UHAL

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended December 31, 2005, and the nine-month period ended on the same date for AMERCO (the holding company for U-Haul International, Inc.). The company operates four primary segments: Moving and Storage Operations, Property and Casualty Insurance, Life Insurance, and SAC Holding II. The fiscal year for the insurance subsidiaries ends September 30, while the consolidated fiscal year ends December 31.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 7.4% for the quarter and 4.2% for the nine months compared to the prior year. This was driven primarily by a 7.6% increase in self-moving equipment rentals (quarter) and 4.7% increase (nine months), attributed to improved utilization, pricing, and the introduction of approximately 12,000 new trucks.
• Operating Income: Earnings from operations improved significantly to $45.4 million for the quarter (up from $0.3 million) and $286.2 million for the nine months (up from $195.7 million). This improvement was aided by the absence of a $6.4 million litigation charge at Oxford Life Insurance that occurred in the prior year.
• Debt Restructuring: The nine-month period included a one-time, non-recurring charge of $35.6 million related to the early extinguishment of debt as part of a comprehensive refinancing. Conversely, the prior year's nine-month period included a $51.3 million litigation settlement gain.
• Insurance Segment Performance: Property and Casualty premiums increased due to retrospective premiums on U-Haul business, while Life Insurance premiums declined due to the lingering effects of a prior rating downgrade.

Guidance, Outlook, and Risks

• Outlook: Management expects momentum in Moving and Storage Operations to continue into fiscal 2007. The company is investing heavily in its fleet, with plans to produce over 2,700 additional mid-sized vans and 3,500 trailers by April 2006 to reduce repair costs and increase rentable days.
• Insurance Strategy: RepWest continues to exit non-U-Haul lines of business. Oxford Life Insurance received a rating upgrade to B+ by A.M. Best in October 2005, which is expected to support distribution expansion.
• Legal and Regulatory Risks:
  • SEC Investigation: The SEC has issued a formal order of investigation regarding potential violations of Federal Securities laws. The outcome is unpredictable and could result in significant penalties.
  • Securities Litigation: The company is a defendant in a consolidated class action lawsuit alleging false financial statements regarding transactions with SAC entities.
  • Derivative Litigation: Pending appeals regarding derivative suits alleging breach of fiduciary duty by directors regarding sales of self-storage properties to SAC Holdings.
• Operational Risks: The company faces risks related to hurricane damage (Katrina and Rita), with estimated losses of 180 trucks and 150 trailers. While insurance coverage exists, deductibles apply. Additionally, the company relies on a limited number of truck manufacturers (Ford and GM).

Investor Verification Checklist

• Debt Refinancing Impact: Verify the long-term interest rate implications of the new debt structure replacing the extinguished debt and the $35.6 million charge.
• Related Party Transactions: Review the $203.7 million in notes receivable from SAC Holdings and the associated credit risk, given SAC Holdings' high leverage.
• Insurance Reserve Adequacy: Assess the sufficiency of reserves for RepWest and Oxford, particularly given the history of losses in non-U-Haul lines and the "long tail" nature of claims.
• Legal Exposure: Monitor the status of the SEC investigation and the consolidated securities litigation for potential material financial impact.
• Fleet Investment ROI: Track the return on the significant capital expenditures ($252.4 million in the first nine months) for new trucks and trailers to ensure they drive the projected revenue growth.