<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[x]QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-10890
HORACE MANN EDUCATORS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 37-0911756
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Horace Mann Plaza, Springfield, Illinois 62715-0001
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: 217-789-2500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
As of May 1, 1996, 23,448,831 shares of Common Stock, par value $0.001 per
share, were outstanding, net of 5,588,098 shares of treasury stock.
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<PAGE>
HORACE MANN EDUCATORS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1996
INDEX
<TABLE>
<CAPTION>
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C> <C>
Consolidated Balance Sheets as of
March 31, 1996 and December 31, 1995.................. 1
Consolidated Statements of Operations for the
Three Months Ended March 31, 1996
and March 31, 1995.................................... 2
Consolidated Statements of Changes in Shareholders'
Equity for the Three Months Ended March 31, 1996
and March 31, 1995.................................... 3
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1996
and March 31, 1995.................................... 4
Notes to Consolidated Financial Statements.............. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 9
PART II - OTHER INFORMATION............................................ 15
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES............................................................. 16
</TABLE>
<PAGE>
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
ASSETS
Investments
Fixed maturities, available for
sale, at market (amortized cost,
1996, $2,582,673; 1995, $2,527,032).............. $2,617,581 $2,643,060
Mortgage loans and real estate.................... 53,978 77,895
Short-term investments............................ 31,990 34,983
Policy loans and other............................ 42,657 42,611
---------- ----------
Total investments............................... 2,746,206 2,798,549
Cash............................................... 11,415 9,518
Accrued investment income.......................... 42,359 43,215
Premiums receivable................................ 55,862 51,144
Value of acquired insurance in force and goodwill.. 127,225 129,843
Other assets....................................... 137,359 142,442
Variable annuity assets............................ 535,397 487,543
---------- ----------
Total assets.................................... $3,655,823 $3,662,254
========== ==========
LIABILITIES, REDEEMABLE SECURITIES AND SHAREHOLDERS' EQUITY
Policy liabilities
Annuity contract liabilities...................... $1,278,371 $1,275,117
Interest-sensitive life contract liabilities...... 298,046 289,310
Unpaid claims and claim expenses.................. 381,551 385,064
Future policy benefits............................ 185,214 185,449
Unearned premiums................................. 139,368 141,105
---------- ----------
Total policy liabilities........................ 2,282,550 2,276,045
Other policyholder funds........................... 120,009 119,070
Other liabilities.................................. 119,761 133,855
Short-term debt.................................... 67,000 75,000
Long-term debt..................................... 99,538 100,000
Variable annuity liabilities....................... 535,397 487,543
---------- ----------
Total liabilities............................... 3,224,255 3,191,513
---------- ----------
Warrants, subject to redemption.................... 577 577
---------- ----------
Common stock....................................... 29 29
Additional paid-in capital......................... 325,281 323,920
Net unrealized gains on fixed
maturities and equity securities.................. 22,763 76,151
Retained earnings.................................. 237,220 224,366
Treasury stock, at cost............................ (154,302) (154,302)
---------- ----------
Total shareholders' equity...................... 430,991 470,164
---------- ----------
Total liabilities, redeemable
securities and shareholders' equity........... $3,655,823 $3,662,254
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1996 1995
---- ----
<S> <C> <C>
Insurance premiums written
and contract deposits.................. $176,547 $169,084
======== ========
Revenues
Insurance premiums and
contract charges earned............... $134,384 $132,600
Net investment income.................. 50,107 49,087
Realized investment gains.............. 2,061 310
-------- --------
Total revenues....................... 186,552 181,997
-------- --------
Benefits, losses and expenses
Benefits, claims and
settlement expenses................... 99,229 95,952
Interest credited...................... 23,539 21,980
Policy acquisition expenses amortized.. 10,605 10,712
Operating expenses..................... 24,952 24,959
Amortization of intangible assets...... 2,619 2,952
Interest expense....................... 2,840 1,641
Debt retirement costs.................. 1,319 -
-------- --------
Total benefits, losses and expenses.. 165,103 158,196
-------- --------
Income before income taxes.............. 21,449 23,801
Income tax expense...................... 6,016 6,685
-------- --------
Net income.............................. $ 15,433 $ 17,116
======== ========
Earnings per share
Assuming no dilution................... $ 0.66 $ 0.59
======== ========
Assuming full dilution................. $ 0.66 $ 0.57
======== ========
Weighted average number of shares
and equivalent shares (in thousands)
Assuming no dilution.................. 23,424 28,960
Assuming full dilution................ 23,424 32,071
</TABLE>
2
<PAGE>
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1996 1995
---- ----
<S> <C> <C>
Common stock
Beginning balance........................ $ 29 $ 29
Options exercised, 1996, 56,500 shares;
1995, 3,000 shares..................... - -
--------- --------
Ending balance........................... 29 29
--------- --------
Additional paid-in capital
Beginning balance........................ 323,920 323,517
Options exercised........................ 1,361 60
--------- --------
Ending balance........................... 325,281 323,577
--------- --------
Net unrealized gains (losses) on
fixed maturities and equity securities
Beginning balance...................... 76,151 (70,861)
Increase (decrease) for the period..... (53,388) 48,418
--------- --------
Ending balance......................... 22,763 (22,443)
--------- --------
Retained earnings
Beginning balance........................ 224,366 159,278
Net income............................... 15,433 17,116
Cash dividends, 1996, $0.11 per share;
1995, $0.09 per share.................. (2,579) (2,607)
--------- --------
Ending balance........................... 237,220 173,787
--------- --------
Treasury stock, at cost................... (154,302) -
--------- --------
Shareholders' equity at end of period..... $ 430,991 $474,950
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities
Premiums collected............................. $ 134,083 $ 135,888
Policyholder benefits paid..................... (108,558) (102,865)
Policy acquisition and other
operating expenses paid....................... (37,477) (36,718)
Federal income taxes recovered................. 3,499 -
Investment income collected.................... 50,963 52,951
Interest expense paid.......................... (2,169) (93)
Other.......................................... 1,834 1,844
--------- ---------
Net cash provided by operating activities.... 42,175 51,007
--------- ---------
Cash flows from investing activities
Fixed maturities
Purchases..................................... (238,646) (139,852)
Sales......................................... 136,007 92,009
Maturities.................................... 61,309 29,733
Reductions in mortgage loans and real estate... 24,405 506
Net (increase) decrease in other investments,
principally short-term investments............ 2,815 (1,396)
--------- ---------
Net cash used in investing activities........ (14,110) (19,000)
--------- ---------
Cash flows from financing activities
Dividends paid to shareholders................. (2,579) (2,607)
Proceeds from issuance of Senior Notes......... 98,530 -
Principal borrowings (payments) on
Bank Credit Facility.......................... (8,000) -
Retirement of Convertible Notes................ (102,890) -
Exercise of stock options...................... 1,361 60
Annuity contracts, variable and fixed
Deposits...................................... 39,666 34,427
Maturities and withdrawals.................... (32,797) (31,182)
Net transfer to variable annuity assets....... (19,881) (10,534)
Net increase in interest-sensitive
life account balances......................... 422 715
--------- ---------
Net cash used in financing activities........ (26,168) (9,121)
--------- ---------
Net increase in cash............................ 1,897 22,886
Cash at beginning of period..................... 9,518 5,997
--------- ---------
Cash at end of period........................... $ 11,415 $ 28,883
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of Horace Mann
Educators Corporation (the "Company") have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. The Company believes that these financial statements contain all
adjustments (consisting of normal recurring accruals) necessary to present
fairly the Company's consolidated financial position as of March 31, 1996 and
December 31, 1995 and the consolidated results of operations, changes in
shareholders' equity and cash flows for the three months ended March 31, 1996
and 1995.
It is suggested that these financial statements be read in conjunction with
the financial statements and the notes thereto contained in the December 31,
1995 Form 10-K filed by the Company.
The results of operations for the three months ended March 31, 1996 are not
necessarily indicative of the results to be expected for the full year.
The Company has reclassified the presentation of certain prior period
information to conform with the current presentation.
Note 2 - Purchase of the Company's Common Stock
On May 3, 1995, the Company entered into an agreement with The Fulcrum III
Limited Partnership and The Second Fulcrum III Limited Partnership (together,
"Fulcrum") providing for the disposition of the Company's common stock owned by
Fulcrum, constituting 44.5% (12.9 million shares) of the then outstanding common
stock.
Pursuant to that agreement, on May 3, the Company repurchased from Fulcrum
6.5 million shares of common stock. The shares were purchased at a price of
$169,000, before a contingent payment and expenses of the transaction. The
Company borrowed $140,000 of the purchase price under its existing Bank Credit
Facility and the balance was paid from cash on hand.
Also pursuant to the May 3, 1995 agreement, 6.1 million shares of common
stock owned by Fulcrum were sold to the public in a secondary public offering
which was completed on July 25, 1995 and the remaining 0.3 million shares were
distributed to Fulcrum's partners.
The secondary public offering also included the sale by the Company of
911,902 over-allotment shares, the $20,568 net proceeds of which were used to
reduce borrowings under the Bank Credit Facility.
5
<PAGE>
Note 3 - Debt
Indebtedness outstanding was as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------ -----------
<S> <C> <C>
Short-term debt:
$100,000 Bank Credit Facility, LIBOR + 1/2%
(5.75% as of March 31, 1996)................. $ 67,000 $ 75,000
Long-term debt:
6-5/8% Senior Notes, due January 15, 2006.
Face amount less unaccrued discount
of $462 (6.7% imputed rate).................. 99,538 -
4%/6-1/2% Convertible Notes, redeemed
February 1996................................ - 100,000
-------- --------
Total...................................... $166,538 $175,000
======== ========
</TABLE>
Issuance of 6-5/8% Senior Notes ("Senior Notes") and Redemption of Convertible
Notes
On January 17, 1996, the Company issued $100,000 face amount of Senior Notes
at an effective yield of 6.7%, which will mature on January 15, 2006. The net
proceeds from the sale of the Senior Notes were used to finance most of the cost
of the redemption of the Convertible Notes. Interest on the Senior Notes is
payable semi-annually at a rate of 6-5/8%. The Senior Notes are redeemable in
whole or in part, at any time, at the Company's option, at a redemption price
equal to the greater of (i) 100% of their principal amount and (ii) the sum of
the present values of the remaining scheduled payments of principal and interest
thereon discounted, on a semi-annual basis, at the Treasury Yield (as defined in
the indenture) plus 15 basis points, together with accrued interest to the date
of redemption.
6
<PAGE>
Note 4 - Investments
The following sets forth the composition and value of the Company's fixed
maturity securities portfolio by rating category. The Company has classified the
entire fixed maturity securities portfolio as available for sale, which is
carried at market value.
<TABLE>
<CAPTION>
Percent of
Carrying Value March 31, 1996
------------------------- ----------------------
Rating of Fixed March 31, December 31, Carrying Amortized
Maturity Securities(1) 1996 1995 Value Cost
- ---------------------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
AAA..................... 46.3% 45.9% $1,210,737 $1,196,941
AA...................... 10.1 10.5 264,166 258,387
A....................... 25.0 24.0 654,209 640,792
BBB..................... 13.4 14.9 351,814 348,210
BB...................... 1.4 1.1 36,733 39,662
B....................... 3.4 3.2 89,477 86,983
CCC or lower............ - - 1,104 1,643
Not rated(2)............ 0.4 0.4 9,341 10,055
----- ----- ---------- ----------
Total........... 100.0% 100.0% $2,617,581 $2,582,673
===== ===== ========== ==========
</TABLE>
(1) Ratings are as assigned primarily by Standard & Poor's Corporation ("S&P")
when available, with remaining ratings as assigned on an equivalent basis by
Moody's Investors Service, Inc. ("Moody's"). Ratings for publicly traded
securities are determined when the securities are acquired and are updated
monthly to reflect any changes in ratings.
(2) This category is comprised primarily of private placement securities not
rated by either S&P or Moody's. The National Association of Insurance
Commissioners (the "NAIC") has rated 57.6% of these private placements as
investment grade. $1.9 million of the remaining $3.6 million of private
placements were rated as investment grade by the NAIC in 1994 and are under
review for the assignment of a current rating.
The following table presents a maturity schedule of the Company's fixed
maturity securities. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Percent Carrying
of Total Value
------------------------- ----------
March 31, December 31, March 31,
Scheduled Maturity 1996 1995 1996
- ------------------ ---------- ------------- ----------
<S> <C> <C> <C>
One year or less...................... 4.9% 4.2% $ 128,022
After one year through five years..... 29.4 30.4 768,553
After five years through ten years.... 33.5 32.4 878,259
After ten years through twenty years.. 18.0 18.7 470,326
After twenty years.................... 14.2 14.3 372,421
----- ----- ----------
Total............................... 100.0% 100.0% $2,617,581
===== ===== ==========
</TABLE>
7
<PAGE>
Note 4 - Investments (Continued)
There were no past-due, renegotiated or non-accrual mortgage loans as of
March 31, 1996 and December 31, 1995. The Company's valuation reserves for
losses on mortgage loans and real estate totaled $2,640 at March 31, 1996 and
December 31, 1995. The Company's investment portfolio included foreclosed real
estate of $10,218 and $10,999 at March 31, 1996 and December 31, 1995,
respectively.
Note 5 - Reinsurance
The Company recognizes the cost of reinsurance premiums over the contract
periods for such premiums in proportion to the insurance protection provided.
Amounts recoverable from reinsurers for unpaid claims and claim settlement
expenses, including estimated amounts for unsettled claims, claims incurred but
not reported and policy benefits are estimated in a manner consistent with the
insurance liability associated with the policy. The effect of reinsurance on
premiums written; premiums earned; and benefits, claims and settlement expenses
were as follows:
<TABLE>
<CAPTION>
Ceded to Assumed
Gross Other from State
Amount Companies Facilities Net
-------- --------- ---------- --------
<S> <C> <C> <C> <C>
Three months ended
March 31, 1996
- -----------------------
Premiums written....... $175,633 $5,770 $6,684 $176,547
Premiums earned........ 133,451 6,298 7,231 134,384
Benefits, claims and
settlement expenses... 97,429 5,954 7,754 99,229
Three months ended
March 31, 1995
- -----------------------
Premiums written....... $168,964 $5,145 $5,265 $169,084
Premiums earned........ 131,743 4,668 5,525 132,600
Benefits, claims and
settlement expenses.. 98,148 5,985 3,789 95,952
</TABLE>
The Company maintains an excess and catastrophe treaty reinsurance program.
Beginning in 1996, the Company reinsures 95% of catastrophe losses above a
retention of $5.5 million per occurrence up to $54 million per occurrence with
an aggregate annual deductible of $2.0 million. For liability coverages, the
Company reinsures each loss up to $10 million above a retention of $500,000. In
addition, the Company reinsures each property loss above a retention of $500,000
up to $1.5 million in 1996.
In 1995, the Company reinsured 95% of catastrophe losses above a retention of
$6 million per occurrence up to $19 million per occurrence. With regard to
liability coverages in 1995, the Company reinsured each loss up to $7 million
above a retention of $200,000. The Company reinsured each property loss above a
retention of $200,000 up to $1.5 million in 1995.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996
COMPARED WITH
THREE MONTHS ENDED MARCH 31, 1995
Insurance Premiums and Contract Charges Earned
Insurance premiums and contract charges earned increased 1.4% for the three
months ended March 31, 1996 compared to the same period in 1995. Insurance
premiums written and contract deposits in the Company's primary product lines,
automobile (excluding involuntary), property, annuity and life, reflected growth
of 5.3%, increasing to $156.3 million for the three months ended March 31, 1996,
compared to $148.5 million for the same period in 1995, driven principally by
15.4% growth in annuity deposits. For all product lines, insurance premiums
written and contract deposits of $176.6 million for the three months ended March
31, 1996 increased 4.5%, compared to $169.0 million for the same period in 1995.
This increase was less than the growth in insurance premiums written and
contract deposits for the Company's primary product lines primarily due to
reduced allocation of business from state mandatory automobile insurance
facilities. Involuntary automobile business includes assigned risk business as
well as state mandatory insurance facilities.
Automobile (excluding involuntary) and homeowners earned premiums increased
1.3% to $95.1 million for the three months ended March 31, 1996, compared to
$93.9 million for the same period in 1995, primarily as a result of a 2%
increase in automobile (excluding involuntary) and homeowners policies in force
partially offset by a 1% decrease in average premium earned per automobile
policy. The 750,000 automobile (excluding involuntary) and homeowners policies
in force at March 31, 1996 represented an increase of 16,000 policies since
March 31, 1995 and an increase of 7,000 policies since December 31, 1995.
Automobile (excluding involuntary) and homeowners premiums written increased
1.5% to $93.6 million for the three months ended March 31, 1996 compared to
$92.2 million for the same period in 1995. For the three months ended March 31,
1996, new direct premiums written of $9.2 million increased 19.5% compared to
$7.7 million for the same period last year. Renewal direct premiums written of
$85.5 million for the three months ended March 31, 1996 were equal to the same
period in 1995. Partially offsetting this growth in automobile (excluding
involuntary) and homeowners premium was a 23.4% decrease in involuntary
automobile and other property and casualty premiums written to $4.9 million for
the first three months of 1996, compared to $6.4 million for the same period in
1995.
For the three months ended March 31, 1996, life insurance premiums and
contract charges earned were $16.8 million compared to $16.4 million for the
same period in 1995, representing an increase of 2.4%. Life insurance in force
increased 4.8% compared to March 31, 1995. These results reflect a lapse rate of
7.7% for the three months ended March 31, 1996, compared to 7.9% for the same
period in 1995.
Annuity contract charges earned increased 33.3% to $2.0 million for the three
months ended March 31, 1996, compared to $1.5 million for the same period in
1995, primarily due to a 45% increase in variable annuity cash value on deposit.
Total annuity deposits received during the three months ended March 31, 1996
increased 15.4% to $39.7 million, compared to $34.4 million for the same period
in 1995, reflecting a
9
<PAGE>
$1.9 million, or 6.4%, increase in scheduled deposits for retirement annuities
and a $3.4 million, or 65.9%, increase in single premiums and rollover deposits
from other companies.
Group insurance segment premiums earned were $15.4 million for the three
months ended March 31, 1996, compared to $14.2 million for the same period in
1995, reflecting an increase in new business. Average medical insurance rate
increases, net of changes in benefits, were less than 1% during the three months
ended March 31, 1996.
Net Investment Income
Net investment income of $50.1 million for the three months ended March 31,
1996 increased 2.0% compared to the same period in 1995. Investments (at
amortized cost) increased 1.6%, or $42.9 million, from March 31, 1995. The
pretax yield on average investments was 7.4% for both the three months ended
March 31, 1996 and the same period in 1995. After tax investment income
increased 1.8% to $33.4 million for the three months ended March 31, 1996, the
result of a 5.0% after tax yield, compared to $32.8 million and a 4.9% after tax
yield for the same period in 1995.
Realized Investment Gains and Losses
Realized investment gains were $2.1 million for the first quarter of 1996
compared to $0.3 million for the same period in 1995.
Benefits, Claims and Settlement Expenses
Total benefits, claims and settlement expenses increased 3.3% to $99.2
million for the three months ended March 31, 1996, compared to $96.0 million for
the same period in 1995, reflecting higher losses from natural catastrophes and
severe winter weather in 1996 partially offset by improvement in the automobile
loss ratio.
Property and casualty claims and settlement costs increased 2.1% to $78.0
million for the three months ended March 31, 1996 from $76.4 million for the
same period in 1995. The property and casualty loss ratio, including winter
weather-related claims, was 77.9% for the three months ended March 31, 1996,
compared to 75.9% for the same period in 1995. Winter weather-related claims
were $15.9 million for the first three months of 1996 compared to $9.0 million
for the same period in 1995. For the three months ended March 31, 1996, the
automobile loss ratio was 73.4% compared to 77.6% for the same period in 1995.
Life benefits were $7.9 million for the three months ended March 31, 1996,
reflecting a 5.3% increase compared to $7.5 million for the same period in 1995.
Group life and health claims of $13.3 million for the three months ended March
31, 1996 increased 9.9% compared to the $12.1 million in claims recorded in the
same period in 1995. The group segment loss ratio was 86.4% for both the three
months ended March 31, 1996 and the same period in 1995.
10
<PAGE>
Interest Credited to Policyholders
Interest credited to policyholders was $23.5 million for the three months
ended March 31, 1996, 6.8% more than the $22.0 million interest credited for the
first three months of 1995. Interest credited to annuity contracts increased
5.0% to $19.0 million for the three months ended March 31, 1996 from $18.1
million for the same period in 1995. The increase reflects a higher average
annual interest rate credited of 5.7% for the three months ended March 31, 1996,
compared to 5.5% for the first quarter of 1995, and a growth of fixed
accumulated deposits of 2.5%.
Life insurance interest credited increased $0.6 million, or 15.4%, to $4.5
million for the three months ended March 31, 1996, compared to the same period
in 1995, primarily as a result of growth in the interest-sensitive whole life
insurance reserves and account balances.
Policy Acquisition and Operating Expenses
Policy acquisition and operating expenses represent the Company's insurance
underwriting expenses. For the three months ended March 31, 1996, policy
acquisition and operating expenses of $35.7 million were comparable to the first
three months of 1995. For the three months ended March 31, 1996, the property
and casualty expense ratio was 19.6% compared to 19.1% for the same period in
1995.
Amortization of Intangible Assets
Amortization of intangible assets decreased by $0.4 million to $2.6 million
for the three months ended March 31, 1996, compared to $3.0 million for the same
period in 1995. The lower amortization was due to the scheduled decrease in the
amortization of the value of acquired insurance in force related to the 1989
acquisition of the Company.
Interest Expense
As a result of borrowings on the Bank Credit Facility related to the
repurchase of shares of its common stock during the second quarter of 1995, the
Company's interest expense of $2.8 million for the three months ended March 31,
1996 was $1.2 million, or 75.0%, greater than the same period in 1995.
Income Tax Expense
The 1996 effective income tax rate of 28% was equal to the 1995 effective
income tax rate. Income from investments in tax-advantaged securities reduced
the 1996 effective income tax rate 4 percentage points compared to a reduction
of 3 percentage points in 1995. Acquisition related tax benefits reduced the
effective income tax rate 3 percentage points in 1996 and 4 percentage points in
1995.
Operating Income
Operating income (income before realized investment gains and losses and 1996
debt retirement costs) was $15.1 million for the three months ended March 31,
1996 compared to $16.9 million for the same period in 1995. The decrease was
primarily due to higher property and casualty winter weather-related storm
claims in the first quarter of 1996 which offset an increase in operating income
from the annuity and life segments.
Property and casualty segment operating income was $10.3 million for the
three
11
<PAGE>
months ended March 31, 1996, compared to $12.5 million for the same period in
1995. This reflected an increase in severe winter weather-related claims of $4.5
million after tax. The property and casualty combined loss and expense ratio for
the three months ended March 31, 1996 was 97.5%, compared to the 95.1% reported
for the same period in 1995, with the increase attributable to the higher levels
of weather-related claims.
Life insurance segment operating income increased $0.2 million for the three
months ended March 31, 1996 to $2.9 million, compared to $2.7 million for the
same period in 1995.
The Company maintained strong annuity net margins in the first quarter of
1996 although the net margin percentage declined slightly compared to the same
period in 1995. Annuity segment operating income of $4.2 million for the three
months ended March 31, 1996 increased 20.0% compared to the same period in 1995
resulting primarily from an increase in cash value on deposit. Total accumulated
fixed and variable annuity cash value on deposit of $1,918.1 million increased
$199.7 million, or 11.6%, compared to March 31, 1995. This increase resulted
from a net increase in funds on deposit of 7.6% plus net increases in market
value of underlying mutual funds of $69.6 million.
The group life and health segment reported break-even results for the three
months ended March 31, 1996, similar to the same period in 1995. The combined
loss and expense ratio decreased to 107.1% for the three months ended March 31,
1996, compared to 111.2% for the same period in 1995, primarily due to a
decrease in the expense ratio resulting from higher premium volume.
Net Income
Net income, which includes realized investment gains, for the three months
ended March 31, 1996 was $15.5 million, or $0.66 per share, reflecting a 9.4%
decrease in net income and a 15.8% increase in net income per share on a fully
diluted basis compared to the same period in 1995. The share repurchase
completed in 1995 and the redemption of the convertible notes in February 1996
contributed to the increase in net income per share. Net income for the three
months ended March 31, 1996 was reduced by $10.3 million due to claims from
severe winter weather; by comparison, severe winter weather claims in the first
three months of 1995 reduced the Company's net income by $5.8 million. Realized
investment gains after tax were $1.3 million for the three months ended March
31, 1996, compared to $0.2 million for the same period in 1995. Net income for
the three months ended March 31, 1996 also reflects a reduction of $0.9 million,
or $0.04 per share, for the costs of the early redemption of $100 million of
convertible notes.
LIQUIDITY AND FINANCIAL RESOURCES
Investments
The Company's investment strategy emphasizes high quality investment grade,
publicly traded fixed income securities. At March 31, 1996, fixed income
securities comprised 95.3% of total investments. Of the fixed income investment
portfolio, 95.1% was investment grade and 99.3% was publicly traded. The average
quality of the total fixed income portfolio was A+ at March 31, 1996.
As of March 31, 1996, 34.3% of the Company's fixed maturity portfolio was
scheduled to mature within five years and 67.8% within 10 years. However, actual
12
<PAGE>
maturities will differ from contractual maturities because borrowers have the
right to call or prepay obligations with or without call or prepayment
penalties. The duration of the investment portfolio is managed to provide cash
flow to satisfy policyholder liabilities as they become due. The average option
adjusted duration of total investments was 4.4 years at both March 31, 1996 and
December 31, 1995. The Company has included in its annuity products substantial
surrender penalties so as to reduce the likelihood of unexpected increases in
policy or contract surrenders. All annuities issued since 1982 and approximately
60% of all outstanding fixed annuity accumulated cash values are subject to
surrender penalties.
The Company holds a limited position, $129.5 million, in high-yield fixed
income securities which are carried at market value. At March 31, 1996, this
represented 4.7% of cash and investments, compared to 4.1% held at year-end
1995. The market value of below investment grade securities at March 31, 1996
was $1.7 million less than the amortized cost.
The Company's mortgage loan and real estate portfolio represented 2.0% of
investments at March 31, 1996, a decrease of 0.8 percentage points from 2.8% at
December 31, 1995. Mortgage loans and real estate totaled $54.0 million at March
31, 1996 compared to $77.9 million at December 31, 1995. The Company plans to
continue to decrease its investment in commercial mortgage loans and real
estate. No significant investment in mortgage loans or real estate has been made
since early 1988. There were no mortgage loan foreclosures or restructures
during the first three months of 1996. No commercial mortgage loans had interest
which was 90 days or more past due at March 31, 1996.
The Company's valuation reserves for investment losses totaled $2.6 million
at both March 31, 1996 and December 31, 1995.
Cash Flow
The short-term liquidity requirements of the Company, within a 12-month
operating cycle, are for the timely payment of claims and benefits to
policyholders, operating expenses, interest payments and federal income taxes.
Cash flow in excess of these amounts is used to pay dividends to shareholders
and retire short-term debt. Long-term liquidity requirements, beyond one year,
are principally for the payment of future insurance policy claims and benefits,
retirement of notes and future dividends to shareholders.
Operating Activities
As a holding company, HMEC conducts its principal operations in the personal
lines segment of the property and casualty and life insurance industries through
its subsidiaries. HMEC's insurance subsidiaries generate cash flow from premium
and investment income, generally well in excess of their immediate needs for
policy obligations, operating expenses and other cash requirements. Net cash
provided by operating activities was $42.2 million for the three months ended
March 31, 1996 compared to $51.0 million for the same period in 1995. In both
years, cash provided by operating activities primarily reflected net cash
provided by the insurance subsidiaries.
13
<PAGE>
Investing Activities
HMEC's insurance subsidiaries maintain significant investments in fixed
maturity securities to meet future contractual obligations to policyholders.
In conjunction with its management of liquidity and other asset/liability
management objectives, the Company, from time to time, will sell fixed maturity
securities prior to maturity and reinvest the proceeds in other investments with
different interest rates, maturities or credit characteristics. Accordingly, the
Company has classified the entire fixed maturities portfolio as available for
sale. During the first three months of 1996, net cash used in investing
activities was $14.1 million. This net amount reflects $238.6 million in
purchases of fixed maturity and other investments, funded by investment sales or
maturities of $224.5 million and net cash provided by operating activities.
Financing Activities
Financing activities include payment of scheduled dividends, transactions
related to the Company's common stock, borrowings and repayments under the
Company's various debt facilities and the receipt and withdrawal of funds by
annuity policyholders. Shareholder dividends paid for the three months ended
March 31, 1996 were $2.6 million.
On January 17, 1996, the Company issued $100.0 million face amount of 6-5/8%
Senior Notes ("Senior Notes"), which will mature on January 15, 2006, at a
discount of 0.5%. The $98.5 million net proceeds from the sale of the Senior
Notes were used to finance most of the cost of the February 6, 1996 redemption
of $100.0 million of outstanding convertible notes at an aggregate cost of
$102.9 million.
For the three months ended March 31, 1996, receipts from annuity contracts of
$39.7 million were greater than contract maturities and withdrawals of $32.8
million. Net transfers to variable annuity assets were $19.9 million during the
first three months of 1996 and interest-sensitive life account balances
increased $0.4 million during the same period.
Capital Resources
Shareholders' equity was $431.0 million at March 31, 1996, including an
unrealized gain in the Company's investment portfolio of $22.8 million after tax
($35.0 million pretax). The market value of the Company's common stock and the
market value per share were $715.1 million and $30-1/2, respectively, at March
31, 1996. Book value per share was $18.38 at March 31, 1996, $17.41 excluding
investment market value adjustments.
The total capital of the Company was $598.1 million at March 31, 1996,
including $99.5 million of long-term debt and $67.0 million of short-term debt.
Long-term debt as a percentage of total shareholders' equity was 23.1% as of
March 31, 1996, compared to 21.3% as of December 31, 1995, with the increase
occurring as a result of lower unrealized gains attributable to the Company's
investment portfolio.
As of March 31, 1996, the Company had short-term debt comprised of $67.0
million outstanding under the Bank Credit Facility. The Bank Credit Facility, as
amended in January 1996, allows borrowings up to $100.0 million at Interbank
Offering Rates plus 0.3% to 2.0% or Bank of America prime rates plus 0% to 1.5%,
or 5.8% as of March 31, 1996. Scheduled semi-annual commitment reductions begin
in August 1997.
14
<PAGE>
On January 17, 1996, the Company issued $100.0 million face amount of 6-5/8%
Senior Notes ("Senior Notes"), which will mature on January 15, 2006, at a
discount of 0.5%. The net proceeds from the sale of the Senior Notes were used
to finance most of the cost of the redemption of $100.0 million of outstanding
convertible notes at an aggregate cost of $102.9 million. Interest on the Senior
Notes is payable semi-annually at a rate of 6-5/8%. The Senior Notes are
redeemable in whole or in part, at any time at the Company's option, at a
redemption price equal to the greater of (i) 100% of their principal amount and
(ii) the sum of the present values of the remaining scheduled payments of
principal and interest thereon discounted, on a semi-annual basis, at the
Treasury yield (as defined in the indenture) plus 15 basis points, together with
accrued interest to the date of redemption.
The Senior Notes have an investment grade rating from both Standard & Poor's
Corporation ("S&P") (A-) and Moody's Investors Service, Inc. ("Moody's") (Baa2)
and are traded on the New York Stock Exchange (HMN 6-5/8).
The Company's ratio of earnings to fixed charges for the three months ended
March 31, 1996 was 8.7x.
Total shareholder dividends were $2.6 million for the three months ended
March 31, 1996. In February 1996, the Board of Directors authorized the fourth
consecutive annual increase in the Company's dividend. The regular quarterly
dividend increased by 22% to $0.11 per share.
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K
(a) The following items are filled as Exhibits.
(11) Statement re computation of per share earnings.
(27) Financial Data Schedule.
(b) No reports on Form 8-K were filed by the Company during the first
quarter of 1996.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HORACE MANN EDUCATORS CORPORATION
(Registrant)
Date May 14, 1996 Paul J. Kardos
-------------------------- ----------------------------------
Paul J. Kardos, President and
Chief Executive Officer
Date May 14, 1996 Larry K. Becker
-------------------------- ----------------------------------
Larry K. Becker, Executive
Vice President and Chief
Financial Officer
16
<PAGE>
Exhibit 11
Horace Mann Educators Corporation
Computation of Net Income per Share
For the Three Months Ended March 31, 1996 and 1995
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Primary - reported:
Weighted average number of common shares
outstanding during the period 23,424 28,960
------- -------
Net income for the period $15,433 $17,116
------- -------
Net income per share - assuming no dilution $ 0.66 $ 0.59
======= =======
Primary:
Weighted average number of common shares
outstanding during the period 23,424 28,960
Weighted average number of common equivalent
shares to reflect the dilutive effect of
common stock equivalent securities:
Warrants 117 107
Stock options 324 147
------- -------
Total common and common equivalent shares 23,865 29,214
------- -------
Net income per share $ 0.65 $ 0.59
======= =======
Percentage of dilution compared to reported
net income per share 1.5% 0.0%
Fully diluted:
Weighted average number of common shares
outstanding during the period 23,424 28,960
Weighted average number of common equivalent
shares to reflect the dilutive effect of
common stock equivalent securities:
Warrants 117 107
Stock options 324 147
Weighted average number of common equivalent
shares to reflect the dilutive effect of
convertible notes - 2,857
------- -------
Total common and common equivalent shares
adjusted to calculate fully diluted
earnings per share 23,865 32,071
------- -------
Net income for the period $15,433 $17,116
Interest expense, net of tax,
on convertible notes - 1,006
------- -------
Adjusted net income for the period $15,433 $18,122
------- -------
Net income per share -
assuming full dilution $ 0.65 $ 0.57
======= =======
Percentage of dilution compared to
reported net income per share 1.5% 3.4%
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND> This schedule contains summary financial information extracted from
the Consolidated Balance Sheet and the Consolidated Statement of Operations
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 2,617,581<F1>
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 43,760
<REAL-ESTATE> 10,218
<TOTAL-INVEST> 2,746,206
<CASH> 11,415
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 68,786
<TOTAL-ASSETS> 3,655,823
<POLICY-LOSSES> 2,143,182<F2>
<UNEARNED-PREMIUMS> 139,368
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 120,009
<NOTES-PAYABLE> 166,538
<COMMON> 29
0
0
<OTHER-SE> 430,962
<TOTAL-LIABILITY-AND-EQUITY> 3,655,823
134,384
<INVESTMENT-INCOME> 50,107
<INVESTMENT-GAINS> 2,061
<OTHER-INCOME> 0
<BENEFITS> 99,229
<UNDERWRITING-AMORTIZATION> 10,605
<UNDERWRITING-OTHER> 24,952
<INCOME-PRETAX> 21,449
<INCOME-TAX> 6,016
<INCOME-CONTINUING> 15,433
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,433
<EPS-PRIMARY> 0.66
<EPS-DILUTED> 0.66
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> Refer to Note 4 - Investments of the Company's Consolidated Notes to
Financial Statements for March 31, 1996.
<F2> Refer to the Company's Consolidated Balance Sheet as of March 31, 1996.
</FN>
</TABLE>
