The Company owns the 41-story office building at One East Wacker Drive, Chicago, Illinois, that houses the executive offices of Unitrin and the home office of its Unitrin Direct operations, which together occupy approximately 48,000 square feet of the 527,000 rentable square feet in the building. In addition, Unitrin’s subsidiaries together own and occupy 14 buildings located in 7 states consisting of approximately 46,000 square feet in the aggregate. Unitrin’s subsidiaries hold additional properties solely for investment purposes that are not utilized by Unitrin or its subsidiaries.
Unitrin’s Life and Health Insurance segment leases facilities with aggregate square footage of approximately 500,000 at 125 locations in 26 states. The latest expiration date of the existing leases is in October of 2019.
Unitrin’s corporate data processing operation leases facilities with aggregate square footage of approximately 36,000 square feet at 2 locations in 2 states. The latest expiration date of the existing leases is in March of 2018.
Kemper, Unitrin Specialty and Unitrin Direct share leased facilities with an aggregate square footage of approximately 88,000 at 3 locations in 3 states. The latest expiration date of the existing leases is in September of 2018.
Net Realized Gains on Sales of Investments, reported in the Consolidated Statement of Operations, were $42.6 million in 2010, compared to $24.6 million in 2009. Net Impairment Losses Recognized in Earnings for the years ended December 31, 2010 and 2009 were $16.5 million and $50.4 million, respectively. The Company cannot predict when or if similar investment gains or losses may occur in the future. Other Comprehensive Investment Gains, which are not reported in the Consolidated Statement of Operations, but rather are reported in the Consolidated Statement of Comprehensive Income (Loss), were $179.5 million in 2010, compared to $233.7 million in 2009. The net comprehensive investment gain for the year ended December 31, 2010 was largely due to lower overall interest rates resulting from lower risk-free interest rates and an appreciation in the fair value of equity securities. The net comprehensive investment gain for the year ended December 31, 2009 was largely due to lower overall interest rates resulting from narrower credit spreads, partially offset by higher risk-free interest rates.
The Life and Health Insurance segment presented above includes reinsurance reinstatement premiums of $0.6 million, $0.7 million and $4.4 million for the years ended December 31, 2010, 2009 and 2008, respectively, to reinstate coverage following certain hurricanes.
Total catastrophe losses and LAE (including development), net of reinsurance recoveries, reported in continuing operations were $78.1 million, $43.5 million and $144.9 million for the years ended December 31, 2010, 2009 and 2008, respectively. Catastrophe losses and LAE (including development), net of reinsurance recoveries, for the years ended December 31, 2010, 2009 and 2008 by business segment are presented below.
Automobile insurance incurred losses and LAE were $399.1 million for the year ended December 31, 2010, compared to $409.6 million for 2009. Automobile insurance incurred losses and LAE decreased by $10.5 million due primarily to lower claim volume resulting principally from fewer automobile insurance policies in force, partially offset by the impact of lower favorable loss and LAE reserve development. Favorable loss and LAE reserve development was $11.8 million for the year ended December 31, 2010, compared to $32.5 million for 2009. Non-catastrophe losses and LAE (excluding development) as a percentage of earned premiums on automobile insurance were 74.1% for the year ended December 31, 2010, compared to 74.5% for 2009.
ended December 31, 2010, compared to favorable development of $25.9 million for 2009. Non-catastrophe losses and LAE (excluding development) decreased by $19.0 million due primarily to lower average, estimated frequency and severity of losses. Non-catastrophe losses and LAE (excluding development) as a percentage of earned premiums on homeowners insurance were 54.1% for the year ended December 31, 2010, compared to 59.8% for 2009.
Insurance Expenses decreased by $16.6 million for the year ended December 31, 2010, compared to 2009. Insurance Expenses for the year ended December 31, 2009 included a reduction in expense of $2.8 million due to a change in the Kemper segment’s estimated TWIA assessment for Hurricane Ike. Insurance Expenses for the year ended December 31, 2009 included a charge of $3.3 million to write off the Kemper segment’s equity in the North Carolina Beach Plan (the “NC Beach Plan”) underwriting pool due to a change in the law enacted in the third quarter of 2009. Excluding the impact of the TWIA assessment and NC Beach Plan write-off, Insurance Expenses decreased $16.1 million due primarily to lower acquisition expenses, largely due to lower earned premiums, and the favorable impact of expense savings initiatives begun in 2009.
Net Income in the Kemper segment decreased by $13.1 million for the year ended December 31, 2010, compared to 2009, due primarily to the lower Operating Profit. The Kemper segment’s 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 $24.7 million for the year ended December 31, 2010, compared to $23.4 million for 2009.
Earned Premiums in the Kemper segment increased by $1.1 million for the year ended December 31, 2009, compared to 2008, due primarily to higher average premium rates, partially offset by an increase in the cost of reinsurance. Earned premiums on homeowners insurance increased by $5.2 million for the year ended December 31, 2009, compared to 2008, due primarily to higher average premium rates, partially offset by an increase in the cost of reinsurance. Earned premiums on automobile insurance decreased by $5.4 million for the year ended December 31, 2009, compared to 2008, due primarily to lower average premium rates and, to a lesser extent, lower volume.
Net Income in the Kemper segment increased by $50.3 million for the year ended December 31, 2009, compared to 2008, due primarily to the changes in Operating Profit. The Kemper segment’s 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 $23.4 million for the year ended December 31, 2009, compared to $24.8 million for 2008.
Net Investment Income in the Unitrin Specialty segment increased by $4.0 million for the year ended December 31, 2010, compared to 2009, due primarily to higher net investment income from Equity Method Limited Liability Investments. The Unitrin Specialty segment reported net investment income of $7.3 million from Equity Method Limited Liability Investments for the year ended December 31, 2010, compared to $3.5 million for 2009.
the year ended December 31, 2010, and was almost entirely related to two liability claims that had been previously reported, one from 2003 and the other from 2005. Loss and LAE reserve development on other personal insurance was not significant for the year ended December 31, 2009.
Earned Premiums in the Unitrin Specialty segment increased by $33.5 million for the year ended December 31, 2009, compared to 2008, 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 $57.5 million for the year ended December 31, 2009, compared to 2008, due to higher volume, partially offset by lower average earned premium rates. Personal automobile insurance volume increased due primarily to a higher level of renewal policies resulting from the Unitrin Specialty segment’s significant growth in 2008 in California. Commercial automobile insurance earned premiums decreased by $24.0 million for the year ended December 31, 2009, compared to 2008, due to lower volume, partially the result of increased competition and, to a lesser extent, lower average earned premium rates. In the fourth quarter of 2008 and throughout 2009, Unitrin Specialty implemented several initiatives targeted to stabilize commercial automobile premium volume, including the introduction of a new commercial insurance product for light commercial vehicles, a reduction in down payment requirements for certain commercial automobile insurance risks and the introduction of improved internet-enabled commercial lines rating technology. While these initiatives appear to have stabilized new business production, commercial automobile insurance premium volume decreased for the year ended December 31, 2009, compared to 2008, due primarily to a lower level of renewal policies.
Net Investment Income in the Unitrin Specialty segment increased by $12.2 million for the year ended December 31, 2009, compared to 2008, due primarily to higher net investment income from Equity Method Limited Liability Investments. The Unitrin Specialty segment reported net investment income of $3.5 million from Equity Method Limited Liability Investments for the year ended December 31, 2009, compared to net investment losses of $7.9 million for 2008.
scale. Incurred losses and LAE (excluding catastrophes and development) as a percentage of personal automobile earned premiums decreased due primarily to lower frequency and severity on physical damage coverages, partially offset by higher severity on liability coverages. Personal automobile insurance catastrophe losses and LAE were $4.2 million for the year ended December 31, 2009, compared to $2.9 million for 2008. Loss and LAE reserve development on personal automobile insurance had a favorable effect of $2.3 million for the year ended December 31, 2009, compared to a favorable effect of $1.7 million for 2008.
On February 13, 2009, the Company completed its acquisition of Direct Response in a cash transaction. 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 are included in the Unitrin Direct segment from the date of acquisition. Direct Response products had earned premiums of $106.8 million for year ended December 31, 2010, compared to $115.2 million from the date of acquisition through December 31, 2009. See Note 3, “Acquisitions of Businesses,” to the Consolidated Financial Statements for additional information pertaining to the acquisition of Direct Response.
Earned Premiums in the Unitrin Direct segment decreased by $63.2 million for the year ended December 31, 2010, compared to 2009, due primarily to lower volume.
Unitrin Direct continues to modify its marketing program to target better response and conversion rates from customers with more favorable risk characteristics and place greater emphasis on improving premium rate adequacy and insurance risk selection. Unitrin Direct has substantially ceased using Direct Response’s products to write new business and has designed a new Unitrin Direct product to replace these products, as well as other products. Unitrin Direct is in the early stages of introducing this newly-designed product on a segment-wide basis. Unitrin Direct currently estimates that this product will comprise approximately 13% of its earned premiums in 2011 and over time will improve policyholder retention, loss ratios and per policy acquisition costs. In the fourth quarter of 2010, Unitrin Direct launched a new initiative featuring its iMingle™ and Insuring The i Generation™ marketing approach. Designed for the “i Generation,” iMingle is specially designed for customers that expect technology and service to work together to make life easy - whether it is applying for insurance, signing policy documents, enrolling in automatic bill pay, or on-line coverage changes- all through an innovative interface. The new approach targets insureds with more favorable risk characteristics primarily through social networking interfaces. The terms iMingle™ and Insuring The i Generation™, and the logos containing such terms, are service marks or trademarks of Unitrin Direct Insurance Company.
The Unitrin Direct segment has implemented and continues to implement rate increases across its book of business. These actions have led to a decrease in the overall premium volume, with the number of policies in force at December 31, 2010 decreasing by 19% from the level at December 31, 2009. While premium rate increases have been and continue to be implemented over much of the Unitrin Direct segment’s book of business, average earned premiums per policy have remained relatively flat due primarily to an improvement in the risk characteristics of the book of business. In the third quarter of 2010, one of Unitrin Direct’s web insurance portal partners was purchased and the acquiring company ceased marketing for the portal. The number of new policies written through this portal has declined substantially. Unitrin Direct expects that new policy sales from this portal will be minimal in 2011. The web insurance portal partner represented 8% and 9% of Unitrin Direct’s policies in force at December 31, 2010 and December 31, 2009, respectively. The Unitrin Direct segment expects earned premiums will continue to decline in 2011, compared to 2010 on a sequential quarter basis, Unitrin Direct expects earned premiums to decline in the first quarter of 2011 and then remain relatively flat through the end of 2011.
Net Investment Income in the Unitrin Direct segment increased by $2.9 million for the year ended December 31, 2010, compared to 2009, due primarily to higher net investment income from Equity Method Limited Liability Investments. The Unitrin Direct segment reported net investment income of $6.3 million from Equity Method Limited Liability Investments for the year ended December 31, 2010, compared to $3.7 million for 2009.
Incurred Losses and LAE as a percentage of earned premiums were 79.3% for the year ended December 31, 2010, compared to 77.9% for 2009. Incurred Losses and LAE as a percentage of earned premiums increased due primarily to higher non-catastrophe losses and LAE (excluding development) and the impact of lower favorable loss and LAE reserve development, partially offset by lower catastrophe losses and LAE (excluding development). Incurred Losses and LAE as a percentage of earned premiums for the year ended December 31, 2010 were significantly higher than the level required to produce an underwriting profit. Underwriting profit is a non-GAAP measure of profitability before tax used by insurance companies to measure the profits directly related to earned premiums. Accordingly, underwriting profit excludes net investment income, whereas Operating Profit, a GAAP measure, includes net investment income.
See MD&A, “Critical Accounting Estimates,” for additional information pertaining to the Company’s 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.
The Unitrin Direct segment reported an Operating Loss of $12.6 million for the year ended December 31, 2009, compared to an Operating Loss of $52.5 million for 2008. The operating loss for Direct Response was $7.0 million from the date of acquisition through December 31, 2009, which includes restructuring costs of $6.5 million and a charge of $1.5 million to write off goodwill. Excluding the impact of the Direct Response acquisition, the Unitrin Direct segment’s Operating Loss was $5.6 million for the year ended December 31, 2009, compared to an Operating Loss of $52.5 million for 2008. Excluding the impact of the acquisition of Direct Response, operating results in the Unitrin Direct segment improved for the year ended December 31, 2009, compared to 2008, due primarily to lower volume of unprofitable business, lower Incurred Losses and LAE and higher Net Investment Income.
Insurance Expenses in the Unitrin Direct segment were $107.0 million for the year ended December 31, 2009, compared to $101.3 million for 2008. Insurance Expenses for Direct Response, including restructuring costs, were $29.3 million from the date of acquisition through December 31, 2009. Insurance Expenses, excluding the impact of the Direct Response acquisition, decreased by $23.6 million for the year ended December 31, 2009, compared to 2008, due primarily to lower marketing expense and lower other variable expenses due to the lower volume of business. Marketing spending, excluding the impact of the Direct Response acquisition, decreased by $13.2 million for the year ended December 31, 2009, compared to 2008. Unitrin Direct closed certain office locations and also reduced staff, including staff at Direct Response, by approximately 30% in 2009. Total restructuring costs incurred related to these expense savings initiatives were $7.2 million for the year ended December 31, 2009.
Operating Profit in the Life and Health Insurance segment was $154.0 million for the year ended December 31, 2010, compared to $168.5 million for 2009. The Life and Health Insurance segment wrote-off $14.8 million of goodwill at the Company’s health insurance subsidiary, Reserve National in the third quarter of 2010. Excluding the write-off of goodwill, Operating Profit in the Life and Health Insurance segment increased $0.3 million for the year ended December 31, 2010, compared to 2009.
The Life and Health Insurance segment has a number of pending legal matters related to catastrophes and storms and could continue to report either favorable or unfavorable catastrophe reserve development in future periods depending on the resolution of these matters. See Note 25, “Contingencies,” to the Consolidated Financial Statements.
Net Income in the Life and Health Insurance segment was $94.9 million for the year ended December 31, 2010, compared to $112.1 million for 2009.
Earned Premiums in the Life and Health Insurance segment decreased by $10.8 million for the year ended December 31, 2009, compared to 2008. Earned Premiums in the Life and Health Insurance segment for the year ended December 31, 2009 included earned premiums of $12.6 million in the first quarter of 2009 (consisting of $9.8 million from life insurance, $1.9 million from accident and health insurance and $0.9 million from property insurance) related to the Primesco acquisition with no corresponding amount in the first quarter of 2008.
AUTOMOBILE LOAN RECEIVABLES AT DECEMBER 31, 2010 BY YEAR OF ORIGINATION
Near the end of the first quarter of 2009 Fireside Bank began a plan to exit the automobile finance business and wind down its operations in an orderly fashion over the next several years. The exit plan continues to favorably exceed the Company’s original expectations. Net Automobile Loan Receivables Outstanding has declined steadily to $381.3 million at December 31, 2010 from $1,125.2 million at March 31, 2009, while Certificates of Deposits has declined to $321.4 million at December 31, 2010 from $1,054.4 million at March 31, 2009. Fireside Bank’s liquidity has increased, as measured by the ratio of cash and investments to certificates of deposits. Cash and investments totaled $224.8 million, or 69.9% of Certificates of Deposits, at December 31, 2010, compared to $204.7 million, or 19.4% of Certificates of Deposits, at March 31, 2009. Fireside Bank estimates that collections of automobile loan receivables will be approximately $190 million in 2011. The Company expects that the Fireside Bank segment will report positive bottom line results for 2011. Fireside Bank’s ratio of Tier 1 capital to total average assets increased from 15.6% at March 31, 2009 to 37.3% at December 31, 2010.
Interest, Loan Fees and Earned Discounts in the Fireside Bank segment decreased by $77.4 million for the year ended December 31, 2010, compared to 2009, due primarily to lower levels of Sales Contracts and Loans Receivables resulting from the cessation of lending activities in connection with the exit plan. Sales Contracts and Loans Receivables was $382.9 million at December 31, 2010, compared to $749.5 million at December 31, 2009. Fireside Bank has no loans outstanding that are secured by real estate. Fireside Bank has not sold or securitized any portion of its loan portfolio.
Operating Profit in the Fireside Bank segment increased by $23.0 million for the year ended December 31, 2010, compared to 2009, due primarily to a negative provision for loan losses of $14.2 million in 2010, compared with a positive provision of $60.2 million in 2009, lower General and Administrative Expenses and lower Interest Expense on Certificates of Deposits, partially offset by lower Interest, Loan Fees and Earned Discounts and higher Incentives to Close Deposit Accounts Early.
The Provision for Loan Losses decreased by $74.4 million for the year ended December 31, 2010, compared to 2009, due primarily to the cessation of all lending activities in connection with the exit plan and a lower rate of Net Charge-Off than previously anticipated for automobile loans originated in prior years. The Reserve for Loan Losses is maintained at a level that considers such factors as actual and expected loss experience, regulatory requirements and economic conditions to provide for estimated loan losses. Any change in these factors will result in either an addition to, or reduction in, the Provision for Loan Losses in future periods. Net Charge-off decreased by $71.6 million for the year ended December 31, 2010, compared to 2009, due to the lower level of Net Automobile Loan Receivables Outstanding and improved collection results. The improved collection results were partially the result of Fireside Bank maintaining a higher ratio of collectors to the number of delinquent customer accounts than in prior periods. Approximately two-thirds of Net Automobile Loan Receivables are concentrated in the state of California, where the unemployment rate has been higher than the national average over the last several years.
cannot currently predict whether a new seasonal pattern is emerging or if loan portfolio delinquency as measured as a percentage of loans outstanding will revert to the seasonal pattern that it has typically followed. Fireside Bank does, however, expect that while delinquent accounts measured in dollars will continue to decline as the loan portfolio declines, delinquency as a percentage of loans outstanding may increase compared to the same periods in prior years. Fireside Bank has historically had many customers who have fallen behind one or two loan payments, but have continued to make regular monthly payments. Fireside Bank expects that the number of these delinquent, but regularly paying, customers will decline at a slower pace than the overall loan portfolio and, accordingly, will comprise a greater percentage of the loan portfolio over time.
The Reserve for Loan Losses as a percentage of Net Automobile Loan Receivables was 11.5% at December 31, 2010, compared to 11.2% at December 31, 2009. The Reserve for Loan Losses was $43.7 million at December 31, 2010, while Delinquent Loan Balances 30 Days or greater totaled $19.3 million. The Reserve for Loan Losses was $83.3 million at December 31, 2009, while Delinquent Loan Balances 30 Days or greater totaled $76.1 million.
In 2010, Fireside Bank redeemed a total of $146.9 million of its outstanding certificates of deposits in advance of their respective scheduled maturity dates. In 2010, Fireside Bank redeemed $60.8 million of certificates of deposits prior to their respective scheduled maturity dates and paid the entire future interest of $2.3 million for these early redemptions. Fireside also Bank offered incentives, in lieu of future interest, to certain depositors to voluntarily redeem their certificates of deposits earlier than their scheduled maturity dates. Fireside Bank redeemed $86.1 million of certificates of deposits for the year ended December 31, 2010, and paid incentives of $4.6 million in connection with such offers.
Net Automobile Loan Receivables Outstanding declined steadily to $744.1 million at December 31, 2009 from $1,125.2 million at March 31, 2009, while Certificates of Deposits declined to $682.4 million at December 31,
General and Administrative Expenses decreased by $18.2 million for the year ended December 31, 2009, compared to 2008. Fireside Bank incurred $11.0 million of pre-tax restructuring charges for the year ended December 31, 2009 related to its plan to exit the automobile finance business. Fireside Bank incurred $5.5 million of pre-tax restructuring charges for the year ended December 31, 2008, related to the consolidation of its branch operations from 26 California branches at the beginning of 2008 to eight California branches by the end of 2008 and the centralization of its collection operations into two call centers.
Net Investment Income for the years ended December 31, 2010, 2009 and 2008 was:
Net Investment Income increased by $4.9 million for the year ended December 31, 2010, compared to 2009. Interest and dividends on fixed maturities increased by $2.1 million for the year ended December 31, 2010, compared to 2009, due primarily to a higher level of fixed maturities due, in part, to the Company reinvesting a portion of its short-term investments in fixed maturities. Dividends on equity securities increased by $2.8 million for the year ended December 31, 2010, compared to 2009, due primarily to higher yields on equity securities. Investment income from Equity Method Limited Liability Investments increased by $1.1 million for the year ended December 31, 2010, compared to 2009, due primarily to a higher investment base in 2010, partially offset by a lower total rate of return. Investment income from policyholder loans increased by $1.1 million for the year ended December 31, 2010, compared to the same period in 2009, due primarily to higher levels of policyholder loans outstanding.
As a result of a decrease in the Company’s ownership percentage and other qualitative factors, the Company determined that its investment in the common stock of Intermec no longer qualified for the equity method of accounting in the third quarter of 2010. Accordingly, beginning with the Company’s September 30, 2010 interim consolidated financial statements, the Company’s investment in Intermec common stock was included in Investments in Equity Securities and was reported at its fair value. See Note 5, “Investments” to the Consolidated Financial Statements. The gains on Equity Securities recognized in Other Comprehensive Income for the year ended December 31, 2010 include an other comprehensive gain of $50.6 million related to the Company’s investment in the common stock of Intermec. The losses on Equity Securities recognized in Other Comprehensive Loss for the year ended December 31, 2008 were due primarily to the overall decline in the stock market in 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.
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 declines are determined to be other than temporary. Net Impairment Losses recognized in the Consolidated Statement of Operations for the years ended December 31, 2010, 2009 and 2008 include other-than-temporary impairment (“OTTI”) losses of $16.5 million, $50.4 million and $152.9 million, respectively. OTTI losses recognized in the Consolidated Statements of Operations for the year ended December 31, 2010 included pre-tax losses of $11.9 million due to the deterioration of the business prospects of a single issuer in the waste management business. OTTI losses recognized in the Consolidated Statements of Operations for the year ended December 31, 2010 included pre-tax foreign currency losses of $2.1 million. OTTI losses from write-downs of fixed maturities for the year ended December 31, 2009 included a pretax loss of $24.4 million related to credit losses recognized for a single issuer in the manufacturing industry due to a continued deterioration in the issuer’s business prospects. OTTI losses from write-downs of fixed maturities for the year ended December 31, 2008 included a pretax loss of $33.5 million related to the same issuer in the manufacturing industry. In addition, OTTI 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. OTTI losses from write-downs of 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 OTTI losses from write-downs of equity securities for the year ended December 31, 2008 were due primarily to the deteriorating financial conditions of issuers in the financial services industry.
The Company’s fixed maturity investment portfolio is comprised primarily of high-grade municipal, corporate and agency bonds. At December 31, 2010, nearly 95% of the Company’s fixed maturity investment portfolio was rated investment grade, which is defined as a security having a rating of AAA, AA, A or BBB from S&P; a rating of Aaa, Aa, A or Baa from Moody’s; rating of AAA, AA, A or BBB from Fitch; 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, 2010 and 2009:
The following table summarizes the underlying ratings of the Company’s investments in obligations of states and political subdivisions, which are included in the preceding table of the credit quality of the Company’s portfolio of investments in fixed maturities at December 31, 2010:
Sixty-one companies comprised over 75% of the Company’s fixed maturity exposure to the Manufacturing industry at December 31, 2010, with the largest single exposure, Caterpillar, Inc., comprising 2.6%, or $26.2 million, of the Company’s fixed maturity exposure to such industry. Twenty-seven companies comprised over 75% of the Company’s exposure to the Finance, Insurance and Real Estate industry at December 31, 2010, with the largest single exposure, Wells Fargo Corporation, comprising 6.5%, or $36.9 million, of the Company’s exposure to such industry.
Interest and Other Expenses was $68.3 million, $61.9 million and $58.5 million for the years ended December 31, 2010, 2009 and 2008, respectively. Interest expense, excluding interest on a mortgage note payable included in real estate investment expense, was $32.2 million, $32.5 million and $32.2 million for the years ended December 31, 2010, 2009 and 2008, respectively. Other Corporate Expenses were $36.1 million, $29.4 million and $26.3 million for the years ended December 31, 2010, 2009 and 2008, respectively. Other Corporate Expenses increased by $6.7 million for the year ended December 31, 2010, compared to the same period in 2009, due primarily to higher postretirement benefit costs. Other Corporate Expenses increased by $3.1 million for the year ended December 31, 2009, compared to 2008, due primarily to higher compensation and higher postretirement benefit costs.
In the fourth quarter of 2010, Unitrin borrowed and repaid $140 million under the 2012 Credit Agreement. As discussed below, Unitrin used a portion of the proceeds from the issuance of its 2015 Senior Notes on November 24, 2010 to repay the borrowings in full under the 2012 Credit Agreement. The 2012 Credit Agreement was undrawn at both December 31, 2010 and 2009. Management estimates that it could borrow the full amount under the 2012 Credit Agreement and still meet the financial covenants therein.
The lenders participating in the 2012 Credit Agreement, as of December 31, 2010, and their aggregate commitments are presented below:
In 2007, Unitrin issued $360 million of its 6.00% senior notes due May 15, 2017 (the “2017 Senior Notes”). The 2017 Senior Notes are unsecured and may be redeemed in whole at any time or in part from time to time at Unitrin’s option at specified redemption prices. Unitrin issued the 2017 Senior Notes for proceeds of $354.8 million, net of transaction costs, for an effective yield of 6.19%. Unitrin used a portion of the proceeds from the sale of the 2017 Senior Notes to repay the $300 million aggregate principal amount of its 5.75% senior notes which matured on July 1, 2007. Interest expense under the 2017 Senior Notes was $22.0 million for each of the annual periods ended December 31, 2010, 2009 and 2008, respectively.
Various state insurance laws restrict the ability of Unitrin’s insurance subsidiaries to pay dividends without regulatory approval. Such insurance laws generally 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. Unitrin’s direct insurance subsidiaries paid dividends consisting of $139.4 million in cash to Unitrin during 2010. In 2011, Unitrin estimates that its direct insurance subsidiaries would be able to pay $170 million in dividends to Unitrin without prior regulatory approval.
During 2010, Unitrin repurchased approximately 1.4 million shares of its common stock at an aggregate cost of $34.4 million in open market transactions. Unitrin did not repurchase shares of its common stock in 2009. Unitrin repurchased and retired approximately 2.0 million shares of its common stock in 2008 at a cost of $69.0 million. Unitrin’s 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 Unitrin’s authority to repurchase Unitrin’s common stock by an aggregate of 6.0 million shares (in addition to approximately 0.8 million shares remaining under its prior authorization). No shares remained available for repurchase at December 31, 2010 under the repurchase program. On February 2, 2011, the Board of Directors approved a new repurchase program under which Unitrin is authorized to repurchase up to $300 million worth of its common stock. For more information, see the discussion on page 3 under the heading “Unitrin Common Stock Repurchases” in Item 1(a) of this 2010 Annual Report.
Unitrin paid a quarterly dividend to shareholders of $0.22 per common share in each quarter in 2010. Dividends paid were $54.6 million for the year ended December 31, 2010.
The primary sources of funds for Unitrin’s insurance subsidiaries are premiums, investment income and proceeds from the sales and maturity of investments. 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 the Company’s 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 either result in investment gains or losses. Management believes that its property and casualty insurance subsidiaries maintain adequate levels of liquidity in the event that they experience several future catastrophic events over a relatively short period of time. The primary sources of funds for Fireside Bank are the repayments of automobile loans, interest on automobile loans, investment income and proceeds from the sales and maturity of investments. The primary uses of funds for Fireside Bank are the repayment of customer deposits, interest paid to depositors, general expenses and purchase of investments.
dividends for the year ended December 31, 2009, compared to $118.4 million of cash used to pay dividends during 2008. The amount of cash used to pay dividends decreased in 2009, compared to 2008, due primarily to a decrease in the quarterly dividend rate beginning with the second quarter of 2009.
Estimated cash disbursements pertaining to the Company’s contractual obligations at December 31, 2010 are as follows:
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 Company’s 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 $3.8 billion using the same assumptions used to estimate the cash outflows. The Company’s Life Insurance Reserves in the Company’s Consolidated Balance Sheet are generally based on the historical assumptions for mortality and policy lapse rates 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 Company’s Consolidated Balance Sheet at December 31, 2010.
Unitrin’s 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
The classification of a company’s investment in a financial instrument may affect its reported results. For investments classified as trading, a company is required to recognize changes in the fair values into income for the period reported. Both the reported and fair value of the Company’s investments classified as trading was $5.1 million at December 31, 2010. For investments in fixed maturities classified as held to maturity, a company is required to carry the investment at amortized cost, with only amortization occurring during the period recognized into income. None of the Company’s investments in fixed maturities were classified as held to maturity at December 31, 2010. Changes in the fair value of investments in fixed maturities classified as available for sale, investments in equity securities classified as available for sale and an insurance entity’s investments in equity securities without readily determinable fair values are not recognized to income during the period, but rather are recognized as a separate component of Accumulated Other Comprehensive Income until realized. All of the Company’s investments in fixed maturities were classified as available for sale at December 31, 2010. Except for investments accounted for under the equity method of accounting or classified as trading, all of the Company’s
The extent to which the fair value has been less than cost;
temporary at a subsequent evaluation date. Such determination would result in an impairment loss recognized in earnings in the period such determination is made.
In estimating the Company’s Property and Casualty Insurance Reserves, the Company’s 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 Company’s 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. Property and Casualty Insurance Reserves related to the Company’s Discontinued Operations are predominantly long-tailed exposures, $59.8 million of which was related to asbestos, environmental matters and construction defect exposures at December 31, 2010.
For each accident quarter, the point estimate selected by the Company’s 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 Company’s 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 Company’s actuaries to conclude that the incurred loss development methodology provides a better estimate than the paid loss development methodology. Therefore, the Company’s 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 Company’s 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 short-tail lines, especially in the more recent accident quarters, 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 Company’s actuaries must make adjustments to these loss reserving estimation methodologies or use additional generally accepted actuarial estimation methodologies. In those circumstances, the Company’s 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 Company’s 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 Company’s actuaries further analyze the data using additional techniques.
The final step in the quarterly loss and LAE reserving process involves a comprehensive review of the actuarial indications by the Company’s 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 0.5%, 0.9% and 1.2% higher than the actuarial indication of reserves at December 31, 2010, 2009 and 2008, respectively.
The Company’s goal is to ensure that 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 Company’s estimates of these losses and LAE over time, also referred to as “development,” will occur and may be material. Favorable development is recognized and reported in the consolidated financial statements when the Company decreases its previous estimate of ultimate losses and LAE and results in an increase in net income in the period recognized, whereas adverse development is recognized and reported in the consolidated financial statements when the Company increases its previous estimate of ultimate losses and LAE and results in a decrease in net income. The Company reported total favorable development of $24.9 million, $80.9 million and $79.3 million before tax for the years ended December 31, 2010, 2009 and 2008, respectively. Development for each of the Company’s continuing business segments and Unitrin Business Insurance for the years ended December 31, 2010, 2009 and 2008, was:
occurred prior to June 1, 2008, the effective date of the sale. Development for Unitrin Business Insurance in 2010 and 2009 did not have as great of an impact, as compared to 2008, as the losses and LAE became more fully developed. The impact of development, either favorable or adverse, should decline over time as the losses and LAE continue to be more fully developed.
In 2005, the personal lines claims function of Unitrin’s Multi Lines Insurance (“MLI”) unit was combined into the Kemper segment’s 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.
Although development will emerge in all of Unitrin’s personal lines’ product lines, development in Kemper’s personal automobile insurance product line could have the most significant impact. To further illustrate the sensitivity of Kemper’s reserves for automobile insurance losses and LAE to changes in the cumulative development factors, the Company’s 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 13.9% in the cumulative development factor, gradually declining to an average decrease of 2.9% over the next 8 older evaluation quarters, gradually declining to average decrease of 0.5% over the next 15 older evaluation quarters and then gradually declining to 0.0% thereafter. Assuming that Kemper’s 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 Kemper’s automobile insurance loss and LAE reserves would have decreased by $73.0 million at December 31, 2010 for all accident years combined.
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 Company’s 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 Company’s 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 Company’s 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 the Company’s product lines over time. Accordingly, the Company’s future reserve variability could ultimately be greater than the illustrated variability.
Additional information pertaining to the estimation of and development of the Company’s Property and Casualty Insurance Reserves is contained in Item 1 of Part I of this 2010 Annual Report under the heading “Property and Casualty Loss and Loss Adjustment Expense Reserves.”
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 for each of the Company’s 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 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 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 Company’s investments. Accordingly, an increase in the investment rate would increase the discounted cash value.
Changes in accounting standards that are most critical or relevant to the Company are discussed in Note 2 “Summary of Accounting Policies and Accounting Changes,” to the Consolidated Financial Statements under the headings “Adoption of New Accounting Standards” and “Accounting Standards Not Yet Adopted.” The accounting changes discussed are as follows:
ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses; and
ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.
The Consolidated Financial Statements included herein have been prepared on the basis of accounting principles generally accepted in the United States (“GAAP”) and include the accounts of Unitrin, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.
The actual value at which financial instruments could actually be sold or settled with a willing buyer or seller may differ from 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 process of determining whether 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 future cash flows may differ materially from projected cash flows. As a result, the Company’s 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.
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. The Company classifies the inputs used to measure fair value into one of three levels as follows:
Level 3 - Assets and liabilities whose significant value drivers are unobservable.
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, which considers such factors as actual and expected loss experience, economic conditions, and regulatory requirements and provides for estimated losses on loans, net of estimated recoveries, inherent in the outstanding portfolio. Additions to the Reserve for Loan Losses are charged to expense. Actual loan losses are deducted from the Reserve for Loan Losses when loans are charged off. Loans generally are charged off against the Reserve for Loan Losses at the end of the month that the loan becomes delinquent more than 120 days or when the collateral is repossessed. Recoveries of loans previously charged off are recognized when received.
The Company accounts for the present value of the future profits embedded in Property and Casualty Insurance customer relationships acquired (“P&C Customer Relationships”) based on the present value of estimated future profits from the customer relationships acquired. P&C Customer Relationships is included in Deferred Policy Acquisition Costs in the Consolidated Balance Sheets. P&C Customer Relationships was $39.0 million and $41.9 million at December 31, 2010 and 2009, respectively. P&C Customer Relationships is amortized using the effective interest method.
Deferred income 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 income 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. A valuation allowance is maintained for the portion of deferred income tax assets that the Company does not expect to recover. Increases in the valuation allowance for deferred income tax assets are recognized as income tax expense. Decreases in the valuation allowance for deferred income tax assets are recognized as income tax benefit. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period in which the change is enacted.
The FASB issues Accounting Standards Updates (“ASU”) to amend the authoritative literature in ASC. There were twenty-nine ASUs issued in 2010 that amend the original text of ASC. Except for ASU 2010-06, Improving Disclosures about Fair Value Measurements, ASU 2010-09, Amendments to Certain Recognition and Disclosure Requirements, ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, and ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts, the ASUs issued in 2010 either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to the Company or (iv) are not expected to have a significant impact on the Company.
On January 1, 2010, the Company adopted SFAS No. 167, Amendments to FASB Interpretation No. 46(R), a grandfathered standard under ASC. The standard amends the consolidation guidance that applies to variable interest entities. The initial application of the standard did not have an impact on the Company.
On January 1, 2010, the Company adopted ASU 2010-06, Improving Disclosures about Fair Value Measurements. The standard amends ASC Topic 820, Fair Value Measurements and Disclosures, to require additional disclosures related to transfers between levels in the hierarchy of fair value measurement. The standard does not change how fair values are measured. Accordingly, except for the additional disclosures, the initial application of the standard did not have an impact on the Company.
The Company initially applied ASU 2010-09, Amendments to Certain Recognition and Disclosure Requirements, to the Company’s Condensed Consolidated Financial Statements as of and for the three months ended March 31, 2010. The standard amends ASC Topic 855, Subsequent Events, to clarify SEC filers are not required to disclose the date through which an entity has evaluated subsequent events. The standard does not change how the Company evaluates subsequent events or the date through which the Company evaluates subsequent events. Accordingly, except for the elimination of the disclosure, the initial application of the standard did not have an impact on the Company.
The Company initially applied the provisions of ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, to these consolidated financial statements. The standard amends ASC Topic 310, Receivables, to require additional disclosures about financing receivables and the allowances for credit losses. The standard does not change how financing receivables or allowances for credit losses are measured. Accordingly, except for the additional disclosures, the initial application of the standard did have an impact on the Company.
In October 2010, the FASB issued ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. The standard is effective for interim and annual reporting periods beginning after December 15, 2011, with earlier adoption permitted. The provisions of the new standard can be applied either prospectively or retrospectively. The standard amends ASC Topic 944, Financial Services-Insurance, and modifies the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts. The Company has not yet determined the impact of the new standard on the Company or the method or date of adoption.
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, beginning June 1, 2009, 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 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. Property and Casualty Insurance Reserves reported in the Company’s Consolidated Balance Sheets include $155.0 million and $203.5 million at December 31, 2010 and 2009, respectively, for the retained liabilities. In accordance with GAAP, changes in the Company’s estimate of such retained liabilities after the sale are reported as a separate component of the results of discontinued operations.
Summary financial information included in Income from Discontinued Operations for the years ended December 31, 2010, 2009 and 2008 are presented below:
The amortized cost and estimated fair values of the Company’s Investments in Fixed Maturities at December 31, 2010 were:
Included in the fair value of Mortgage and Asset Backed investments at December 31, 2010 are $1.9 million of non-governmental residential mortgage-backed securities, $5.0 million of collateralized debt obligations, $1.2 million of other asset-backed securities and $0.2 million of commercial mortgage-backed securities.
The estimated fair values of the Company’s Investments in Fixed Maturities at December 31, 2010 by contractual maturity were:
The expected maturities of the Company’s Investments in Fixed Maturities may differ from the contractual maturities because issuers 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, 2010 consisted of securities issued by Ginnie Mae with a fair value of $179.0 million, securities issued by Fannie Mae with a fair value of $35.2 million, securities issued by Freddie Mac with a fair value of $1.4 million and securities of other issuers with a fair value of $8.3 million.
Gross unrealized gains and gross unrealized losses on the Company’s Investments in Equity Securities at December 31, 2010 were:
Unrealized losses on fixed maturities, all of which the Company determined to be temporary at December 31, 2010, were $32.2 million, of which $11.5 million is related to fixed maturities that were in an unrealized loss position for 12 months or longer. There were no unrealized losses at December 31, 2010 related to securities for which the Company has recognized credit losses in earnings in the second preceding table under either the heading “Less Than 12 Months” or the heading “12 Months or Longer.” Included in the second preceding table under the heading “12 Months or Longer” are unrealized losses of $0.1 million at December 31, 2010 related to securities for which the Company has recognized foreign currency losses in earnings. Investment-grade fixed maturity investments comprised $28.1 million and below-investment-grade fixed maturity investments
partnerships that primarily invest in distressed debt, mezzanine debt and secondary transactions. By the nature of their underlying investments, the Company believes that its investments in the limited liability partnerships also exhibit debt-like characteristics which, among other factors, the Company considers when evaluating these investments for impairment. Based on evaluations at December 31, 2010 and 2009 of the factors in the preceding paragraph, the Company concluded that the declines in the fair values of the Company’s investments in equity securities were temporary at the respective evaluation dates.
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 maximum original term for Sales Contracts and Loans at December 31, 2010 is approximately 72 months. The maximum remaining term of Sales Contracts and Loans at December 31, 2010 is approximately 53 months. There were no sales contracts originated in 2010. The weighted-average maturity of sales contracts originated in 2009 was 65 months.
The components of Automobile Loan Receivables at December 31, 2010 and 2009 were:
An aging of Net Automobile Loan Receivables Outstanding at December 31, 2010 and 2009 is presented below:
Activity in the Reserve for Loan Losses for the years ended December 31, 2010, 2009 and 2008 was:
The Company used several quality indicators, including, but not limited to, Fair Isaac Corporation (“FICO”) credit scores, loan-to-value (“LTV”) ratios and residency of customers to underwrite its automobile loans and uses these indicators to monitor its automobile loan portfolio. The FICO score is a measure of the credit worthiness of a borrower. A lower FICO score, compared to a higher FICO score, represents a higher likelihood of default. The LTV ratio is a measure of the value of a loan to the value of the collateral at the time a loan is originated. In the event of default, loans with higher initial LTV ratios are more likely to result in greater charge-off, compared to loans with lower initial LTV ratios, because a greater portion of the loan is unsecured. Economic conditions may vary by state and impact the ability of borrowers to repay their loans. For example, the unemployment rate in the state of California has been higher than the national average for the past several years. The Company does not update the initial quality indicators periodically, but rather monitors changes in the mix of its automobile loan portfolio by such quality indicators to assess whether or not its historical charge-off and recovery patterns used to estimate future charge-offs and recoveries should be adjusted.
Automobile Loan Receivables outstanding at December 31, 2010 and 2009 by initial FICO score were:
The Company tests goodwill for recoverability on an annual basis at the beginning of the first quarter and, if circumstances or events indicate that the fair value of a reporting unit may have declined below its carrying
During the third quarter of 2010, the sales process continued with several potential buyers conducting on-site due diligence reviews. On September 23, 2010, the NAIC published for comment a model regulation containing the definitions and methodologies for calculating the medical loss ratios under the Health Care Acts. On October 21, 2010, the NAIC voted to adopt a model regulation containing such definitions and methodologies and authorized the delivery of such model regulation to the U.S. Department of Health and Human Services (“HHS”) for certification. Based on these proposed regulations, the Company concluded that it was more likely than previously believed that the minimum loss ratio provisions under the Health Care Acts would apply to Reserve National’s non-comprehensive health insurance coverages. Accordingly, based on the status of the sales process to date, the continuing uncertainty about the impact of the Health Care Acts on Reserve National’s operations and the increased likelihood that the minimum loss ratio provisions of the Health Care Acts would apply to Reserve National’s non-comprehensive health insurance coverages, the Company concluded that the sales process was unlikely to result in a sales price that exceeds the carrying value of Reserve National, which includes the associated goodwill, at September 30, 2010. Accordingly, an additional evaluation was necessary to determine the amount of implied goodwill that would result from a pro forma allocation of the estimated fair value of Reserve National to the fair value of the assets and liabilities of Reserve National as if it had been acquired in a business combination on the evaluation date. The Company assumed that no value would be assigned to goodwill in a pro forma allocation. Thus, the Company determined that all of the goodwill associated with Reserve National was impaired and not recoverable at September 30, 2010 and wrote off $14.8 million of goodwill in the third quarter of 2010.
Goodwill activity by business segment for the year ended December 31, 2009 is presented below.
The quoted value of Unitrin’s common stock was significantly below the book value per share of the Company at the end of each interim period during 2009. Accordingly, the Company tested the goodwill associated with each of its reporting units at March 31, 2009, June 30, 2009, September 30, 2009 and December 31, 2009 for recoverability at such dates. The Company used discounted projections of future cash flows to estimate the fair value of all reporting units tested for recoverability of goodwill. No goodwill was associated with Fireside Bank on such dates. Accordingly, no testing for recoverability of goodwill was performed for Fireside Bank. Excluding goodwill associated with the Company’s Direct Response reporting unit, the estimated fair value exceeded the carrying value of the reporting unit at each afore-mentioned date tested, and the Company concluded that the associated goodwill was recoverable.
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 Company’s 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 Company’s discontinued operations. During the fourth quarter of 2008, the Company’s actuaries conducted their regular reserve review of retained property and casualty insurance reserves of discontinued operations for all traditional reserving groups. In addition, the Company’s actuaries updated certain commercial property and liability analyses using A.M. Best’s latest industry study to re-estimate asbestos and environmental liabilities and a more detailed review by peril of other general liabilities, including construction defect liabilities. These additional procedures, along with the actuaries’ regular quarterly reserve reviews during 2008, resulted in favorable reserve development of $29.7 million.
The Company cannot predict whether and LAE will develop favorably or unfavorably from the amounts reported in the Company’s consolidated financial statements. The Company believes that any such development will not have a material effect on the Company’s consolidated financial position, but could have a material effect on the Company’s consolidated financial results for a given period.
The weighted-average interest rates on Certificates of Deposits were 5.42% and 4.99% at December 31, 2010 and 2009, respectively. The range of interest rates on Certificates of Deposits was 0.75% to 5.70% at December 31, 2010 and 0.05% to 5.85% at December 31, 2009. The contractual maturities of Certificates of Deposits at December 31, 2010 and 2009 were:
In December 2010, Fireside Bank redeemed and closed substantially all of its then outstanding certificates of deposits with a scheduled maturity date after September 30, 2012. Fireside Bank paid $63.1 million, including $2.3 million of future interest payable through the respective maturity dates of the certificates of deposits, in connection with the redemption. Fireside Bank had an outstanding commitment to redeem, in January 2011, all certificates of deposits outstanding with a maturity date after September 30, 2012 that remained outstanding at December 31, 2010. Fireside Bank also paid $4.6 million in incentives, in lieu of future interest, to certificate holders to voluntarily close their accounts in advance of their scheduled maturity date. Fireside Bank redeemed $86.1 million of certificates of deposits in connection with such incentive offers.
Interest Paid on Notes Payable, including facility fees, for the years ended December 31, 2010, 2009 and 2008 was:
In the fourth quarter of 2010, Unitrin borrowed $140 million under the 2012 Credit Agreement. As discussed below, Unitrin used a portion of the proceeds from the issuance of its 2015 Senior Notes to repay in full the borrowings under the 2012 Credit Agreement. Unitrin had no outstanding advances under the 2012 Credit Agreement at both December 31, 2010 and 2009. The amount available for borrowing under the 2012 Credit Agreement was $245 million at both December 31, 2010 and 2009.
In 2003, Unitrin issued $200 million of its 4.875% senior notes due November 1, 2010 for an effective yield of 5.04%. The 2010 Senior Notes were repaid and retired on November 1, 2010.
Net rental expense for operating leases for the years ended December 31, 2010, 2009 and 2008 was:
Unitrin 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, 2010 and 2009. There were 61,066,587 shares and 62,357,016 shares of common stock outstanding at December 31, 2010 and 2009,
respectively. Common stock outstanding included 218,156 shares and 202,916 shares at December 31, 2010 and 2009, respectively, that have been issued, subject to certain vesting and other requirements, in connection with one of the Company’s long-term equity compensation plans. See Note 13, “Long-Term Equity Compensation,” to the Consolidated Financial Statements for an additional discussion of the restrictions and vesting provisions.
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 subsidiary’s net equity which results from differences between statutory insurance accounting practices and GAAP would not be available for cash dividends, loans or advances. Unitrin’s insurance subsidiaries paid dividends of $139.4 million in cash to Unitrin in 2010. In 2011, Unitrin’s insurance subsidiaries would be able to pay approximately $170 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.
Unitrin’s 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 Company’s life and health insurance subsidiaries was approximately $405 million and was $298.3 million at December 31, 2010 and 2009, respectively. Statutory net income for the Company’s life and health insurance subsidiaries was income of approximately $75 million, was income of $79.9 million and was income of $15.0 million for the years ended December 31, 2010, 2009 and 2008, respectively. Statutory capital and surplus for the Company’s property and casualty insurance subsidiaries was approximately $900 million and was $880.0 million at December 31, 2010 and 2009, respectively. Statutory net income for the Company’s property and casualty insurance subsidiaries was income of approximately $115 million, was income of $75.0 million and was loss of $57.3 million for the years ended December 31, 2010, 2009 and 2008, respectively. Statutory capital and surplus and statutory net income exclude Fireside Bank and parent company operations.
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. For equity compensation 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 Company’s historical experience and future expectations. Share-based compensation expense for all of the Company’s long-term equity-based compensation plans was $4.2 million, $3.1 million and $7.4 million for the years ended December 31, 2010, 2009 and 2008, respectively. Total unamortized compensation expense related
Options outstanding and available for future grants under all of the Company’s stock option plans at December 31, 2010 are:
The Compensation Committee of the Board of Directors, or the Board’s 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. Stock options to purchase Unitrin’s common stock are granted at prices equal to the fair value of Unitrin’s common stock on the date of grant. Prior to 2003, only non-qualified stock options had been granted. Beginning in 2003, options granted to employees were coupled with tandem SARs, settled in Unitrin common stock. Employee options generally vest over a period of three and one-half years and expire ten years from the date of grant. 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 Unitrin’s 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 Unitrin’s common stock on the date of grant and expire 10 years from the date of grant.
For original awards granted in 2006 through 2008 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 option’s exercise price by 15%. Further, no Restorative Options will be granted if the option giving rise to the Restorative Option is set to expire within twelve months.
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 Company’s 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 assumed was the annualized yield on Unitrin common stock on the date of grant for original grants made in 2008. In light of the economic environment at the beginning of 2009, the Company changed its dividend yield assumption prospectively for original options granted in 2009. For original option grants made in 2009, the dividend yield assumed was the average, annualized dividend yield computed over the twenty consecutive quarters preceding the date of grant. Each quarterly dividend yield is calculated by dividing the amount of declared dividend per share during each quarter by the closing price of Unitrin common stock at the end of such quarter. The quarterly yields were then annualized and averaged to arrive at the dividend yield assumed. In light of the economic conditions at the beginning of 2009, the Company believed that basing dividend yield over a longer historical period of time was likely to be more consistent with the actual yield during the expected life of the option rather than the then current dividend yield. For original option grants made in 2010, the dividend yield assumed was the annualized continuous dividend yield on Unitrin common stock on the date of grant. The dividend yield in 2010 was calculated by taking the natural logarithm of the annualized yield divided by the Unitrin common stock price on the date of grant. The Company believes that basing the dividend yield on the current annualized yield is likely to be more consistent with the actual yield during the expected life of the option. For Restorative Options, the annualized dividend yield on Unitrin common stock for the month prior to the grant of the Restorative Option was used for all restorative grants made in 2008. No Restorative Options were granted in 2010 or 2009. 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, 2010, 2009 and 2008 were as follows:
In addition to the stock option plans, the Company has a restricted stock plan, which has been approved by Unitrin’s 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 on the same basis as all other outstanding shares of Unitrin common stock and all awards are subject to forfeiture until certain restrictions have lapsed. From inception of the plan to December 31, 2010, 600,100 shares of restricted stock having a weighted-average grant-date fair value of $34.36 per share had been awarded, of which 135,154 shares were forfeited and 75,721 were tendered to satisfy tax withholding obligations. As of December 31, 2010, there were 610,775 common shares available for future grants under the restricted stock plan, of which up to 110,725 common shares were reserved for future grant under outstanding performance-based restricted stock awards if performance levels exceed “target” levels as described below.
The 2009 three-year performance period began on January 1, 2009 and will end on December 31, 2011. The 2010 three-year performance period began on January 1, 2010 and will end on December 31, 2012. If, at the end
of the performance period, the Company’s relative performance exceeds the “target” performance level, additional shares of performance-based restricted stock will be issued to the award recipient. If, at the end of the performance period, the Company’s relative performance is below the “target” performance level, only a portion of the shares of performance-based restricted stock originally issued to the award recipient will vest. If, at the end of the performance period, the Company’s relative performance is below a “minimum” performance level, none of the shares of performance-based restricted stock originally issued to the award recipient will vest.
Activity related to nonvested restricted stock for the year ended December 31, 2010 is presented below:
Activity related to restructuring costs for the year ended December 31, 2009 are presented below.
The Company’s awards of restricted common stock contain a right to receive non-forfeitable dividends and participate in the undistributed earnings with common shareholders. Accordingly, the Company is required to apply the two-class method of computing basic and diluted earnings per share. A reconciliation of the numerator and denominator used in the calculation of Basic Income Per Share from Continuing Operations and Diluted Income Per Share from Continuing Operations for the year ended December 31, 2010 is as follows:
The dilutive effect of Investee Equivalent Shares and Unitrin Share-based Compensation Equivalent Shares on Income from Continuing Operations was not significant for the year ended December 31, 2010. Options outstanding to purchase 4.1 million shares of Unitrin common stock were excluded from the computation of Unitrin Share-based Compensation Equivalent Shares and Weighted-Average Common Shares and Equivalent Shares Outstanding Assuming Dilution for the year ended December 31, 2010 because the exercise price exceeded the average market price.
NOTE 15. NET INCOME (LOSS) PER SHARE FROM CONTINUING OPERATIONS (Continued)
A reconciliation of the numerator and denominator used in the calculation of Basic Income Per Share from Continuing Operations and Diluted Income Per Share from Continuing Operations for the year ended December 31, 2009 is as follows:
The dilutive effect of Investee Equivalent Shares and Unitrin Share-based Compensation Equivalent Shares on Income from Continuing Operations was not significant for the year ended December 31, 2009. Options outstanding to purchase 4.7 million shares of Unitrin common stock were excluded from the computation of Unitrin Share-based Compensation Equivalent Shares and Weighted-Average Common Shares and Equivalent Shares Outstanding Assuming Dilution for the year ended December 31, 2009 because the exercise price exceeded the average market price.
In the second quarter of 2009, the Company adopted a required change in accounting which impacts the determination of the amount of OTTI losses on Investments in Fixed Maturities that are recognized in earnings on and subsequent to April 1, 2009.
Insurance Expenses for the years ended December 31, 2010, 2009 and 2008 were:
The components of Liabilities for Income Taxes at December 31, 2010 and 2009 were:
The tax effects of temporary differences that give rise to significant portions of the Company’s Net Deferred Income Tax Assets (Liabilities) at December 31, 2010 and 2009 were:
A reconciliation of the Statutory Federal Income Tax Expense and Rate to the Company’s Effective Income Tax Expense and Rate from Continuing Operations for the years ended December 31, 2010, 2009 and 2008 was:
Comprehensive Income Tax Benefit (Expense) included in the Consolidated Financial Statements for the years ended December 31, 2010, 2009 and 2008 was:
The Company sponsors an other than pension postretirement employee benefit plan (“OPEB”) that provides medical, dental and/or life insurance benefits to approximately 800 retired and 500 active employees (the “OPEB Plan”). The Company generally is self-insured for the benefits under the OPEB Plan. The medical plan generally
NOTE 20. PENSION BENEFITS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (Continued)
provides for a limited number of years of medical insurance benefits at retirement based on the participant’s 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, 2010 and 2009 were:
The Accumulated Benefit Obligation for the Pension Plans was $417.5 million and $362.9 million at December 31, 2010 and 2009, respectively. For the Company’s pension plan with an accumulated benefit obligation in excess of plan assets at December 31, 2010, the Projected Benefit Obligation was $430.6 million, the Accumulated Benefit Obligation was $415.0 million and the Fair Value of Plan Assets was $349.8 million. For the Company’s pension plan with an accumulated benefit obligation in excess of plan assets at December 31, 2009, the Projected Benefit Obligation was $374.5 million, the Accumulated Benefit Obligation was $360.4 million and the Fair Value of Plan Assets was $309.7 million.
The Company estimates that OPEB Expense for the year ended December 31, 2011 will include income of $0.9 million resulting from the amortization of the related accumulated actuarial gain included in Accumulated Other Comprehensive Income at December 31, 2010.
The OPEB Plan was unfunded at December 31, 2010 and 2009. Weighted-average asset allocations for the Pension Plans at December 31, 2010 and 2009 by asset category were:
The Company determines its Expected Long Term Rate of Return on Plan Assets based primarily on the Company’s 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.
Fair value measurements for the Pension Plans’ assets at December 31, 2009 is summarized below:
Additional information pertaining to the changes in the fair value of the Pension Plans’ assets classified as Level 3 for the year ended December 31, 2009 is presented below:
Total Pension Expense Recognized presented in the preceding table includes service cost benefits earned and reported in discontinued operations of $0.7 million for the year ended December 31, 2008.
The actuarial assumptions used to develop the components of the Pension Projected Benefit Obligation at December 31, 2010 and 2009 were:
The actuarial assumptions used to develop the components of the OPEB Expense for the years ended December 31, 2010, 2009 and 2008 were:
Segment Net Income for the years ended December 31, 2010, 2009 and 2008 was:
Earned Premiums by product line for the years ended December 31, 2010, 2009 and 2008 were:
The catastrophe reinsurance program for the Kemper segment in 2010 also includes reinsurance coverage for catastrophes losses in North Carolina at retentions lower than those described above. The catastrophe reinsurance program for the Life and Health Insurance and Unitrin Direct segments in 2010 also includes reinsurance coverage from FHCF for hurricane losses in Florida at retentions lower than those described above.
In the event that the Company’s incurred catastrophe losses and LAE covered by any of its catastrophe reinsurance programs presented in the three preceding tables exceed the retention for that particular layer, each of the programs 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 layer. The reinstatement premium is a percentage of the original premium based on the ratio of the losses exceeding the Company’s retention to the reinsurers’ coverage limit.
Catastrophe reinsurance premiums for the Company’s primary reinsurance programs, the Kemper NC Program and the FHCF reduced earned premiums for the years ended December 31, 2010, 2009 and 2008 by the following:
Catastrophe losses and LAE (including development), net of reinsurance recoveries, for the years ended December 31, 2010, 2009 and 2008 by business segment are presented below.
Total Catastrophe loss and LAE reserves, net of reinsurance recoverables, developed adversely by $1.4 million for the year ended December 31, 2010. Total Catastrophe loss and LAE reserves, net of reinsurance recoverables, developed favorably by $18.4 million for the year ended December 31, 2009. Total Catastrophe loss and LAE reserves, net of reinsurance recoverables, developed adversely by $4.8 million for the year ended December 31, 2008. The Kemper segment reported favorable catastrophe reserve development of $4.9 million, $18.3 million and $5.8 million for the years ended December 31, 2010, 2009 and 2008, respectively. The Life and Health Insurance segment reported adverse catastrophe reserve development of $3.3 million and $11.0 million for the years ended December 31, 2010 and 2008, respectively, and favorable catastrophe reserve development of $0.1 million for the year ended December 31, 2009. Excluding such development, the Kemper segment experienced a higher severity of catastrophe losses, due in part to a catastrophe loss of $12.9 million resulting from damage caused by hail in the state of Arizona in the fourth quarter of 2010, for the year ended December 31, 2010, compared to 2009. No major hurricanes that significantly impacted the Company made landfall in the United States during 2010 or 2009. In the third quarter of 2008, three major hurricanes (Dolly, Gustav and Ike) that significantly impacted the Company made landfall in the United States. The Kemper, Unitrin Specialty, Unitrin Direct and Life and Health Insurance segments reported $40.6 million, $1.5 million, $0.5 million and $22.8 million, respectively, of catastrophe loss and LAE, net of reinsurance recoveries, related to these hurricanes for the year ended December 31, 2008.
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.
Transfers between levels 1 and 2 were not significant for the year ended December 31, 2009. Included in Other Equity Interests at December 31, 2009 in the preceding table is $35.2 million of private equity funds and mezzanine debt funds which the company has unfunded commitments of $65.3 million. These funds cannot be redeemed, instead distributions are received through the liquidation of the underlying investments of the fund. It is estimated that the assets of these funds will be liquidated and distributed to the Company between 2010 and 2023.
One of Unitrin’s directors, Mr. Fayez Sarofim, is the Chairman of the Board, President and the majority shareholder of FS&C, a registered investment advisory firm. In the second quarter of 2010, Unitrin’s subsidiary, Trinity, entered into an agreement with FS&C whereby FS&C provides investment management services with respect to certain assets of Trinity for a fee based on the fair market value of the assets under management. Such agreement is terminable by either party at any time upon 30 days advance written notice. At December 31, 2010, Trinity had $102.4 million in assets managed by FS&C. Investment Expenses incurred in connection with such agreement were $0.1 million for the year ended December 31, 2010.
FS&C also provided investment management services to Trinity in 2008 for a fee based on the fair market value of the assets under management pursuant to investment services agreement. During 2008, FS&C sold all of the investments it managed for Trinity. Accordingly, Trinity had no investments managed by FS&C at December 31, 2008. Investment Expenses incurred in connection with such agreement were $0.5 million for the year ended December 31, 2008. FS&C did not provide investment management services to Trinity in 2009.
FS&C also provides investment management services with respect to certain funds of the Company’s defined benefit pension plans. The Company’s defined benefit pension plans had $98.3 million, $84.3 million and $68.5 million, respectively, in assets managed by FS&C at December 31, 2010, 2009 and 2008, respectively. The Company’s defined benefit pension plans incurred, in the aggregate, expenses of $0.3 million, $0.3 million and $0.2 million to FS&C for the years ended December 31, 2010, 2009 and 2008, respectively.
With respect to the Company’s defined contribution plans, 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 Fund’s average daily net assets. The Company does not compensate FS&C for services provided to the Dreyfus Appreciation Fund. Participants in the Company’s defined contribution plans had allocated $18.2 million, $16.9 million and $14.7 million for investment in the Dreyfus Appreciation Fund at December 31, 2010, 2009 and 2008, respectively, representing 6%, 7% and 7% of the total amount invested in the Company’s defined contribution plans at December 31, 2010, 2009 and 2008, respectively.
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, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity