity Compensation Plans Approved by Security Holders |
5,125,249 | 46.17 | 1,475,468 | |||
Equity Compensation Plans Not Approved by Security Holders |
| | | |||
Total |
5,125,249 | 46.17 | 1,475,468 | |||
(1) | In addition to shares available for issuance under the Companys four stock option plans, this number includes 730,139 shares of restricted stock available for issuance under the Companys 2005 Restricted Stock and Restricted Stock Unit Plan. |
Item 13. | Certain Relationships and Related Transactions and Director Independence. |
The information required by this Item is incorporated herein by reference to the sections captioned Related Person Transactions and Director Independence in the Proxy Statement for the 2009 Annual Meeting of Shareholders of Unitrin.
Item 14. | Principal Accounting Fees and Services. |
The information required by this Item is incorporated by reference to the section captioned Independent Registered Public Accountant in the Proxy Statement for the 2009 Annual Meeting of Shareholders of Unitrin.
142
PART IV
Item 15. | Exhibits, Financial Statement Schedules. |
(a) Documents filed as part of this Report
1. | Financial Statements. The consolidated balance sheets of Unitrin and subsidiaries as of December 31, 2008 and 2007, and the consolidated statements of operations, cash flows and shareholders equity and comprehensive income (loss) for the years ended December 31, 2008, 2007 and 2006, together with the notes thereto and the report of Deloitte & Touche LLP thereon appearing in Item 8 are included in this 2008 Annual Report on Form 10-K. |
2. | Financial Statement Schedules. The following five financial statement schedules are included on the pages immediately following the signature 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 Consolidated Financial Statements. |
Schedule I Investments Other Than Investments in Related Parties
Schedule II Parent Company Financial Statements
Schedule III Supplementary Insurance Information
Schedule IV Reinsurance Schedule
Schedule VI Supplemental Information Concerning Property-Casualty Insurance Operations
The Report of Independent Registered Public Accounting Firm, Deloitte & Touche LLP, with regards to the Financial Statement Schedules listed above, is incorporated by reference to the Report of Independent Registered Public Accountant included in Item 8.
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 10.17 relate to compensatory plans incorporated by reference as exhibits hereto pursuant to Item 15(b) of Form 10-K. |
3.1 | Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to the Companys 2007 Annual Report on Form 10-K filed February 4, 2008). |
3.2 | Amended and Restated Bylaws (Incorporated herein by reference to Exhibit 3.2 to the Companys Current Report on Form 8-K filed February 4, 2008.) |
4.1 | Rights Agreement between Unitrin, Inc. and Computershare Trust Company, N.A. as successor Rights Agent, including the Form of Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock, the Form of Rights Certificate and the Summary of Rights to Purchase Preferred Stock, dated as of August 4, 2004 and amended May 4, 2006 and October 9, 2006 (Incorporated herein by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K dated August 6, 2004, Exhibits 4.1 and 4.2 to the Companys Registration Statement on Form 8-A/A dated May 4, 2006 and Exhibit 4.1 to the Companys Registration Statement on Form 8-A/A dated October 10, 2006.) |
4.2 | Indenture dated as of June 26, 2002, by and between Unitrin, Inc. and The Bank of New York Trust Company, N.A., as successor trustee to BNY Midwest Trust Company, as Trustee (Incorporated herein by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K filed May 14, 2007.) |
4.3 | Officers Certificate, including form of Senior Note with respect to the Companys 6.00% Senior Notes due May 15, 2017 (Incorporated herein by reference to Exhibit 4.2 to the Companys Current Report on Form 8-K filed May 14, 2007.) |
143
4.4 | Officers Certificate, including form of Senior Note with respect to the Companys 4.875% Senior Notes due November 1, 2010 (Incorporated herein by reference to Exhibit 4.4 to the Companys Quarterly Report on Form 10-Q filed November 3, 2008.) |
10.1 | Unitrin, Inc. 1990 Stock Option Plan, as amended and restated effective May 3, 2000 (Incorporated herein by reference to Exhibit 10.1 to the Companys 2006 Annual Report on Form 10-K filed February 2, 2007.) |
10.2 | Unitrin, Inc. 1995 Non-Employee Director Stock Option Plan, as amended and restated effective February 3, 2009. |
10.3 | Unitrin, Inc. 1997 Stock Option Plan, as amended and restated effective February 6, 2006 (Incorporated herein by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K filed February 6, 2006.) |
10.4 | Unitrin, Inc. 2002 Stock Option Plan, as amended and restated effective February 3, 2009. |
10.5 | 2005 Restricted Stock and Restricted Stock Unit Plan, as amended and restated effective February 3, 2009. |
10.6 | Form of Stock Option Agreement under the Unitrin, Inc. 1995 Non-Employee Director Stock Option Plan, as of February 1, 2006 (Incorporated herein by reference to Exhibit 10.6 to the Companys Current Report on Form 8-K filed February 6, 2006.) |
10.7 | Form of Stock Option Agreement under the Unitrin, Inc. 1995 Non-Employee Director Stock Option Plan, as of February 3, 2009. |
10.8 | Form of Stock Option Agreement (including stock appreciation rights) under the Unitrin, Inc. 1997 Stock Option Plan, as of February 1, 2006 (Incorporated herein by reference to Exhibit 10.7 to the Companys Current Report on Form 8-K filed February 6, 2006.) |
10.9 | Form of Stock Option Agreement (including stock appreciation rights) under the Unitrin, Inc. 2002 Stock Option Plan, as of February 1, 2006 (Incorporated herein by reference to Exhibit 10.8 to the Companys Current Report on Form 8-K filed February 6, 2006.) |
10.10 | Form of Stock Option Agreement under the Unitrin, Inc. 2002 Stock Option Plan, as of February 3, 2009. |
10.11 | Form of Time-Vested Restricted Stock Agreement under the 2005 Restricted Stock and Restricted Stock Unit Plan, as of February 3, 2009. |
10.12 | Unitrin, Inc. Pension Equalization Plan, as amended and restated effective January 1, 2009. |
10.13 | Unitrin, Inc. Defined Contribution Supplemental Retirement Plan, effective January 1, 2008. |
10.14 | Unitrin, Inc. Non-Qualified Deferred Compensation Plan, as amended and restated effective January 1, 2009. |
10.15 | Unitrin is a party to individual severance agreements (the form of which is incorporated herein by reference to Exhibit 10.11 to the Companys Current Report on Form 8-K filed December 31, 2008), with the following executive officers: |
Richard C. Vie (Chairman)
Donald G. Southwell (President and Chief Executive Officer)
David F. Bengston (Vice President)
John M. Boschelli (Vice President and Treasurer)
Eric J. Draut (Executive Vice President and Chief Financial Officer)
144
Edward J. Konar (Vice President)
Scott Renwick (Senior Vice President, General Counsel and Secretary)
Richard Roeske (Vice President and Chief Accounting Officer)
Each of the foregoing agreements is identical except that the severance compensation multiple is 3.0 for Messrs. Vie and Southwell and 2.0 for the other executive officers.
10.16 | Unitrin, Inc. Severance Plan, as amended and restated effective January 1, 2009. |
10.17 | Unitrin, Inc. Incentive Bonus Plan, dated February 3, 2004 (Incorporated herein by reference to Appendix A to the Companys Proxy Statement, dated March 29, 2004, in connection with the Companys 2004 Annual Meeting of Shareholders.) |
10.18 | Credit Agreement, dated as of June 24, 2005, by and among Unitrin, Inc., the lenders party thereto, JPMorgan Chase Bank, N.A., individually and as administrative agent, letter of credit issuer and swing line lender, Wells Fargo Bank, National Association, individually and as syndication agent, and Wachovia Bank, N.A., individually and as documentation agent (Incorporated herein by reference to Exhibit 10.1 to Unitrins Current Report on Form 8-K filed June 27, 2005.) |
12 | Ratios of Earnings to Fixed Charges |
13 | Shareholders Letter (forms a part of MD&A) |
21 | Subsidiaries of Unitrin, Inc. |
23 | Consent of Deloitte & Touche LLP |
24 | Power of Attorney (included on the signature page hereof) |
31.1 | Certification of Chief Executive Officer Pursuant to SEC Rule 13a-14(a). |
31.2 | Certification of Chief Financial Officer Pursuant to SEC Rule 13a-14(a). |
32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32) of Regulation S-K.) |
32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32) of Regulation S-K.) |
(b) | Exhibits. Included in Item 15(a)3 above |
(c) | Financial Statement Schedules. Included in Item 15(a)2 above |
145
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints each of Donald G. Southwell, President and Chief Executive Officer, Eric J. Draut, Executive Vice President and Chief Financial Officer, and Scott Renwick, Senior Vice President, General Counsel and Secretary, his true and lawful attorney-in-fact with authority together or individually to execute in the name of each such signatory, and with authority to file with the SEC, any and all amendments to this 2008 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 SEC in respect thereof, which amendments may make such other changes in the 2008 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 2008 Annual Report on Form 10-K for the fiscal year ended December 31, 2008 to be signed on its behalf by the undersigned, thereunto duly authorized, on February 4, 2009.
UNITRIN, INC. (Registrant) |
||
By: | / S / D ONALD G. S OUTHWELL | |
Donald G. Southwell | ||
President, Chief Executive Officer and Director |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Unitrin, Inc. in the capacities indicated on February 4, 2009.
Signature |
Title |
|
/ S / R ICHARD C. V IE Richard C. Vie |
Chairman and Director | |
/ S / D ONALD G. S OUTHWELL Donald G. Southwell |
President, Chief Executive Officer and Director | |
/ S / E RIC J. D RAUT Eric J. Draut |
Executive Vice President, Chief Financial Officer and Director (principal financial officer) | |
/ S / R ICHARD R OESKE Richard Roeske |
Vice President and Chief Accounting Officer (principal accounting officer) | |
/ S / J AMES E. A NNABLE James E. Annable |
Director | |
/ S / D ONALD V. F ITES Donald V. Fites |
Director | |
/ S / D OUGLAS G. G EOGA Douglas G. Geoga |
Director |
146
Signature |
Title |
|
/ S / R EUBEN L. H EDLUND Reuben L. Hedlund |
Director | |
/ S / J ERROLD V. J EROME Jerrold V. Jerome |
Director | |
/ S / W ILLIAM E. J OHNSTON , J R . William E. Johnston, Jr. |
Director | |
/ S / W AYNE K AUTH Wayne Kauth |
Director | |
/ S / F AYEZ S. S AROFIM Fayez S. Sarofim |
Director | |
/ S / A NN E. Z IEGLER Ann E. Ziegler |
Director |
147
SCHEDULE I
UNITRIN, INC. AND SUBSIDIARIES
INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2008
(Dollars in Millions)
Amortized
Cost |
Fair Value |
Amount
Carried in Balance Sheet |
|||||||
Fixed Maturities: |
|||||||||
Bonds and Notes: |
|||||||||
United States Government and Government Agencies and Authorities |
$ | 934.6 | $ | 979.1 | $ | 979.1 | |||
States, Municipalities and Political Subdivisions |
1,295.6 | 1,308.5 | 1,308.5 | ||||||
Corporate Securities: |
|||||||||
Other Bonds and Notes |
1,765.0 | 1,682.5 | 1,682.5 | ||||||
Redeemable Preferred Stocks |
179.2 | 165.8 | 165.8 | ||||||
Total Investments in Fixed Maturities |
4,174.4 | 4,135.9 | 4,135.9 | ||||||
Northrop Common Stock |
38.6 | 40.3 | 40.3 | ||||||
Other Equity Securities: |
|||||||||
Preferred Stocks |
150.1 | 119.9 | 119.9 | ||||||
Common Stocks |
15.8 | 17.5 | 17.5 | ||||||
Other Equity Interests |
50.9 | 44.1 | 44.1 | ||||||
Total Investments in Other Equity Securities |
216.8 | 181.5 | 181.5 | ||||||
Investee (A): |
|||||||||
Intermec |
102.2 | 168.1 | 102.2 | ||||||
Loans, Real Estate and Other Investments |
714.9 | XXX.X | 714.9 | ||||||
Short-term Investments |
548.6 | XXX.X | 548.6 | ||||||
Total Investments |
$ | 5,795.5 | $ | 5,723.4 | |||||
(A)Amortized Cost = Cost Plus Cumulative Undistributed Earnings.
See Accompanying Report of Independent Registered Public Accounting Firm.
SCHI-1
SCHEDULE II
UNITRIN, INC.
PARENT COMPANY BALANCE SHEETS
December 31, 2008 and 2007
(Dollars in Millions)
December 31,
2008 |
December 31,
2007 |
||||||
ASSETS |
|||||||
Investments in Subsidiaries |
$ | 2,382.4 | $ | 2,633.0 | |||
Northrop Preferred Stock at Fair Value (Cost: 2007 $186.9) |
| 258.5 | |||||
Northrop Common Stock at Fair Value (Cost: 2007 $69.3) |
| 83.3 | |||||
Notes Receivable from Subsidiary, 10.00% Due 2010 |
20.0 | 20.0 | |||||
Other Equity Securities at Fair Value (Cost: 2008 $4.0; 2007 $5.9) |
4.2 | 6.7 | |||||
Short-term Investments |
9.9 | 65.9 | |||||
Cash |
9.2 | 1.7 | |||||
Other Receivables |
3.1 | 8.4 | |||||
Deferred Income Taxes |
58.0 | | |||||
Other Assets |
0.1 | 0.5 | |||||
Total Assets |
$ | 2,486.9 | $ | 3,078.0 | |||
LIABILITIES AND SHAREHOLDERS EQUITY |
|||||||
Senior Notes Payable, 6.00% due 2017 (Fair Value: 2008 $250.8 ;2007 $344.3) |
$ | 355.5 | $ | 355.0 | |||
Senior Notes Payable, 4.875% due 2010 (Fair Value: 2008 $177.2; 2007 $200.0) |
199.4 | 199.1 | |||||
Liabilities for Income Taxes |
143.0 | 174.2 | |||||
Liabilities for Benefit Plans |
135.9 | 53.8 | |||||
Accrued Expenses and Other Liabilities |
4.5 | 4.9 | |||||
Total Liabilities |
838.3 | 787.0 | |||||
Shareholders Equity: |
|||||||
Common Stock |
6.2 | 6.4 | |||||
Additional Paid-in Capital |
764.7 | 781.3 | |||||
Retained Earnings |
985.8 | 1,178.5 | |||||
Accumulated Other Comprehensive Income (Loss) |
(108.1 | ) | 324.8 | ||||
Total Shareholders Equity |
1,648.6 | 2,291.0 | |||||
Total Liabilities and Shareholders Equity |
$ | 2,486.9 | $ | 3,078.0 | |||
See Accompanying Report of Independent Registered Public Accounting Firm.
SCHII-1
SCHEDULE II
UNITRIN, INC.
PARENT COMPANY STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(Dollars in Millions)
Years Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Net Investment Income |
$ | 8.0 | $ | 26.1 | $ | 14.6 | ||||||
Net Realized Investment Gains (Losses) |
(12.9 | ) | 22.6 | 2.2 | ||||||||
Total Revenues |
(4.9 | ) | 48.7 | 16.8 | ||||||||
Interest Expense |
33.5 | 33.5 | 28.5 | |||||||||
Other Operating (Income) Expenses |
(4.8 | ) | (1.9 | ) | 0.4 | |||||||
Total Operating Expenses |
28.7 | 31.6 | 28.9 | |||||||||
Income (Loss) before Income Taxes and Equity in Net Income (Loss) of Subsidiaries |
(33.6 | ) | 17.1 | (12.1 | ) | |||||||
Income Tax Benefit (Expense) |
13.0 | (0.3 | ) | 7.0 | ||||||||
Income (Loss) before Equity in Net Income (Loss) of Subsidiaries |
(20.6 | ) | 16.8 | (5.1 | ) | |||||||
Equity in Net Income (Loss) of Subsidiaries |
(9.0 | ) | 188.6 | 292.1 | ||||||||
Net Income (Loss) |
$ | (29.6 | ) | $ | 205.4 | $ | 287.0 | |||||
See Accompanying Report of Independent Registered Public Accounting Firm.
SCHII-2
SCHEDULE II
UNITRIN, INC.
PARENT COMPANY STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(Dollars in Millions)
Years Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Operating Activities: |
||||||||||||
Net Income (Loss) |
$ | (29.6 | ) | $ | 205.4 | $ | 287.0 | |||||
Adjustment Required to Reconcile Net Income to Net Cash Provided by Operations: |
||||||||||||
Equity in Net (Income) Loss of Subsidiaries |
9.0 | (188.6 | ) | (292.1 | ) | |||||||
Cash Dividends from Subsidiaries |
84.2 | 157.6 | 221.8 | |||||||||
Net Realized Investment (Gains) Losses |
12.9 | (22.6 | ) | (2.2 | ) | |||||||
Other, Net |
(15.4 | ) | 15.6 | 13.0 | ||||||||
Net Cash Provided by Operating Activities |
61.1 | 167.4 | 227.5 | |||||||||
Investing Activities: |
||||||||||||
Capital Contributed to Subsidiaries |
(125.0 | ) | (52.0 | ) | | |||||||
Sale of Subsidiary |
| 4.0 | | |||||||||
Acquisition of Business, Net of Cash Acquired |
(95.4 | ) | | | ||||||||
Sales of Common Stocks to Unaffiliates |
296.4 | 105.6 | 12.7 | |||||||||
Change in Short-term Investments |
56.0 | (25.9 | ) | (39.0 | ) | |||||||
Net Cash Provided (Used) by Investing Activities |
132.0 | 31.7 | (26.3 | ) | ||||||||
Financing Activities: |
||||||||||||
Notes Payable Proceeds: |
||||||||||||
Senior Notes Payable Issued |
| 354.8 | | |||||||||
Revolving Credit Agreement |
232.0 | | 40.0 | |||||||||
Notes Payable Payments: |
||||||||||||
Senior Notes Payable Repaid |
| (300.0 | ) | | ||||||||
Revolving Credit Agreement |
(232.0 | ) | | (40.0 | ) | |||||||
Cash Dividends Paid |
(118.4 | ) | (119.9 | ) | (119.8 | ) | ||||||
Common Stock Repurchases |
(69.0 | ) | (139.5 | ) | (89.9 | ) | ||||||
Exercise of Stock Options |
1.6 | 5.1 | 6.8 | |||||||||
Excess Tax Benefits on Share Based Awards |
0.2 | 1.3 | 2.3 | |||||||||
Net Cash Used by Financing Activities |
(185.6 | ) | (198.2 | ) | (200.6 | ) | ||||||
Increase in Cash |
7.5 | 0.9 | 0.6 | |||||||||
Cash, Beginning of Year |
1.7 | 0.8 | 0.2 | |||||||||
Cash, End of Year |
$ | 9.2 | $ | 1.7 | $ | 0.8 | ||||||
See Accompanying Report of Independent Registered Public Accounting Firm.
SCHII-3
SCHEDULE II
UNITRIN, INC.
PARENT COMPANY STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(Dollars in Millions)
Years Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Net Income (Loss) |
$ | (29.6 | ) | $ | 205.4 | $ | 287.0 | |||||
Other Comprehensive Income (Loss): |
||||||||||||
Unrealized Holding Gains (Losses) Arising During the Year: |
||||||||||||
Securities Held by Subsidiaries |
(584.9 | ) | 85.9 | 72.3 | ||||||||
Securities Held by Parent |
(97.1 | ) | 35.5 | 21.5 | ||||||||
Reclassification Adjustment for Amounts Included in Net Income: |
||||||||||||
Securities Held by Subsidiaries |
77.6 | (34.1 | ) | (23.7 | ) | |||||||
Securities Held by Parent |
10.8 | (18.1 | ) | (1.8 | ) | |||||||
Unrealized Holding Gains (Losses) |
(593.6 | ) | 69.2 | 68.3 | ||||||||
Unrecognized Postretirement Benefit Costs Arising During the Year |
(73.4 | ) | (5.0 | ) | | |||||||
Amortization of Unrecognized Postretirement Benefit Costs |
(2.3 | ) | (2.0 | ) | | |||||||
Net Unrecognized Postretirement Benefit Costs |
(75.7 | ) | (7.0 | ) | | |||||||
Foreign Currency Translation Adjustments |
(2.0 | ) | | | ||||||||
Equity in Other Comprehensive Income (Loss) of Subsidiary |
2.5 | 1.2 | (2.1 | ) | ||||||||
Other Comprehensive Income (Loss) before Income Taxes |
(668.8 | ) | 63.4 | 66.2 | ||||||||
Income Tax Benefit (Expense): |
||||||||||||
Unrealized Holding Gains (Losses) Arising During the Year: |
||||||||||||
Securities Held by Subsidiaries |
205.9 | (30.8 | ) | (25.4 | ) | |||||||
Securities Held by Parent |
34.0 | (12.4 | ) | (7.5 | ) | |||||||
Reclassification Adjustment for Amounts Included in Net Income: |
||||||||||||
Securities Held by Subsidiaries |
(27.1 | ) | 12.0 | 8.5 | ||||||||
Securities Held by Parent |
(3.8 | ) | 6.3 | 0.6 | ||||||||
Unrealized Holding Gains (Losses) |
209.0 | (24.9 | ) | (23.8 | ) | |||||||
Unrecognized Postretirement Benefit Costs Arising During the Year |
26.5 | 1.4 | | |||||||||
Amortization of Unrecognized Postretirement Benefit Costs |
0.6 | 0.6 | | |||||||||
Net Unrecognized Postretirement Benefit Costs |
27.1 | 2.0 | | |||||||||
Foreign Currency Translation Adjustments |
0.7 | | | |||||||||
Equity in Other Comprehensive Income (Loss) of Subsidiary |
(0.9 | ) | (0.4 | ) | 0.7 | |||||||
Income Tax Benefit (Expense) |
235.9 | (23.3 | ) | (23.1 | ) | |||||||
Other Comprehensive Income (Loss) |
(432.9 | ) | 40.1 | 43.1 | ||||||||
Total Comprehensive Income (Loss) |
$ | (462.5 | ) | $ | 245.5 | $ | 330.1 | |||||
See Accompanying Report of Independent Registered Public Accounting Firm.
SCHII-4
SCHEDULE III
UNITRIN, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(Dollars in Millions)
Year Ended December 31, | December 31, | ||||||||||||||||||||||||||||||
Premiums |
Premiums
Written |
Other
Income |
Net
Investment Income |
Insurance
Claims and Policy- holders Benefits |
Amortization
Of Deferred Policy Acquisition Costs |
Other
Insurance Expenses |
Deferred
Policy Acquisition Costs |
Insurance
Reserves |
Unearned
Premiums |
||||||||||||||||||||||
2008 |
|||||||||||||||||||||||||||||||
Kemper |
$ | 930.7 | $ | 946.8 | $ | 0.5 | $ | 19.1 | $ | 673.8 | $ | 166.7 | $ | 102.2 | $ | 79.5 | $ | 476.1 | $ | 455.8 | |||||||||||
Unitrin Specialty |
494.0 | 523.4 | 0.2 | 8.6 | 397.0 | 65.1 | 30.5 | 24.6 | 293.1 | 174.1 | |||||||||||||||||||||
Unitrin Direct |
290.5 | 286.7 | 0.4 | 4.6 | 246.7 | 7.5 | 93.8 | 15.6 | 163.1 | 70.1 | |||||||||||||||||||||
Life and Health (1) |
661.4 | N/A | 1.1 | 162.1 | 447.7 | 72.2 | 225.4 | 369.5 | 2,995.7 | 29.9 | |||||||||||||||||||||
Other |
| N/A | 1.9 | 18.5 | | | (26.9 | ) | | 313.3 | 3.6 | ||||||||||||||||||||
Total |
$ | 2,376.6 | $ | N/A | $ | 4.1 | $ | 212.9 | $ | 1,765.2 | $ | 311.5 | $ | 425.0 | $ | 489.2 | $ | 4,241.3 | $ | 733.5 | |||||||||||
2007 |
|||||||||||||||||||||||||||||||
Kemper |
$ | 926.3 | $ | 935.0 | $ | 0.5 | $ | 44.0 | $ | 618.1 | $ | 163.5 | $ | 101.0 | $ | 76.6 | $ | 502.4 | $ | 439.7 | |||||||||||
Unitrin Specialty |
449.3 | 445.4 | 0.1 | 19.2 | 340.9 | 56.6 | 35.8 | 18.5 | 278.6 | 144.7 | |||||||||||||||||||||
Unitrin Direct |
257.6 | 247.6 | 0.4 | 8.9 | 219.3 | 11.0 | 77.8 | 16.3 | 142.6 | 74.1 | |||||||||||||||||||||
Life and Health (1) |
653.7 | N/A | 1.2 | 181.0 | 394.0 | 69.3 | 222.1 | 326.0 | 2,544.3 | 29.4 | |||||||||||||||||||||
Other |
| N/A | 1.3 | 36.8 | | | (31.3 | ) | | 388.0 | 34.3 | ||||||||||||||||||||
Total |
$ | 2,286.9 | $ | N/A | $ | 3.5 | $ | 289.9 | $ | 1,572.3 | $ | 300.4 | $ | 405.4 | $ | 437.4 | $ | 3,855.9 | $ | 722.2 | |||||||||||
2006 |
|||||||||||||||||||||||||||||||
Kemper |
$ | 944.6 | $ | 955.0 | $ | 0.4 | $ | 50.4 | $ | 586.2 | $ | 165.4 | $ | 110.4 | |||||||||||||||||
Unitrin Specialty |
444.4 | 444.3 | | 22.4 | 335.6 | 60.9 | 31.1 | ||||||||||||||||||||||||
Unitrin Direct |
225.9 | 182.5 | 0.4 | 9.3 | 182.3 | 10.4 | 52.7 | ||||||||||||||||||||||||
Life and Health (1) |
675.6 | N/A | 11.2 | 181.3 | 404.6 | 71.5 | 236.7 | ||||||||||||||||||||||||
Other |
| N/A | 2.4 | 22.6 | | | (27.1 | ) | |||||||||||||||||||||||
Total |
$ | 2,290.5 | $ | N/A | $ | 14.4 | $ | 286.0 | $ | 1,508.7 | $ | 308.2 | $ | 403.8 | |||||||||||||||||
(1) | The Companys 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. |
See Accompanying Report of Independent Registered Public Accounting Firm.
SCHIII-1
SCHEDULE IV
UNITRIN, INC.
REINSURANCE SCHEDULE
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 and 2006
(Dollars in Millions)
Gross
Amount |
Ceded to
Other Companies |
Assumed
from Other Companies |
Net
Amount |
Percentage
of Amount Assumed to Net |
||||||||||||
Year Ended December 31, 2008: |
||||||||||||||||
Life Insurance in Force |
$ | 21,908.7 | $ | 847.4 | $ | 310.4 | $ | 21,371.7 | 1.5 | % | ||||||
Premiums |
||||||||||||||||
Life Insurance |
$ | 398.3 | $ | 2.5 | $ | 2.7 | $ | 398.5 | 0.7 | % | ||||||
Accident and Health Insurance |
160.0 | | 0.1 | 160.1 | | |||||||||||
Property and Liability Insurance |
1,800.6 | 46.6 | 64.0 | 1,818.0 | 3.5 | % | ||||||||||
Total Premiums |
$ | 2,358.9 | $ | 49.1 | 66.8 | $ | 2,376.6 | 2.8 | % | |||||||
Year Ended December 31, 2007: |
||||||||||||||||
Life Insurance in Force |
$ | 20,177.0 | $ | 642.7 | $ | | $ | 19,534.3 | | |||||||
Premiums |
||||||||||||||||
Life Insurance |
$ | 388.6 | $ | 0.8 | $ | | $ | 387.8 | | |||||||
Accident and Health Insurance |
157.6 | (0.3 | ) | | 157.9 | | ||||||||||
Property and Liability Insurance |
1,716.2 | 42.2 | 67.2 | 1,741.2 | 3.9 | % | ||||||||||
Total Premiums |
$ | 2,262.4 | $ | 42.7 | 67.2 | $ | 2,286.9 | 2.9 | % | |||||||
Year Ended December 31, 2006: |
||||||||||||||||
Life Insurance in Force |
$ | 20,767.3 | $ | 687.4 | $ | | $ | 20,079.9 | | |||||||
Premiums |
||||||||||||||||
Life Insurance |
$ | 401.6 | $ | 0.9 | $ | | $ | 400.7 | | |||||||
Accident and Health Insurance |
158.3 | | | 158.3 | | |||||||||||
Property and Liability Insurance |
1,692.7 | 34.1 | 72.9 | 1,731.5 | 4.2 | % | ||||||||||
Total Premiums |
$ | 2,252.6 | $ | 35.0 | $ | 72.9 | $ | 2,290.5 | 3.2 | % | ||||||
See Accompanying Report of Independent Registered Public Accounting Firm.
SCHIV-1
SCHEDULE VI
UNITRIN, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS
(Dollars in Millions)
Affiliation |
Deferred
Policy Acquisition Costs |
Reserves
for Unpaid Claims and Claim Adjustment Expenses |
Discount |
Unearned
Premiums |
Earned
Premiums |
Net
Investment Income |
Claim and Claim
Adjustment Expenses Incurred Related to |
Amortization
of Deferred Policy Acquisition Costs |
Paid
Claims and Claim Adjustment Expenses |
Premiums
Written |
|||||||||||||||||||||||||
Current
Year |
Prior
Years |
||||||||||||||||||||||||||||||||||
Year Ended December 31, 2008: |
|||||||||||||||||||||||||||||||||||
(a) Consolidated property casualty entities |
$ | 122.2 | $ | 1,268.7 | $ | | $ | 707.1 | $ | 1,818.1 | $ | 33.7 | $ | 1,456.0 | $ | (49.6 | ) | $ | 248.7 | $ | 1,382.5 | $ | 1,859.7 | ||||||||||||
(b) Unconsolidated property casualty entities |
$ | | $ | | $ | | $ | | $ | 70.8 | $ | 6.7 | $ | 62.0 | $ | (29.7 | ) | $ | 13.1 | $ | 110.5 | $ | (12.3 | ) | |||||||||||
Year Ended December 31, 2007: |
|||||||||||||||||||||||||||||||||||
(a) Consolidated property casualty entities |
$ | 112.1 | $ | 1,322.9 | $ | | $ | 696.2 | $ | 1,741.2 | $ | 72.8 | $ | 1,290.6 | $ | (55.4 | ) | $ | 240.7 | $ | 1,264.9 | $ | 1,735.6 | ||||||||||||
(b) Unconsolidated property casualty entities |
$ | 15.0 | $ | | $ | | $ | 50.8 | $ | 171.5 | $ | 23.0 | $ | 117.3 | $ | (45.7 | ) | $ | 29.9 | $ | 123.2 | $ | 161.5 | ||||||||||||
Year Ended December 31, 2006: |
|||||||||||||||||||||||||||||||||||
(a) Consolidated property casualty entities |
$ | 1,731.5 | $ | 82.7 | $ | 1,221.3 | $ | (65.8 | ) | $ | 249.0 | $ | 1,161.5 | $ | 1,698.2 | ||||||||||||||||||||
(b) Unconsolidated property casualty entities |
$ | 188.2 | $ | 28.9 | $ | 134.6 | $ | (25.8 | ) | $ | 34.4 | $ | 130.7 | $ | 189.6 | ||||||||||||||||||||
Amounts reported in (b) above represent amounts for Unitrin Business Insurance which is reported as a discontinued operation in the Companys financial statements. The Company has no 50%-or-less-owned property and casualty equity investees. Accordingly, amounts for category (c) are omitted from the table.
See Accompanying Report of Independent Registered Public Accounting Firm.
SCHVI-1
Exhibit 10.2
UNITRIN, INC.
1995 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
Amended and Restated
1. Purpose .
The purpose of this 1995 Non-Employee Director Stock Option Plan (Plan) of Unitrin, Inc. (Company) is to encourage ownership in the Company by non-employee directors of the Company and to attract and retain qualified non-employee personnel to serve as directors of the Company.
2. Administration .
The Plan will be administered by a committee or committees (which term includes subcommittees) consisting of two or more persons appointed by the Board of Directors of the Company. The composition of any committee responsible for administration of the Plan shall comply with the applicable requirements of the Securities Exchange Act of 1934, as amended (Exchange Act). Members of a committee will serve for such term as the Board of Directors may determine, subject to removal by the Board of Directors at any time. With respect to any matter, the term Committee refers to the committee that has been delegated authority with respect to such matter.
Subject to the provisions of the Plan, the Committee shall have authority: (i) to construe and interpret the Plan; (ii) to define the terms used herein; (iii) to prescribe, amend and rescind rules and regulations relating to the Plan; (iv) to make such changes to the Plan as may become necessary or advisable to comply with the Exchange Act or other legal requirements; and (v) to make all other determinations necessary or advisable for the administration of the Plan. All determinations and interpretations made by the Committee shall be binding and conclusive on all participants in the Plan and their legal representatives and beneficiaries.
3. Shares Subject to the Plan .
The shares to be offered under the Plan shall consist of authorized but unissued shares or treasury shares of the Companys common stock (Common Stock) and, subject to adjustment as provided in paragraph 13 hereof, the aggregate amount of Common Stock which may be subject to options granted pursuant to paragraphs 5a, 5b and 5c hereunder (Options) shall not exceed 400,000 shares. If any Option granted under the Plan shall expire or terminate for any reason, without having been exercised or vested in full, as the case may be, the unpurchased shares subject thereto shall again be available for Options to be granted under the Plan. Options granted under the Plan will not be qualified as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (Code). All Options granted under the Plan shall be granted on or before
1 | As of 2/3/09 |
August 2, 2015, except for Restorative Options (as defined in Section 5f below) which may continue to be granted after August 2, 2015 until the expiration dates of the original options to which such Restorative Options relate, subject to the limitation in the last sentence of paragraph 5f.
4. Eligibility .
Each director of the Company who first becomes a director after November 1, 1993 and is not an employee of the Company or any subsidiary of the Company and each director who has retired as an employee of the Company or a subsidiary of the Company shall be eligible to participate in the Plan (Eligible Directors). Each Option granted under the Plan shall be governed by an agreement in such form as the Committee shall from time to time approve.
5. Stock Option Grants .
a. Initial Option Grants .
An Option covering 4,000 shares of Common Stock shall be granted to such director on the date that he or she first becomes an Eligible Director.
b. Annual Option Grants .
An Option covering 4,000 shares of Common Stock will be granted to each Eligible Director automatically at the conclusion of each Company Annual Meeting.
c. Duration of Options .
Subject to paragraph 9, below, each Option granted pursuant to this paragraph 5 and all rights associated therewith shall expire ten years from the date of grant.
d. Purchase Price .
The purchase price of the stock covered by each Option shall be the fair market value (as defined in paragraph 6) of a share of Common Stock as of the date of the grant of such Option.
e. Exercise of Options .
Options granted hereunder shall be exercisable during an Option holders lifetime only by the Option holder or by his or her guardian or legal representative. Each Option granted under this Plan shall be exercisable in full one year after the date of the grant. No Option may be exercised for a fraction of a share and no partial exercise of any Option may be for less than: (i) one hundred (100) shares; or (ii) the total number of shares then eligible for exercise, if less than one hundred (100) shares.
Each Option holder or his or her guardian or legal representative who desires to exercise an Option shall give advance written notice of such exercise to the Company in
2 | As of 2/3/09 |
such form as may be prescribed from time to time by the Committee. Before shares will be issued in connection with an Option exercise, the purchase price for the shares shall be paid in full by: (i) cash or check payable to the order of the Company; (ii) Constructive or Actual Delivery of Mature Shares; (iii) wire transfer to an account specified by the Company or (iv) any combination of the foregoing. Shares of Common Stock used to satisfy the exercise price of an Option shall be valued at their fair market value determined in accordance with paragraph 6 hereof.
For purposes hereof:
(i) the term Constructive or Actual Delivery means either: (a) presentation to the Company of a recent brokerage account statement or other written evidence satisfactory to the Committee evidencing beneficial ownership by an Eligible Director of shares of Common Stock other than shares held in 401(k), pension, IRA or similar accounts; or (b) physical delivery of certificates evidencing shares of Common Stock, properly indorsed for transfer to the Company or with an appropriately executed stock power; and
(ii) the term Mature Shares means shares of Common Stock that satisfy the following requirements: (a) have been owned by a Participant free of any encumbrances, vesting requirements or similar restrictions for at least six (6) months; and (b) have not been exchanged or surrendered by Constructive or Actual Delivery in full or partial payment of the Exercise Price and/or the related tax withholding obligations arising out of an Option exercise within the previous six months.
f. Restorative Options.
No Restorative Options (as defined in the next paragraph below) will be granted in connection with Options under original grants made on or after February 3, 2009.
With regard to Options under original grants made before February 3, 2009, and for Restorative Options relating to such original grants, and subject to the remaining provisions of this paragraph 5f, if (i) an Eligible Director elects to pay some or all of the exercise price of an Option granted on or after May 3, 2000 (the Underlying Option) by Constructive or Actual Delivery of Mature Shares, and (ii) for Options under original grants made on or after February 1, 2006, and for Restorative Options relating to such original grants, the fair market value of a share of Common Stock on the exercise date exceeds the exercise price of a share of Common Stock subject to the Underlying Option by at least the percentage set forth in the Option agreement, then such Eligible Director shall be granted an Option to purchase shares of Common Stock equal to the number of Mature Shares used by Constructive or Actual Delivery to pay the exercise price (a Restorative Option).
3 | As of 2/3/09 |
The exercise price of a Restorative Option shall be equal to one hundred percent (100%) of the fair market value of the Common Stock on the date the Underlying Option is exercised. The Restorative Option shall be fully vested beginning six months after the date of its grant and shall expire on the expiration date of the Underlying Option. All other terms of the Restorative Option shall be identical to the terms of the Underlying Option.
No Restorative Option shall be granted (i) if, on the date of exercise of the Underlying Option, such Option would be scheduled to expire within the period set forth in the Option agreement, or if not specified in the Option Agreement, within six months, (ii) for Options under original grants made on or after February 1, 2006, and for Restorative Options relating to such original grants, if, on the date of exercise of the Underlying Option, the share price of the Common Stock does not meet the appreciation requirement described above; or (iii) in connection with original Option grants made on or after February 3, 2009.
6. Fair Market Value of Common Stock .
For purposes of the Plan, the fair market value of a share of Common Stock shall be determined by reference to the closing price of a share of Common Stock as reported by the New York Stock Exchange (or such other exchange on which the Shares of Common Stock are primarily traded) , for the date on which the Option is granted or exercised, as the case may be, or if such date is not a business day, for the business day immediately preceding such date (or, if for any reason no such price is available, in such other manner as the Committee in its sole discretion may deem appropriate to reflect the fair market value thereof).
7. Withholding Tax .
Upon the exercise of Options issued hereunder, the Company shall have the right to require the Option holder to pay the Company the amount of taxes, if any, which the Company may be required to withhold with respect to such shares.
8. Transferability .
Options granted hereunder shall not be transferable, other than by will or the laws of descent and distribution, except to the extent transfer is: (i) permitted by Rule 16b-3 of the Exchange Act; and (ii) approved by the Committee. Subject to the foregoing, Options shall not be assigned, pledged or otherwise encumbered by the holder thereof, either voluntarily or by operation of law.
9. Termination of Directorship .
All rights of a director in an Option, to the extent that the Option has not been exercised, shall terminate three months after the date of the termination of his or her services as a director for any reason other than: (i) the death of the director; (ii) cessation
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of services as a director because the individual, although nominated by the Board of Directors, is not elected by the shareholders to the Board of Directors; or (iii) retirement because of total and permanent disability as defined in Section 22(e)(3) of the Code (collectively, Termination Events). If a director ceases to be a director of the Company because of a Termination Event, his or her unvested Options shall vest immediately. All vested Options shall expire twelve months after the date of a Termination Event.
10. No Right to Continue as a Director .
Neither the Plan nor the granting of an Option under the Plan shall constitute or be evidence of any agreement or understanding that any director has a right to continue as a director for any period of time or at any particular rate of compensation.
11. Restrictions on Disposition of Shares .
Each Option shall provide that the holder, by accepting such Option, represents and agrees, for the Option holder and the Option holders permitted transferees, that none of the shares acquired upon exercise of such Option will be acquired with a view towards any sale, transfer or distribution of said shares in violation of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder, or any applicable blue sky laws, and the holder of such Option shall furnish evidence satisfactory to the Company (including a written and signed representation) to that effect in form and substance satisfactory to the Company, including an indemnification of the Company in the event of any violation by such person of the Securities Act of 1933, as amended, or state blue sky law.
12. Privileges of Stock Ownership .
No Option holder shall have any of the rights or privileges of a shareholder of the Company in respect of any shares of Common Stock issuable with respect to such Option until such shares shall have been issued and delivered (i) to the Option holder in the form of certificates, (ii) to a brokerage or other account for the benefit of the Option holder either in certificate form or via DWAC or similar electronic means, or (iii) to a book entry or direct registration account in the name of the Option holder. No shares shall be issued and delivered upon the exercise of an Option unless and until there shall have been full compliance with all applicable requirements of the Securities Act of 1933, as amended (whether by registration or satisfaction of exemption conditions), all applicable listing requirements of the New York Stock Exchange or any national securities exchange on which shares of the same class are then listed and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery.
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13. Adjustments .
If the outstanding shares of the Common Stock are increased, decreased, changed into or exchanged for a different number or kind of shares or securities of the Company through reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares as to which Options may be granted under this Plan. A corresponding adjustment changing the number or kind of shares allocated to unexercised Options, which shall have been granted prior to any such change, and to the number of shares covered by initial and annual Option grants under paragraph 5, shall likewise be made. Any such adjustment in the outstanding Options shall be made without change in the aggregate purchase price applicable to the unexercised portion of the Options but with a corresponding adjustment in the price for each share or other unit of security covered by the Option. Share amounts specified in paragraphs 3, 5a and 5b of this Amended and Restated Plan have been restated in accordance with this paragraph 13 to reflect the Companys 2-for-1 stock split effective March 26, 1999.
Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon a sale of substantially all the property or more than eighty percent (80%) of the then outstanding stock of the Company to another corporation, the Plan shall terminate, and all Options theretofore granted shall immediately become exercisable.
No fractional shares of stock shall be issued under the Plan on any such adjustment.
14. Amendment and Termination of Plan .
The Board of Directors may at any time terminate the Plan. The Board of Directors may also at any time amend the terms of the Plan, provided that no such amendment shall become effective without the approval of the Companys shareholders if such approval is required in order to comply with Rule 16b-3 of the Exchange Act or any other applicable law or regulation. Notwithstanding the foregoing, Plan provisions relating to the amount, price and timing of Options may be amended only by action of the shareholders, but not more than once every six months, other than to comport with changes in the Code or the Employee Retirement Income Security Act of 1974, as amended, or the rules in effect thereunder.
The Committee may from time to time increase or decrease the six-month holding periods specified in the definition of Mature Shares in Section 5e above: (i) to satisfy applicable legal or accounting requirements; (ii) to secure advantageous treatment for the Company or the Participants under any provision of law or any accounting rule, pronouncement or interpretation applicable to financial statements prepared on the basis
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of accounting principles generally accepted in the United States; or (iii) for any reason determined by the Committee to be in the best interests of the Company or the Participants and not inconsistent with any applicable legal or accounting requirements. The Committee may eliminate such holding periods in the event that there are no legal or accounting requirements that they be imposed or if there is no longer any advantage to the Company or the Participants that they be imposed and such elimination is otherwise consistent with applicable legal and accounting requirements. The Committee may also reinstate holding periods in order to satisfy applicable legal or accounting requirements or to secure advantageous treatment for the Company or the Participants of the type contemplated in this paragraph.
Notwithstanding the foregoing, no amendment or termination of the Plan by the Board, and no change related to holding periods made by the Committee pursuant to the foregoing paragraph, shall in any way adversely affect the rights of a holder of any outstanding Option or Restorative Option subsequently granted in connection with the exercise of an outstanding Option without the prior written consent of such Option holder.
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Exhibit 10.4
UNITRIN, INC.
2002 STOCK OPTION PLAN
Amended and Restated
1. PURPOSE
The purpose of the Unitrin, Inc. 2002 Stock Option Plan is to secure for Unitrin, Inc. and its shareholders the benefits arising from stock ownership by selected executive and other key employees of Unitrin, Inc. or its subsidiaries or affiliates and such other persons as the Committee (as defined hereafter) may from time to time determine.
2. DEFINITIONS
As used herein, the following words or terms have the meanings set forth below:
Affiliate means any person or entity controlled directly or indirectly by the Company, whether by equity ownership, contract or otherwise and shall include direct and indirect subsidiaries of the Company and mutual companies the management of which is controlled by the Company or its subsidiaries.
Board means the Board of Directors of the Company.
Code means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute.
Committee means the Compensation Committee of the Board or any successor committee. The Committee shall be composed of two or more persons who qualify both as outside directors under Section 162(m) of the Code and related regulations and non-employee directors under Rule 16b-3 of the Securities Exchange Act of 1934, or any successor provisions.
Common Stock means the common stock of the Company.
Company means Unitrin, Inc., a Delaware corporation.
Constructive or Actual Delivery means either: (i) presentation to the Company of a recent brokerage account statement or other written evidence satisfactory to the Committee evidencing beneficial ownership by the Participant of Shares other than Shares held in 401(k), pension, IRA or similar accounts, or (ii) physical delivery of certificates evidencing Shares, properly indorsed for transfer to the Company or with an appropriately executed stock power.
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Disability or Disabled refers to a physical or mental condition that: (i) would qualify a Participant for benefits under a long-term disability insurance plan under which such Participant is covered, or (ii) in the absence of any such plan, would cause such Participant to be unable to substantially perform his or her duties as an employee, director, consultant or advisor, as the case may be.
Exercise Price means the price at which the Shares underlying an Option may be purchased upon exercise of the Option.
Fair Market Value, as used to refer to the price of a Share on a particular day, means the closing price for a Share for that day as subsequently reported by the New York Stock Exchange (or such other exchange on which the Shares of Common Stock are primarily traded), or if no prices are quoted for that day, the last preceding day on which such prices are quoted (or, if for any reason no such price is available, in such other manner as the Committee may deem appropriate to reflect the fair market value of a Share.)
ISO means an Option that satisfies the requirements of Code Section 422(b) and any regulations promulgated thereunder from time to time, or any successor provisions thereto.
Mature Shares means Shares that satisfy the following requirements:
(i) have been owned by a Participant free of any encumbrances, vesting requirements or similar restrictions for at least six (6) months; and
(ii) have not been exchanged or surrendered by Constructive or Actual Delivery in full or partial payment of the Exercise Price and/or the related tax withholding obligations arising out of an Option exercise within the previous six months.
Non-Qualified Option means an Option that does not satisfy the requirements for an ISO.
Option means an option granted to a Participant under this Plan to purchase a designated number of Shares.
Option Agreement means an agreement between the Company and a Participant evidencing the terms and conditions of a particular Option.
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Participant means an individual selected by the Committee to receive an Option or Stock Appreciation Right under the Plan.
Representative means an executor, administrator, guardian, trustee or other representative of a Participant who has legal authority to exercise such Participants Options or Stock Appreciation Rights on behalf of such Participant or such Participants estate.
Restorative Option means an Option granted to a Participant under Section 8 of the Plan.
Retirement or Retires means the termination of a Participants employment with the Company and/or its subsidiaries or affiliates after attaining age 55.
Shares means shares of the Common Stock.
Stock Appreciation Right means a right of the type described in Section 9 of the Plan.
Substantial Cause means (a) the commission of a criminal act against, or in derogation of, the interests of the Company or its subsidiaries or affiliates; (b) knowingly divulging confidential information about the Company or its subsidiaries or affiliates to a competitor or to the public or using such information for personal gain, including, without limitation, by trading in Company securities on the basis of material, non-public information; or (c) the performance of any similar action that the Committee, in its sole discretion, may deem to be sufficiently injurious to the interests or reputation of the Company or its subsidiaries or affiliates to constitute substantial cause for the termination of services by a Participant as an employee, director, consultant or advisor. Nothing in this Plan shall be construed to imply that a Participants employment or other relationship with the Company or its subsidiaries or affiliates may only be terminated for Substantial Cause.
3. THE COMMITTEE
The Plan shall be administered by the Committee, which shall have authority:
(i) | to construe and interpret the Plan and to prescribe, amend and rescind rules and regulations relating to the Plan; |
(ii) | to make all determinations as to eligibility pursuant to Section 5(a) of the Plan; |
(iii) | to grant Options and Stock Appreciation Rights as more fully described in Section 5(b) below; |
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(iv) | to make adjustments or modifications to, or to waive, the terms of any outstanding Options or Stock Appreciation Rights, provided that such actions are consistent with the terms of the Plan and do not adversely affect or impair the rights under such Options or Stock Appreciation Rights; |
(v) | to approve and determine the duration of leaves of absence which may be granted to Participants without constituting a termination of their employment for the purposes of the Plan; and |
(vi) | to make all other determinations necessary or advisable for the administration of the Plan. |
All determinations and interpretations made by the Committee shall be binding and conclusive on all Participants and their Representatives, successors in interest and beneficiaries. Any action of the Committee with respect to administration of the Plan shall be taken at a meeting of the Committee at which a quorum is present or by written consent of its members.
4. SHARES SUBJECT TO PLAN
Subject to adjustment as provided in Section 13(a) hereof, the maximum number of Shares that may be issued pursuant to the exercise of Options and Stock Appreciation Rights shall not exceed five million (5,000,000) Shares in total. The maximum number of Shares that may be issued to an individual Participant under the Plan shall be one-third of such total. If any Option granted under the Plan shall expire or terminate for any reason (other than surrender at the time of exercise of a related Stock Appreciation Right), without having been exercised in full, the unpurchased Shares subject thereto shall again be available for grant under the Plan. Any Shares that are used by Constructive or Actual Delivery as full or partial payment for the Exercise Price of an Option and/or the withholding taxes arising from the exercise of such Option, or that are withheld from the Shares that would otherwise be issued upon exercise of such Option in full or partial payment of such withholding taxes, shall in each case be added to the aggregate number of Shares available for issuance under this Plan.
5. ELIGIBILITY AND GRANTING AUTHORITY
a) Eligibility. The following persons shall be eligible to receive grants of Options or Stock Appreciation Rights under this Plan:
(i) executive and other key employees of the Company or of any subsidiary or affiliate of the Company who are selected by and in the sole discretion of: (a) the Committee or, (b) if applicable, an executive officer of the Company who has been delegated such authority in accordance with Section 5(b)(ii) below; and
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(ii) any key person selected by the Committee in its sole discretion who renders services to: (i) the Company or a Company subsidiary or affiliate as a member of its board of directors, or (ii) the Company or a Company subsidiary or affiliate as a consultant or advisor pursuant to a written agreement.
Any persons selected pursuant to Section 5(a)(ii) above shall only be eligible to receive Non-Qualified Options (including any Restorative Options issued with respect to such Options).
b) Granting Authority. Subject to the provisions of the Plan, the authority and discretion to determine the Participants to whom and the time or times at which Options shall be granted, whether an Option will be an ISO or a Non-Qualified Option, whether to couple a Stock Appreciation Right with an Option and the terms and conditions of such Right, the number of Shares to be subject to each Option, the Exercise Price, the number of installments, if any, in which each Option may vest, the expiration date of each Option and all other terms and conditions of each Option shall reside with the following persons:
(i) the Committee; and
(ii) if authorized by a resolution adopted by the Board, one or more executive officers of the Company may be delegated such authority and discretion, provided that no such officer may grant Options or Rights to himself or herself or to any officer of the Company who is subject to the reporting and short-swing liability provisions of Section 16 of the Securities Exchange Act of 1934.
6. TERMS OF OPTIONS
a ) Duration. Each Option and all rights associated therewith, shall expire on such date as the Committee may determine, subject to earlier termination as provided in this Plan. All Options granted under this Plan shall be granted on or before February 1, 2012, except for Restorative Options which may continue to be granted after February 1, 2012 until the expiration dates of the original Options from which such Restorative Options arose, subject in all events to the limitations in Section 8(b).
b) Exercise Price . The Exercise Price for each Share that is the subject of an Option shall be determined by the Committee and shall not be less than the Fair Market Value of a Share on the date of grant, subject to adjustment pursuant to Section 13.
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c) Vesting. Each Option granted under this Plan shall vest and be exercisable in such installments, if any, during the period prior to its expiration date as the Committee shall determine, and, unless otherwise specified in an Option Agreement, no Option shall be exercisable for at least six months after grant except in the case of the death or Disability of the Participant.
d) Non-Transferability. Unless otherwise provided in an Option Agreement, an Option (and any accompanying Stock Appreciation Right) shall not be transferable by the Participant, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and shall be exercisable during the Participants lifetime only by the Participant (or, in the case of the incapacity of the Participant, by the Participants Representative) regardless of any community property interest therein of the spouse of the Participant, or such spouses successors in interest. If the spouse of the Participant shall have acquired a community property interest in such Option (or accompanying Stock Appreciation Right), the Participant, or the Participants Representative, may exercise the Option (or accompanying Stock Appreciation Right) on behalf of the spouse of the Participant or such spouses successors in interest.
e) Option Agreements. The terms of each Option granted pursuant to this Plan shall be evidenced by an Option Agreement in a form approved by the Committee and signed by both the Company and the Participant, except that a Restorative Option may be evidenced by a certificate or statement issued by the Company that recites the essential terms of such Option.
7. EXERCISE OF OPTIONS AND STOCK APPRECIATION RIGHTS
a) Notice by Participant. Each Participant (or such Participants Representative) who desires to exercise an Option or Stock Appreciation Right shall give advance written notice of such exercise to the Company in such form as may be prescribed from time to time by the Committee or the management of the Company.
b) Payment for Exercises of Options. Before shares will be issued in connection with an Option exercise, the Exercise Price of an Option shall be paid in full by: (i) check payable to the order of the Company; (ii) Constructive or Actual Delivery of Mature Shares; (iii) electronic transfer of funds to an account of the Company; or (iv) any combination of the foregoing. Mature Shares used by Constructive or Actual Delivery to satisfy the Exercise Price of an Option shall be valued at their Fair Market Value on the date of exercise.
c) Partial Exercises. No Option or Stock Appreciation Right may be exercised for a fraction of a share and no partial exercise of any Option or Stock Appreciation Right may be made for less than fifty (50) shares unless the total number of Shares covered by an Option is less than 50 at the time of exercise or unless an Option or Stock Appreciation Right is scheduled to expire within six months of the date of exercise.
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d) Withholding Taxes. Upon the exercise of a Non-Qualified Option or a Stock Appreciation Right, the Company shall have the right to: (i) require such Participant (or such Participants Representative) to pay the Company the amount of any taxes which the Company may be required to withhold with respect to such exercise, or (ii) deduct from all amounts paid in cash with respect to the exercise of a Stock Appreciation Right the amount of any taxes which the Company may be required to withhold with respect to such cash amounts. Subject to the limitation set forth in the next sentence, a Participant or such Participants Representative may elect to satisfy all or any portion of the tax withholding obligations arising from the exercise of an Option or Stock Appreciation Right either by: (1) any of the methods described in Section 7(b), or (2) directing the Company to withhold Shares that would otherwise be issued pursuant to such exercise. No Participant or Participants Representative shall have the right to utilize Constructive or Actual Delivery of Mature Shares or have Shares withheld, in either case, in excess of the minimum number required to satisfy applicable tax withholding requirements based on minimum statutory withholding rates for federal and state tax purposes, including payroll taxes. Shares used in either of the foregoing ways to satisfy tax withholding obligations will be valued at their Fair Market Value on the date of exercise.
e) Exercise of Stock Appreciation Rights. Exercises of Stock Appreciation Rights shall be done in accordance with provisions of Sections 7(a) and 9.
8. RESTORATIVE OPTIONS
a) Original Option Grants On Or After February 3, 2009. No Restorative Options will be granted in connection with original grants of Options made on or after February 3, 2009.
b) Original Option Grants Before February 3, 2009. Grant and Terms of Restorative Options. Subject to Section 8(b), a Restorative Option to purchase Shares will be granted to a Participant in connection with the exercise of an Option under an original grant made before February 3, 2009, and for Restorative Options relating to such original grants, if: (i) the Participant elects to pay some or all of the Exercise Price of the Option (the Underlying Option) and/or any related withholding taxes by Constructive or Actual Delivery of Mature Shares (or, in the case of such taxes, by directing the Company to withhold Shares that would otherwise be issued upon exercise of such Underlying Option); and (ii) for Options under original grants made on or after February 1, 2006, and for Restorative Options relating to such original grants, the Fair Market Value of a Share on the exercise date exceeds the
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Exercise Price of the Underlying Option by at least the percentage set forth in the Option Agreement. The number of Shares subject to the Restorative Option shall be equal to the sum of: (a) any Mature Shares used by Constructive or Actual Delivery to pay the Exercise Price and/or the related withholding taxes, and (b) any Shares withheld from an exercise in payment of withholding taxes. The Exercise Price of the Restorative Option shall be equal to the Fair Market Value of a Share on the date the Underlying Option is exercised. The Restorative Option shall be fully vested beginning six months after the date of its grant and shall expire on the expiration date of the Underlying Option. All other terms of the Restorative Option shall be identical to the terms of the Underlying Option.
b) Limitations on Restorative Options. No Restorative Options shall be granted: (i) to any Participant who does not meet any of the standards for eligibility set forth in Section 5(a) on the date of exercise of the Underlying Option; (ii) if, on the date of exercise of the Underlying Option, such Option is scheduled to expire within the period set forth in the Option Agreement, or, if not specified in the Option Agreement, within six (6) months; (iii) for Options under original grants made on or after February 1, 2006, and for Restorative Options relating to such original grants, if the Share price on the exercise date does not meet the appreciation requirement described in Section 8(a)(ii); or (iv) in connection with original Option grants made on or after February 3, 2009.
9. STOCK APPRECIATION RIGHTS
If deemed appropriate by the Committee, any Option may be coupled with a Stock Appreciation Right at the time of the grant of the Option, or the Committee may grant a Stock Appreciation Right to any Participant at any time after granting an Option to such Participant but prior to the expiration date of such associated Option. Such Stock Appreciation Right shall be subject to such terms and conditions consistent with the Plan as the Committee shall impose, provided that:
(i) A Stock Appreciation Right shall be exercisable to the extent, and only to the extent, the associated Option is exercisable and shall be exercisable only for such period as the Committee may determine (which period may expire prior to the expiration date of the Option);
(ii) A Stock Appreciation Right shall entitle the Participant to surrender to the Company unexercised the Option to which it is related, or any portion thereof (subject to Section 7(c)), and to receive from the Company in exchange therefor that number of Shares (rounded down to the nearest whole number) having an aggregate value equal to the excess of the Fair Market Value of one Share over the Exercise Price per Share specified in such Option, multiplied by the number of Shares subject to the Option, or portion thereof, which is so surrendered; and
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(iii) The Committee may elect to settle, or the Stock Appreciation Right may permit the Participant to elect to receive (subject to approval by the Committee), any part or all of the Companys obligation arising out of the exercise of a Stock Appreciation Right by the payment of cash equal to the aggregate Fair Market Value of that part or all of the Shares it would otherwise be obligated to deliver, provided that in no event shall cash be payable to an officer or director of the Company upon exercise of a Stock Appreciation Right: (i) if the Stock Appreciation Right was exercised during the first six months of its term; or (ii) unless the transaction is otherwise exempt from the operation of Section 16(b) of the Securities Exchange Act of 1934.
10. HOLDING OF COMMON STOCK
At the discretion of the Committee, any Option Agreement may provide that the Participant, by accepting such Option, represents and agrees, for the Participant and the Participants permitted transferees, that none of the shares purchased upon exercise of the Option or any accompanying Stock Appreciation Right will be acquired with a view to any sale, transfer or distribution of said shares in violation of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder, or any applicable state blue sky laws, and the Participant shall furnish evidence in form and substance satisfactory to the Company to that effect, including an indemnification of the Company in the event of any violation of the Securities Act of 1933 or state blue sky law by such Participant.
11. CESSATION OF SERVICES
a) Termination of employment . If a Participant ceases to be an employee of the Company or any of its subsidiaries or affiliates other than by reason of death, Disability or Retirement, then the following consequences shall apply:
(i) If the termination of employment was not for Substantial Cause, then the Participant shall have 90 days from the date of termination in which to exercise all of his or her Options that were vested on such date and all such Options which are not exercised within such 90-day period shall expire and be of no further force or effect. All Options that were not vested on the date of termination shall immediately expire and be of no further force or effect. A leave of absence approved in writing by the Committee shall not be deemed a termination of employment provided that no Option may be exercised during a leave of absence, except during the first 90 days thereof unless otherwise consented to in writing by the Committee. The foregoing provisions shall apply equally to any Stock Appreciation Rights held by the Participant.
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(ii) If the termination of employment was for Substantial Cause, then all of the Participants outstanding Options (and any accompanying Stock Appreciation Rights) shall immediately terminate (whether vested or not) as of the date of such termination and shall be of no further force or effect.
b) Death or Disability . Effective for original grants made hereunder on or after February 1, 2005, and for Restorative Option grants relating to such original grants, if a Participant dies or becomes Disabled while employed by the Company or any of its subsidiaries or affiliates or while such Participant was providing services as a director, consultant or advisor to any of such entities, then all Options granted to such Participant that were outstanding but not vested on such date shall immediately vest, and the Participant (or his or her Representative) shall have one year from the date of death or the date the Participant first became Disabled in which to exercise all vested Options held by such Participant on such date. For original grants made hereunder prior to February 1, 2005, and for Restorative Option grants relating to such original grants, if a Participant dies or becomes Disabled while employed by the Company or any of its subsidiaries or affiliates or while such Participant was providing services as a director, consultant or advisor to any of such entities, then the Participant (or his or her Representative) shall have one year from the date of death or the date the Participant first became Disabled in which to exercise any Options that were vested on such date. All Options that were not vested on such date shall immediately expire and be of no further force or effect. The provisions of this Section 11(b) shall apply equally to any Stock Appreciation Rights held by the Participant.
c) Retirement. If a Participant Retires, the following consequences shall apply:
(i) If the Participant continues to render services to the Company or any of its subsidiaries or affiliates as a director, or as a consultant or advisor pursuant to a written agreement, then all Options held by such Participant shall continue in full force and effect in accordance with their terms for so long as such Participant continues to satisfy at least one of the eligibility requirements of Section 5(a). Thereafter, if the Participant dies or becomes Disabled, the provisions of Section 11(b) above shall apply, or if the Participant at any time fails to satisfy at least one of the eligibility requirements of Section 5(a), then the provisions of Section 11(a)(i) above (including time limits for the exercise of vested Options) shall apply as if the Participant had experienced a termination of employment thereunder. The foregoing provisions shall apply equally to any Stock Appreciation Rights held by the Participant.
(ii) If the Participant does not at the time of Retirement satisfy any of the eligibility requirements of Section 5(a), then the Participant shall have one year from the date of retirement in which to exercise all of his or her Options that were
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vested on such date and all such Options which are not exercised within such one-year period shall expire and be of no further force or effect. All Options that were not vested on the date of Retirement will immediately expire and be of no further force or effect. The foregoing provisions shall apply equally to any Stock Appreciation Rights held by the Participant.
d) Sale or Divestiture of Employer. In the event that the Company sells or divests its controlling interest in any subsidiary or if its control of an affiliate ceases, then any employee of such subsidiary or affiliate who is a Participant shall have 90 days from the date of such sale, divestiture or cessation of control (or one year in the case of a Participant who has attained the age of 55 on such date) in which to exercise all of his or her Options that were vested on such date and all such Options which are not exercised within such 90-day (or one year) period shall expire and be of no further force or effect. All Options that were not vested on the date of such sale, divestiture or cessation of control shall immediately expire and be of no further force or effect. The foregoing provisions shall apply equally to any Stock Appreciation Rights held by the Participant.
12. PRIVILEGES OF STOCK OWNERSHIP
No Participant shall have any of the rights or privileges of a shareholder of the Company in respect of any Shares issuable upon exercise of any Option or Stock Appreciation Right until Shares shall have been issued and delivered: (i) to the Participant in the form of certificates, (ii) to a brokerage or other account for the benefit of the Participant either in certificate form or via DWAC or similar electronic means, or (iii) to a book entry or direct registration account in the name of the Participant. No shares shall be issued and delivered upon the exercise of any Option or accompanying Stock Appreciation Rights unless and until there has been compliance with all applicable requirements of the Securities Act of 1933, as amended (whether by registration or satisfaction of an available exemption), all applicable listing requirements of the New York Stock Exchange or any other national securities exchange or market on which the Common Stock is then listed and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery.
13. ADJUSTMENTS
a) Stock splits, reorganizations, etc. If the outstanding Shares are increased, decreased, changed into or exchanged for a different number or kind of shares or securities of the Company through reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares or securities as to which Options (and accompanying Stock
11 | As of 02/03/09 |
Appreciation Rights) may thereafter be granted under this Plan. A corresponding adjustment changing the number or kind of shares or securities allocated to unexercised Options (and any accompanying Stock Appreciation Rights), or portions thereof, which shall have been granted prior to any such change, shall likewise be made. Any such adjustment in an outstanding Option (or Stock Appreciation Right) shall be made without change in the aggregate purchase price applicable to the unexercised portion of such Option (or Stock Appreciation Right) but with a corresponding adjustment in the Exercise Price for each Share or other unit of any security covered by the Option (or Stock Appreciation Right).
b) Equity Restructurings. The Committee may, but shall not be obligated to, make an appropriate reduction in the Exercise Price of any outstanding Option, and/or grant additional Options to the holder of any outstanding Option, to compensate for the diminution in the intrinsic value of the Shares resulting from any non-reciprocal transaction (i.e., one in which the Company does not receive consideration) between the Company and its shareholders, such as a spin-off, stock dividend, rights offering, or recapitalization through a special, substantial nonrecurring dividend.
c) Change of Control Events. Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon a sale of substantially all the property or more than eighty percent (80%) of the then outstanding Common Stock of the Company to another corporation, this Plan shall terminate; provided, however, that notwithstanding the foregoing, the Board shall provide in writing in connection with such transaction for any one or more of the following alternatives (separately or in combinations): (i) for each Option and any accompanying Stock Appreciation Rights theretofore granted to become immediately exercisable notwithstanding the provisions of Section 6(c) hereof, (ii) for the assumption by the successor corporation of the Options and Stock Appreciation Rights theretofore granted or the substitution by such corporation for such Options and Stock Appreciation Rights theretofore granted of new options and rights covering the stock of the successor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices; (iii) for the continuance of the Plan by such successor corporation in which event the Plan and the Options and any accompanying Stock Appreciation Rights therefore granted shall continue in the manner and under the terms so provided; or (iv) for the payment in cash or stock in lieu of and in complete satisfaction of such Options and rights. At the discretion of the Committee, any Option Agreement may contain provisions to the effect that upon the happening of certain events, including a change in control of the Company (as defined by the Committee in such Option Agreement), any outstanding Options and accompanying Stock Appreciation Rights not theretofore vested shall immediately become vested and exercisable in their entirety, notwithstanding any of the other provisions of the Option.
12 | As of 02/03/09 |
d) Authority of Committee. All adjustments under this Section 13 shall be made by the Committee, whose determination as to which adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional Shares shall be issued under the plan on any such adjustment.
14. AMENDMENT AND TERMINATION OF PLAN
The Board may at any time suspend or terminate the Plan or amend the terms of the Plan. In the event that any provision of applicable law mandates that any such amendment be approved by the Companys shareholders, then such amendment shall be submitted to such shareholders for approval or ratification within a time period that satisfies such law. In the case of other laws that require shareholder approval of amendments as a condition to receiving or preserving certain benefits (e.g., deductibility of certain compensation under Section 162(m) of the Code) or achieving a safe harbor status, the Board shall have sole discretion to determine whether or not to submit amendments to the Companys shareholders for approval.
The Committee may from time to time increase or decrease the six-month holding periods specified in the definition of Mature Shares in Section 2 above: (i) to satisfy applicable legal or accounting requirements; (ii) to secure advantageous treatment for the Company or the Participants under any provision of law or any accounting rule, pronouncement or interpretation applicable to financial statements prepared on the basis of accounting principles generally accepted in the United States; or (iii) for any reason determined by the Committee to be in the best interests of the Company or the Participants and not inconsistent with any applicable legal or accounting requirements. The Committee may eliminate such holding periods in the event that there are no legal or accounting requirements that they be imposed or if there is no longer any advantage to the Company or the Participants that they be imposed and such elimination is otherwise consistent with applicable legal and accounting requirements. The Committee may also reinstate holding periods in order to satisfy applicable legal or accounting requirements or to secure advantageous treatment for the Company or the Participants of the type contemplated in this paragraph.
Notwithstanding the foregoing, no amendment, suspension or termination of the Plan by the Board, and no change related to holding periods made by the Committee pursuant to the foregoing paragraph, shall in any way adversely affect the rights of a holder of any outstanding Option or accompanying Stock Appreciation Right without the prior written consent of such holder.
13 | As of 02/03/09 |
15. ARBITRATION
The Committee may, as a condition to granting Options or Stock Appreciation Rights, require that a Participant agree in writing to submit all disputes or claims arising out of or relating to any such Options or Stock Appreciation Rights to binding arbitration in accordance with such terms as the Committee shall prescribe.
14 | As of 02/03/09 |
Exhibit 10.5
UNITRIN, INC.
2005 Restricted Stock and Restricted Stock Unit Plan,
as amended and restated effective February 3, 2009
As of 2/3/09
TABLE OF CONTENTS
Page | ||||||
Article | 1 | Establishment, Purpose, and Duration | 1 | |||
1.1 | Establishment | 1 | ||||
1.2 | Purpose of this Plan | 1 | ||||
1.3 | Duration of this Plan | 1 | ||||
Article | 2 | Definitions | 1 | |||
2.1 | Affiliate | 1 | ||||
2.2 | Annual Award Limit or Annual Award Limits | 1 | ||||
2.3 | Award | 1 | ||||
2.4 | Award Agreement | 1 | ||||
2.5 | Beneficial Owner or Beneficial Ownership | 2 | ||||
2.6 | Board or Board of Directors | 2 | ||||
2.7 | Code | 2 | ||||
2.8 | Committee | 2 | ||||
2.9 | Company | 2 | ||||
2.10 | Covered Employee | 2 | ||||
2.11 | Disability or Disabled | 2 | ||||
2.12 | Effective Date | 2 | ||||
2.13 | Employee | 2 | ||||
2.14 | Exchange Act | 2 | ||||
2.15 | Fair Market Value or FMV | 2 | ||||
2.16 | Insider | 2 | ||||
2.17 | Participant | 3 | ||||
2.18 | Performance-Based Compensation | 3 | ||||
2.19 | Performance Measures | 3 | ||||
2.20 | Performance Period | 3 | ||||
2.21 | Period of Restriction | 3 | ||||
2.22 | Plan | 3 | ||||
2.23 | Plan Year | 3 | ||||
2.24 | Restricted Stock | 3 | ||||
2.25 | Restricted Stock Unit | 3 | ||||
2.26 | Retirement or retires | 3 |
-i-
TABLE OF CONTENTS
(continued)
Page | ||||||
2.27 | Section 162(m) | 3 | ||||
2.28 | Section 409A | 3 | ||||
2.29 | Share | 3 | ||||
Article | 3 | Administration | 3 | |||
3.1 | General | 3 | ||||
3.2 | Authority of the Committee | 4 | ||||
3.3 | Delegation | 4 | ||||
Article | 4 | Shares Subject to this Plan and Maximum Awards | 4 | |||
4.1 | Number of Shares Available for Awards | 4 | ||||
4.2 | Share Usage | 4 | ||||
4.3 | Annual Award Limits | 4 | ||||
4.4 | Adjustments in Authorized Shares | 5 | ||||
Article | 5 | Eligibility and Participation | 5 | |||
5.1 | Eligibility | 5 | ||||
5.2 | Actual Participation | 5 | ||||
Article | 6 | Restricted Stock and Restricted Stock Units | 5 | |||
6.1 | Grant of Restricted Stock or Restricted Stock Units | 5 | ||||
6.2 | Restricted Stock or Restricted Stock Unit Agreement | 6 | ||||
6.3 | Other Restrictions | 6 | ||||
6.4 | Certificate Legend | 6 | ||||
6.5 | Voting Rights | 6 | ||||
6.6 | Dividends and Dividend Equivalents | 6 | ||||
6.7 | Termination of Employment | 7 | ||||
6.8 | Section 83(b) Election | 7 | ||||
Article | 7 | Transferability of Awards | 8 | |||
7.1 | Transferability | 8 | ||||
7.2 | Domestic Relations Orders | 8 | ||||
Article | 8 | Performance Measures | 8 | |||
8.1 | Performance Measures | 8 | ||||
8.2 | Evaluation of Performance | 9 | ||||
8.3 | Adjustment of Performance-Based Compensation | 9 |
-ii-
TABLE OF CONTENTS
(continued)
Page | ||||||
8.4 | Committee Discretion | 9 | ||||
Article | 9 | Arbitration | 10 | |||
Article | 10 | Compliance with Section 409A | 10 | |||
10.1 | 409A Compliance | 10 | ||||
10.2 | Deferrals | 10 | ||||
Article | 11 | Rights of Participants | 10 | |||
11.1 | Employment | 10 | ||||
11.2 | Participation | 11 | ||||
11.3 | Rights as a Shareholder | 11 | ||||
Article | 12 | Change of Control | 11 | |||
Article | 13 | Amendment, Modification, Suspension, and Termination | 11 | |||
13.1 | Amendment, Modification, Suspension, and Termination | 11 | ||||
13.2 | Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events | 11 | ||||
13.3 | Awards Previously Granted | 12 | ||||
Article | 14 | Withholding | 12 | |||
14.1 | Tax Withholding | 12 | ||||
14.2 | Share Withholding | 12 | ||||
Article | 15 | Successors | 12 | |||
Article | 16 | General Provisions | 12 | |||
16.1 | Forfeiture Events | 12 | ||||
16.2 | Gender and Number | 12 | ||||
16.3 | Severability | 13 | ||||
16.4 | Requirements of Law | 13 | ||||
16.5 | Delivery of Title | 13 | ||||
16.6 | Inability to Obtain Authority | 13 | ||||
16.7 | Investment Representations | 13 | ||||
16.8 | Uncertificated Shares | 13 | ||||
16.9 | Unfunded Plan | 13 | ||||
16.10 | No Fractional Shares | 13 | ||||
16.11 | Nonexclusivity of this Plan | 14 |
-iii-
TABLE OF CONTENTS
(continued)
Page | ||||||
16.12 |
No Constraint on Corporate Action | 14 | ||||
16.13 |
Governing Law | 14 |
-iv-
Unitrin, Inc.
2005 Restricted Stock and Restricted Stock Unit Plan,
as amended and restated effective February 3, 2009
Article 1 Establishment, Purpose, and Duration
1.1 Establishment . Unitrin, Inc., a Delaware corporation (hereinafter referred to as the Company), established the 2005 Restricted Stock and Restricted Stock Unit Plan (hereinafter referred to as the Plan), effective May 4, 2005 (the Effective Date).
This Plan permits the grant of Restricted Stock and Restricted Stock Units.
1.2 Purpose of this Plan . The purpose of this Plan is to provide a means whereby Employees of the Company develop a sense of proprietorship and personal involvement in the development and financial success of the Company, and to encourage them to devote their best efforts to the business of the Company, thereby advancing the interests of the Company and its shareholders. A further purpose of this Plan is to provide a means through which the Company may attract able individuals to become Employees and to provide a means whereby those individuals upon whom the responsibilities for the successful administration and management of the Company depend can acquire and maintain stock ownership, thereby strengthening their concern for the welfare of the Company.
1.3 Duration of this Plan . Unless sooner terminated as provided herein, this Plan shall terminate ten (10) years from the Effective Date. After this Plan is terminated, no Awards may be granted but Awards previously granted shall remain outstanding in accordance with their applicable terms and conditions and this Plans terms and conditions.
Article 2 Definitions
Whenever used in this Plan, the following terms shall have the meanings set forth below, and when the meaning is intended, the initial letter of the word shall be capitalized.
2.1 Affiliate means any person or entity controlled directly or indirectly by the Company, whether by equity ownership, contract or otherwise and shall include direct or indirect subsidiaries of the Company and mutual companies the management of which is controlled by the Company and its subsidiaries.
2.2 Annual Award Limit or Annual Award Limits have the meaning set forth in Section 4.3.
2.3 Award means, individually or collectively, a grant under this Plan of Restricted Stock or Restricted Stock Units, in each case subject to the terms of this Plan.
2.4 Award Agreement means either (i) an agreement entered into by the Company and a Participant setting forth the terms and provisions applicable to an Award granted under this Plan, or (ii) a written or electronic statement issued by the Company to a Participant describing the terms and provisions of such Award.
1 | As of 2/3/09 |
2.5 Beneficial Owner or Beneficial Ownership shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act.
2.6 Board or Board of Directors means the Board of Directors of the Company.
2.7 Code means the U.S. Internal Revenue Code of 1986, as amended from time to time, or any successor statute.
2.8 Committee means the Compensation Committee of the Board or any subcommittee thereof, or any other committee designated by the Board to administer this Plan.
2.9 Company means Unitrin, Inc., a Delaware corporation, and any successor thereto as provided in Article 15 herein.
2.10 Covered Employee means any Employee who is or may become a Covered Employee, as defined in Section 162(m).
2.11 Disability or Disabled when used with respect to a particular Participant, means a physical or mental condition that: (i) is of a type that would generally trigger benefits under the Companys long-term disability plan (as in effect from time to time), whether or not such Participant is actually enrolled in such plan; or (ii) in the absence of any such plan, would cause such Participant to be unable to substantially perform his or her duties as an Employee, as determined in the sole discretion of the Committee. Notwithstanding the foregoing, if an Award of Restricted Stock Units becomes subject to the requirements of Article 10, the term disabled shall be defined as required under Section 409A.
2.12 Effective Date has the meaning set forth in Section 1.1.
2.13 Employee means any employee of the Company, its subsidiaries and/or Affiliates, and may include, by specific designation of the Committee, other natural persons who provide bona fide services as a consultant or advisor to the Company, its subsidiaries and/or Affiliates, provided that such services may not be in connection with the offer or sale of securities in a capital-raising transaction or, directly or indirectly, the promotion or maintenance of a market for the Companys securities.
2.14 Exchange Act means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto.
2.15 Fair Market Value or FMV as used to refer to the price of a Share on a particular day, means the closing price for the common stock for that day as subsequently reported by the New York Stock Exchange (or such other exchange on which the Shares of common stock are primarily traded), or if no prices are reported for that day, the last preceding day on which such prices are reported (or, if for any reason no such price is available, in such other manner as the Committee in its sole discretion may deem appropriate to reflect the fair market value of the common stock).
2.16 Insider means an individual who is, on the relevant date, an officer, or Director of the Company, or a more than ten percent (10%) Beneficial Owner of any class of the Companys equity securities that is registered pursuant to Section 12 of the Exchange Act, as determined by the Board in accordance with Section 16 of the Exchange Act.
2 | As of 2/3/09 |
2.17 Participant means any eligible individual as set forth in Article 5 to whom an Award is granted.
2.18 Performance-Based Compensation means compensation under an Award that satisfies the requirements of Section 162(m) and the applicable regulations thereunder for certain performance-based compensation, if any, paid to Covered Employees.
2.19 Performance Measures means measures as described in Article 8 on which the performance goals are based and which are approved by the Companys shareholders pursuant to this Plan in order to qualify Awards as Performance-Based Compensation.
2.20 Performance Period means the period of time during which the performance goals must be met in order to determine the degree of payout and/or vesting with respect to an Award.
2.21 Period of Restriction means the period when Restricted Stock or Restricted Stock Units are subject to a substantial risk of forfeiture (based on the passage of time, the achievement of performance goals, or upon the occurrence of other events as determined by the Committee, in its discretion), as provided in Article 6.
2.22 Plan means the 2005 Restricted Stock and Restricted Stock Unit Plan.
2.23 Plan Year means the calendar year.
2.24 Restricted Stock means an Award granted to a Participant pursuant to Article 6.
2.25 Restricted Stock Unit means an Award granted to a Participant pursuant to Article 6, except that no Shares are actually awarded to the Participant on the date of grant.
2.26 Retirement or retires means the voluntary termination of a Participants employment with the Company and/or its subsidiaries or Affiliates after attaining age 55.
2.27 Section 162(m) means Section 162(m) of the Code, or any successor provision, and the regulations, rulings and other guidance issued thereunder.
2.28 Section 409A means Section 409A of the Code, or any successor provision, and the regulations, rulings and other guidance issued thereunder.
2.29 Share means a share of common stock of the Company, $0.10 par value per share.
Article 3 Administration
3.1 General . The Committee shall be responsible for administering this Plan, subject to this Article 3 and the other provisions of this Plan. The Committee may retain attorneys, consultants, accountants, or other advisors and the Committee, the Company, and its officers and Directors shall be entitled to rely upon the advice, opinions, or valuations of any such advisors The fees of any such advisors shall be paid by the Company. All actions taken and all interpretations and determinations made by the Committee shall be final and binding upon the Participants, beneficiaries, the Company, and all other interested individuals.
3 | As of 2/3/09 |
3.2 Authority of the Committee . The Committee shall have full and, except as otherwise expressly provided in this Plan, exclusive, power and discretion: (a) to interpret the terms and the intent of this Plan and any Award Agreement or other agreement or document ancillary to or in connection with this Plan, and to adopt such rules, regulations, forms, instruments, and guidelines for administering this Plan as the Committee may deem necessary or proper; (b) to select Award recipients; (c) to establish the terms and conditions of all Awards, including the terms and conditions set forth in Award Agreements; (d) to grant Awards as an alternative to or as the form of payment for grants or rights earned or due under other compensation plans or arrangements of the Company; and (e) subject to Article 13, to adopt modifications and amendments to this Plan or any Award Agreement, including without limitation, any that are necessary to comply with the laws of the jurisdictions in which the Company, its Affiliates, and/or its subsidiaries operate or may operate.
3.3 Delegation . The Committee may delegate to one or more of its members or to one or more officers of the Company, and/or its subsidiaries or to one or more agents or advisors such administrative duties or powers as it may deem advisable, and the Committee or any individuals to whom it has delegated duties or powers as aforesaid may employ one or more individuals to render advice with respect to any responsibility the Committee or such individuals may have under this Plan. The Board may, by resolution, authorize one or more officers of the Company to do one or both of the following on the same basis as can the Committee: (a) designate Employees to be recipients of Awards; and (b) determine the size of any such Awards and the terms and conditions of such Awards; provided, however, (i) the Board shall not authorize any such officer to grant Awards to himself or herself, nor to any Employees who are considered Insiders; (ii) the resolution providing such authorization must specify the total number of Shares that may be covered by all Awards in the aggregate that are granted by such officer(s); and (iii) the officer(s) shall report periodically to the Committee regarding the nature and scope of the Awards granted pursuant to the authority delegated.
Article 4 Shares Subject to this Plan and Maximum Awards
4.1 Number of Shares Available for Awards . Subject to adjustment as provided in Section 4.4, the maximum number of Shares available for issuance to Participants under this Plan on or after the Effective Date (the Share Authorization) shall be one million (1,000,000) Shares.
4.2 Share Usage . Shares covered by an Award shall only be counted as used to the extent they are actually issued. Any Shares related to Awards which terminate by expiration, forfeiture, cancellation, or otherwise without the issuance of such Shares, are settled in cash in lieu of Shares, or are exchanged with the Committees permission, prior to the issuance of Shares, for Awards not involving Shares, shall be available again for grant under this Plan. Moreover, if the tax withholding requirements with respect to any Award granted under this Plan are satisfied by tendering Shares to the Company (by either actual delivery or by attestation), only the number of Shares issued, net of the Shares tendered, if any, will be deemed delivered for purposes of determining the maximum number of Shares available for delivery under this Plan. The Shares available for issuance under this Plan may be authorized and unissued Shares or treasury Shares.
4.3 Annual Award Limits . Unless and until the Committee determines that an Award to a Covered Employee shall not be designed to qualify as Performance-Based Compensation, the following limits (Annual Award Limit) shall apply to grants of such Awards under this Plan. The maximum aggregate grant with respect to Awards of Restricted Stock or Restricted Stock Units in any one Plan Year to any one Participant shall be one hundred thousand (100,000) plus the amount of the Participants unused applicable Annual Award Limit for Restricted Stock or Restricted Stock Units as of the close of the previous Plan Year.
4 | As of 2/3/09 |
4.4 Adjustments in Authorized Shares . If the number of outstanding Shares is increased or decreased through a reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, an appropriate and proportionate adjustment shall be made in: (a) the maximum number of Shares that may be issued under this Plan, (b) the number of Restricted Stock Units outstanding under existing Awards, and (c) the Award limit specified in Section 4.3. In the event that the Shares are changed into or exchanged for a different kind of shares or other securities of the Company through transactions of the type referenced above, the Committee, in its sole discretion, in order to prevent dilution or enlargement of Participants rights under this Plan, may substitute or adjust, as applicable, the number and kind of securities that may be issued under this Plan or under particular forms of Awards, the number and kind of securities subject to outstanding Awards, the Annual Award Limits, and other value determinations applicable to outstanding Awards.
The Committee, in its sole discretion, may also make appropriate adjustments in the terms of any Awards under this Plan to reflect such changes or distributions and to modify any other terms of outstanding Awards, including modifications of performance goals and changes in the length of Performance Periods. The determination of the Committee as to the foregoing adjustments, if any, shall be conclusive and binding on Participants under this Plan.
Subject to the provisions of Article 13, without affecting the number of Shares reserved or available hereunder, the Committee may authorize the issuance or assumption of benefits under this Plan in connection with any merger, consolidation, acquisition of property or stock, or reorganization upon such terms and conditions as it may deem appropriate.
Article 5 Eligibility and Participation
5.1 Eligibility . All Employees shall be eligible to participate in this Plan.
5.2 Actual Participation . Subject to the provisions of this Plan, the Committee (or an officer authorized under Section 3.3 hereof) may, from time to time, select from all eligible individuals, those individuals to whom Awards shall be granted and shall determine, in its sole discretion, the nature of, any and all terms permissible by law, and the amount of each Award.
Article 6 Restricted Stock and Restricted Stock Units
6.1 Grant of Restricted Stock or Restricted Stock Units . Subject to the terms and provisions of this Plan, the Committee (or an officer authorized under Section 3.3), at any time and from time to time, may grant Shares of Restricted Stock and/or Restricted Stock Units to Participants in such amounts as the Committee (or such officer) shall determine. Restricted Stock Units shall be similar to Restricted Stock except that no Shares are actually awarded to the Participant on the date of grant. The terms of any such Restricted Stock Units shall be specified in the Award Agreement. Subject to the provisions of applicable law, the Board may by resolution authorize Shares of Restricted Stock to be issued in book entry or similar non-certificated form, or by DWAC or similar electronic transfer to a brokerage or other account of the Participant. In the absence of such a resolution, all Shares of Restricted Stock shall be evidenced by certificates.
5 | As of 2/3/09 |
6.2 Restricted Stock or Restricted Stock Unit Agreement . Each Award of Restricted Stock and/or Restricted Stock Units shall be evidenced by an Award Agreement that shall specify the Period(s) of Restriction, the number of Shares of Restricted Stock or the number of Restricted Stock Units granted, and such other provisions as the Committee (or an officer authorized under Section 3.3) shall determine, including, without limitation, such provisions as the Committee shall determine, in its discretion, are necessary or advisable to comply with Article 10 of this Plan.
6.3 Other Restrictions . The Committee (or an officer authorized under Section 3.3) may impose such other conditions and/or restrictions on any Shares of Restricted Stock or Restricted Stock Units granted pursuant to this Plan as it (or such officer) may deem advisable including, without limitation, time-based restrictions, and/or restrictions under applicable laws or under the requirements of any stock exchange or market upon which such Shares are listed or traded, holding requirements or sale restrictions placed on the Shares by the Company upon vesting of such Restricted Stock or Restricted Stock Units, a requirement that Participants pay a stipulated purchase price for each Share of Restricted Stock or each Restricted Stock Unit, restrictions based upon the achievement of specific performance goals, or time-based restrictions on vesting following the attainment of the performance goals.
To the extent deemed appropriate by the Committee, the Company may retain any certificates representing Shares of Restricted Stock in the Companys possession until such time as all conditions and/or restrictions applicable to such Shares have been satisfied or lapse.
Except as otherwise provided in this Article 6, and subject in all cases to the requirements of applicable law, Shares of Restricted Stock covered by each Restricted Stock Award shall become freely transferable by the Participant after all conditions and restrictions applicable to such Shares have been satisfied or lapse (including satisfaction of any applicable tax withholding obligations), and Restricted Stock Units shall be paid in cash, Shares, or a combination of cash and Shares as the Committee, in its sole discretion shall determine.
6.4 Certificate Legend . To the extent that certificates are issued to evidence Shares of Restricted Stock, then in addition to any legends placed on certificates pursuant to Section 6.3, each certificate representing Shares of Restricted Stock granted pursuant to this Plan may bear a legend such as the following or as otherwise determined by the Committee in its sole discretion:
The sale or transfer of Shares represented by this certificate, whether voluntary, involuntary, or by operation of law, is subject to certain restrictions on transfer as set forth in the Unitrin, Inc. 2005 Restricted Stock and Restricted Stock Unit Plan, and in the associated Award Agreement. A copy of this Plan and such Award Agreement may be obtained from Unitrin, Inc.
6.5 Voting Rights . Issued and outstanding Shares of Restricted Stock shall at all times possess the same voting rights as all other issued and outstanding Shares. A Participant shall have no voting rights with respect to any Restricted Stock Units granted hereunder.
6.6 Dividends and Dividend Equivalents . Issued and outstanding Shares of Restricted Stock shall be entitled to dividends if, as and when declared by the Board with respect to the Companys Shares on the same basis and on the same payment dates as all other issued and outstanding Shares. The Committee may grant dividend equivalents with respect to any Restricted Stock Units. The terms and conditions of such dividend equivalents, including the rate per Unit, timing of payment and other requirements, shall be established by the Committee in its discretion, subject to the requirements of Article 10 of this Plan.
6 | As of 2/3/09 |
6.7 Termination of Employment.
(a) Death or Disability . Unless otherwise determined by the Committee at the time of grant and set forth in a Participants Award Agreement, upon a Participants termination of employment due to death or Disability, all restrictions on such Participants Shares of Restricted Stock and/or Restricted Stock Units shall lapse and such Shares and/or Units shall be considered vested.
(b) Retirement . If a Participant retires, but continues to render services to the Company or any of its subsidiaries or Affiliates as a director, or as a consultant or advisor pursuant to a written agreement, then all Shares of Restricted Stock and Restricted Stock Units held by such Participant shall remain outstanding and in full force and effect in accordance with their terms so long as such Participant continues to render such services. Thereafter, if a Participant ceases to render such services (other than as a result of death or Disability), all of the unvested Shares of Restricted Stock and Restricted Stock Units such Participant holds at the time of the cessation of such services shall be forfeited to the Company. If a retired Participant ceases to render such services as a result of death or Disability, all restrictions on such Participants Shares of Restricted Stock and/or Restricted Stock Units shall lapse and such Shares and/or Units shall be considered vested.
(c) Other Termination Events . In the event a Participants employment terminates for any reason other than death, Disability or retirement, including but not limited to, termination with or without cause by the Company, its Affiliates, and/or its subsidiaries, or voluntary termination by the Participant, all of the unvested Shares of Restricted Stock and Restricted Stock Units a Participant holds at the time of such termination shall be forfeited to the Company.
(d) Sale or Divestiture of Employer . In the event that the Company sells or divests its controlling interest in any subsidiary or if its control of an Affiliate ceases, then all of the unvested Shares of Restricted Stock and Restricted Stock Units held by Employees of such subsidiary or Affiliate shall be forfeited to the Company at the time of such sale or divestiture or cessation of control, as the case may be.
(e) Other Provisions. The Committee may, in its discretion, approve termination provisions in connection with particular Awards or Participants that differ from the terms of this Section 6.7 to the extent such provisions: (i) are consistent with Section 162(m), if and as applicable; and (ii) do not adversely affect any Award previously granted under this Plan in any material way without the written consent of the Participant holding such Award.
6.8 Section 83(b) Election . The Committee may provide in an Award Agreement that the Award of Restricted Stock is conditioned upon the Participant making or refraining from making an election with respect to the Award under Section 83(b) of the Code. If a Participant makes an election pursuant to Section 83(b) of the Code concerning a Restricted Stock Award, the Participant shall be required to file promptly a copy of such election with the Company.
7 | As of 2/3/09 |
Article 7 Transferability of Awards
7.1 Transferability . Awards shall not be transferable other than by will or the laws of descent and distribution; no Awards shall be subject, in whole or in part, to attachment, execution, or levy of any kind; and any purported transfer in violation hereof shall be null and void.
7.2 Domestic Relations Orders . Without limiting the generality of Section 7.1, no domestic relations order purporting to authorize a transfer of an Award or any interest in an Award shall be recognized as valid.
Article 8 Performance Measures
8.1 Performance Measures . Unless and until the Committee proposes for shareholder vote and the shareholders approve a change in the general Performance Measures set forth in this Article 8, the performance goals upon which the payment or vesting of an Award to a Covered Employee that is intended to qualify as Performance-Based Compensation shall be limited to the following Performance Measures:
(a) | Net earnings or net income (before or after taxes); |
(b) | Operating earnings per share; |
(c) | Net sales or revenue growth; |
(d) | Operating income and/or average increase in dollars of operating income of the Company or any of its Subsidiaries or operating units; |
(e) | Return measures (including, but not limited to, return on assets, capital, invested capital, investment portfolio performance returns or yields, equity, sales, or revenue); |
(f) | Cash flow (including, but not limited to, operating cash flow, free cash flow, and cash flow return on equity); |
(g) | Earnings before or after taxes, interest, depreciation, and/or amortization; |
(h) | Gross or operating margins; |
(i) | Productivity ratios; |
(j) | Share price (including, but not limited to, growth measures and total shareholder return); |
(k) | Expense targets; |
(l) | Margins; |
(m) | Operating efficiency; |
(n) | Market share; |
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(o) | Customer satisfaction; |
(p) | Working capital targets; |
(q) | Bad debt experience; |
(r) | Reduction in costs; |
(s) |
Economic value added or EVA ® (net operating profit after tax minus the sum of capital multiplied by the cost of capital); and |
(t) | Insurance company underwriting income, combined ratios, loss ratios or expense ratios. |
Any Performance Measure(s) may be defined in accordance with generally acceptable accounting principles or otherwise, and may be used to measure the performance of the Company, subsidiary, and/or Affiliate as a whole or any business unit of the Company, subsidiary, and/or Affiliate or any combination thereof, as the Committee may deem appropriate, or any of the above Performance Measures as compared to the performance of a group of comparator companies, or a published or special index that the Committee, in its sole discretion, deems appropriate, or the Committee may select Performance Measure (j) above as compared to various stock market indices. The Committee also has the authority to provide for accelerated vesting of any Award based on the achievement of performance goals pursuant to the Performance Measures specified in this Article 8.
8.2 Evaluation of Performance . The Committee may provide in any such Award that any evaluation of performance may include or exclude any of the following events that occurs during a Performance Period: (a) asset write-downs, (b) litigation or claim judgments or settlements, (c) the effect of changes in tax laws, accounting principles, or other laws or provisions affecting reported results, (d) any reorganization and restructuring programs, (e) extraordinary nonrecurring items as described in Accounting Principles Board Opinion No. 30 (or a successor pronouncement) and/or in the Companys periodic reports filed with the Securities and Exchange Commission for periods within the applicable year, and (f) acquisitions or divestitures. To the extent such inclusions or exclusions affect Awards to Covered Employees, they shall be prescribed in a form that meets the requirements of Section 162(m) for deductibility.
8.3 Adjustment of Performance-Based Compensation . Awards that are intended to qualify as Performance-Based Compensation may not be adjusted upward so as to enrich the Award. The Committee shall retain the discretion to adjust such Awards downward, either on a formula or discretionary basis or any combination, as the Committee determines.
8.4 Committee Discretion . In the event that applicable tax and/or securities laws change to permit Committee discretion to alter the governing Performance Measures without obtaining shareholder approval of such changes, the Committee shall have sole discretion to make such changes without obtaining shareholder approval. In addition, in the event that the Committee determines that it is advisable to grant Awards that shall not qualify as Performance-Based Compensation, the Committee may make such grants without satisfying the requirements of Section 162(m) and base vesting on Performance Measures other than those set forth in Section 8.1.
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Article 9 Arbitration
The Committee may, as a condition to granting an Award, require that a Participant agree in writing to submit all disputes or claims arising out of or relating to any such Award to binding arbitration in accordance with such terms as the Committee shall prescribe.
Article 10 Compliance with Section 409A
10.1 409A Compliance . Any Award that is granted under this Plan shall be designed and administered so that the Award is either exempt from the application of, or compliant with, the requirements of Section 409A To the extent that the Committee determines that any Award granted under this Plan is subject to Section 409A, the Award Agreement shall include such terms and conditions as the Committee determines, in its discretion, are necessary or advisable to avoid the imposition on the Participant of an additional tax under Section 409A. Notwithstanding any other provision of this Plan or any Award Agreement (unless the Award Agreement provides otherwise with specific reference to this Section): (i) an Award shall not be granted, deferred, accelerated, extended, paid out, settled, substituted, adjusted or modified under this Plan in a manner that would result in the imposition of an additional tax under Section 409A upon a Participant; and (ii) if an Award Agreement provides for the deferral of compensation within the meaning of Section 409A, no distribution or payment of any amount shall be made before a date that is six (6) months following the date of such participants separation from service (as defined in Section 409A) or, if earlier, the date of the participants death. Although the Company intends to administer this Plan so that Awards will be exempt from, or will comply with, the requirements of Section 409A, the Company does not warrant that any Award under this Plan will qualify for favorable tax treatment under Section 409A or any other provision of federal, state, local, or non-United States law. Neither the Company, its Affiliates nor their respective directors, officers, employees or advisers shall be liable to any Participant (or any other individual claiming a benefit through the Participant) for any tax, interest or penalties the Participant may owe as a result of the grant, holding, vesting, exercise or payment of any Award under this Plan.
10.2 Deferrals . Subject to the requirements of Section 10.1 of this Plan, the Committee may permit or require a Participant to defer such Participants receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant by virtue of the lapse or waiver of restrictions with respect to an Award of Restricted Stock Units. If any such deferral election is required or permitted, the Committee shall, prior to requiring or permitting such deferral election, establish written rules and procedures for such payment deferrals that are intended to comply with the requirements of Section 409A including, without limitation, the time when a deferral election can or must be made, the period of the deferral, and the events that would result in payment of the deferred amount.
Article 11 Rights of Participants
11.1 Employment . Nothing in this Plan or an Award Agreement shall interfere with or limit in any way the right of the Company, its Affiliates, and/or its subsidiaries, to terminate any Participants employment at any time or for any reason not prohibited by law, nor confer upon any Participant any right to continue his or her employment for any specified period of time.
Neither an Award nor any benefits arising under this Plan shall constitute an employment contract with the Company, its Affiliates, and/or its subsidiaries and, accordingly, subject to
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Articles 3 and 13, this Plan and the benefits hereunder may be terminated at any time in the sole and exclusive discretion of the Committee without giving rise to any liability on the part of the Company, its Affiliates, and/or its subsidiaries.
11.2 Participation . No individual shall have the right to be selected to receive an Award under this Plan, or, having been so selected, to be selected to receive a future Award.
11.3 Rights as a Shareholder . No Participant shall have any of the rights or privileges of a shareholder with respect to Shares covered by any Award until Shares shall have been issued and delivered: (a) to the Participant in the form of certificates, (b) to a brokerage or other account for the benefit of the Participant either in certificate form or via DWAC or similar electronic means, or (c) to a book entry or direct registration account in the name of the Participant, including a book entry account at the Companys transfer agent during the period(s) prior to which Shares of Restricted Stock have not vested.
Article 12 Change of Control
Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon a sale of substantially all the property or more than eighty percent (80%) of the then outstanding Shares of the Company to another corporation, this Plan shall terminate; provided, however, that notwithstanding the foregoing, the Board shall provide in writing in connection with such transaction for any one or more of the following alternatives (separately or in combinations): (i) all restrictions on outstanding Awards shall immediately lapse; (ii) for the assumption by the successor corporation of the Awards theretofore granted or the substitution by such corporation for such Awards theretofore granted of new Awards covering the stock of the successor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices; (iii) for the continuance of this Plan by such successor corporation in which event this Plan and the Awards therefore granted shall continue in the manner and under the terms so provided; or (iv) for the payment in cash or stock in lieu of and in complete satisfaction of such Awards; provided, however, that if any such Award is subject to Section 409A, the timing of a payment with respect to such Award shall not be accelerated except to the extent permitted by Section 409A. To the extent permitted by Article 10, at the discretion of the Committee, any Award Agreement may contain provisions which differ from the provisions set forth in this Article with regard to vesting upon the happening of events within the scope of this Article 12.
Article 13 Amendment, Modification, Suspension, and Termination
13.1 Amendment, Modification, Suspension, and Termination . Subject to Sections 10.1 and 13.3, the Board may, at any time and from time to time, alter, amend, modify, suspend, or terminate this Plan in whole or in part; provided, however, that, no material amendment of this Plan shall be made without shareholder approval if shareholder approval is required by law, regulation, or stock exchange rule. Furthermore, no amendment, modification, suspension or termination may impact the distribution of any Award that is subject to Section 162(m) or Section 409A, except as permitted by such applicable Section.
13.2 Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events . The Committee may make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without
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limitation, the events described in Section 4.4 hereof) affecting the Company or the financial statements of the Company or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent unintended dilution or enlargement of the benefits or potential benefits intended to be made available under this Plan. The determination of the Committee as to the foregoing adjustments, if any, shall be conclusive and binding on Participants under this Plan.
13.3 Awards Previously Granted . Notwithstanding any other provision of this Plan to the contrary, no termination, amendment, suspension, or modification of this Plan or an Award Agreement shall adversely affect in any material way any Award previously granted under this Plan, without the written consent of the Participant holding such Award.
Article 14 Withholding
14.1 Tax Withholding . The Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, the amount of any taxes which the Company may be required to withhold with respect to any taxable event arising from such Participants Awards.
14.2 Share Withholding . Unless a different form of remittance is agreed to in writing by the Company pursuant to Section 14.1, upon the lapse of restrictions on a Participants Restricted Stock and Restricted Stock Units, or any other taxable event arising as a result of an Award granted hereunder, the Company shall withhold Shares having a Fair Market Value equal to the amount of the tax withholding requirements with respect to any such taxable event based on minimum statutory withholding rates for federal and state purposes, including payroll taxes.
Article 15 Successors
All obligations of the Company under this Plan with respect to Awards granted hereunder shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.
Article 16 General Provisions
16.1 Forfeiture Events . The Committee may specify in an Award Agreement that the Participants rights, payments, and benefits with respect to an Award shall be subject to reduction, cancellation, forfeiture, or recoupment upon the occurrence of certain specified events, in addition to any otherwise applicable vesting or performance conditions of an Award. Such events may include, but shall not be limited to, termination of employment for cause, violation of material Company, Affiliate, and/or subsidiary policies, breach of non-competition, confidentiality, or other restrictive covenants that may apply to the Participant, or other conduct by the Participant that is detrimental to the business or reputation of the Company, its Affiliates, and/or its subsidiaries.
16.2 Gender and Number . Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine, the plural shall include the singular, and the singular shall include the plural.
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16.3 Severability . In the event any provision of this Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of this Plan, and this Plan shall be construed and enforced as if the illegal or invalid provision had not been included.
16.4 Requirements of Law . The granting of Awards and the issuance of Shares under this Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.
16.5 Delivery of Title . The Company shall have no obligation to issue or deliver evidence of title for Shares issued under this Plan prior to:
(a) | Obtaining any approvals from governmental agencies or national securities exchanges that the Company determines are necessary or advisable; and |
(b) | Completion of any registration or other qualification of the Shares under any applicable securities, Blue Sky or other laws that the Company determines to be necessary or advisable. |
16.6 Inability to Obtain Authority . The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Companys counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.
16.7 Investment Representations . The Committee may require any individual receiving Shares pursuant to an Award under this Plan to represent and warrant in writing that the individual is acquiring the Shares for investment and without any present intention to sell or distribute such Shares.
16.8 Uncertificated Shares . To the extent that this Plan provides for issuance of certificates to reflect the transfer of Shares, the transfer of such Shares may be effected on a non-certificated basis, to the extent not prohibited by applicable law or the rules of any stock exchange.
16.9 Unfunded Plan . Participants shall have no right, title, or interest whatsoever in or to any investments that the Company, and/or its subsidiaries, and/or its Affiliates may make to aid it in meeting its obligations under this Plan. Nothing contained in this Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and any Participant, beneficiary, legal representative, or any other individual. To the extent that any person acquires a right to receive payments from the Company, its subsidiaries, and/or its Affiliates under this Plan, such right shall be no greater than the right of an unsecured general creditor of the Company, a subsidiary, or an Affiliate, as the case may be. All payments to be made hereunder shall be paid from the general assets of the Company, a subsidiary, or an Affiliate, as the case may be and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such amounts except as expressly set forth in this Plan.
16.10 No Fractional Shares . No fractional Shares shall be issued or delivered pursuant to this Plan or any Award. The Committee shall determine whether cash, Awards, or other property shall be issued or paid in lieu of fractional Shares or whether such fractional Shares or any rights thereto shall be forfeited or otherwise eliminated.
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16.11 Nonexclusivity of this Plan . The adoption of this Plan shall not be construed as creating any limitations on the power of the Board or Committee to adopt such other compensation arrangements as it may deem desirable for any Participant.
16.12 No Constraint on Corporate Action . Nothing in this Plan shall be construed to: (i) limit, impair, or otherwise affect the Companys or a subsidiarys or an Affiliates right or power to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure, or to merge or consolidate, or dissolve, liquidate, sell, or transfer all or any part of its business or assets; or, (ii) limit the right or power of the Company or a subsidiary or an Affiliate to take any action which such entity deems to be necessary or appropriate.
16.13 Governing Law . This Plan and each Award Agreement shall be governed by the laws of the State of Delaware, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Plan to the substantive law of another jurisdiction. Unless otherwise provided in the Award Agreement, recipients of an Award under this Plan are deemed to submit to the exclusive jurisdiction and venue of the federal or state courts of Delaware and Illinois, to resolve any and all issues that may arise out of or relate to this Plan or any related Award Agreement.
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Exhibit 10.7
Unitrin, Inc. 1995 Non-Employee Director Stock Option Plan
NON-QUALIFIED STOCK OPTION AGREEMENT
This NON-QUALIFIED STOCK OPTION AGREEMENT (the Agreement) is made as of this day of , between UNITRIN, INC., a Delaware corporation (the Company), and (the Option Holder).
RECITALS
A. The Board of Directors and Shareholders of the Company have adopted the 1995 Non-Employee Director Stock Option Plan.
B. The Plan provides, among other things, for the automatic grant of stock options to non-employee directors of the Company in the amounts and at the times set forth in the Plan.
C. The option granted hereby is not intended to qualify as an incentive stock option under §422A of the Internal Revenue Code of 1986, as amended.
D. Terms used herein and not otherwise defined shall have the meanings given to such terms in the Plan.
NOW, THEREFORE, the parties hereto agree as follows:
1. Grant of Option . The Company grants to the Option Holder the right and option to purchase on the terms and conditions hereinafter set forth, all or any part of an aggregate of four thousand (4,000) shares of the Common Stock of the Company (the Option) at the purchase price of $ per share, exercisable from time to time in accordance with the provisions of this Agreement during a period expiring on the tenth anniversary of the date of this Agreement or such later date as may result from the application of §6 (the Expiration Date). This Option is also subject to early termination in accordance with §5.
2. Vesting . The Option Holder may not purchase any shares by exercise of this Option between the date of this Agreement and the first anniversary date hereof. The shares subject to this Option shall become exercisable in full by the Option Holder commencing on the first anniversary date of this Agreement. Subject to earlier termination under §5 or the terms of the Plan and no later than the Expiration Date, the Option Holder may purchase all or any part of the shares subject to this Option which are currently exercisable in the manner and under the terms specified in §3 hereof. The
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number of shares subject to the Option which the Option Holder may purchase shall be reduced by the number of shares previously purchased by the Option Holder pursuant to the Agreement.
3. Manner of Exercise . Each exercise of this Option shall be by means of a written notice of exercise delivered to the Company. Such notice shall identify the Options being exercised. When applicable, the notice shall also specify the number of Mature Shares (as defined in the Plan) that the Option Holder plans to deliver in payment of all or part of the exercise price. Before shares will be issued, the full purchase price of the shares subject to the Options being exercised shall be paid to the Company using the following methods, individually or in combination: (i) in cash or by certified, cashiers or (as funds clear) personal check payable to the order of the Company; (ii) by Constructive or Actual Delivery (as defined in the Plan) of Mature Shares with a fair market value as of the close of business on the date of exercise equal to or greater than the purchase price; (iii) by wire transfer to an account specified by the Company, or (iv) by delivery of a properly executed exercise notice together with irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds to pay such full purchase price (in which case the exercise will be effective upon the earlier of the trade date or receipt of such proceeds by the Company for the related sale of shares). The Company reserves the right to accept shares of stock of the Company in payment of the purchase price of an option only if such shares have been held by the Option Holder for a specified minimum period of time during which such shares were not exchanged to effectuate another option exercise. This Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than: (i) one hundred (100) shares; or (ii) the total number of shares then eligible for exercise, if less than one hundred (100) shares.
This Option may be exercised: (i) during the lifetime of the Option Holder only by the Option Holder or in the event a guardian or legal representative is appointed during the Option Holders lifetime to handle the affairs of the Option Holder, such guardian or legal representative; and (ii) after the Option Holders death by his or her transferees by will or the laws of descent or distribution, and not otherwise, regardless of any community property interest therein of the spouse of the Option Holder, or such spouses successors in interest. If the spouse of the Option Holder shall have acquired a community property interest in this Option, the Option Holder, or the Option Holders permitted successors in interest, may exercise the Option on behalf of the spouse of the Option Holder or such spouses successors in interest.
4. Fair Market Value of Common Stock . The fair market value of a share of Common Stock shall be determined for purposes of this Agreement by reference to the closing price of a share of Common Stock, as reported by the New York Stock Exchange (or such other exchange on which the shares of Common Stock are primarily traded) for the Grant Date or date of exercise, as applicable, or if such date is not a business day, for the business day immediately preceding such date (or, if for any reason no such price is available, in such other manner as the Committee may deem appropriate to reflect the then fair market value thereof).
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5. Cessation of Services, Death or Permanent Disability . All rights of the Option Holder in this Option shall terminate three (3) months after the date of the termination of Option Holders service as a director of the Company for any reason other than: (i) the death of Option Holder; (ii) cessation of services as a director because Option Holder, although nominated by the Board of Directors, is not elected by the shareholders to the Board of Directors; or (iii) retirement of Option Holder because of total and permanent disability as defined in §22(e)(3) of the Internal Revenue Code of 1986, as amended (each of which events is hereafter collectively referred to as a Termination Event). If Option Holder ceases to be a director of the Company because of a Termination Event, then this Option shall vest immediately to the extent not already vested and shall expire twelve (12) months (and not three months) after the date of such Termination Event. In the event of Option Holders death, any vested, unexercised portion of this Option may be exercised by the person or persons to whom the Option Holders rights under the Option shall pass by any reason of the death of the Option Holder, whether by will or by the applicable laws of descent and distribution. However, in no event may the Option be exercised to any extent by anyone after the Expiration Date.
6. Extension of Expiration in Certain Cases . From time to time, the Company may declare blackout periods during which directors and covered employees are prohibited from engaging in certain transactions in Company securities. In the event that the scheduled Expiration Date of this Option shall fall within a blackout period that has been declared by the Company and that applies to the Option Holder, then the Expiration Date shall automatically, and without further notice to Option Holder, be extended until such time as fifteen (15) consecutive business days have elapsed after the scheduled Expiration Date without interruption by any blackout period that applied to the Option Holder.
7. Shares to be Issued in Compliance with Federal Securities Laws and Other Rules . No shares issuable upon the exercise of this Option shall be issued and delivered unless and until there shall have been full compliance with all applicable requirements of the Securities Act of 1933, as amended (whether by registration or satisfaction of exemption conditions), all applicable listing requirements of the New York Stock Exchange (or such other exchange(s) or market(s) on which shares of the same class are then listed) and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. The Company shall use its best efforts and take all necessary or appropriate actions to assure that such full compliance on the part of the Company is made. By signing this Agreement, the Option Holder represents and warrants that none of the shares to be acquired upon exercise of this Option will be acquired with a view towards any sale, transfer or distribution of said shares in violation of the Securities Act of 1933, as amended (the Act), and the rules
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and regulations promulgated thereunder, or any applicable blue sky laws, and that Option Holder hereby agrees to indemnify the Company in the event of any violation by Option Holder of such Act, rules, regulations or laws.
8. Withholding of Taxes . Upon the exercise of this Option, the Company shall require the Option Holder or the Option Holders permitted successor in interest to pay the Company the amount of taxes, if any, which the Company may be required to withhold with respect to such shares.
9. Transferability . This Option and all other rights and privileges granted hereby shall not be transferred, assigned, pledged or otherwise encumbered in any way, whether by operation of the law or otherwise except by will or the laws of descent and distribution. Without limiting the generality of the preceding sentence, no rights or privileges granted hereby may be assigned or otherwise transferred to the spouse or former spouse of the Option Holder pursuant to any divorce proceedings, settlement or judgment. Upon any attempt so to transfer, assign, pledge, encumber or otherwise dispose of this Option or any other rights or privileges granted hereby contrary to the provisions hereof, this Option and all other rights and privileges contained herein shall immediately become null and void and of no further force or effect.
10. Adjustment for Reorganizations, Stock Splits, etc. If the outstanding shares of the Common Stock of the Company are increased, decreased, changed into, or exchanged for a different number or kind of shares or securities of the Company through reorganization, recapitalization, reclassification, stock dividend, stock split or reverse stock split, or other similar transaction, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares receivable upon the exercise of this Option, without change in the aggregate purchase price applicable to the unexercised portion of this Option but with a corresponding adjustment in the price for each share or other unit of any security covered by this Option. No fractional shares of stock shall be issued under the Plan on any such adjustment.
11. Participation by Option Holder in Other Company Plans . Nothing herein contained shall affect the right of the Option Holder to participate in and receive benefits under and in accordance with the then current provisions of any pension, insurance, profit sharing or other welfare plan or program of the Company or of any subsidiary of the Company in which non-employee directors of the Company are otherwise eligible to participate.
12. No Rights as a Stockholder Until Issuance of Shares . Neither the Option Holder nor any other person legally entitled to exercise this Option shall be entitled to any of the rights or privileges of a shareholder of the Company in respect of any shares issuable upon any exercise of this Option unless and until such shares shall have been issued and delivered to: (i) Option Holder in the form of certificates, (ii) a brokerage or other account for the benefit of Option Holder either in certificate form or via DWAC or similar electronic means, or (iii) a book entry or direct registration account in the name of Option Holder.
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13. No Right to Continue as a Director . Nothing herein contained shall be construed as an agreement by the Company, expressed or implied, that Option Holder has a right to continue as a director of the Company for any period of time or at any particular rate of compensation.
14. Agreement Subject to Stock Option Plan . The Option hereby granted is subject to, and the Company and the Option Holder agree to be bound by, all of the terms and conditions of the Plan, as the same shall be amended from time to time in accordance with the terms thereof, but no such amendment shall adversely affect the Option Holders rights under this Option without the prior written consent of the Option Holder. In the event that the terms or conditions of this Agreement conflict with the terms or conditions of the Plan, the Plan shall govern.
15. Execution . This Option has been granted, executed and delivered as of the day and year first above written at Chicago, Illinois, and the interpretation, performance and enforcement of this Agreement shall be governed by the laws of the state of Illinois without application of its conflicts of laws and principles.
UNITRIN, INC. | OPTION HOLDER | |||||
By: |
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Richard C. Vie |
By his or her signature below, the spouse of the Option Holder agrees to be bound by all of the terms and conditions of the foregoing Option Agreement.
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Print Name |
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Exhibit 10.10
Unitrin, Inc. 2002 Stock Option Plan
NON-QUALIFIED STOCK OPTION AND SAR AGREEMENT
This NON-QUALIFIED STOCK OPTION AND SAR AGREEMENT (Agreement) is made as of this day of , 2 (Grant Date) between UNITRIN, INC., a Delaware corporation (the Company), and «name» (the Option Holder).
RECITALS
A. The Board of Directors of the Company has adopted the Unitrin, Inc. 2002 Stock Option Plan, including any and all amendments to date (the Plan).
B. Pursuant to the Plan, the Plan shall be administered by a committee appointed by and comprised of members of the Companys Board of Directors (Committee).
C. The Plan provides for the granting to selected executive and other key employees, and other persons furnishing services to the Company or any subsidiary or affiliate of the Company, as the Committee may from time to time determine, of options to purchase shares of Common Stock of the Company and tandem stock appreciation rights (SAR(s)).
D. Pursuant to the Plan, the Committee has determined that it is to the advantage and best interest of the Company and its stockholders to grant a non-qualified stock option (and tandem SAR) to the Option Holder covering «shares» («number») shares of the Companys Common Stock as an inducement to remain in the service of the Company and as an incentive for increased effort during such service, and has approved the execution of this Non-Qualified Stock Option and SAR Agreement between the Company and the Option Holder.
E. Neither the option nor the SAR granted hereby is intended to qualify as an incentive stock option under Section 422A of the Internal Revenue Code of 1986, as amended.
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NOW, THEREFORE, the parties hereto agree as follows:
1. Grant .
(a) The Company grants to the Option Holder the right and option (the Option) to purchase on the terms and conditions hereinafter set forth, all or any part (subject to the limitations of Section 3) of an aggregate of «shares» («number») shares of the Common Stock of the Company at the purchase price of $ per share. The Option shall be exercisable from time to time in accordance with the provisions of this Agreement during a period expiring on the tenth anniversary of the Grant Date or such later date as may result from the application of Section 6 (such anniversary or later date is referred to as the Expiration Date). The Option is also subject to early termination pursuant to Section 3(f) and Section 5.
(b) The Option is coupled with a SAR that is exercisable to the extent, and only to the extent, that the Option is exercisable under the vesting provisions of Section 2. The term of the SAR shall expire on the Expiration Date and shall be subject to early termination pursuant to Section 3(f) and Section 5. The SAR shall entitle the Option Holder to surrender the Option (or any portion thereof, subject to Section 3(a)) to the Company unexercised and receive in exchange for the surrender of the Option (or the surrendered portion thereof) that number of shares of the Companys common stock having an aggregate value equal to: (A) the excess of the fair market value of one share of such stock (as determined in accordance with Section 4) over the purchase price per share specified in Section 1(a) above (or, if applicable, such price as adjusted pursuant to Section 9 hereof), multiplied by (B) the number of such shares subject to the Option (or portion thereof) which is so surrendered.
2. Vesting . The Option Holder may not purchase any shares by exercise of this Option or the SAR prior to the initial vesting date shown below. Subject to the early termination and vesting provisions in Sections 11 and 13(c) of the Plan, the shares subject to this Option and the SAR shall become exercisable as shown below:
Vesting Date: | Number of Shares Vesting: | |
[ ] | [ ] |
Subject to the early termination provision of Sections 11 and 13(c) of the Plan, and no later than the Expiration Date, the Option Holder may purchase all or any part (subject to the limitations of Section 3) of the shares subject to this Option which are currently exercisable, or such lesser number of shares as may be available through the exercise of the SAR. The total number of shares subject to the Option and the number of shares subject to the Option which are currently exercisable by the Option Holder each shall be reduced by the number of shares previously acquired by the Option Holder pursuant to this Agreement.
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3. Manner of Exercise .
(a) Each exercise of this Option shall be by means of a written notice of exercise delivered to the Company by the Option Holder or his or her Representative (as such term is defined in the Plan). Such notice shall identify the Options being exercised. When applicable, the notice shall also specify the number of Mature Shares (as defined in the Plan) that the Option Holder plans to deliver in payment of all or part of the exercise price. Before shares will be issued, the full purchase price of the shares subject to the Options being exercised shall be paid to the Company using the following methods, individually or in combination: (i) by check payable to the order of the Company in an amount equal to the purchase price, (ii) by Constructive or Actual Delivery of Mature Shares (as defined in the Plan) with a fair market value as of the close of business on the date of exercise equal to or greater than the purchase price, (iii) by electronic transfer of funds to an account of the Company, or (iv) by other means acceptable to the Committee. This Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than fifty (50) shares unless the total number of shares covered by this Option is less than 50 on the date of exercise or unless this Option is scheduled to expire within six months of the date of exercise.
(b) Each exercise of the SAR shall be by means of a written notice of exercise delivered to the Company, specifying whether the Option Holder is surrendering all or a portion of the Option and, if only a portion of the Option is being surrendered, how many shares are included in such portion (to the extent determinable by the Option Holder). Upon satisfaction of the Option Holders obligation to pay the Company the amount of all taxes that the Company is required to withhold in connection with such exercise as specified in Section 3(e) below, the Company shall issue to the Option Holder a number of shares of the Companys common stock computed in accordance with Section 1(b) and the Option and the SAR (or the surrendered portions thereof) shall be deemed extinguished. The SAR may only be settled in shares of the Companys common stock and not by payment of cash to the Option Holder. Any fractional share that would otherwise result from an exercise of the SAR shall be rounded down to the nearest whole share.
(c) The date of exercise shall be: (i) in the case of a broker-assisted cashless exercise, the earlier of (A) the trade date of the related sale of stock or (B) the date that the Company receives the purchase price; (ii) in the case of a SAR, or an Option exercise in which the Option Holder elects to pay some or all of the exercise price and/or any related withholding taxes by Constructive or Actual Delivery of Mature Shares (or, in the case of such taxes, by directing the Company to withhold shares that would otherwise be issued upon exercise of such Option), the date that the Company receives written notice of such exercise; or (iii) in all other cases, the date that the Company receives the purchase price.
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(d) This Option and SAR may be exercised only by the Option Holder or his or her Representative, and not otherwise, regardless of any community property interest therein of the spouse of the Option Holder, or such spouses successors in interest. If the spouse of the Option Holder shall have acquired a community property interest in this Option and the SAR, the Option Holder, or the Option Holders Representative, may exercise the Option and the SAR on behalf of the spouse of the Option Holder or such spouses successors in interest.
(e) Upon the exercise of this Option or the SAR, the Company shall require the Option Holder or the Option Holders Representative to pay the Company the amount of any taxes which the Company may be required to withhold with respect to such exercise. Subject to the limitations set forth in the next three sentences, the Option Holder or his/her Representative may elect to satisfy all or any portion of such tax withholding obligations either by: (i) any of the methods described in Sections 3(a)(i) through 3(a)(iv) above, or (ii) directing the Company to withhold shares that would otherwise have been issued pursuant to the exercise of this Option or SAR. Neither the Option Holder nor his/her Representative shall have the right to utilize Constructive or Actual Delivery of Mature Shares or to have shares withheld, in either case, in excess of the minimum number required to satisfy applicable tax withholding requirements based on minimum statutory withholding rates for federal and state tax purposes, including payroll taxes. Shares used in either of the foregoing ways to satisfy tax withholding obligations will be valued at their fair market value on the date of exercise. In the case of an exercise of the SAR, the Company retains the right to require the Option Holder to pay any and all withholding taxes arising out of such exercise solely in cash.
(f) In the event the Option (or any portion thereof) is exercised, then the SAR (or the corresponding portion) shall terminate. In the event that the SAR (or any portion thereof) is exercised, then the Option (or the corresponding portion) shall likewise terminate.
4. Fair Market Value of Common Stock . The fair market value of a share of Common Stock shall be determined for purposes of this Agreement by reference to the closing price of a share of Common Stock, as reported by the New York Stock Exchange (or such other exchange on which the Shares of Common Stock are primarily traded) for the Grant Date or date of exercise, as applicable, or if such date is not a business day, for the business day immediately preceding such date (or, if for any reason no such price is available, in such other manner as the Committee may deem appropriate to reflect the then fair market value thereof).
5. Cessation of Services . The provisions of Sections 11(a), 11(b), 11(c) and 11(d) of the Plan are hereby incorporated into and made a part of this Agreement.
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6. Extension of Expiration in Certain Cases . From time to time, the Company may declare blackout periods with respect to designated employees of the Company and/or its subsidiaries or affiliates during which such employees are prohibited from engaging in certain transactions in Company securities. In the event that the scheduled Expiration Date of this Option and SAR shall fall within a blackout period that has been declared by the Company and that applies to the Option Holder, then the Expiration Date shall automatically, and without further notice to Option Holder, be extended until such time as fifteen (15) consecutive business days have elapsed after the scheduled Expiration Date without interruption by any blackout period that applied to the Option Holder.
7. Shares to be Issued in Compliance with Federal Securities Laws and Exchange Rules . No shares issuable upon the exercise of this Option or SAR shall be issued and delivered unless and until there shall have been full compliance with all applicable requirements of the Securities Act of 1933, as amended (whether by registration or satisfaction of exemption conditions), all applicable listing requirements of the New York Stock Exchange or such other exchange(s) or markets on which shares of the same class are then listed and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. The Company shall use its best efforts and take all necessary or appropriate actions to assure that such full compliance on the part of the Company is made.
8. No Assignment . This Option and SAR and all rights and privileges granted hereby (including the right of exercise) shall not be transferred, assigned, pledged or hypothecated in any way, whether by operation of the law or otherwise, except by will or the laws of descent and distribution. Without limiting the generality of the preceding sentence, no rights or privileges granted hereby may be assigned or otherwise transferred to the spouse or former spouse of the Option Holder pursuant to any divorce proceedings, settlement or judgment. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of this Option or SAR or any other rights or privileges granted hereby contrary to the provisions hereof, this Option and SAR and all other rights and privileges contained herein shall immediately become null and void and of no further force or effect.
9. Certain Adjustments . The provisions of Sections 13(a), 13(b) and 13(c) of the Plan relating to certain adjustments in the case of stock splits, reorganizations, equity restructurings, change of control events and similar matters described therein are hereby incorporated in and made a part of this Agreement.
Any such adjustments shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional shares of stock shall be issued under the Plan on any such adjustment.
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10. Participation by Option Holder in Other Company Plans . Nothing herein contained shall affect the right of the Option Holder to participate in and receive benefits under and in accordance with the then current provisions of any retirement plan or employee welfare benefit plan or program of the Company or of any subsidiary or affiliate of the Company, subject in each case, to the terms and conditions of any such plan or program.
11. No Rights as a Stockholder Until Issuance of Shares . Neither the Option Holder nor his/her Representative shall be entitled to any of the rights or privileges of a stockholder of the Company in respect of any shares issuable upon any exercise of this Option or SAR unless and until such shares shall have been issued and delivered to: (i) Option Holder in the form of certificates, (ii) a brokerage or other account for the benefit of Option Holder either in certificate form or via DWAC or similar electronic means, or (iii) a book entry or direct registration account in the name of Option Holder.
12. Not an Employment or Service Contract . Nothing herein contained shall be construed as an agreement by the Company or any of its subsidiaries or affiliates, expressed or implied, to employ Option Holder or contract for Option Holders services, to restrict the right of the Company or any of its subsidiaries or affiliates to discharge Option Holder or cease contracting for Option Holders services or to modify, extend or otherwise affect in any manner whatsoever, the terms of any employment agreement or contract for services which may exist between the Option Holder and the Company or any of its subsidiaries or affiliates.
13. Agreement Subject to Stock Option Plan . The Option and SAR hereby granted are subject to, and the Company and the Option Holder agree to be bound by, all of the terms and conditions of the Plan, as the same may be amended from time to time hereafter in accordance with the terms thereof, but no such amendment shall adversely affect the Option Holders rights under this Agreement without the prior written consent of the Option Holder. To the extent that the terms or conditions of this Agreement conflict with the terms or conditions of the Plan, the Plan shall govern.
14. Arbitration . All disputes related to this Agreement or any Options granted hereunder, shall be submitted to binding arbitration with the American Arbitration Association (AAA) pursuant to the AAA Employment Arbitration Rules and Mediation Procedures (AAA Rules). A copy of the AAA Rules is available to the Option Holder upon written request to the Companys Director of Human Resources at One East Wacker Drive, Chicago, Illinois 60601 (or such other address as the Company may specify from time to time), or may be obtained online at: www.adr.org .
To initiate arbitration, either party must file a Demand for Arbitration (Demand) in the manner described in the AAA Rules. After a demand has been filed and served, either party may request that the dispute initially be mediated pursuant to the AAA Rules. If mediation does not fully resolve the dispute, then the matter will be subject to arbitration before a single arbitrator who shall have the power to award any types of legal
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or equitable relief available in a court of competent jurisdiction, including, but not limited to, attorneys fees and costs, to the extent such relief is available under applicable law, and all defenses that would be applicable in a court of competent jurisdiction shall be available. All administrative costs of arbitration (including reimbursement of filing fees) and the fees of the arbitrator will be paid by the Company.
15. Execution . This Option and SAR have been granted, executed and delivered as of the day and year first above written at Chicago, Illinois, and the interpretation, performance and enforcement of this Agreement shall be governed by the laws of the state of Illinois without application of its conflicts of laws principles.
16. Miscellaneous . This Agreement, together with the Plan, is the entire agreement of the parties with respect to the Option and SAR granted hereby and may not be amended except in a writing signed by both Unitrin, Inc. and the Option Holder or his/her Representative.
<ADD THE NEXT SECTION FOR ALL GRANTS TO THE FOLLOWING OFFICERS OF THE COMPANY: CEO; COO; PRESIDENT; AND VICE PRESIDENTS>
17. Stock Holding Period . The Option Holder agrees to hold all shares of Common Stock acquired upon the exercise of Options granted hereunder for a minimum of twelve months following the date of such exercise. This holding period shall not apply to shares sold or tendered by the Option Holder and/or withheld by the Company to pay the Option exercise price and/or to settle tax liabilities related to the Option exercise.
UNITRIN, INC. |
OPTION HOLDER | |||||
By: |
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||||
«Authorized Officer» | «name» |
By his or her signature below, the spouse of the Option Holder agrees to be bound by all of the terms and conditions of the foregoing Non-Qualified Stock Option and SAR Agreement.
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Print Name |
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Exhibit 10.11
Unitrin, Inc. 2005 Restricted Stock and Restricted Stock Unit Plan
TIME-VESTED RESTRICTED STOCK AWARD AGREEMENT
This TIME-VESTED RESTRICTED STOCK AWARD AGREEMENT (Agreement) is made as of this day of , 2 (Grant Date) between UNITRIN, INC., a Delaware corporation (the Company), and «name» (the Restricted Stockholder).
RECITALS
A. The Board of Directors of the Company has adopted the 2005 Restricted Stock and Restricted Stock Unit Plan, including any and all amendments to date (the Plan).
B. The Plan is administered by the Compensation Committee of the Companys Board of Directors (the Committee).
C. The Plan provides for the granting to selected employees and other persons furnishing services to the Company or any subsidiary or affiliate of the Company, as the Committee may from time to time determine, of restricted stock which shall be shares of the Companys Common Stock (the Shares).
D. Pursuant to the Plan, the Committee has determined that it is to the advantage and best interest of the Company and its stockholders to grant an award of restricted stock to the Restricted Stockholder covering «shares» («number») Shares of restricted stock as an inducement to remain in the service of the Company and as an incentive for increased effort during such service, and has approved the execution of this Agreement between the Company and the Restricted Stockholder.
NOW, THEREFORE, the parties hereto agree as follows:
1. Grant . The Company grants to the Restricted Stockholder an award of restricted stock on the terms and conditions hereinafter set forth, consisting of an aggregate of «shares» («number») Shares of restricted stock (the Restricted Stock).
2. Vesting and Forfeiture .
(a) Restricted Period . The Restricted Stock shall be restricted during a period (the Restricted Period) beginning on the Grant Date and expiring on the date(s) that the Shares vest (the Vesting Date(s)). Subject to the forfeiture and early vesting provisions referenced in Section 2(b) below and the Plan sections referenced in Section 7 below, the shares shall vest as shown below:
Vesting Date: | Number of Shares Vesting: | |
[ ] | [ ] |
1 | As of 2/03/09 |
(b) Forfeiture or Early Vesting upon Retirement, Death, Disability or Other Termination of Service . During the Restricted Period, the Restricted Stock may be subject to forfeiture or early vesting as follows:
(i) | Retirement . If the Restricted Stockholder retires but continues to render services to Unitrin as a director, consultant or advisor pursuant to a written agreement, all Shares of Restricted Stock held by the Restricted Stockholder will remain outstanding while such services continue. At the time such post-retirement services end (other than as a result of death or disability), or upon retirement if the Restricted Stockholder does not continue to render services to Unitrin as a director, consultant or advisor pursuant to a written agreement, all unvested Shares held by the Restricted Stockholder will be forfeited to Unitrin. |
(ii) | Death or Disability . Upon the termination of the Restricted Stockholders employment or service agreement due to death or disability, all restrictions on the Shares of Restricted Stock which are then held by the Restricted Stockholder will lapse and the Shares will become fully vested. |
(iii) | Other Termination . Upon the termination of the Restricted Stockholders employment (or service as a consultant or advisor) for reasons other than death, disability or retirement, including the divestiture by the Company of a subsidiary or affiliate which employs (or utilizes such services of) the Restricted Stockholder, all unvested Shares of Restricted Stock held by the Restricted Stockholder will be forfeited to Unitrin. |
3. Delivery of Restricted Stock; Stockholder Rights . The Shares of Restricted Stock will be issued and delivered to a book entry account maintained by the Companys transfer agent. Thereafter, subject to the forfeiture provisions referenced in Section 2(b) above, the Restricted Stockholder shall be entitled to the rights and privileges of a stockholder of the Company in respect to such Shares of Restricted Stock, including the right to vote and receive dividends (subject to applicable tax withholding obligations) during the Restricted Period on the same basis as all other issued and outstanding Shares.
2 | As of 2/03/09 |
4. Fair Market Value of Common Stock . The fair market value (Fair Market Value) of a Share of Common Stock shall be determined for purposes of this Agreement by reference to the closing price of a share of Common Stock as reported by the New York Stock Exchange (or such other exchange on which the Shares of Common Stock are primarily traded) for the Grant Date or Vesting Date, as applicable, or if no prices are reported for that day, the last preceding day on which such prices are reported (or, if for any reason no such price is available, in such other manner as the Committee in its sole discretion may deem appropriate to reflect the fair market value thereof).
5. Withholding of Taxes .
(a) The Restricted Stockholder acknowledges that the vesting of Restricted Stock Shares will generally be a taxable event. The Company will instruct the transfer agent to deduct from the Restricted Stockholders book entry account whole Shares having a Fair Market Value equal to the amount determined by the Company to satisfy any applicable minimum statutory withholding or other tax obligations that may arise upon such vesting, and the Restricted Stockholder shall remit to the Company in cash any and all applicable withholding taxes resulting from fractional shares. The Company shall withhold from any dividends paid during the Restricted Period only the amounts the Company is required to withhold to satisfy any applicable tax withholding requirements with respect to such dividends based on minimum statutory withholding rates for federal and state tax purposes, including any payroll taxes.
(b) The provisions of paragraph 5 (a) will not apply if a Restricted Stockholder chooses to make an Internal Revenue Code Section 83(b) election. Upon such an election, the Restricted Stockholder shall remit to the company in cash any and all taxes which the Company may be required to withhold with respect to such election.
6. No Assignment or Other Transfer . During the Restricted Period, neither this Agreement, the Restricted Stock or any rights and privileges granted hereby may be transferred, assigned, pledged or hypothecated in any way, whether by operation of the law or otherwise, except by will or the laws of descent and distribution. Without limiting the generality of the preceding sentence, no rights or privileges granted hereby may be assigned or otherwise transferred during the Restricted Period to the spouse or former spouse of the Restricted Stockholder pursuant to any divorce proceedings, settlement or judgment. Any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of this Agreement, the Restricted Stock or any other rights or privileges granted hereby contrary to the provisions hereof shall be null and void and of no force or effect.
7. Certain Adjustments . The provisions of Articles 4.4 and 12 of the Plan relating to certain adjustments in the case of stock splits, reorganizations, equity restructurings, change of control events and similar matters described therein are hereby
3 | As of 2/03/09 |
incorporated in and made a part of this Agreement. Any such adjustments shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional Shares of stock shall be issued under the Plan on any such adjustment.
8. Participation by Restricted Stockholder in Other Company Plans . Nothing herein contained shall affect the right of the Restricted Stockholder to participate in and receive benefits under and in accordance with the then current provisions of any retirement plan or employee welfare benefit plan or program of the Company or of any subsidiary or affiliate of the Company, subject in each case, to the terms and conditions of any such plan or program.
9. Not an Employment or Service Contract . Nothing herein contained shall be construed as an agreement by the Company or any of its subsidiaries or affiliates, expressed or implied, to employ or contract for the services of the Restricted Stockholder, to restrict the right of the Company or any of its subsidiaries or affiliates to discharge the Restricted Stockholder or cease contracting for the Restricted Stockholders services or to modify, extend or otherwise affect in any manner whatsoever, the terms of any employment agreement or contract for services which may exist between the Restricted Stockholder and the Company or any of its subsidiaries or affiliates.
10. Agreement Subject to Restricted Stock Plan . The Restricted Stock hereby granted is subject to, and the Company and the Restricted Stockholder agree to be bound by, all of the terms and conditions of the Plan, as the same may be amended from time to time hereafter in accordance with the terms thereof, but no such amendment shall adversely affect the Restricted Stockholders rights under this Agreement without the prior written consent of the Restricted Stockholder. To the extent that the terms or conditions of this Agreement conflict with the terms or conditions of the Plan, the Plan shall govern.
11. Arbitration . All disputes related to this Agreement or any Restricted Stock granted hereunder, shall be submitted to binding arbitration with the American Arbitration Association (AAA) pursuant to the AAA Employment Arbitration Rules and Mediation Procedures (AAA Rules). A copy of the AAA Rules is available to the Restricted Stockholder upon written request to the Companys Director of Human Resources at One East Wacker Drive, Chicago, Illinois 60601 (or such other address as the Company may specify from time to time), or may be obtained online at: www.adr.org .
To initiate arbitration, either party must file a Demand for Arbitration (Demand) in the manner described in the AAA Rules. After a demand has been filed and served, either party may request that the dispute initially be mediated pursuant to the AAA Rules. If mediation does not fully resolve the dispute, then the matter will be subject to arbitration before a single arbitrator who shall have the power to award any types of legal or equitable relief available in a court of competent jurisdiction, including, but not limited
4 | As of 2/03/09 |
to, attorneys fees and costs, to the extent such relief is available under applicable law, and all defenses that would be applicable in a court of competent jurisdiction shall be available. All administrative costs of arbitration (including reimbursement of filing fees) and the fees of the arbitrator will be paid by the Company.
12. Execution . This Agreement has been executed and delivered as of the day and year first above written at Chicago, Illinois, and the interpretation, performance and enforcement of this Agreement shall be governed by the laws of the state of Delaware without application of its conflicts of laws principles.
13.
Miscellaneous
. This Agreement, together with the Plan, is the entire agreement of the parties with respect to the Restricted Stock
<ADD THE NEXT SECTION FOR ALL GRANTS TO THE FOLLOWING OFFICERS OF THE COMPANY: CEO; COO; PRESIDENT; AND VICE PRESIDENTS>
14. Stock Holding Period . The Restricted Stockholder agrees to hold the shares of Restricted Stock acquired hereunder for a minimum of twelve months following their Vesting Date. This holding period shall not apply to shares of Restricted Stock withheld by the Company to settle tax liabilities related to the vesting of such shares.
UNITRIN, INC. |
RESTRICTED STOCKHOLDER | |||||
By: |
|
|
||||
«Authorized Officer» | «name» |
By his or her signature below, the spouse of the Restricted Stockholder agrees to be bound by all of the terms and conditions of the foregoing Restricted Stock Agreement.
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|
Print Name |
5 | As of 2/03/09 |
Exhibit 10.12
UNITRIN, INC. PENSION EQUALIZATION PLAN
As Amended and Restated Effective January 1, 2009
TABLE OF CONTENTS
Page | ||||
ARTICLE I | DEFINITIONS | 1 | ||
ARTICLE II | ELIGIBILITY | 5 | ||
ARTICLE III | SUPPLEMENTAL RETIREMENT BENEFIT | 6 | ||
ARTICLE IV | SUPPLEMENTAL SURVIVING SPOUSE BENEFIT | 7 | ||
ARTICLE V | SUPPLEMENTAL NON-SPOUSAL BENEFIT | 8 | ||
ARTICLE VI | FUNDING | 9 | ||
ARTICLE VII | ADMINISTRATION OF THE PLAN | 9 | ||
ARTICLE VIII | AMENDMENT OR TERMINATION | 10 | ||
ARTICLE IX | GENERAL PROVISIONS | 11 |
-i-
UNITRIN, INC. PENSION EQUALIZATION PLAN
The Unitrin, Inc. Pension Equalization Plan (the Plan ) was adopted effective April 10, 1990, was amended and restated effective January 19, 1995 and hereby is further amended and restated, effective January 1, 2009, to comply with Section 409A of the Internal Revenue Code. The Plan is established and maintained by Unitrin, Inc. for the purpose of providing benefits in excess of the limitations on benefits imposed by Section 415 of the Internal Revenue Code for certain of its or its Affiliates employees who participate in any Qualified Plan, as hereinafter defined.
Also, only with respect to those Participants hereunder who are Top Hat Participants as defined in Section 1.25, the Plan shall provide benefits in excess of the limitations on benefits imposed by Section 401(a)(17) of the Internal Revenue Code.
ARTICLE I
DEFINITIONS
1.1 General . For purposes of the Plan, the following terms, when capitalized, will have the following meanings. The masculine pronoun wherever used herein will include the feminine gender, the singular number will include the plural, and the plural will include the singular, unless the context clearly indicates a different meaning.
1.2 Affiliated Company or Affiliate means any corporation, trade or business entity which is a member of a controlled group of corporations, trades or businesses of which the Company is also a member, as provided in Code Sections 414(b) or (c).
1.3 Beneficiary means the person designated as a beneficiary by the Participant in accordance with such procedures as may be established by the Company.
1.4 Board means the Board of Directors of the Company.
1.5 Change of Control Event means the occurrence of any of the following events described in subsections (a) through (d) below:
(a) any Person (defined below) is or becomes the Beneficial Owner, (defined below) directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliate (defined below)) representing 25% or more of the combined voting power of the Companys then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (1) of subsection (c) below; or
(b) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 31, 2008, constituted the Board of Directors and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of directors of the Company) whose appointment or election by the Board of Directors or nomination for election by the Companys
shareholders was approved or recommended by a vote of at least two-thirds of the directors still in office who either were directors on December 31, 2008 or whose appointment, election or nomination for election was previously so approved or recommended; or
(c) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (i) a merger or consolidation which results in the directors of the Company immediately prior to such merger or consolidation continuing to constitute at least a majority of the board of directors of the surviving entity or any parent thereof, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliate) representing 25% or more of the combined voting power of the Companys then outstanding securities; or
(d) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Companys assets, other than a sale or disposition by the Company of all or substantially all of the Companys assets immediately following which the individuals who comprise the Board of Directors immediately prior thereto constitute at least a majority of the board of directors of the entity to which such assets are sold or disposed or any parent thereof.
(e) As used in this definition of Change of Control Event:
(i) Affiliate shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Securities Exchange Act of 1934, as amended (the Exchange Act);
(ii) Beneficial Owner shall have the meaning set forth in Rule 13d-3 under the Exchange Act; and
(iii) Person shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified in Sections 13(d)(3) and 14(d)(2) thereof, except that such term shall not include (1) the Company or any entity, more than 50% of the voting securities of which are Beneficially Owned by the Company, (2) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (3) an underwriter temporarily holding securities pursuant to an offering of such securities, (4) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company, (5) any individual, entity or group whose ownership of securities of the Company is reported on Schedule 13G pursuant to Rule 13d-1 promulgated under the Exchange Act (but only for so long as such ownership is so reported) or (6) Singleton Group LLC or any successor in interest to such entity.
2
1.6 Code means the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated thereunder.
1.7 Committee means the Compensation Committee of the Board.
1.8 Company means Unitrin, Inc., a Delaware corporation, or, to the extent provided in Section 9.11, any successor corporation or other entity resulting from a reorganization, merger or consolidation into or with the Company, or a transfer or sale of substantially all of the assets of the Company.
1.9 Early Retirement Date means any date, prior to a Participants normal retirement date under the Qualified Plan, on which a Participant is eligible to begin payment of his or her Qualified Plan Retirement Benefit.
1.10 ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated thereunder.
1.11 Employer means the Company and its Affiliates.
1.12 Normal Retirement Date means the first day of the month coinciding with or next following the date on which a Participant attains age 65.
1.13 Participant means an employee of the Company or of an Affiliated Company who at any time after April 10, 1990 is a participant under a Qualified Plan and to whom or with respect to whom a benefit is payable under the Plan. The term Participant shall include Top Hat Participants.
1.14 Plan means the Unitrin, Inc. Pension Equalization Plan.
1.15 Qualified Plan means any tax-qualified defined benefit pension plan maintained by the Company or any Affiliate and each predecessor, successor or replacement to any such Qualified Plan, excluding any Qualified Plan maintained solely pursuant to a collective bargaining agreement.
1.16 Qualified Plan Retirement Benefit means the accrued benefit, determined as of the relevant determination date, which a Participant would be entitled to receive for his or her life under a Qualified Plan commencing on his or her normal retirement date (as defined in the Qualified Plan) by assuming that, as of such determination date, the Participant had a termination of employment with the Company and all Affiliates for any reason other than death. Where a Qualified Plan provides for an offset to a Participants accrued benefit thereunder to reflect the accrued benefit the Participant earned under other defined benefit pension plans of the Company or an Affiliated Company, the Participants Qualified Plan Retirement Benefit shall be the total value of all such accrued benefits.
1.17 Qualified Plan Surviving Spouse Benefit means the aggregate benefit payment to the Surviving Spouse of a Participant with respect to the Participants Qualified Plan Retirement Benefit in the event of the death of the Participant at any time prior to commencement of payment of his or her Qualified Plan Retirement Benefit.
3
1.18 Regulations means the regulations, as amended from time to time, which are issued under Code Section 409A.
1.19 Separation from Service means the Participants termination from employment from the Employer for reasons other than death, subject to the following and other provisions of the Regulations:
(a) The employment relationship is treated as continuing intact while the Participant is on military leave, sick leave, or other bona fide leave of absence if the period of such leave does not exceed six months, or if longer, so long as the individual retains a right to reemployment with the Employer under an applicable statute or by contract. A leave of absence constitutes a bona fide leave of absence only if there is a reasonable expectation that the Participant will return to perform services for the Employer. If the period of leave exceeds six months and the Participant does not retain a right to reemployment under an applicable statute or by contract, the employment relationship is deemed to terminate on the first day immediately following such six-month period. Notwithstanding the foregoing, where a leave of absence is due to any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than six months, where such impairment causes the Participant to be unable to perform the duties of his or her position of employment or any substantially similar position of employment, a 29-month period of absence may be substituted for such six-month period.
(b) In determining whether a Separation from Service has occurred, the following presumptions, which may be rebutted as provided in the Regulations, shall apply:
(i) A Participant is presumed to have separated from service where the level of bona fide services performed decreases to a level equal to 20% or less of the average level of services performed by the Participant during the immediately preceding 36-month period.
(ii) A Participant will be presumed not to have separated from service where the level of bona fide services performed continues at a level that is 50% or more of the average level of services performed by the Participant during the immediately preceding 36-month period.
No presumption applies to a decrease in the level of bona fide services performed to a level that is more than 20% but less than 50% of the average level of bona fide services performed during the immediately preceding 36-month period. If a Participant had not performed services for the Employer for 36 months, the full period that the Participant has performed services for the Employer shall be substituted for 36 months.
(c) For purposes of this Section, the term Employer has the meaning set forth in Section 1.11, provided that the following shall apply in determining whether a person is an Affiliate as defined in Section 1.2:
(i) In applying Code Sections 1563(a)(1), (2) and (3) for purposes of determining a controlled group of corporations under Code Section 414(b), the phrase at least 50 percent shall be used instead of at least 80 percent each place it appears in Code Sections 1563(a)(1), (2) and (3); and
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(ii) In applying Treas. Reg. Section 1.414(c)-2 for purposes of determining trades or businesses (whether or not incorporated) that are under common control for purposes of Code Section 414(c), at least 50 percent is used instead of at least 80 percent each place it appears in Treas. Reg. Section 1.414(c)-2.
(d) In the event of the sale or other disposition of assets by the Company or an Affiliate (the Seller ) to an unrelated service recipient (the Buyer ), the Seller and the Buyer may specify whether a Separation from Service has occurred for a Participant who would otherwise experience a Separation from Service with the Seller, in accordance with the rules set forth in Section 1.409A-1(h)(4) of the Regulations.
1.20 Supplemental Non-Spousal Benefit means the benefit payable to a Beneficiary pursuant to Article V of the Plan.
1.21 Supplemental Retirement Benefit means the benefit payable to a Participant pursuant to the Plan by reason of his or her Separation from Service for any reason other than death.
1.22 Supplemental Retirement Payment Date means the date on which the Participants Supplemental Retirement Benefit is, or commences to be, paid pursuant to Sections 3.3, 3.4 or 9.10 as applicable.
1.23 Surviving Spouse means a person who is married to a Participant at the date of his or her death within the meaning of the laws of the state of the Participants residence and as evidenced by a valid marriage certificate or other proof acceptable to the Company.
1.24 Supplemental Surviving Spouse Benefit means the benefit payable to a Surviving Spouse pursuant to the Plan.
1.25 Top Hat Participant means a Participant who qualifies for inclusion in a select group of management or highly compensated employees as provided in Sections 201(2), 301(a)(3), 401(a)(1) and 4021(b)(6) of ERISA and who has been designated as a Top Hat Participant by the Board, as reflected in Board minutes or other official records of the Board.
ARTICLE II
ELIGIBILITY
An employee who is eligible to receive a Qualified Plan Retirement Benefit, the amount of which is reduced by reason of the application of the limitations on benefits imposed by application of Code Section 415 (or in the case of a Top Hat Participant, is reduced by the limitations on benefits imposed by application of Code Section 401(a)(17)), shall be eligible to receive a Supplemental Retirement Benefit. If a Participant described in the preceding sentence dies prior to his or her Supplemental Retirement Payment Date, a Supplemental Surviving Spouse Benefit or a Supplemental Non-Spousal Benefit shall be payable if so provided by Article IV or V. The Participant must be fully vested in his or her Qualified Plan Retirement Benefit in order for the Participant, his Surviving Spouse or Beneficiary to receive a benefit under the Plan.
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ARTICLE III
SUPPLEMENTAL RETIREMENT BENEFIT
3.1 Amount . The Supplemental Retirement Benefit payable to a Participant in the form of a single life annuity over the lifetime of the Participant only, commencing on the later of his or her Normal Retirement Date or the first day of the seventh month following the Participants Separation from Service, shall be a monthly amount equal to the difference between (A) and (B) below where (A) is:
the monthly amount of the Qualified Plan Retirement Benefit to which the Participant would have been entitled if such Qualified Plan Retirement Benefit were computed without giving effect to the limitations on benefits imposed by application of Code Section 415 (and in the case of a Top Hat Participant, Code Section 401(a)(17)) to plans to which those Sections apply;
and (B) is:
the monthly amount of the Participants Qualified Plan Retirement Benefit.
The amounts described in (A) and (B) shall be computed as of the Participants Separation from Service.
3.2 Payment Options . Except as described in Section 9.10, the Company shall distribute the Participants Supplemental Retirement Benefit to the Participant (as adjusted pursuant to Section 3.5) in one of the following forms selected by the Participant prior to his or her Supplemental Retirement Payment Date: (a) single life annuity; (b) ten year certain and life annuity; (c) fifteen year certain and life annuity; (d) joint and 50% survivor annuity; (e) joint and 75% survivor annuity; and (f) joint and 100% survivor annuity; provided , however , that each of the payment options described above is actuarially equivalent to the other, pursuant to the terms of Section 3.5 and the Regulations. If the Participant fails to make an election prior to his or her Supplemental Retirement Payment Date, payment shall be made to the Participant in the form of a single life annuity. If the Participant dies prior to his or her Supplemental Retirement Payment Date, no Supplemental Retirement Benefit will be payable and the Supplemental Surviving Spouse Benefit, if any, or the Supplemental Non-Spousal Benefit, if any, shall be payable as set forth in Article IV or Article V, as applicable.
3.3 Commencement of Supplemental Retirement Benefi t. Except as otherwise provided in Section 3.4 or Section 9.10, payment of a Participants Supplemental Retirement Benefit shall commence on the later of (a) the first day of the seventh month following his or her Separation from Service or (b) his or her Normal Retirement Date. If payment to the Participant is made pursuant to the foregoing clause (a), the first payment to the Participant shall include the monthly pension payments the Participant would have received had payments begun as of the first day of the month following the Participants Separation from Service.
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3.4 Transitional Relief . To the extent permitted by IRS Notice 2007-86 and administrative procedures adopted by the Company, a Participant who participated in the Plan prior to January 1, 2009 shall have the option of electing, no later than December 31, 2008, to have his or her benefit commence on or after the later of (a) the first day of the seventh month following his or her Separation from Service or (b) an Early Retirement Date. If payment to the Participant is made pursuant to the foregoing clause (a), the first payment to the Participant shall include the monthly pension payments the Participant would have received had payments begun as of the first day of the month following the Participants Separation from Service. Any such election shall be made prior to January 1, 2009 and shall be irrevocable.
3.5 Actuarial Equivalent . A Supplemental Retirement Benefit which is payable in any form other than a single life annuity over the lifetime of the Participant or which commences at any time prior to the Participants Normal Retirement Date, shall be the actuarial equivalent of the Supplemental Retirement Benefit set forth in Section 3.1 above as determined by the same actuarial adjustments as those specified in the Qualified Plan with respect to determination of the amount of the Qualified Plan Retirement Benefit on the date for commencement of payment hereunder or on the last day that any such Qualified Plan was in effect.
3.6 Acceleration Prohibited . Except as otherwise provided in Section 9.10, the acceleration of the time of payment of any portion of a Supplemental Retirement Benefit is prohibited.
ARTICLE IV
SUPPLEMENTAL SURVIVING SPOUSE BENEFIT
4.1 Amount . If a Participant dies prior to his or her Supplemental Retirement Payment Date and after he is vested in his or her Qualified Plan Retirement Benefit, then a Supplemental Surviving Spouse Benefit is payable to his or her Surviving Spouse, if any, as hereinafter provided. The Supplemental Surviving Spouse Benefit payable to a Surviving Spouse shall be a monthly amount equal to the difference between (A) and (B) below where (A) is:
the monthly amount of the Qualified Plan Surviving Spouse Benefit to which the Surviving Spouse would have been entitled if such Qualified Plan Surviving Spouse Benefit were computed without giving effect to the limitations on benefits imposed by application of Code Section 415 (and in the case of a Top Hat Participant, Code Section 40l(a)(17)) to plans to which those Sections apply;
and (B) is:
the monthly amount of the Qualified Plan Surviving Spouse Benefit that is, or would have been, payable to the Surviving Spouse if the Participant died prior to commencement of payment of his or her Qualified Plan Retirement Benefit.
The amounts described in (A) and (B) shall be computed by assuming that the Participant had a Separation from Service on the date of his or her death, survived to his or her Normal Retirement Date, began receiving his Qualified Plan Retirement Benefit in the form of a joint and 50% survivor annuity on the later of the date of his or her death or his or her Normal Retirement Date and then died.
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4.2 Payment Option . Except as described in Section 9.10, a Supplemental Surviving Spouse Benefit shall be payable over the lifetime of the Surviving Spouse only in monthly installments commencing on the date specified in Section 4.3 and terminating on the date of the last monthly payment prior to the Surviving Spouses death.
4.3 Commencement of Supplemental Surviving Spouse Benefit . Except as otherwise provided in Section 4.4 or Section 9.10, payment of the Supplemental Surviving Spouse Benefit, if any, shall commence on the later of (a) the first day of the month following the Participants death or (b) the Participants Normal Retirement Date.
4.4 Transitional Relief . To the extent permitted by IRS Notice 2007-86 and administrative procedures adopted by the Company, a Participant who participated in the Plan prior to January 1, 2009 shall have the option of electing, no later than December 31, 2008, to have payment of the Supplemental Surviving Spouse Benefit, if any, commence on the later of (a) the first day of the month following the Participants death or (b) an Early Retirement Date. Any such election shall be made prior to January 1, 2009 and shall be irrevocable.
4.5 Actuarial Equivalent . A Supplemental Surviving Spouse Benefit which commences at any time prior to the date set forth in Section 4.3 shall be the actuarial equivalent of the Supplemental Surviving Spouse Benefit set forth in Section 4.1 as determined by the same actuarial adjustments as those specified in the Qualified Plan with respect to determination of the amount of the Qualified Plan Surviving Spouse Benefit on the date for commencement of payment hereunder or on the last day that any such Qualified Plan was in effect.
4.6 Acceleration Prohibited . Except as provided in Section 9.10, the acceleration of the time of payment of any portion of a Supplemental Surviving Spouse Benefit is prohibited.
ARTICLE V
SUPPLEMENTAL NON-SPOUSAL BENEFIT
5.1 Death Within 30 Days Before Proposed Retirement Date .
(a) If a married Participant (i) elects a joint and 75% or 100% survivor annuity under the Plan, (ii) properly completes, signs and delivers to the Company all of the relevant distribution forms, as determined by the Company, and (iii) dies within 30 days before the proposed retirement date (as hereinafter defined), then the surviving Spouse shall not receive the pre retirement death benefit described in Article IV, but shall, subject to Section 9.10, rather be eligible for the 75% or 100% survivor annuity (based upon the Participants election), as if the Participant had begun receiving the joint and 75% or 100% survivor annuity (whichever was elected by the Participant) and then died after the proposed retirement date. If the commencement of a Participants benefit is delayed due to the requirement that payment be made no earlier than the first day of the seventh month following the Participants Separation from Service, the proposed retirement date shall be the date that payment of such benefit would have commenced but for such requirement.
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(b) If an unmarried Participant properly completes and signs and delivers to the Company all of the relevant distribution forms, as determined by the Company, and the Participant dies within 30 days before the proposed retirement date after electing one of the forms of payment described in Section 3.2 which provides for payments to continue after his death, then the Beneficiary designated by the Participant, if any, shall, subject to Section 9.10, be eligible for the applicable benefit selected by the Participant, as if the Participant had begun receiving the selected benefit and then died after the proposed retirement date. Except as otherwise provided in this subsection, if an unmarried Participant dies prior to the actual benefit commencement date, no death benefit shall be payable hereunder.
5.2 Benefit Commencement and Payment Option . Except as otherwise provided in Section 9.10, the benefit provided by this Article shall commence as of the date the Supplemental Retirement Benefit would have commenced had the Participant survived to such date.
5.3 Acceleration Prohibited . Except as otherwise provided in Section 9.10, the acceleration of the time of payment of any portion of a Supplemental Non-Spousal Benefit is prohibited.
ARTICLE VI
FUNDING
The Plan at all times shall be entirely unfunded and the Company shall not be required at any time to segregate any assets of the Company for payment of any benefits hereunder. No Participant, Surviving Spouse or any other person shall have any interest in any particular assets of the Company by reason of the right to receive a benefit under the Plan and any such Participant, Surviving Spouse or other person shall have only the contractual rights of a general unsecured creditor of the Company with respect to any rights under the Plan.
ARTICLE VII
ADMINISTRATION OF THE PLAN
7.1 Administration by the Company . The Committee, acting through the Company, shall be responsible for the general operation and administration of the Plan and for carrying out the provisions thereof.
7.2 General Powers of Administration . The Committee shall have such powers and duties with respect to the administration of the Plan as are applicable to the Administrative Committee of the Unitrin, Inc. Pension Plan. The Committee shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, treasurer, controller, counsel or other person employed or engaged by the Company with respect to the Plan.
7.3 Claims . Any Participant or Beneficiary who believes that there was an error in the calculation of his or her account balance or in the payment of benefits under the Plan shall file a claim with the Committee. The claim must be filed, signed and dated within 90 days of the date on which the claimant learned of the facts from which such claim arises. The claim must be sent by certified mail or presented in person to the Committee.
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The Committee, acting through the Company, shall respond in writing to the claimant within a reasonable period of time but not later than 90 days after receipt of the claim unless special circumstances require an extension of time for processing. If such extension of time is required, the Committee, acting through the Company, shall furnish written notice of the extension to the claimant prior to the termination of the initial 90 day period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Committee, acting through the Company, expects to render a final decision. In no event shall such extension exceed a period of 90 days from the end of the initial period.
7.4 Appeals . Any claimant not satisfied with the Committees decision of a claim shall have the right to appeal to the Committee. The appeal must be signed and dated by the claimant and include a copy of the claim submitted to the Committee as well as a copy of the Committees decision. The appeal should explain why the claimant does not agree with the Committees decision. The appeal must be filed within 60 days of the receipt of the Committees decision. The appeal must be sent by certified mail or presented in person to the Committee.
The Committee shall promptly advise the claimant of its decision on the claimants appeal. Such decision shall be written in laymans terms, shall include specific reasons for the decision and shall contain specific references to pertinent Plan provisions upon which the decision is based. The decision on appeal shall be made no later than 60 days after the Committees receipt of the appeal, unless special circumstances require an extension of the time for processing. If such an extension of time is required, the Committee shall furnish written notice of the extension to the claimant prior to the termination of the 60 day period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Committee expects to render a final decision. If an extension of time is required, a decision shall be rendered as soon as possible, but not later than 120 days following receipt of the appeal.
ARTICLE VIII
AMENDMENT OR TERMINATION
8.1 Amendment or Termination . The Company intends the Plan to be permanent but reserves the right, subject to Section 8.2, to amend or terminate the Plan when, in the sole opinion of the Company, such amendment or termination is advisable. Any such amendment or termination shall be made pursuant to a resolution of the Board and shall be effective as of the date of such resolution or as specified therein. Notwithstanding the foregoing, the Board may from time to time by specific resolution delegate its right to amend the Plan to any person or persons and in such event, such person may take such action to amend the Plan in lieu of the Board in accordance with this Section.
8.2 Effect of Amendment or Termination . No amendment or termination of the Plan shall, without the express written consent of the affected current or former Participant, Surviving Spouse or Beneficiary, reduce or alter any benefit entitlement (as defined below) of such Participant, Surviving Spouse or Beneficiary. The benefit entitlement of any Participant, Surviving Spouse or Beneficiary
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whose benefit hereunder shall have commenced on a date prior to or coincident with the date of a Plan termination or amendment shall be the amount and form of payment hereunder in effect at the time of such termination or amendment. The benefit entitlement of any other Participant, Surviving Spouse or Beneficiary shall be the benefit that would be payable hereunder as a single life annuity if payment of the Participants Qualified Plan Retirement Benefit or the Surviving Spouses Qualified Plan Surviving Spouse Benefit were to commence on the date of a Plan termination or amendment; provided that such benefit entitlement shall not exceed the benefit that would be subsequently calculated and payable hereunder as a single life annuity if the Plan in effect on the day immediately preceding the date of such Plan termination or amendment were to continue until the Participants Qualified Plan Retirement Benefit or the Surviving Spouses Qualified Plan Surviving Spouse Benefit actually commences. If the benefit of a Participant is payable in any form other than a single life annuity over the lifetime of the Participant, the provisions of Section 3.5 shall be applicable in determining the amount of benefit so payable. The termination of the Plan shall not affect the form or time of payment, which shall be determined in accordance with Article III, IV or V, as applicable.
ARTICLE IX
GENERAL PROVISIONS
9.1 General Conditions . Except as otherwise expressly provided herein and to the extent permitted by Section 1.409A-2(a)(9) and Section 1.409A-3(j)(5) of the Regulations, all terms and conditions of the Qualified Plan applicable to the Qualified Plan Retirement Benefit or a Qualified Plan Surviving Spouse Benefit shall also be applicable to a Supplemental Retirement Benefit, Supplemental Surviving Spouse Benefit or Supplemental Non-Spousal Benefit payable hereunder. Any Qualified Plan Retirement Benefit, Qualified Plan Surviving Spouse Benefit or any other benefit payable under a Qualified Plan, shall be paid solely in accordance with the terms and conditions of such Qualified Plan and nothing in this Plan shall operate or be construed in any way to modify, amend or affect the terms and provisions of such Qualified Plan.
9.2 Taxes . The Company shall have the right to (a) require any Participant or Beneficiary to pay the Company the amount of any taxes which the Company may be required to withhold with respect to any benefits earned under, or distributions from, the Plan or (b) deduct from all amounts paid the amount of any taxes which the Company may be required to withhold with respect to any such distributions.
9.3 Entire Agreement . The Plan document along with the administrative forms required of Participants, and made known to them by the Company, shall constitute the entire agreement or contract between the Company and the Participant regarding the Plan. No oral statement regarding the Plan may be relied upon by the Participant or any other person claiming through or under the Participant.
9.4 Construction . Any mention of Articles, Sections and subsections thereof, unless stated specifically to the contrary, refers to Articles, Sections or subsections in the Plan. Headings of Articles, Sections and subsections are for convenient reference. The headings are not part of the Plan and are not to be considered in its construction. All references to statutory sections shall include the section as amended from time to time.
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9.5 Employment Rights . Neither the establishment of the Plan nor any modification thereof, nor the creation of any Trust or account, nor the payment of any benefits, shall be construed as conferring upon a Participant the right to continue to be employed by the Company in his or her present capacity, or in any capacity. The Plan relates to the payment of deferred compensation as provided herein, and is not intended to be an employment contract.
9.6 Benefit Transfers . Neither the Participant nor his or her Beneficiary under the Plan shall have any right to transfer, assign, anticipate, hypothecate or otherwise encumber all or any part of the amounts payable under the Plan; except that a domestic relations order (as defined in Code Section 414(p)(1)(B)) may assign a portion or all of a Participants benefit payment under the Plan, but may not change the date on which a benefit payment under the Plan shall commence. No such amounts shall be subject to seizure by any creditor of any such Participant or Beneficiary, by a proceeding at law or in equity, nor shall any such amounts be transferable by operation of law in the event of bankruptcy, insolvency or death of the Participant, his or her Beneficiary or any other beneficiary hereunder. Any attempted assignment or transfer in contravention of this provision shall be void.
9.7 Governing Law . Construction, validity and administration of the Plan shall be governed by applicable Federal law and the laws of the State of Illinois.
9.8 Inurement . The Plan shall be binding upon and inure to the benefit of Unitrin, Inc. and its successors and assigns, and the Participant, his or her successors, heirs, executors, administrators and beneficiaries.
9.9 Notices . Except as otherwise provided in procedures adopted by the Company, any notice required or permitted to be given pursuant to the Plan shall be in writing, and shall be signed by the person giving the notice. If such notice is mailed, it shall be sent by United States first class mail, postage prepaid, addressed to such persons last known address as shown on the records of the Company. The date of such mailing shall be deemed to be the date of notice, but the notice shall not be effective until actually received. The Company or the Participant may change the address to which notice is sent by giving notice of such change in the manner above.
9.10 Small Benefits . If, upon the date payment of a Participants Supplemental Retirement Benefit, Supplemental Surviving Spouse Benefit or Supplemental Non-Spousal Benefit is scheduled to commence, the actuarial equivalent of such benefit (determined in accordance with Section 3.5) is less than or equal to the applicable dollar limit under Code Section 402(g)(1)(B) and results in the determination and liquidation of the entirety of the Participants interest under all agreements, methods, programs or other arrangements with respect to which deferrals of compensation are treated as having been deferred under a single nonqualified deferred compensation plan under Section 1.409A-1(c)(2) of the Regulations, the Company may pay such benefit to the Participant, his or her Surviving Spouse or his or her Beneficiary in a single lump sum in lieu of any further benefit payments hereunder.
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9.11 Corporate Successor . The Plan shall not be automatically terminated by a Change of Control Event, but the Plan shall be continued after such Change of Control Event only if and to the extent that the transferee, purchaser or successor entity agrees to continue the Plan. In the event that the Plan is not continued by the transferee, purchaser or successor entity, then the Plan shall terminate subject to the provisions of Section 8.2.
9.12 Unclaimed Benefit . Each Participant shall keep the Company informed of his or her current address and the current address of his or her Spouse and Beneficiary. The Company shall not be obligated to search for the whereabouts of any person. The Company is authorized to adopt procedures regarding unclaimed benefits that provide for the irrevocable forfeiture of a benefit if the Company is unable to locate the Participant, or if the Participant is deceased, his or her beneficiary. Such procedures shall be consistent with the Regulations and any other guidance issued by the Internal Revenue Service.
9.13 Limitations on Liability . Notwithstanding any of the preceding provisions of the Plan, neither the Company nor any individual acting as an employee or agent of the Company shall be liable to any Participant, former Participant, Surviving Spouse, Beneficiary or any other person for any claim, loss, liability or expense incurred in connection with the Plan.
9.14 No Guaranty of Benefits . Nothing contained in the Plan shall constitute a guaranty by the Company or any other entity or person that the assets of the Company will be sufficient to pay any benefit hereunder.
9.15 409A Compliance . The Plan is intended to be a nonqualified deferred compensation plan that complies with the provisions of Code Section 409A and the Regulations, and shall be interpreted and operated consistent with such intent. If any ambiguity exists in the terms of the Plan, it shall be interpreted to be consistent with this purpose.
IN WITNESS WHEREOF, a duly appointed member of the Unitrin, Inc. Pension Plan Administrative Committee has executed the Plan on this 19th day of December, 2008.
UNITRIN, INC. | ||
By: |
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Its: |
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Exhibit 10.13
UNITRIN, INC. DEFINED CONTRIBUTION SUPPLEMENTAL RETIREMENT PLAN
As Adopted Effective January 1, 2008
TABLE OF CONTENTS
Page | ||||
ARTICLE I |
DEFINITIONS | 1 | ||
ARTICLE II |
ELIGIBILITY | 5 | ||
ARTICLE III |
SUPPLEMENTAL PLAN CONTRIBUTION | 5 | ||
ARTICLE IV |
FUNDING | 6 | ||
ARTICLE V |
INVESTMENT OF FUNDS, ACCOUNT MAINTENANCE AND VESTING | 6 | ||
ARTICLE VI |
DISTRIBUTIONS | 7 | ||
ARTICLE VII |
PAYMENTS UPON DEATH | 9 | ||
ARTICLE VIII |
ADMINISTRATION OF THE PLAN | 9 | ||
ARTICLE IX |
AMENDMENT OR TERMINATION | 11 | ||
ARTICLE X |
GENERAL PROVISIONS | 11 |
-i-
UNITRIN, INC. DEFINED CONTRIBUTION
SUPPLEMENTAL RETIREMENT PLAN
The Unitrin, Inc. Defined Contribution Supplemental Retirement Plan (the Plan) is hereby adopted effective January 1, 2008. The Plan is established and maintained by Unitrin, Inc. for the purpose of providing benefits in excess of the limitations on benefits imposed by Section 415 of the Internal Revenue Code for certain of its or its Affiliates employees who participate in the Qualified Plan, as hereinafter defined.
Also, only with respect to those Participants hereunder who are Top Hat Participants as defined in Section 1.24, the Plan shall provide benefits in excess of the limitations on benefits imposed by Section 401(a)(17) of the Internal Revenue Code.
ARTICLE I
DEFINITIONS
1.1 General . For purposes of the Plan, the following terms, when capitalized, will have the following meanings. The masculine pronoun wherever used herein will include the feminine gender, the singular number will include the plural, and the plural will include the singular, unless the context clearly indicates a different meaning.
1.2 Account means the account maintained with respect to each Participant under the Plan, as described in Section 5.1.
1.3 Administrative Committee means the Administrative Committee of the Unitrin, Inc. Defined Contribution Retirement Plan.
1.4 Affiliated Company or Affiliate means any corporation, trade or business entity which is a member of a controlled group of corporations, trades or businesses of which the Company is also a member, as provided in Code Sections 414(b) or (c).
1.5 Beneficiary Designation Form means a written document, the form of which the Company shall determine from time to time, on which a Participant shall have the right to designate a beneficiary.
1.6 Board means the Board of Directors of the Company.
1.7 Change in Control Event means the occurrence of any of the following events in subsections (a) through (d) below:
(a) any Person (defined below) is or becomes the Beneficial Owner, (defined below) directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliate (defined below)) representing 25% or more of the combined voting power of the Companys then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (i) of subsection (c) below; or
(b) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 31, 2008, constituted the Board of Directors and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of directors of the Company) whose appointment or election by the Board of Directors or nomination for election by the Companys shareholders was approved or recommended by a vote of at least two-thirds of the directors still in office who either were directors on December 31, 2008 or whose appointment, election or nomination for election was previously so approved or recommended; or
(c) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (i) a merger or consolidation which results in the directors of the Company immediately prior to such merger or consolidation continuing to constitute at least a majority of the board of directors of the surviving entity or any parent thereof, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliate) representing 25% or more of the combined voting power of the Companys then outstanding securities; or
(d) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Companys assets, other than a sale or disposition by the Company of all or substantially all of the Companys assets immediately following which the individuals who comprise the Board of Directors immediately prior thereto constitute at least a majority of the board of directors of the entity to which such assets are sold or disposed or any parent thereof.
(e) As used in this definition of Change of Control Event:
(i) Affiliate shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Securities Exchange Act of 1934, as amended (the Exchange Act);
(ii) Beneficial Owner shall have the meaning set forth in Rule 13d-3 under the Exchange Act; and
(iii) Person shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified in Sections 13(d)(3) and 14(d)(2) thereof, except that such term shall not include (1) the Company or any entity, more than 50% of the voting securities of which are Beneficially Owned by the Company, (2) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (3) an underwriter temporarily holding securities pursuant to an offering of such securities, (4) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company, (5) any individual, entity or group whose ownership of securities of the Company is reported on Schedule 13G pursuant to Rule 13d-1 promulgated under the Exchange Act (but only for so long as such ownership is so reported) or (6) Singleton Group LLC or any successor in interest to such entity.
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1.8 Code means the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated thereunder.
1.9 Committee means the Compensation Committee of the Board.
1.10 Company means Unitrin, Inc., a Delaware corporation, or, to the extent provided in Section 10.10, any successor corporation or other entity resulting from a reorganization, merger or consolidation into or with the Company, or a transfer or sale of substantially all of the assets of the Company.
1.11 Disabled means that the Participant has a Disability as defined in the Qualified Plan.
1.12 Employer means the Company and its Affiliates.
1.13 ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated thereunder.
1.14 Investment Preference Form means a written document, the form of which the Company shall determine from time to time, on which a Participant shall communicate his or her investment preference.
1.15 Participant means an employee of the Company or of an Affiliated Company who at any time on or after January 1, 2008 is a participant under the Qualified Plan and to whom or with respect to whom a benefit is payable under the Plan. The term Participant shall include Top Hat Participants.
1.16 Plan means the Unitrin, Inc. Defined Contribution Supplemental Retirement Plan.
1.17 Plan Administrator means the Committee.
1.18 Plan Year means any calendar year during which the Plan is in effect.
1.19 Qualified Plan means the Unitrin, Inc. Defined Contribution Retirement Plan.
1.20 Qualified Plan Contribution means any contribution made by the Employer on behalf of the Participant under the Qualified Plan.
1.21 Regulations means the regulations, as amended from time to time, which are issued under Code Section 409A.
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1.22 Separation from Service means the Participants termination from employment from the Employer, subject to the following and other provisions of the Regulations:
(a) The employment relationship is treated as continuing intact while the Participant is on military leave, sick leave, or other bona fide leave of absence if the period of such leave does not exceed six months, or if longer, so long as the individual retains a right to reemployment with the Employer under an applicable statute or by contract. A leave of absence constitutes a bona fide leave of absence only if there is a reasonable expectation that the Participant will return to perform services for the Employer. If the period of leave exceeds six months and the Participant does not retain a right to reemployment under an applicable statute or by contract, the employment relationship is deemed to terminate on the first day immediately following such six-month period.
(b) In determining whether a Separation from Service has occurred, the following presumptions, which may be rebutted as provided in the Regulations, shall apply:
(i) A Participant is presumed to have separated from service where the level of bona fide services performed decreases to a level equal to 20% or less of the average level of services performed by the Participant during the immediately preceding 36-month period.
(ii) A Participant will be presumed not to have separated from service where the level of bona fide services performed continues at a level that is 50% or more of the average level of services performed by the Participant during the immediately preceding 36-month period.
No presumption applies to a decrease in the level of bona fide services performed to a level that is more than 20% but less than 50% of the average level of bona fide services performed during the immediately preceding 36-month period. If a Participant had not performed services for the Employer for 36 months, the full period that the Participant has performed services for the Employer shall be substituted for 36 months.
(c) For purposes of this Section, the term Employer has the meaning set forth in Section 1.12, provided that the following shall apply in determining whether a person is an Affiliate as defined in Section 1.4:
(i) In applying Code Sections 1563(a)(1), (2) and (3) for purposes of determining a controlled group of corporations under Code Section 414(b), the phrase at least 50 percent shall be used instead of at least 80 percent each place it appears in Code Sections 1563(a)(1), (2) and (3); and
(ii) In applying Treas. Reg. Section 1.414(c)-2 for purposes of determining trades or businesses (whether or not incorporated) that are under common control for purposes of Code Section 414(c), at least 50 percent is used instead of at least 80 percent each place it appears in Treas. Reg. Section 1.414(c)-2.
(d) In the event of the sale or other disposition of assets by the Company or an Affiliate (the Seller ) to an unrelated service recipient (the Buyer ), the Seller and the Buyer may specify whether a Separation from Service has occurred for a Participant who would otherwise experience a Separation from Service with the Seller, in accordance with the rules set forth in Section 1.409A-1(h)(4) of the Regulations.
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1.23 Supplemental Plan Contribution means the contribution made to a Participants Account pursuant to the terms of the Plan.
1.24 Top Hat Participant means a Participant who qualifies for inclusion in a select group of management or highly compensated employees as provided in Sections 201(2), 301(a)(3), 401(a)(1) and 4021(b)(6) of ERISA and who has been designated as a Top Hat Participant by the Board, as reflected in Board minutes or other official records of the Board.
1.25 Trust means a so-called rabbi trust, the assets of which shall remain, for all purposes, a part of the general unrestricted assets of the Company.
1.26 Valuation Date means each day that the New York Stock Exchange is open for business. The determination of the Valuation Date as of which changes in investment preferences under the Plan are effected shall be made in accordance with rules and procedures established by the Company.
ARTICLE II
ELIGIBILITY
An employee who is eligible to receive a Qualified Plan Contribution, the amount of which is reduced by reason of the application of the limitations on benefits imposed by application of Code Section 415 (or in the case of a Top Hat Participant, is reduced by the limitations on benefits imposed by application of Code Section 401(a)(17)), shall be eligible to receive a Supplemental Plan Contribution.
ARTICLE III
SUPPLEMENTAL PLAN CONTRIBUTION
The Supplemental Plan Contribution to be credited to a Participants Account for each Plan Year shall be an amount equal to the difference between (a) and (b) below:
(a) the amount of the Qualified Plan Contribution to which the Participant would have been entitled if such Qualified Plan Contribution were computed: (i) without giving effect to the limitations on benefits imposed by application of Code Section 415 (and in the case of a Top Hat Participant, Code Section 401(a)(17)), and (ii) by modifying the compensation used to determine such Qualified Plan Contribution by including in compensation any amount which a Participant elected to have deducted from his or her compensation on a pre-tax basis and contributed to a nonqualified deferred compensation plan maintained by the Company or an Affiliate and excluding from compensation any benefits paid or payable to the Participant under such deferred compensation plan;
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LESS
(b) the amount of the Qualified Plan Contribution that would have been credited to the Participants account under the Qualified Plan during the plan year of the Qualified Plan that is coincident with the applicable Plan Year if the Participants Compensation used to calculate such Qualified Plan Contribution were equal to the limit under Code Section 401(a)(17).
ARTICLE IV
FUNDING
4.1 Unsecured Obligation . Supplemental Plan Contributions and the hypothetical investment earnings/losses thereon shall be reflected in book entries maintained by or on behalf of the Company, as set forth in Section 5.1. The existence of such book entries shall not create a trust of any kind, or a fiduciary relationship between the Company, any third party record keeper and the Participant, his or her designated beneficiary, or other beneficiaries provided for under the Plan. The bookkeeping entries represent an unsecured obligation of the Company to pay Supplemental Plan Contributions and the investment earnings/losses thereon to a Participant at a future date.
4.2 Discretionary Rabbi Trust . If the Company so determines, in its sole discretion, payments to a Participant or his or her designated beneficiary or any other beneficiary hereunder may be made from assets held in a Trust. No person shall have any interest in such assets by virtue of the Plan. The Companys obligations hereunder shall be an unfunded and unsecured promise to pay money in the future. Any Participant having a right to receive payments pursuant to the provisions of the Plan shall have no greater rights than any unsecured general creditor of the Company in the event of the Companys insolvency or bankruptcy, and no person shall have nor acquire any legal or equitable right, claim or interest in or to any property or assets of the Company. In no event shall the assets accumulated in the Trust be construed as creating a funded plan under the applicable provisions of ERISA, or under the Code, or under the provisions of any other applicable statute or regulation.
ARTICLE V
INVESTMENT OF FUNDS, ACCOUNT MAINTENANCE AND VESTING
5.1 Record Keeper . The Company shall appoint a Plan record keeper which shall establish and maintain an individual bookkeeping Account on behalf of each Participant for purposes of determining each Participants benefits under the Plan.
5.2 Account Adjustments .
(a) The Plan record keeper shall adjust each Participants Account for amounts representing:
(i) | Supplemental Plan Contributions, |
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(ii) | Hypothetical investment earnings/losses, |
(iii) | Expenses, and |
(iv) | Distributions paid to the Participant or beneficiaries. |
(b) Upon becoming a Participant, each Participant, or in the absence of action by the Participant, the Company, shall specify the hypothetical measure(s) of investment performance from among the choices made available from time to time to Plan participants by the Trust Administrative Committee of the Unitrin, Inc. Defined Contribution Retirement Plan. The Participants bookkeeping account shall be deemed to be invested in the hypothetical investment selected by the Participant, or if none, by the Company. Investment preferences selected by the Participant are used only to determine the value of a Participants Account and in no event is the Company required to follow these investment preferences for actual plan investments. A Participants investment preference shall be communicated to the Company by completion and delivery to the Company of an Investment Preference Form in such form as the Company shall determine from time to time. Participants shall indicate their initial investment preferences by filing an Investment Preference Form with the Company prior to the date on which the first Supplemental Plan Contribution is credited to the Participants Account. Once elected, investment preferences shall be valid until revoked by filing a new Investment Preference Form. Participants shall have the opportunity to change their investment preferences with respect to the Account in accordance with such procedures as may be established by the Company.
(c) The Plan record keeper shall determine the value of all Accounts maintained under the terms of the Plan on each Valuation Date. The Plan record keeper shall provide each Participant with a statement of his or her individual bookkeeping Account reflecting adjustments to such Account during the period from the last statement date. Such statement shall be provided to Participants as soon as administratively feasible following the end of each calendar quarter.
5.3 Vesting . The Participants Account will vest upon the completion of three (3) years of vesting service, as defined in the Qualified Plan. If the Participant dies or becomes Disabled prior to his or her Separation from Service, the Participants Account shall become fully vested. The Participant shall forfeit any non-vested portion of his or her Account upon his or her Separation from Service.
5.4 Bookkeeping Accounts . The Accounts shall be hypothetical in nature and shall be maintained for bookkeeping purposes only, so that contributions can be credited to Participants and so that investment returns on such contributions can be credited. Neither the Plan nor any of the Accounts shall hold any actual funds or assets.
ARTICLE VI
DISTRIBUTIONS
6.1 Form of Distribution . The Company shall distribute an amount equal to the vested balance of the Participants Account to the Participant (or, in the event of the death of the Participant, to his or her beneficiary) in the form of a single lump sum distribution
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or installments, as elected by the Participant. Installment payments shall be made over a term of years selected by the Participant, not to exceed 10 years in duration, and shall be paid in quarterly or annual installments, as elected by the Participant. The Participant shall make the above elections in accordance with procedures established by the Company and no later than 30 days following the date on which the Participant is initially eligible to participate in the Plan, at which time the elections shall become irrevocable. If a Participant fails to make an election within the required time period, the Participants benefit will be paid in the form of a single lump sum distribution.
6.2 Timing of Distribution . Subject to the provisions of Section 6.5 through Section 6.8:
(a) Upon a Participants Separation from Service, payment of the vested balance of the Participants Account shall be made, or commence, on the first day of the seventh month following the Participants Separation from Service; and
(b) Upon a Participants death, payment of the vested balance of a Participants Account shall be made, or commence, as soon as practicable after the Participants death, but no later than ninety (90) days after such death.
6.3 Transitional Relief . Prior to January 1, 2009, a Participant may change the form of payment for his Account to the extent permitted by IRS Notice 2007-86 and administrative procedures adopted by the Company.
6.4 Acceleration Prohibited . Except as provided in Section 6.6 through Section 6.8, acceleration of the time of payment of any portion of the balance of a Participants Account is prohibited.
6.5 Payments in Violation of Federal Securities Laws . To the extent permitted by the Regulations, the Company may delay a benefit payment where the Company reasonably anticipates that the making of the payment will violate Federal securities laws or other applicable law. Such a benefit payment shall be made at the earliest date at which the Company reasonably anticipates that the making of the benefit payment will not cause such violation and, if the Participant had elected installment payments, the first payment to the Participant shall include the payments that the Participant would have received had payments begun as of the date such payments were scheduled to begin.
6.6 Accelerated Payment for Domestic Relations Orders . To the extent necessary to fulfill a domestic relations order (as defined in Code Section 414(p)(1)(B)) and as permitted by the Regulations, the Company, in its sole discretion, may accelerate the time or schedule of a benefit payment under the Plan to an individual other than the Participant, or a benefit payment under the Plan may be made to an individual other than the Participant.
6.7 Accelerated Payment for Failure to Comply with Code Section 409A . To the extent permitted by the Regulations, at any time the Plan fails to meet the requirements of Code Section 409A and the Regulations, the Company may accelerate the time or schedule of a payment, or a payment under the Plan may be made; provided, however, that such payment shall not exceed the amount required to be included in income as a result of the failure to comply with the requirements of Code Section 409A and the Regulations.
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6.8 Small Benefits . If, upon the first day of the seventh month following a Participants Separation from Service (Payment Date), a Participants Account is less than or equal to the applicable dollar limit under Code Section 402(g)(1)(B) and results in the determination and liquidation of the entirety of the Participants interest under all agreements, methods, programs or other arrangements with respect to which deferrals of compensation are treated as having been deferred under a single nonqualified deferred compensation plan under Section 1.409A-1(c)(2) of the Regulations, the Company may pay such Account to the Participant or his or her beneficiary in a single lump sum, in lieu of any further benefit payments hereunder, on the Payment Date.
ARTICLE VII
PAYMENTS UPON DEATH
7.1 Payment to Beneficiary . Any benefit which a deceased Participant is entitled to receive under the Plan shall be paid to such Participants beneficiary. Such death benefit shall be paid in accordance with the Participants election pursuant to Section 6.1 and at the time specified in Section 6.2.
7.2 Designation of Beneficiary . A Participant shall have the right to designate a beneficiary on the Beneficiary Designation Form and to amend or revoke such designation at any time in writing. Such designation, amendment or revocation shall be effective only when filed with the Company. Any beneficiary designation, amendment or revocation shall apply to the Participants entire Account.
If no Beneficiary Designation Form is filed with the Company, or if the Beneficiary Designation Form is held invalid, or if no beneficiary survives the Participant and benefits remain payable following the Participants death, the Company shall direct that payment of benefits be made to the person or persons in the first category in which there is a survivor. The categories of successor beneficiaries, in order, are (a) the Participants spouse and (b) the Participants estate.
ARTICLE VIII
ADMINISTRATION OF THE PLAN
8.1 Administration by the Company . The Committee, acting through the Company, shall be responsible for the general operation and administration of the Plan and for carrying out the provisions thereof.
8.2 General Powers of Administration . The Committee shall have such powers and duties with respect to the administration of the Plan as are applicable to the Administrative Committee with respect to the Qualified Plan. The Committee shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, treasurer, controller, counsel or other person employed or engaged by the Company with respect to the Plan.
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8.3 Claims .
Any Participant or beneficiary who believes that there was an error in the calculation of his or her account balance or in the payment of benefits under the Plan shall file a claim with the Plan Administrator. The claim must be filed, signed and dated within 90 days of the date on which the claimant learned of the facts from which such claim arises. The claim must be sent by certified mail or presented in person to the Plan Administrator.
The Plan Administrator, acting through the Company, shall respond in writing to the claimant within a reasonable period of time but not later than 90 days after receipt of the claim unless special circumstances require an extension of time for processing. If such extension of time is required, the Plan Administrator, acting through the Company, shall furnish written notice of the extension to the claimant prior to the termination of the initial 90 day period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan Administrator, acting through the Company, expects to render a final decision. In no event shall such extension exceed a period of 90 days from the end of the initial period.
8.4 Appeals .
Any claimant not satisfied with the Plan Administrators decision of a claim shall have the right to appeal to the Plan Administrator. The appeal must be signed and dated by the claimant and include a copy of the claim submitted to the Plan Administrator as well as a copy of the Plan Administrators decision. The appeal should explain why the claimant does not agree with the Plan Administrators decision. The appeal must be filed within 60 days of the receipt of the Plan Administrators decision. The appeal must be sent by certified mail or presented in person to the Plan Administrator.
The Plan Administrator shall promptly advise the claimant of its decision on the claimants appeal. Such decision shall be written in laymans terms, shall include specific reasons for the decision and shall contain specific references to pertinent Plan provisions upon which the decision is based. The decision on appeal shall be made no later than 60 days after the Plan Administrators receipt of the appeal, unless special circumstances require an extension of the time for processing. If such an extension of time is required, the Plan Administrator shall furnish written notice of the extension to the claimant prior to the termination of the 60 day period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan Administrator expects to render a final decision. If an extension of time is required, a decision shall be rendered as soon as possible, but not later than 120 days following receipt of the appeal.
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ARTICLE IX
AMENDMENT OR TERMINATION
9.1 Amendment or Termination . The Company intends the Plan to be permanent but reserves the right, subject to Section 9.2, to amend or terminate the Plan when, in the sole opinion of the Company, such amendment or termination is advisable. However, no amendment shall deprive a Participant or beneficiary of any of the benefits which he or she has accrued under the Plan or otherwise adversely affect the Participants Account with respect to amounts credited thereto prior to the date such amendment is made. The Administrative Committee shall have the authority, on behalf of the Company, to amend the Plan in any manner permitted by Article IX of the Plan as the Administrative Committee considers desirable, appropriate or necessary, provided that no such amendments, either individually or in the aggregate, have a material adverse financial impact on the Company and the Employers. The Board reserves the authority to make any other amendments to the Plan, including, but not limited to, amendments that the Administrative Committee deems desirable, appropriate or necessary which would have a material adverse financial impact on the Company and the Employers.
9.2 Effect of Amendment or Termination . No amendment or termination of the Plan shall, without the express written consent of the affected current or former Participant or beneficiary, reduce or alter any benefit entitlement of such Participant or beneficiary.
ARTICLE X
GENERAL PROVISIONS
10.1 General Conditions . Any benefit payable under the Qualified Plan shall be paid solely in accordance with the terms and conditions of the Qualified Plan and nothing in the Plan shall operate or be construed in any way to modify, amend or affect the terms and provisions of the Qualified Plan.
10.2 Taxes . The Company shall have the right to (a) require any Participant or beneficiary to pay the Company the amount of any taxes which the Company may be required to withhold with respect to any benefits earned under, or distributions from, the Plan or (b) deduct from all amounts paid the amount of any taxes which the Company may be required to withhold with respect to any such distributions.
10.3 Entire Agreement . The Plan document along with the Investment Preference Form, Beneficiary Designation Form and other administration forms required of Participants, and made known to them by the Company, shall constitute the entire agreement or contract between the Company and the Participant regarding the Plan. No oral statement regarding the Plan may be relied upon by the Participant or any other person claiming through or under the Participant.
10.4 Construction . Any mention of Articles, Sections and subsections thereof, unless stated specifically to the contrary, refers to Articles, Sections or subsections in the Plan. Headings of Articles, Sections and subsections are for convenient reference. The headings are not part of the Plan and are not to be considered in its construction. All references to statutory sections shall include the section as amended from time to time.
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10.5 Employment Rights . Neither the establishment of the Plan nor any modification thereof, nor the creation of any trust or account, nor the payment of any benefits, shall be construed as conferring upon a Participant the right to continue to be employed by the Company in his or her present capacity, or in any capacity. The Plan relates to the payment of deferred compensation as provided herein, and is not intended to be an employment contract.
10.6 Benefit Transfers . Neither the Participant nor his or her designated or other beneficiary under the Plan shall have any right to transfer, assign, anticipate, hypothecate or otherwise encumber all or any part of the amounts payable under the Plan, except as provided in Section 6.6. No such amounts shall be subject to seizure by any creditor of any such Participant or beneficiary, by a proceeding at law or in equity, nor shall any such amounts be transferable by operation of law in the event of bankruptcy, insolvency or death of the Participant, his or her designated beneficiary or any other beneficiary hereunder. Any attempted assignment or transfer in contravention of this provision shall be void.
10.7 Governing Law . Construction, validity and administration of the Plan shall be governed by applicable Federal law and the laws of the State of Illinois.
10.8 Inurement . The Plan shall be binding upon and inure to the benefit of the Company and its successors and assigns, and the Participant, his or her successors, heirs, executors, administrators and beneficiaries.
10.9 Notices . Any notice (other than pursuant to enrollment materials) required or permitted to be given pursuant to the Plan shall be in writing, and shall be signed by the person giving the notice. If such notice is mailed, it shall be sent by United States first class mail, postage prepaid, addressed to such persons last known address as shown on the records of the Company. The date of such mailing shall be deemed to be the date of notice, but the notice shall not be effective until actually received. The Company or the Participant may change the address to which notice is sent by giving notice of such change in the manner above.
10.10 Corporate Successor . The Plan shall not be automatically terminated by a Change in Control Event, but the Plan shall be continued after such Change in Control Event only if and to the extent that the transferee, purchaser or successor entity agrees to continue the Plan. In the event that the Plan is not continued by the transferee, purchaser or successor entity, then the Plan shall terminate subject to the provisions of Section 9.2.
10.11 Unclaimed Benefit . Each Participant shall keep the Company informed of his or her current address and the current address of his or her beneficiary. The Company shall not be obligated to search for the whereabouts of any person. The Company is authorized to adopt procedures regarding unclaimed benefits that provide for the irrevocable forfeiture of a benefit if the Company is unable to locate the Participant, or if the Participant is deceased, his or her beneficiary. Such procedures shall be consistent with the Regulations and any other guidance issued by the Internal Revenue Service.
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10.12 Limitations on Liability . Notwithstanding any of the preceding provisions of the Plan, neither the Company nor any individual acting as an employee or agent of the Company shall be liable to any Participant, former Participant, beneficiary or any other person for any claim, loss, liability or expense incurred in connection with the Plan.
10.13 No Guaranty of Benefits . Nothing contained in the Plan shall constitute a guaranty by the Company or any other entity or person that the assets of the Company will be sufficient to pay any benefit hereunder.
10.14 409A Compliance . The Plan is intended to be a nonqualified deferred compensation plan that complies with the provisions of Code Section 409A and the Regulations, and shall be interpreted and operated consistent with such intent. If any ambiguity exists in the terms of the Plan, it shall be interpreted to be consistent with this purpose.
IN WITNESS WHEREOF, a duly appointed member of the Administrative Committee has executed the Plan on this 19th day of December, 2008.
UNITRIN, INC. | ||
By: |
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Its: |
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Exhibit 10.14
UNITRIN, INC.
NON-QUALIFIED DEFERRED COMPENSATION PLAN
As Amended and Restated Effective January 1, 2009
TABLE OF CONTENTS
Page | ||||
ARTICLE I |
DEFINITIONS | 1 | ||
ARTICLE II |
ELIGIBILITY | 4 | ||
ARTICLE III |
DEFERRALS | 5 | ||
ARTICLE IV |
FUNDING | 6 | ||
ARTICLE V |
INVESTMENT OF FUNDS, ACCOUNT MAINTENANCE AND VESTING | 8 | ||
ARTICLE VI |
PAYMENT OF BENEFITS | 9 | ||
ARTICLE VII |
PAYMENTS UPON DEATH | 11 | ||
ARTICLE VIII |
ADMINISTRATION OF THE PLAN | 11 | ||
ARTICLE IX |
AMENDMENT OR TERMINATION | 12 | ||
ARTICLE X |
GENERAL PROVISIONS | 13 |
-i-
UNITRIN, INC.
NON-QUALIFIED DEFERRED COMPENSATION PLAN
The Unitrin, Inc. Non-Qualified Deferred Compensation Plan (the Plan) was adopted effective January 1, 2002 and was amended and restated effective January 1, 2008 to comply with Code Section 409A. The Plan is now further amended and restated effective January 1, 2009 to clarify the operation of the Plan and its compliance with Code Section 409A.
The purpose of the Plan is to provide a benefit to directors who are not employees of Unitrin, Inc. and select executives of Unitrin, Inc. or one of its subsidiaries. Plan Participants are allowed the opportunity to elect to defer a portion of their Eligible Compensation (as defined in Section 1.14) to some future period. The Plan is intended to be an unfunded top hat plan exempt from certain provisions of ERISA.
ARTICLE I
DEFINITIONS
1.1 General . For purposes of the Plan, the following terms, when capitalized, will have the following meanings. The masculine pronoun wherever used herein will include the feminine gender, the singular number will include the plural, and the plural will include the singular, unless the context clearly indicates a different meaning.
1.2 Account means the aggregate of a Participants bookkeeping sub-accounts established pursuant to Section 5.1.
1.3 Administrative Committee means the Administrative Committee of the Unitrin, Inc. 401(k) Savings Plan.
1.4 Affiliated Company or Affiliate means any corporation, trade or business entity which is a member of a controlled group of corporations, trades or businesses of which the Company is also a member, as provided in Code Sections 414(b) or (c).
1.5 Beneficiary Designation Form means a written document, the form of which the Company shall determine from time to time, on which a Participant shall have the right to designate a beneficiary.
1.6 Board means the Board of Directors of the Company.
1.7 Bonus Compensation means the annual formula and annual discretionary management bonuses earned in a given year and generally paid in the following year. Bonus Compensation does not include other bonuses such as a relocation bonus, a hiring bonus or other periodic bonuses.
1.8 Change of Control means Change of Control as defined in Section 4.3.
1.9 Code means the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated thereunder.
1.10 Committee means the Compensation Committee of the Board.
1.11 Company means Unitrin, Inc., a Delaware corporation, or, to the extent provided in Section 10.9, any successor corporation or other entity resulting from a reorganization, merger or consolidation into or with the Company, or a transfer or sale of substantially all of the assets of the Company.
1.12 Deferral Election means the following: (a) for Employee Participants, an election to defer all or part of such Participants Regular Base Salary or such Participants Bonus Compensation, all pursuant to Section 3.1, and (b) for Outside Director Participants, an election to defer Director Fees pursuant to Section 3.1. A Participants Deferral Election shall also include an election by the Participant specifying the calendar year in which payments shall commence and the method of payment with respect to the payout of all future benefits attributable to deferrals for the Plan Year.
1.13 Director Fees means the cash fees Outside Directors earn.
1.14 Eligible Compensation means Regular Base Salary, Bonus Compensation or Director Fees.
1.15 Eligible Employees means a select group of management employees of the Company or an Affiliate.
1.16 Employee Participant means with respect to any Plan Year, an Eligible Employee who has been designated in writing as a Participant pursuant to Section 2.1.
1.17 Employer means the Company and its Affiliates.
1.18 ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated thereunder.
1.19 401(a)(17) Limit means the amount of compensation which may be considered by a plan sponsor for purposes of determining benefits under a qualified retirement plan. This amount is automatically adjusted annually by the Secretary of the Treasury for increases in the cost-of-living and such adjustment shall automatically be taken into account by the Plan.
1.20 Investment Preference Form means a written document, the form of which the Company shall determine from time to time, on which a Participant shall communicate his or her investment preference.
1.21 Outside Directors mean the directors of the Board who are not employees of the Company.
1.22 Outside Director Participant means with respect to any Plan Year, a Participant who is an Outside Director for that Plan Year.
1.23 Participation Date means the date on which an Eligible Employee or an Outside Director is eligible to participate in the Plan, as set forth in Section 2.2.
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1.24 Participant means an Employee Participant or an Outside Director Participant.
1.25 Plan means the Unitrin, Inc. Non-Qualified Deferred Compensation Plan.
1.26 Plan Administrator means the Committee.
1.27 Plan Year means any calendar year during which the Plan is in effect.
1.28 Regular Base Salary means the annual scheduled base salary, excluding, without limitation, stock option income, severance pay, and income included in pay due to fringe benefits.
1.29 Regulations means the regulations, as amended from time to time, which are issued under Code Section 409A.
1.30 Separation from Service means the Participants termination from employment from the Employer, subject to the following and other provisions of the Regulations:
(a) The employment relationship is treated as continuing intact while the Participant is on military leave, sick leave, or other bona fide leave of absence if the period of such leave does not exceed six months, or if longer, so long as the individual retains a right to reemployment with the Employer under an applicable statute or by contract. A leave of absence constitutes a bona fide leave of absence only if there is a reasonable expectation that the Participant will return to perform services for the Employer. If the period of leave exceeds six months and the Participant does not retain a right to reemployment under an applicable statute or by contract, the employment relationship is deemed to terminate on the first day immediately following such six-month period.
(b) In determining whether a Separation from Service has occurred, the following presumptions, which may be rebutted as provided in the Regulations, shall apply:
(i) A Participant is presumed to have separated from service where the level of bona fide services performed decreases to a level equal to 20% or less of the average level of services performed by the Participant during the immediately preceding 36-month period.
(ii) A Participant will be presumed not to have separated from service where the level of bona fide services performed continues at a level that is 50% or more of the average level of services performed by the Participant during the immediately preceding 36-month period.
No presumption applies to a decrease in the level of bona fide services performed to a level that is more than 20% but less than 50% of the average level of bona fide services performed during the immediately preceding 36-month period. If a Participant had not performed services for the Employer for 36 months, the full period that the Participant has performed services for the Employer shall be substituted for 36 months.
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(c) For purposes of this Section, the term Employer has the meaning set forth in Section 1.17 provided that the following shall apply in determining whether a person is an Affiliate as defined in Section 1.4:
(i) In applying Code Sections 1563(a)(1), (2) and (3) for purposes of determining a controlled group of corporations under Code Section 414(b), the phrase at least 50 percent shall be used instead of at least 80 percent each place it appears in Code Sections 1563(a)(1), (2) and (3); and
(ii) In applying Treas. Reg. Section 1.414(c)-2 for purposes of determining trades or businesses (whether or not incorporated) that are under common control for purposes of Code Section 414(c), at least 50 percent is used instead of at least 80 percent each place it appears in Treas. Reg. Section 1.414(c)-2.
(d) In the event of the sale or other disposition of assets by the Company or an Affiliate (the Seller ) to an unrelated service recipient (the Buyer ), the Seller and the Buyer may specify whether a Separation from Service has occurred for a Participant who would otherwise experience a Separation from Service with the Seller, in accordance with the rules set forth in Section 1.409A-1(h)(4) of the Regulations.
1.31 Trust means a so-called rabbi trust, the assets of which shall remain, for all purposes, a part of the general unrestricted assets of the Company.
1.32 Valuation Date means each day that the New York Stock Exchange is open for business. The determination of the Valuation Date as of which changes in investment preferences under the Plan are effected shall be made in accordance with rules and procedures established by the Company.
ARTICLE II
ELIGIBILITY
2.1 Eligibility . The Board may, in its discretion, or an Affiliate may, in its discretion and subject to the approval of the Board, designate in writing any Eligible Employee as a Participant who is eligible to participate in the Plan. An Outside Director is automatically eligible to participate in the Plan.
2.2 Participation Date and Notice . An Eligible Employee designated as a Participant pursuant to Section 2.1 shall become a Participant as of the first day of the Plan Year following such designation. An Outside Director shall become a Participant as of the date he or she is elected a director of the Board. The date that an Eligible Employee or Outside Director is eligible to participate in the Plan shall be known as the Participation Date. The Company will provide the Participant with notice of the Participants Participation Date and the forms needed to make an election pursuant to Section 3.2 as soon as reasonably practicable after the Company is informed of a Participants Participation Date.
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ARTICLE III
DEFERRALS
3.1 Deferral Amounts . Participants may elect to defer Eligible Compensation subject to the limits described below. A separate election for Regular Base Salary, Bonus Compensation and Director Fees must be made. Outside Director Participants may elect to defer up to 100% of their Director Fees. Employee Participants may elect to defer up to 100% of their Regular Base Salary in excess of the 401(a)(17) Limit in effect for the year of payment. Employee Participants may also elect to defer up to 100% of their Bonus Compensation to the extent that Bonus Compensation plus non-deferred Regular Base Salary is in excess of the 401(a)(17) Limit in effect for the year in which such bonus is earned, instead of for the year of payment.
3.2 Deferral Election . The Company shall provide each Participant, upon becoming a Participant and thereafter annually, with a Deferral Election to be filed by the Participant, in accordance with such procedures as may be established by the Company but subject to the following:
(a) An Employee Participant desiring to participate in the Plan must file with the Company a Deferral Election prior to the beginning of the Plan Year to which it pertains, at which time the election shall become irrevocable. Such Deferral Election shall be effective on the first day of the Plan Year following the filing thereof.
(b) A Director Participant desiring to participate in the Plan must file with the Company an initial Deferral Election within 30 days (or such lesser number of days as the Company shall determine) following such Participants Participation Date at which time the election shall become irrevocable. Such initial election shall be effective commencing with the first day of the first month following such filing. Thereafter, a Deferral Election must be filed by a Director Participant prior to the beginning of the Plan Year to which it pertains, at which time the election shall become irrevocable. Such Deferral Election shall be effective on the first day of the Plan Year following the filing thereof.
(c) In no event shall a Participant be permitted to defer Eligible Compensation for any period that has commenced prior to the date on which the Plan is effective or the date on which a Deferral Election is signed by the Participant and accepted by the Company.
(d) Upon receipt of a properly completed and executed Deferral Election, the Company shall notify the payroll department of the Participants Employer to withhold that portion of the Participants Eligible Compensation specified in the agreement. All amounts shall be withheld ratably throughout the Plan Year except for any bonus amounts which shall be withheld in a single lump sum. In no event shall the Participant be permitted to defer more than the amount specified by the Plan.
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ARTICLE IV
FUNDING
4.1 Unsecured Obligation . Individual Participant deferrals of Eligible Compensation and the hypothetical investment earnings/losses thereon shall be reflected in book entries maintained by or on behalf of the Company, as set forth in Section 5.1. The existence of such book entries shall not create a trust of any kind, or a fiduciary relationship between the Company, any third party record keeper and the Participant, his or her designated beneficiary, or other beneficiaries provided for under the Plan. The bookkeeping entries represent an unsecured obligation of the Company to pay deferred Eligible Compensation and the investment earnings/losses thereon to a Participant at a future date.
4.2 Discretionary Rabbi Trust . If the Company so determines, in its sole discretion, payments to a Participant or his or her designated beneficiary or any other beneficiary hereunder may be made from assets held in a Trust. No person shall have any interest in such assets by virtue of the Plan. The Companys obligations hereunder shall be an unfunded and unsecured promise to pay money in the future. Any Participant having a right to receive payments pursuant to the provisions of the Plan shall have no greater rights than any unsecured general creditor of the Company in the event of the Companys insolvency or bankruptcy, and no person shall have nor acquire any legal or equitable right, claim or interest in or to any property or assets of the Company. In no event shall the assets accumulated in the Trust be construed as creating a funded plan under the applicable provisions of ERISA, or under the Code, or under the provisions of any other applicable statute or regulation.
4.3 Change in Control .
(a) Upon a Change of Control the Company shall, as soon as possible, but in no event longer than 30 days following the Change of Control, make an irrevocable contribution to the Trust in an amount that is sufficient to pay each Participant or beneficiary the benefits to which such Participant(s) or their beneficiaries would be entitled pursuant to the terms of the Plan as of the date on which the Change of Control occurred. For purposes of the Plan Change of Control shall mean the occurrence of any of the following events:
(i) | any Person (defined below) is or becomes the Beneficial Owner, (defined below) directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliate (defined below)) representing 25% or more of the combined voting power of the Companys then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (1) of subparagraph (iii) below; or |
(ii) |
the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on December 31, 2008, constituted the Board of Directors and any new director (other |
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than a director whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of directors of the Company) whose appointment or election by the Board of Directors or nomination for election by the Companys shareholders was approved or recommended by a vote of at least two-thirds of the directors still in office who either were directors on December 31, 2008 or whose appointment, election or nomination for election was previously so approved or recommended; or |
(iii) | there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (1) a merger or consolidation which results in the directors of the Company immediately prior to such merger or consolidation continuing to constitute at least a majority of the board of directors of the surviving entity or any parent thereof, or (2) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliate) representing 25% or more of the combined voting power of the Companys then outstanding securities; or |
(iv) | the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Companys assets, other than a sale or disposition by the Company of all or substantially all of the Companys assets immediately following which the individuals who comprise the Board of Directors immediately prior thereto constitute at least a majority of the board of directors of the entity to which such assets are sold or disposed or any parent thereof. |
(b) As used in this Change of Control section:
(i) | Affiliate shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Securities Exchange Act of 1934, as amended (the Exchange Act); |
(ii) | Beneficial Owner shall have the meaning set forth in Rule 13d-3 under the Exchange Act; and |
(iii) |
Person shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified in Sections 13(d)(3) and 14(d)(2) thereof, except that such term shall not include (1) the Company or any entity, more than 50% |
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of the voting securities of which are Beneficially Owned by the Company, (2) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (3) an underwriter temporarily holding securities pursuant to an offering of such securities, (4) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company, (5) any individual, entity or group whose ownership of securities of the Company is reported on Schedule 13G pursuant to Rule 13d-1 promulgated under the Exchange Act (but only for so long as such ownership is so reported) or (6) Singleton Group LLC or any successor in interest to such entity. |
ARTICLE V
INVESTMENT OF FUNDS, ACCOUNT MAINTENANCE AND VESTING
5.1 Record Keeper . The Company shall appoint a Plan record keeper which shall establish and maintain an individual bookkeeping Account on behalf of each Participant for purposes of determining each Participants benefits under the Plan. Separate sub-accounts shall be established for each Participant with respect to each years Deferral Election and for which a different form of payment or payment start date has been elected.
5.2 Account Adjustments .
(a) The Plan record keeper shall adjust each Participants Account for amounts representing:
(i) | Participant deferrals, |
(ii) | Hypothetical investment earnings/losses, |
(iii) | Expenses, and |
(iv) | Distributions paid to the Participant or beneficiaries. |
(b) Each Participant electing to defer Eligible Compensation pursuant to the Plan shall also specify at the time the Deferral Election is made, the hypothetical measure(s) of investment performance from among the choices made available from time to time to Plan participants by the Trust Administrative Committee of the Unitrin, Inc. 401(k) Savings Plan. If the Participant fails to specify the hypothetical measure of investment performance, the Company shall do so. The Participants bookkeeping account shall be deemed to be invested in the hypothetical investment selected by the Participant, or if none, by the Company. Investment preferences selected by the Participant are used only to determine the value of a Participants Account and in no event is the Company required to follow these investment preferences for actual plan investments. A Participants investment preference shall be communicated to the Company by completion and delivery to the Company of an Investment Preference Form in such form as the Company shall
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determine from time to time. Participants shall indicate their initial investment preferences by filing an Investment Preference Form with the Company prior to the date on which deferrals commence under the terms of the Participants Deferral Election. Once elected, investment preferences shall be valid until revoked by filing a new Investment Preference Form. Participants shall have the opportunity to change their investment preferences with respect to (i) new deferrals, (ii) their entire existing balances or (iii) deferrals made for a specific Plan Year, in accordance with such procedures as may be established by the Company.
(c) The Plan record keeper shall determine the value of all Accounts maintained under the terms of the Plan on each Valuation Date. The Plan record keeper shall provide each Participant with a statement of his or her individual bookkeeping Account reflecting adjustments to such Account during the period from the last statement date. Such statement shall be provided to Participants as soon as administratively feasible following the end of each calendar quarter.
ARTICLE VI
PAYMENT OF BENEFITS
6.1 Distributions . A Participants or beneficiarys benefit payable under the Plan shall be determined by reference to the value of each bookkeeping sub-account balance at the time of distribution. Sub-accounts shall be maintained for each Plan Years deferrals. Benefit payments from the Plan shall be payable from the general assets of the Company which include any assets held in the Trust.
6.2 Timing of Payments . Subject to Section 6.4 through Section 6.10, each of a Participants subaccounts shall be paid or payment shall begin within 30 days following the specific date elected on the Participants applicable Deferral Election. Except as set forth in Section 6.8 through Section 6.10, no Participant or beneficiary shall have any right to receive payment of his or her benefit under the Plan prior to the specific date elected on the applicable Deferral Election.
6.3 Form of Payments . Each of a Participants subaccounts shall be paid as a lump sum or in installments as elected in the applicable Deferral Election. A different form of payment, as to amount and timing, may be elected with respect to each years Deferral Election. Except as otherwise provided in Sections 6.4 and 6.5, once a Deferral Election is made with respect to amounts deferred for a Plan Year, it cannot be altered and is irrevocable. A Participants account balance shall be distributed to the Participant or his or her beneficiary in the form of cash only.
6.4 Subsequent Deferral . A Participant may elect to delay payment or change the form of payment of any of his or her sub-accounts if all of the following conditions are met with respect to such sub-account:
(a) Such election shall not take effect until at least 12 months after the date on which the election is made;
(b) Payment must be deferred for a period of not less than five years from the date such payment would otherwise have been paid; and
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(c) Any election must be made not less than 12 months before the first day of the calendar year in which payment of such sub-account would otherwise be made or commence.
The right to a series of installment payments, as defined in the Regulations, shall be treated as a right to a single payment.
6.5 Transitional Relief . Prior to January 1, 2009, a Participant may change the specific date for payment and the form of payment for one or more of his or her subaccounts to the extent permitted by IRS Notice 2007-86 and administrative procedures adopted by the Company.
6.6 Acceleration Prohibited . Except as provided in Section 6.8 through 6.10, acceleration of the time of payment of any portion of the balance of a Participants Account is prohibited.
6.7 Payments in Violation of Federal Securities Laws . To the extent permitted by the Regulations, the Company may delay a benefit payment where the Company reasonably anticipates that the making of the payment will violate Federal securities laws or other applicable law. Such a benefit payment shall be made at the earliest date at which the Company reasonably anticipates that the making of the benefit payment will not cause such violation and, if the Participant had elected installment payments, the first payment to the Participant shall include the payments that the Participant would have received had payments begun as of the date such payments were scheduled to begin. Notwithstanding the foregoing, if a benefit payment to a Participant is delayed until the Participants Separation from Service, then the benefit payment shall not be made before the first day of the seventh month after the Participants Separation from Service or, if earlier, the date of death of the Participant.
6.8 Accelerated Payment for Domestic Relations Orders . To the extent necessary to fulfill a domestic relations order (as defined in Code Section 414(p)(1)(B)) and as permitted by the Regulations, the Company, in its sole discretion, may accelerate the time or schedule of a benefit payment under the Plan to an individual other than the Participant, or a benefit payment under the Plan may be made to an individual other than the Participant.
6.9 Accelerated Payment for Failure to Comply with Code Section 409A . To the extent permitted by the Regulations, at any time the Plan fails to meet the requirements of Code Section 409A and the Regulations, the Company may accelerate the time or schedule of a payment, or a payment under the Plan may be made; provided, however, that such payment shall not exceed the amount required to be included in income as a result of the failure to comply with the requirements of Code Section 409A and the Regulations.
6.10 Small Benefits . If, upon the first day of the seventh month following a Participants Separation from Service (Payment Date), a Participants Account is less than or equal to the applicable dollar limit under Code Section 402(g)(1)(B) and results in the determination and liquidation of the entirety of the Participants interest under all agreements, methods, programs or other arrangements with respect to which deferrals of compensation are treated as having been deferred under a single nonqualified deferred compensation plan under Section 1.409A-1(c)(2) of the Regulations, the Company may pay such Account to the Participant or his or her beneficiary in a single lump sum, in lieu of any further benefit payments hereunder, on the Payment Date.
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ARTICLE VII
PAYMENTS UPON DEATH
7.1 Payment to Beneficiary . Any benefit which a deceased Participant is entitled to receive under the Plan shall be paid to such Participants beneficiary. Such death benefit shall be paid in the form and at the time elected in accordance with the Participants Deferral Elections.
7.2 Designation of Beneficiary . A Participant shall have the right to designate a beneficiary on the Beneficiary Designation Form and to amend or revoke such designation at any time in writing. Such designation, amendment or revocation shall be effective only when filed with the Company. Any beneficiary designation, amendment or revocation shall apply to all past and present Deferral Elections.
If no Beneficiary Designation Form is filed with the Company, or if the Beneficiary Designation Form is held invalid, or if no beneficiary survives the Participant and benefits remain payable following the Participants death, the Company shall direct that payment of benefits be made to the person or persons in the first category in which there is a survivor. The categories of successor beneficiaries, in order, are (a) the Participants spouse and (b) the Participants estate.
ARTICLE VIII
ADMINISTRATION OF THE PLAN
8.1 Plan Administration . The Plan Administrator is the Committee. The Committee has complete authority to interpret and administer the Plan. The Committees responsibilities and obligations may be delegated as deemed necessary by the Committee from time to time. The Committee may establish administrative practices as necessary for the establishment and ongoing maintenance of the Plan. The Committee may delegate to one or more of its members or to one or more agents such administrative duties as it may deem advisable, and the Committee or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan. The decisions made by and the actions taken by the Plan Administrator in the administration and interpretation of the Plan shall be final and conclusive for all persons. If, after reading the Plan, Participants have questions about the Plan, such questions should be directed to the designated contact at the Company.
8.2 Claims .
Any Participant or beneficiary who believes that there was an error in the calculation of his or her account balance or in the payment of benefits under the Plan shall file a claim with the Plan Administrator. The claim must be filed, signed and dated within 90 days of the date on which the claimant learned of the facts from which such claim arises. The claim must be sent by certified mail or presented in person to the Plan Administrator.
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The Plan Administrator, acting through the Company, shall respond in writing to the claimant within a reasonable period of time but not later than 90 days after receipt of the claim unless special circumstances require an extension of time for processing. If such extension of time is required, the Plan Administrator, acting through the Company, shall furnish written notice of the extension to the claimant prior to the termination of the initial 90 day period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan Administrator, acting through the Company, expects to render a final decision. In no event shall such extension exceed a period of 90 days from the end of the initial period.
8.3 Appeals .
Any claimant not satisfied with the Plan Administrators decision of a claim shall have the right to appeal to the Plan Administrator. The appeal must be signed and dated by the claimant and include a copy of the claim submitted to the Plan Administrator as well as a copy of the Plan Administrators decision. The appeal should explain why the claimant does not agree with the Plan Administrators decision. The appeal must be filed within 60 days of the receipt of the Plan Administrators decision. The appeal must be sent by certified mail or presented in person to the Plan Administrator.
The Plan Administrator shall promptly advise the claimant of its decision on the claimants appeal. Such decision shall be written in laymans terms, shall include specific reasons for the decision and shall contain specific references to pertinent Plan provisions upon which the decision is based. The decision on appeal shall be made no later than 60 days after the Plan Administrators receipt of the appeal, unless special circumstances require an extension of the time for processing. If such an extension of time is required, the Plan Administrator shall furnish written notice of the extension to the claimant prior to the termination of the 60 day period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan Administrator expects to render a final decision. If an extension of time is required, a decision shall be rendered as soon as possible, but not later than 120 days following receipt of the appeal.
ARTICLE IX
AMENDMENT OR TERMINATION
9.1 Amendment or Termination . The Company intends the Plan to be permanent but reserves the right, subject to Section 9.2, to amend or terminate the Plan when, in the sole opinion of the Company, such amendment or termination is advisable. However, no amendment shall deprive a Participant or beneficiary of any of the benefits which he or she has accrued under the Plan or otherwise adversely affect the Participants Account with respect to amounts credited thereto prior to the date such amendment is made. The Administrative Committee of the Unitrin, Inc. 401(k) Savings Plan (the Administrative Committee) shall have the authority, on behalf of the Company, to amend the Plan in any manner permitted by Article IX of the Plan as the Administrative Committee considers desirable, appropriate or necessary, provided that no such amendments, either individually or in the aggregate, have a material adverse financial impact on the Company and the Employers. The Board reserves the authority to make any other
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amendments to the Plan, including, but not limited to, amendments that the Administrative Committee deems desirable, appropriate or necessary which would have a material adverse financial impact on the Company and the Employers.
9.2 Effect of Amendment or Termination . No amendment or termination of the Plan shall, without the express written consent of the affected current or former Participant or beneficiary, reduce or alter any benefit entitlement of such Participant or beneficiary. Upon Plan termination, no further deferrals shall be made. In such event, the Participant or his or her beneficiary, as the case may be, shall be entitled to receive any benefit attributable to the deferrals accrued as of the day preceding the effective date of termination, plus hypothetical investment earnings and less hypothetical investment losses, taxes and expenses chargeable to the Participants Account up to the benefit distribution date. The Plan Administrator shall make distributions of the Participants benefit (a) in accordance with the Participant elections then in effect, or (b) if permitted by the Regulations and elected by the Company, in a single lump sum payment that is paid at such time as is permitted by Section 1.409A-3(j)(4)(ix) of the Regulations.
ARTICLE X
GENERAL PROVISIONS
10.1 Taxes . The Company shall have the right to (a) require any Participant or beneficiary to pay the Company the amount of any taxes which the Company may be required to withhold with respect to any benefits earned under, or distributions from, the Plan or (b) deduct from all amounts paid the amount of any taxes which the Company may be required to withhold with respect to any such distributions.
10.2 Entire Agreement . The Plan document along with the Deferral Election, Investment Preference Form, Beneficiary Designation Form and other administration forms required of Participants, and made known to them by the Company, shall constitute the entire agreement or contract between the Company and the Participant regarding the Plan. No oral statement regarding the Plan may be relied upon by the Participant or any other person claiming through or under the Participant.
10.3 Construction . Any mention of Articles, Sections and subsections thereof, unless stated specifically to the contrary, refers to Articles, Sections or subsections in the Plan. Headings of Articles, Sections and subsections are for convenient reference. The headings are not part of the Plan and are not to be considered in its construction. All references to statutory sections shall include the section as amended from time to time.
10.4 Employment Rights . Neither the establishment of the Plan nor any modification thereof, nor the creation of any trust or account, nor the payment of any benefits, shall be construed as conferring upon a Participant the right to continue to be employed by the Company in his or her present capacity, or in any capacity, or the right to continue to serve as an Outside Director. The Plan relates to the payment of deferred compensation as provided herein, and is not intended to be an employment contract.
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10.5 Benefit Transfers . Neither the Participant nor his or her designated or other beneficiary under the Plan shall have any right to transfer, assign, anticipate, hypothecate or otherwise encumber all or any part of the amounts payable under the Plan, except as provided in Section 6.8. No such amounts shall be subject to seizure by any creditor of any such Participant or beneficiary, by a proceeding at law or in equity, nor shall any such amounts be transferable by operation of law in the event of bankruptcy, insolvency or death of the Participant, his or her designated beneficiary or any other beneficiary hereunder. Any attempted assignment or transfer in contravention of this provision shall be void.
10.6 Governing Law . Construction, validity and administration of the Plan shall be governed by applicable Federal law and the laws of the State of Illinois.
10.7 Inurement . The Plan shall be binding upon and inure to the benefit of the Company and its successors and assigns, and the Participant, his or her successors, heirs, executors, administrators and beneficiaries.
10.8 Notices . Any notice (other than pursuant to enrollment materials) required or permitted to be given pursuant to the Plan shall be in writing, and shall be signed by the person giving the notice. If such notice is mailed, it shall be sent by United States first class mail, postage prepaid, addressed to such persons last known address as shown on the records of the Company. The date of such mailing shall be deemed to be the date of notice, but the notice shall not be effective until actually received. The Company or the Participant may change the address to which notice is sent by giving notice of such change in the manner above.
10.9 Corporate Successor . The Plan shall not be automatically terminated by a Change of Control event, but the Plan shall be continued after such Change of Control event only if and to the extent that the transferee, purchaser or successor entity agrees to continue the Plan. In the event that the Plan is not continued by the transferee, purchaser or successor entity, then the Plan shall terminate subject to the provisions of Section 9.2.
10.10 Unclaimed Benefit . Each Participant shall keep the Company informed of his or her current address and the current address of his or her beneficiary. The Company shall not be obligated to search for the whereabouts of any person. The Company is authorized to adopt procedures regarding unclaimed benefits that provide for the irrevocable forfeiture of a benefit if the Company is unable to locate the Participant, or if the Participant is deceased, his or her beneficiary. Such procedures shall be consistent with the Regulations and any other guidance issued by the Internal Revenue Service.
10.11 Limitations on Liability . Notwithstanding any of the preceding provisions of the Plan, neither the Company nor any individual acting as an employee or agent of the Company shall be liable to any Participant, former Participant, beneficiary or any other person for any claim, loss, liability or expense incurred in connection with the Plan.
10.12 No Guaranty of Benefits . Nothing contained in the Plan shall constitute a guaranty by the Company or any other entity or person that the assets of the Company will be sufficient to pay any benefit hereunder.
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10.13 409A Compliance . The Plan is intended to be a nonqualified deferred compensation plan that complies with the provisions of Code Section 409A and the Regulations, and shall be interpreted and operated consistent with such intent. If any ambiguity exists in the terms of the Plan, it shall be interpreted to be consistent with this purpose.
IN WITNESS WHEREOF, a duly appointed member of the Administrative Committee has executed the Plan on this 19th day of December, 2008.
UNITRIN, INC. | ||
By: |
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Its: |
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Exhibit 10.16
UNITRIN, INC.
SEVERANCE PLAN
Unitrin, Inc. (the Company ) adopted the Unitrin, Inc. Severance Plan (the Plan ) effective January 1, 2002 for the benefit of certain employees of the Company and its Subsidiaries and Affiliates, on the terms and conditions hereinafter stated. The Plan is being amended and restated as of January 1, 2009.
The Plan, as set forth herein, is intended to help retain qualified employees, maintain a stable work environment and provide economic security to certain employees of the Company and its Subsidiaries and Affiliates in the event of a Qualifying Termination following a Change in Control. The Plan, as a severance pay arrangement within the meaning of Section 3(2)(B)(i) of ERISA, is intended to be excepted from the definitions of employee pension benefit plan and pension plan set forth under Section 3(2) of ERISA, and is intended to meet the descriptive requirements of a plan constituting a severance pay plan within the meaning of regulations published by the Secretary of Labor at Title 29, Code of Federal Regulations, § 2510.3-2(b).
Section 1. DEFINITIONS. As hereinafter used:
1.1 Affiliate shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act.
1.2 Annual Compensation shall mean:
(a) with respect to a Severed Employee who was a salaried employee immediately prior to his or her Qualifying Termination, such Severed Employees rate of annual base salary as in effect immediately prior to such Severed Employees Qualifying Termination, without regard to any decrease in such salary constituting Good Reason;
(b) with respect to a Severed Employee who was compensated primarily based on commissions immediately prior to his or her Qualifying Termination, the total commissions earned by such Severed Employee with respect to the 12 full calendar month period ending immediately prior to such Severed Employees Qualifying Termination, without regard to any decrease in the rate of such commissions constituting Good Reason;
(c) with respect to a Severed Employee who was compensated based on an hourly rate of pay immediately prior to his or her Qualifying Termination, the total hourly wages earned by such Severed Employee with respect to the 12 full calendar month period ending immediately prior to such Severed Employees Qualifying Termination, without regard to any decrease in the Severed Employees hourly rate of pay constituting Good Reason;
1.3 Beneficial Owner shall have the meaning set forth in Rule 13d-3 under the Exchange Act.
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1.4 Board shall mean the Board of Directors of the Company, or any successor thereto.
1.5 Cause shall mean, with respect to a termination of the Employees employment with the Employer, (a) fraud, misappropriation of or intentional material damage to the property or business of the Company (including its Subsidiaries and Affiliates), which in any such case is materially injurious to the Company (including its Subsidiaries and Affiliates), monetarily or otherwise, or (b) the conviction of the Employee for the commission of a felony.
1.6 A Change in Control shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred:
(a) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or any of its Subsidiaries or Affiliates) representing 25% or more of the combined voting power of the Companys then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (i) of paragraph (c) below; or
(b) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Companys shareholders was approved or recommended by a vote of at least two-thirds of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or
(c) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (i) a merger or consolidation which results in the directors of the Company immediately prior to such merger or consolidation continuing to constitute at least a majority of the board of directors of the Company, the surviving entity or any parent thereof or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or any of its Subsidiaries or Affiliates) representing 25% or more of the combined voting power of the Companys then outstanding securities; or
(d) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Companys assets, other than a sale or disposition by the Company of all or substantially all of the Companys assets immediately following which the individuals who comprise the Board
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immediately prior thereto constitute at least a majority of the board of directors of the entity to which such assets are sold or disposed or any parent thereof.
1.7 Code shall mean the Internal Revenue Code of 1986, as it may be amended from time to time.
1.8 Employee shall mean any person who is employed by the Employer on a full-time basis (as determined under the Employers policies) and whose compensation is reported on a Form W-2, excluding any Employee who has an individual severance agreement that provides for benefits in connection with a Change in Control. For purposes of the Plan, an Employee shall be considered to continue to be employed by the Employer on a full-time basis during sick leave, military leave or any other leave of absence approved by the Employer.
1.9 The Employer of an Employee shall mean the Company or any Subsidiary or Affiliate of the Company by which such Employee is employed.
1.10 ERISA shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time.
1.11 Exchange Act shall mean the Securities Exchange Act of 1934, as amended.
1.12 Good Reason shall mean any action taken by the Employer which results in a material negative change to the Employee in the employment relationship, such as the duties to be performed, the conditions under which such duties are to be performed or the compensation to be received for performing such services. A termination by the Employee shall not constitute termination for Good Reason unless the Employee shall first have delivered to the Employer written notice setting forth with specificity the occurrence deemed to give rise to a right to terminate for Good Reason (which notice must be given no later than 90 days after the occurrence of such event), and there shall have passed a reasonable time (not less than 30 days) within which the Company may take action to correct, rescind or otherwise substantially reverse the occurrence supporting termination for Good Reason as identified by the Employee.
1.13 Level I Employee shall mean any Employee who is primarily compensated by commissions with at least three continuous years of service with the Employer as of the date of such Employees Qualifying Termination.
1.14 Level II Employee shall mean any Employee who is not primarily compensated by commissions and whose Annual Compensation is greater than $150,000.
1.15 Level III Employee shall mean any Employee who is not primarily compensated by commissions and whose Annual Compensation is at least $100,000 and not more than $150,000.
1.16 Level IV Employee shall mean any Employee who is not primarily compensated by commissions and whose Annual Compensation is at least $50,000 and less than $100,000.
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1.17 Level V Employee shall mean any Employee who is not primarily compensated by commissions and whose Annual Compensation is less than $50,000.
1.18 Payment Date means, with respect to a Severed Employee, the March 15 th that next follows the calendar year in which the Severed Employees Severance Date occurred.
1.19 Person shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (a) the Company or any of its Subsidiaries or Affiliates, (b) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Subsidiaries or Affiliates, (c) an underwriter temporarily holding securities pursuant to an offering of such securities, (d) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company, (e) any individual, entity or group whose ownership of securities of the Company is reported on Schedule 13G pursuant to Rule 13d-1 promulgated under the Exchange Act (but only for so long as such ownership is so reported) or (f) Singleton Group LLC or any successor in interest to such entity.
1.20 Plan Administrator shall mean the committee appointed to administer the Plan. Such committee shall be selected by the Board. Following a Change in Control, a person may be appointed to such committee only by a two-thirds majority of the individuals who were members of the Board immediately prior to such Change in Control.
1.21 A Potential Change in Control shall be deemed to occur in the event that (a) the Company enters into an agreement, the consummation of which would result in a Change in Control, (b) the Company or any Person publicly announces an intention to take or to consider taking action which, if consummated would constitute a Change in Control, (c) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 15% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Companys then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or any of its Subsidiaries or Affiliates) or (d) the Board adopts a resolution to the effect that, for purposes of the Plan, a Potential Change in Control has occurred.
1.22 Qualifying Termination shall mean a termination of an Employees employment during the 2-year period immediately following a Change in Control, either (a) by the Employer without Cause or (b) by the Employee for Good Reason. A termination of employment will not be deemed to have occurred upon (i) the transfer of the Employee to employment with a Subsidiary or Affiliate of the Company or (ii) the divestiture of a business with which the Employee is primarily associated if the Employee is offered comparable employment by the successor company.
1.23 Severance Benefits shall mean the payments and benefits provided to Severed Employees pursuant to Sections 2.1, 2.2, and 2.3 hereof.
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1.24 Severance Date shall mean the date on which an Employee incurs a Qualifying Termination.
1.25 Severance Weeks means, for each Employee, one week for (a) each full year such Employee has been continuously employed by the Employer, plus (without duplication), if there has been a break in such Employees employment with the Employer, (b) each full year of employment for which such Employee has received credit under any retirement plan or program maintained by the Employer for employment prior to such break, but in no event less than four (4) weeks or more than twenty six (26) weeks (thirteen (13) weeks in the case of a Level I Employee). For purposes of calculating an Employees full years of employment, (x) any partial year of employment of at least thirty five (35) weeks shall count as a full year of employment and (y) employment at one Employer shall count (without duplication) toward the number of years of employment at another Employer, provided that (i) there is no break (other than as the result of vacation or sick leave, military leave or other approved leave of absence) in the employment between the two Employers or (ii) such Employee has received credit under any retirement plan or program maintained by the Employer for such years of employment prior to such break.
1.26 Severed Employee shall mean an Employee who has incurred a Qualifying Termination.
1.27 Subsidiary shall mean any entity at least 50% of the voting securities of which are Beneficially Owned by the Company.
Additional definitions are set forth within the Plan and shall have the meanings ascribed to them in the Plan.
Section 2. BENEFITS.
2.1 The Company shall pay (or shall cause the Severed Employees Employer to pay) to each Severed Employee a severance payment (the Severance Payment ) equal to:
(a) in the case of a Level I Employee, the product of (i) one-fifty-second ( 1 / 52 ) of his or her Annual Compensation and (ii) his or her Severance Weeks.
(b) in the case of a Level II Employee, one years Annual Compensation plus the product of (i) one-fifty-second ( 1 / 52 ) of his or her Annual Compensation and (ii) his or her Severance Weeks.
(c) in the case of a Level III Employee, thirty-five-fifty seconds ( 35 / 52 ) of his or her Annual Compensation plus the product of (i) one-fifty-second ( 1 / 52 ) of his or her Annual Compensation and (ii) his or her Severance Weeks.
(d) in the case of a Level IV Employee, seventeen-fifty seconds ( 17 / 52 ) of his or her Annual Compensation plus the product of (i) one-fifty-second ( 1 / 52 ) of his or her Annual Compensation and (ii) his or her Severance Weeks.
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(e) in the case of a Level V Employee, the product of (i) one-fifty-second ( 1 / 52 ) of his or her Annual Compensation and (ii) his or her Severance Weeks.
The Severance Payment shall be paid to such Severed Employee in a lump sum as soon as practicable following the Severed Employees Qualifying Termination, but no later than the Payment Date. The Severance Payment that a Severed Employee receives under the Plan shall not be taken into account for purposes of determining benefits under any other qualified or nonqualified plans of the Employer.
2.2 For a period equal to a number of weeks (not to exceed fifty-two (52) in total) equal to the sum of (i) the Severed Employees Severance Weeks and (ii) in the case of (a) Level I Employees, eight (8) weeks, (b) Level II and III Employees, fifty-two (52) weeks, (c) Level IV Employees, thirty-five (35) weeks, and (d) Level V Employees, seventeen (17) weeks (the Welfare Benefit Continuation Period ), the Company shall provide (or shall cause the Severed Employees Employer to provide) the Severed Employee and anyone entitled to claim under or through such Severed Employee with all Employer-provided benefits under any group health plan (including any dental coverage) and life insurance plan of the Employer (as in effect immediately prior to such Severed Employees Severance Date or, if more favorable to the Severed Employee, immediately prior to the Change in Control) for which employees of the Employer are eligible, to the same extent as if such Severed Employee had continued to be an employee of the Employer during the Welfare Benefit Continuation Period, at no greater cost to the Severed Employee than the cost to the Severed Employee immediately prior to such date. To the extent that the Severed Employees participation in Employer benefit plans is not practicable, the Company shall arrange to provide, at the Companys sole expense, the Severed Employee and anyone entitled to claim under or through such Severed Employee with equivalent health and life insurance benefits under an alternative arrangement during the Welfare Benefit Continuation Period. The coverage period for purposes of the group health continuation requirements of Section 4980B of the Code shall commence at the expiration of the Welfare Benefit Continuation Period. The benefits described in this Section 2.2 shall end as of the date the Severed Employee becomes covered under any group health plan maintained by a subsequent employer which provides benefits to the Severed Employee (and anyone entitled to claim the benefits described in this Section 2.2 under or through such Severed Employee) not materially less favorable than the benefits described in this Section 2.2, and which does not exclude any pre-existing condition that the Severed Employee or his or her dependents may have at that time.
2.3 Outplacement .
(a) Each Level II and III Employee who is entitled to receive a Severance Payment under Section 2.1 shall also be entitled to receive outplacement services consisting of counseling, networking, spousal programs and the use of a private office. Such outplacement services will be provided for a maximum of thirty-nine (39) weeks by a reputable organization selected by the Company. These outplacement services will be paid for by the Company.
(b) Each Level IV Employee who is entitled to receive a Severance Payment under Section 2.1 shall also be entitled to receive outplacement services consisting of counseling, group workshops and the use of a semi-private office. Such
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outplacement services will be provided for a maximum of twenty-six (26) weeks by a reputable organization selected by the Company. These outplacement services will be paid for by the Company.
(c) Each other Employee who is entitled to receive a Severance Payment under Section 2.1 shall also be entitled to receive outplacement services consisting of group workshops, resume writing assistance and help-line support. Such outplacement services will be provided for a maximum of eight (8) weeks by a reputable organization selected by the Company. These outplacement services will be paid for by the Company.
2.4 In the event of a claim by an Employee as to the amount or timing of any payment or benefit under the Plan, such Employee shall present the reason for his or her claim in writing to the Plan Administrator. The Plan Administrator shall, within 90 days after receipt of such written claim, send a written notification to the Employee as to its disposition. In the event the claim is wholly or partially denied, such written notification shall (a) state the specific reason or reasons for the denial, (b) make specific reference to pertinent Plan provisions on which the denial is based, (c) provide a description of any additional material or information necessary for the Employee to perfect the claim and an explanation of why such material or information is necessary, and (d) set forth the procedure by which the Employee may appeal the denial of his or her claim. In the event an Employee wishes to appeal the denial of his or her claim, he or she may request a review of such denial by making application in writing to the Plan Administrator within 60 days after receipt of such denial. Such Employee (or his or her duly authorized legal representative) may, upon written request to the Plan Administrator, review any documents pertinent to his or her claim, and submit in writing issues and comments in support of his or her position. Within 60 days after receipt of a written appeal (unless special circumstances require an extension of time, but in no event more than 120 days after such receipt), the Plan Administrator shall notify the Employee of the final decision. The final decision shall be in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, and specific references to the pertinent Plan provisions on which the decision is based.
2.5 Any further dispute or controversy arising under or in connection with the Plan with respect to an Employee shall be settled exclusively by arbitration at a location within fifty miles from the location of such Employees job with an Employer immediately prior to the Change in Control (determined without regard to any relocation thereof which constitutes Good Reason) in accordance with the rules of the American Arbitration Association then in effect; provided , however , that the evidentiary standards set forth in the Plan shall apply. Judgment may be entered on the award of the arbitrator in any court having jurisdiction. Each party shall bear its own expenses of such arbitration.
2.6 Cap .
(a) Notwithstanding any other provision of the Plan, in the event that any payment or benefit received or to be received by the Employee in connection with a Change in Control or the termination of the Employees employment (whether pursuant to the terms of the Plan or any other plan, arrangement or agreement with the Company,
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any Person whose actions result in a Change in Control or any Person Affiliated with the Company or such Person) (all such payments and benefits, including the Severance Benefits, being hereinafter called Total Payments ) would not be deductible (in whole or part), by the Company, Affiliate or Person making such payment or providing such benefit as a result of Code section 280G, then, to the extent necessary to make such portion of the Total Payments deductible (and after taking into account any reduction in the Total Payments provided by reason of Code section 280G in such other plan, arrangement or agreement), the cash Severance Payments shall first be reduced (if necessary, to zero), and all other Severance Payments shall thereafter be reduced (if necessary, to zero); provided , however , that the Employee may elect to have the noncash Severance Payments reduced (or eliminated) prior to any reduction of the cash Severance Payments.
(b) For purposes of this limitation, (i) no portion of the Total Payments the receipt or enjoyment of which the Employee shall have waived at such time and in such manner as not to constitute a payment within the meaning of Code section 280G(b) shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which, in the opinion of tax counsel ( Tax Counsel ) reasonably acceptable to the Employee and selected by the accounting firm which was, immediately prior to the Change in Control, the Companys independent auditor (the Auditor ), does not constitute a parachute payment within the meaning of Code section 280G(b)(2), including by reason of Code section 280G(b)(4)(A), (iii) the Severance Benefits shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (i) or (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of Code section 280G(b)(4)(B) or are otherwise not subject to disallowance as deductions by reason of Code section 280G, in the opinion of Tax Counsel, and (iv) the value of any noncash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Auditor in accordance with the principles of Code sections 280G(d)(3) and (4).
(c) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Employee and the Company in applying the terms of this Section 2.6, the Total Payments paid to or for the Employees benefit are in an amount that would result in any portion of such Total Payments being subject to the Excise Tax, then, if such repayment would result in (i) no portion of the remaining Total Payments being subject to the Excise Tax and (ii) a dollar-for-dollar reduction in the Employees taxable income and wages for purposes of federal, state and local income and employment taxes, the Employee shall have an obligation to pay the Company upon demand an amount equal to the sum of (i) the excess of the Total Payments paid to or for the Employees benefit over the Total Payments that could have been paid to or for the Employees benefit without any portion of such Total Payments being subject to the Excise Tax; and (ii) interest on the amount set forth in clause (i) of this sentence at the rate provided in Code section 1274(b)(2)(B) from the date of the Employees receipt of such excess until the date of such payment.
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Section 3. PLAN ADMINISTRATION.
3.1 The Plan shall be interpreted, administered and operated by the Plan Administrator, which shall have complete authority, in its sole discretion subject to the express provisions of the Plan, to determine who shall be eligible for Severance Benefits, to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, and to make all other determinations necessary or advisable for the administration of the Plan.
3.2 All questions of any character whatsoever arising in connection with the interpretation of the Plan or its administration or operation shall be submitted to and settled and determined by the Plan Administrator in an equitable and fair manner in accordance with the procedure for claims and appeals described in Section 2.4 hereof.
3.3 The Plan Administrator may delegate any of its duties hereunder to such person or persons from time to time as it may designate.
3.4 The Plan Administrator is empowered, on behalf of the Plan, to engage accountants, legal counsel and such other personnel as it deems necessary or advisable to assist it in the performance of its duties under the Plan. The functions of any such persons engaged by the Plan Administrator shall be limited to the specified services and duties for which they are engaged, and such persons shall have no other duties, obligations or responsibilities under the Plan. Such persons shall exercise no discretionary authority or discretionary control respecting the management of the Plan. All reasonable expenses thereof shall be borne by the Company.
Section 4. PLAN MODIFICATION OR TERMINATION.
The Plan may be amended by the Plan Administrator or terminated by the Board at any time; provided , however , that (a) no termination or amendment of the Plan may reduce the Severance Benefits to be paid or provided under the Plan to an Employee if the Employees termination of employment with the Employer has occurred prior to such termination of the Plan or amendment of its provisions and (b) during the pendency of a Potential Change in Control and during the two-year period following a Change in Control, the Plan may not be terminated or amended, if such amendment would be adverse to the interests of any Employee or his or her beneficiary, without the consent of such Employee or beneficiary.
Section 5. GENERAL PROVISIONS.
5.1 Except as otherwise provided herein or by law, none of the payments, benefits or rights of any Employee shall be subject to any claim of any creditor, and, in particular, to the fullest extent permitted by law, all such payments, benefits and rights shall be free from attachment, garnishment, trustees process, or any other legal or equitable process available to any creditor of such Employee. No Employee shall have the right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits or payments which he or she may expect to receive, contingently or otherwise, under the Plan.
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5.2 Neither the establishment of the Plan, nor any modification thereof, nor the creation of any fund, trust or account, nor the payment of any benefits shall be construed as giving any Employee, or any person whomsoever, the right to be retained in the service of the Employer, and all Employees shall remain subject to discharge to the same extent as if the Plan had never been adopted.
5.3 If any provision of the Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and the Plan shall be construed and enforced as if such provisions had not been included.
5.4 The Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Company, expressly and unconditionally to assume and agree to perform the Companys obligations under the Plan, in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. In such event, the term Company, as used in the Plan, shall mean the Company as herein before defined and any successor or assignee to the business or assets which by reason hereof becomes bound by the terms and provisions of the Plan.
5.5 The headings and captions herein are provided for reference and convenience only, shall not be considered part of the Plan, and shall not be employed in the construction of the Plan.
5.6 The Plan shall not be funded. No Employee shall have any right to, or interest in, any assets of the Company which may be applied by the Company to the payment of benefits or other rights under the Plan.
5.7 Any benefit payable to or for the benefit of a minor, an incompetent person or other person incapable of giving a receipt therefor shall be deemed paid when paid to such persons guardian or to the party providing or reasonably appearing to provide for the care of such person, and such payment shall fully discharge the Company, the Plan Administrator and all other parties with respect thereto. If a Severed Employee dies prior to the payment of all benefits due such Severed Employee, such unpaid amounts shall be paid to the executor, personal representative or estate of such Employee.
5.8 The Severance Benefits that a Severed Employee may be entitled to receive pursuant to the Plan are not intended to be duplicative of any similar benefits to which a Severed Employee may be entitled from the Company or any of its Subsidiaries or Affiliates under any other severance plan, agreement, policy or program maintained by the Company or any of its Subsidiaries or Affiliates or to which the Company or any of its Subsidiaries or Affiliates is a party. Accordingly, to the extent permissible under Code section 409A, the Company shall reduce the benefits to which a Severed Employee may be entitled under the Plan to take account of any other similar benefits to which the Severed Employee is entitled from the Company or any of its Subsidiaries or Affiliates; provided, however, that if the amount of benefits to which such Severed Employee is entitled under such other severance plan, agreement, policy or program is greater than the benefits to which the Severed Employee is entitled under the Plan, the Severed Employee will be entitled to receive the full amount of the benefits to
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which such Employee is entitled under such other plan, agreement, policy or program and no benefits under the Plan.
5.9 Any notice or other communication required or permitted pursuant to the terms hereof shall have been duly given when delivered or mailed by United States mail, first class, postage prepaid, addressed to the intended recipient at his, her or its last known address.
5.10 The Plan shall be construed and enforced according to the laws of the State of Illinois, without giving effect to its principles of conflicts of law, to the extent not preempted by federal law, which shall otherwise control.
Section 6. 409A COMPLIANCE.
6.1 The Plan shall be interpreted and administered in a manner so that any amount or benefit payable hereunder shall be paid or provided in a manner that is either exempt from or compliant with the requirements of Code section 409A and the regulations and other guidance issued thereunder.
6.2 Notwithstanding anything in the Plan to the contrary, to the extent that the requirements of Code section 409A apply to any amount or benefit that would otherwise be payable or distributable hereunder by reason of the Employees termination of employment, such amount or benefit will not be payable or distributable to the Employee by reason of such circumstance unless the circumstances giving rise to such termination of employment meet any description or definition of separation from service in Code section 409A and applicable regulations, without giving effect to any elective provisions that may be available under such definition, except that in determining whether there is a separation from service with the employer (as defined in the regulations under Code section 409A), the employer shall be determined as follows:
(a) In applying Code section 1563(a)(1), (2) and (3) for purposes of determining a controlled group of corporations under Code section 414(b), the phrase at least 50 percent shall be used instead of at least 80 percent each place it appears in Code section 1563(a)(1), (2) and (3); and
(b) In applying Treasury Regulation Section 1.414(c)-2 for purposes of determining trades or businesses (whether or not incorporated) that are under common control for purposes of Code section 414(c), at least 50 percent is used instead of at least 80 percent each place it appears in Treasury Regulation Section 1.414(c)-2.
6.3 Nothing in this Section 6 prohibits the vesting of any amount upon a termination of employment, however defined. If this Section 6 prevents the payment or distribution of any amount or benefit, such payment or distribution shall be made on the date, if any, on which an event occurs that constitutes a Code section 409A-compliant separation from service or such later date as may be required by Section 6.4 below.
6.4 Notwithstanding anything in the Plan to the contrary, if any amount or benefit is nonqualified deferred compensation for purposes of Code section 409A that would otherwise be payable or distributable under the Plan by reason of the Employees separation
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from service during a period in which he is a Specified Employee (as defined in the regulations under Code section 409A), then, subject to any permissible acceleration of payment by the Company under Treas. Reg. Section 1.409A-3(j)(4)(ii) (domestic relations order), (j)(4)(iii) (conflicts of interest), or (j)(4)(vi) (payment of employment taxes):
(a) If the payment or distribution is payable in a lump sum, the Employees right to receive payment or distribution of such non-exempt deferred compensation will be delayed until the earlier of Employees death or the first day of the seventh month following the Employees separation from service; and
(b) If the payment or distribution is payable over time, the amount of such non-exempt deferred compensation that would otherwise be payable during the six-month period immediately following the Employees separation from service will be accumulated and the Employees right to receive payment or distribution of such accumulated amount will be delayed until the earlier of the Employees death or the first day of the seventh month following the Employees separation from service, whereupon the accumulated amount will be paid or distributed to the Employee on such date and the normal payment or distribution schedule for any remaining payments or distributions will resume.
6.5 With regard to any provision herein that provides for reimbursement of costs and expenses or in-kind benefits that are not exempt from Code section 409A, (a) the right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit, (b) the amount of expenses eligible for reimbursement, or in-kind benefits, provided during any of the Employees taxable years shall not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other of the Employees taxable years, provided that the foregoing clause (b) shall not be violated with regard to expenses reimbursed under any arrangement covered by Code section 105(b) solely because such arrangement provides for a limit on the amount of expenses that may be reimbursed over some or all of the period the arrangement is in effect and (c) such payments shall be made on or before the last day of the Employees taxable year following the taxable year in which the expenses was incurred.
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Exhibit 12
UNITRIN, INC. AND SUBSIDIARIES
COMPUTATION OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
Dollars in Millions
Years Ended December 31, | ||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||
Income (Loss) from Continuing Operations before Income Taxes and Equity in Net Income of Investee |
$ | (90.0 | ) | $ | 226.8 | $ | 375.2 | $ | 312.4 | $ | 312.1 | |||||
Fixed Charges, Excluding Capitalized Interest |
97.0 | 98.0 | 84.1 | 71.7 | 66.2 | |||||||||||
Adjusted Earnings from Continuing Operations before Income Taxes and Fixed Charges |
$ | 7.0 | $ | 324.8 | $ | 459.3 | $ | 384.1 | $ | 378.3 | ||||||
Interest |
$ | 94.6 | $ | 95.8 | $ | 82.0 | $ | 69.8 | $ | 64.4 | ||||||
Rental Factor |
2.4 | 2.2 | 2.1 | 1.9 | 1.8 | |||||||||||
Capitalized Interest |
1.3 | 0.3 | ||||||||||||||
Total Fixed Charges |
$ | 98.3 | $ | 98.3 | $ | 84.1 | $ | 71.7 | $ | 66.2 | ||||||
Ratio of Earnings to Fixed Charges |
0.1 x | 3.3 x | 5.5 x | 5.4 x | 5.7 x |
The ratios of earnings to fixed charges have been computed on a consolidated basis by dividing earnings from continuing operations before income taxes and fixed charges by fixed charges. Fixed charges consist of interest on debt and a factor for interest included in rent expense. Income from Continuing Operations before Income Taxes and Equity in Net Income of Investee has the meaning as set forth in the Consolidated Statements of Operations included in this 2008 Annual Report on Form 10-K.
Exhibit 13
To Our Shareholders
The year 2008 was a difficult one for your company. We were battered by natural catastrophes and by the economic crisis. Catastrophe losses were $94 million after tax in 2008 compared to only $25 million after tax in 2007. Yet, this pales in comparison to realized and unrealized investment losses of nearly $450 million after tax in 2008. Net Investment Income also declined by $50 million after tax compared to 2007.
Still we are weathering the storm. As we discuss below, our capital position remains strong and most of our businesses are not directly tied to the general economic cycle. The property and casualty cycle is, we believe, hardening. Our life and health insurance businesses sell basic insurance products that are for the most part unaffected by the economic times. We believe our insurance operations will perform well in 2009.
Our operating strategy for 2009 is to focus on profitability and risk reduction. You will see that reflected in our investment and individual operating business strategies.
Insurance Operations
Kemper and Unitrin Specialty are well positioned to take advantage of the hardening property and casualty cycle and we expect improved profitability and growth in 2009. Growth will be dampened by our continued focus on reducing catastrophe risk.
Unitrin Direct again produced disappointing results in 2008, and we are taking dramatic steps to improve operating results, including aggressive rate and underwriting actions and a reduction in marketing spending. After closing the Direct Response acquisition, we intend to limit growth of the combined operation until profitability is achieved. The combination of Unitrin Direct and Direct Response will result in a company that has sufficient scale to turn a profit. We continue to believe that our shareholders will benefit from this alternative distribution channel in the years to come.
With the sale of Unitrin Business Insurance complete, our property and casualty insurance businesses are almost exclusively personal lines. This gives us the opportunity to take advantage of the combined scale of Kemper, Unitrin Specialty and Unitrin Direct. A shared services initiative is now underway to combine the back office operations of these businesses where it makes sense while still retaining the individual marketing and underwriting operations unique to each business.
Our Life and Health insurance segment net income was $51.8 million in 2008down from $97 million in 2007. The decline was entirely due to lower net investment income and higher catastrophe losses from the property insurance products distributed by our career agents. We have discontinued sales of dwelling coverages and are considering additional steps to decrease our catastrophe exposure.
Fireside Bank
We continue to take risk off the table by decreasing the volume of new loans while simultaneously increasing the quality of those originations. Fireside Banks automobile loan portfolio shrunk from $1.4 billion at the end of 2007 to $1.2 billion at the end of 2008 a decline of about 12%. Fireside Banks tier 1 capital to total average assets ratio was a strong 15.6% at the end of 2008. The loan loss reserve stands at 10% of the automobile loan portfolio. We are continuing the process of exploring the strategic alternatives associated with our investment in Fireside Bank and will have a better perspective on the future of this business later in 2009.
Investment Operations
We have always had little direct investment exposure to sub-prime residential mortgage-backed securities, Alt-A investment securities, collateralized debt obligations, credit derivatives, enhanced money market funds, or commercial paper investments. We have not written credit default swap products nor do we write annuity or other investment-based life insurance products. We do not participate in securities lending programs.
We have substantially reduced investment risk and the corresponding risk to your capital. We reduced our concentrated holding in Northrop stock valued at $706 million at the end of 2007 to $40 million at the end of 2008. We also sold most of our diversified stock and REIT portfolios in the fourth quarter. We still hold 12.6 million shares of Intermec common stock valued at $168 million at the end of 2008. We also hold an alternative investment fund portfolio valued at $286 million at the end of 2008. The primary investments of these funds are leveraged loans and other high yielding securities that suffered substantial declines in value in 2008. These securities could continue to decline in value in 2009.
Our fixed maturity and short-term investment portfolios are almost entirely investment grade securities. Our $1.7 billion corporate bond portfolio has an average Standard and Poors rating of A-. Our municipal bond investment strategy has always been to focus on the underlying credit and not to rely on the rating of the bond insurers. The majority of our $1.3 billion of municipal bond investments are direct obligations of states. The average underlying credit rating on the entire municipal bond portfolio is AA.
Unitrin Business Overview
The Unitrin family of insurance and finance companies serves clients in markets across the United States. More than 6 million policyholders and automobile finance customers have their basic insurance and financial needs met by a nationwide network of career agents and independent agents and loan representatives. As one of Americas leading financial services providers, the Unitrin family specializes in property and casualty, life, health and accident insurance as well as automobile finance products. With nearly $9 billion in assets, we employ over 7 thousand associates.
Capital
Shareholders Equity declined from $2.3 billion at the end of 2007 to $1.6 billion at the end of 2008. Still, we have adequate capital at our subsidiaries to operate our businesses and debt-to-total capitalization was a manageable 25.3%. We had $311 million of undrawn capacity under our revolving credit agreement at the end of 2008. Our earliest long-term debt maturity is in late 2010. Our debt remains rated as investment grade. We do not anticipate needing to raise either debt or equity capital in 2009.
Your Board of Directors understands the importance of the dividend to shareholders. We have decided to continue our dividend at the previous quarters level this quarter.
A Special Thanks
Lastly, two of our directorsDon Fites and Jerry Jeromewill be retiring at our May shareholders meeting. Don Fites is a world class business leader with broad experience. Jerrys service to Unitrin dates back to its spinoff from Teledyne in 1990. He was Unitrins first President and CEO and has also served as its Chairman. Our sincere thanks go to both of these gentlemen along with best wishes for their well deserved retirement.
February 4, 2009
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|
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Richard C. Vie |
Donald G. Southwell |
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Chairman |
President and Chief Executive Officer |
Exhibit 21
Subsidiaries of UNITRIN, INC.
Subsidiaries of Unitrin, Inc., with their states of incorporation in parentheses, are as follows:
1. | Alpha Property & Casualty Insurance Company (Wisconsin) |
2. | Capitol County Mutual Fire Insurance Company (Texas) * |
3. | Charter General Agency, Inc. (Texas) |
4. | Charter Group, Inc. (Texas) |
5. | Charter Indemnity Company (Texas) |
6. | Clayton Reinsurance Ltd. (Bermuda) |
7. | Family Security Funerals Company (Texas) |
8. | Financial Indemnity Company (California) |
9. | Fireside Bank (California) |
10. | Fireside Securities Corporation (California) |
11. | Kemper Auto and Home Group, Inc. (Illinois) |
12. | Kemper Enterprise Agency, Inc. (Pennsylvania) |
13. | Kemper Independence Insurance Company (Illinois) |
14. | Merastar Industries, Ltd. (Delaware) |
15. | Merastar Insurance Company (Indiana) |
16. | Mutual Benefit Assessment Corporation (Alabama) |
17. | Mutual Savings Fire Insurance Company (Alabama) |
18. | Mutual Savings Life Insurance Company (Alabama) |
19. | NCM Management Corporation (Delaware) |
20. | Old Reliable Casualty Company (Missouri) * |
21. | One East Wacker Corporation (Illinois) |
22. | Primesco, Inc. (Delaware) |
23. | The Reliable Life Insurance Company (Missouri) |
24. | Reserve National Insurance Company (Oklahoma) |
25. | Security One Insurance Agency (Tennessee) |
26. | Southern States Finance Corporation (Louisiana) |
27. | Trinity Universal Insurance Company (Texas) |
28. | Union National Fire Insurance Company (Louisiana) |
29. | Union National Life Insurance Company (Louisiana) |
30. | United Casualty Insurance Company of America (Illinois) |
31. | United Insurance Company of America (Illinois) |
32. | Unitrin Advantage Insurance Company (New York) |
33. | Unitrin Auto and Home Insurance Company (New York) |
34. | Unitrin County Mutual Insurance Company (Texas) * |
35. | Unitrin Data Systems, Inc. (Illinois) |
36. | Unitrin Direct General Agency, Inc. (Texas) |
37. | Unitrin Direct Insurance Company (Illinois) |
38. | Unitrin Direct Property & Casualty Company (Illinois) |
39. | Unitrin Internal Audit Services, Inc. (Illinois) |
40. | Unitrin Preferred Insurance Company (New York) |
41. | Unitrin Safeguard Insurance Company (Wisconsin) |
42. | Unitrin Services Company (Illinois) |
43. | Valley Group, Inc. (Oregon) |
44. | Valley Insurance Company (California) |
45. | Valley Property & Casualty Insurance Company (Oregon) |
* | May be deemed to be an affiliate pursuant to Rule 1-02 of SEC Regulation S-X. |
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 33-47530, 33-58300, 333-4530, 333-38981, 333-86935, 333-76076, 333-87898, and 333-127216 on Form S-8 and Nos. 333-127215 and 333-142722 on Form S-3 of our report, dated February 4, 2009, relating to the consolidated financial statements and the financial statement schedules of Unitrin, Inc. and subsidiaries (the Company), and the effectiveness of the Companys internal control over financial reporting (which report expresses an unqualified opinion and includes an explanatory paragraph as to the changes in the Companys method of accounting for certain investments reported under the equity method of accounting in 2008), appearing in this Annual Report on Form 10-K of Unitrin, Inc. and subsidiaries for the year ended December 31, 2008.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 4, 2009
Exhibit 31.1
CERTIFICATIONS
I, Donald G. Southwell, certify that:
1. | I have reviewed this annual report on Form 10-K of Unitrin, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: February 4, 2009
/s/ D ONALD G. S OUTHWELL |
Donald G. Southwell |
President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATIONS
I, Eric J. Draut, certify that:
1. | I have reviewed this annual report on Form 10-K of Unitrin, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: February 4, 2009
/s/ E RIC J. D RAUT |
Eric J. Draut |
Executive Vice President and |
Chief Financial Officer |
Exhibit 32.1
Certification of CEO Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report on Form 10-K of Unitrin, Inc. (the Registrant) for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the Report), Donald G. Southwell, as Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
/s/ D ONALD G. S OUTHWELL |
||
Name: | Donald G. Southwell | |
Title: | President and Chief Executive Officer |
Date: February 4, 2009
Exhibit 32.2
Certification of CFO Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report on Form 10-K of Unitrin, Inc. (the Registrant) for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the Report), Eric J. Draut, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
/s/ E RIC J. D RAUT |
||
Name: | Eric J. Draut | |
Title: |
Executive Vice President and Chief Financial Officer |
Date: February 4, 2009