HORACE MANN EDUCATORS CORP /DE/, 10-Q, 1996-08-13

HORACE MANN EDUCATORS CORP /DE/
10-Q, 1996-08-13
FIRE, MARINE & CASUALTY INSURANCE

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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 June 30, 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 August 1, 1996, 23,456,331 shares of Common Stock, par value $0.001
per share, were outstanding, net of 5,588,098 shares of treasury stock.

Total of sequentially numbered pages 31.

Exhibit index on page number 20.

===============================================================================
<PAGE>

HORACE MANN EDUCATORS CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 1996

INDEX
<TABLE>
<CAPTION>

Page
----
<S> <C>
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of
June 30, 1996 and December 31, 1995................... 1

Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1996
and June 30, 1995..................................... 2

Consolidated Statements of Changes in Shareholders'
Equity for the Six Months Ended June 30, 1996
and June 30, 1995..................................... 3

Consolidated Statements of Cash Flows for the
Three and Six Months Ended June 30, 1996
and June 30, 1995..................................... 4

Notes to Consolidated Financial Statements.............. 5

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 10

PART II - OTHER INFORMATION............................................ 17

Item 4. Submission of Matters to a Vote of Security Holders

Item 6. Exhibits and Reports on Form 8-K

SIGNATURES............................................................ 18
</TABLE>
<PAGE>

HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
<S> <C> <C>
ASSETS

Investments
Fixed maturities, available for
sale, at market (amortized cost,
1996, $2,583,433; 1995, $2,527,032)............. $2,589,559 $2,643,060
Mortgage loans and real estate.................... 53,601 77,895
Short-term investments............................ 23,253 34,983
Policy loans and other............................ 43,579 42,611
---------- ----------
Total investments........................... 2,709,992 2,798,549
Cash............................................... 13,712 9,518
Accrued investment income.......................... 42,072 43,215
Premiums receivable................................ 55,174 51,144
Value of acquired insurance in force and goodwill.. 124,144 129,843
Other assets....................................... 157,295 142,442
Variable annuity assets............................ 574,108 487,543
---------- ----------
Total assets................................ $3,676,497 $3,662,254
========== ==========
</TABLE>
LIABILITIES, REDEEMABLE SECURITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>

<S> <C> <C>
Policy liabilities
Annuity contract liabilities...................... $1,283,123 $1,275,117
Interest-sensitive life contract liabilities...... 308,871 289,310
Unpaid claims and claim expenses.................. 376,340 385,064
Future policy benefits............................ 182,630 185,449
Unearned premiums................................. 140,968 141,105
---------- ----------
Total policy liabilities.................... 2,291,932 2,276,045
Other policyholder funds........................... 119,705 119,070
Other liabilities.................................. 105,630 133,855
Short-term debt.................................... 58,000 75,000
Long-term debt..................................... 99,546 100,000
Variable annuity liabilities....................... 574,108 487,543
---------- ----------
Total liabilities 3,248,921 3,191,513
---------- ----------
Warrants, subject to redemption.................... 577 577
---------- ----------
Common stock....................................... 29 29
Additional paid-in capital......................... 325,567 323,920
Net unrealized gains on fixed
maturities and equity securities.................. 3,984 76,151
Retained earnings.................................. 251,721 224,366
Treasury stock, at cost............................ (154,302) (154,302)
---------- ----------
Total shareholders' equity.................. 426,999 470,164
---------- ----------
Total liabilities, redeemable
securities and shareholders' equity........ $3,676,497 $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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>

Insurance premiums written
and contract deposits.................. $188,884 $173,432 $365,431 $342,516
======== ======== ======== ========
Revenues
Insurance premiums and
contract charges earned............... $136,873 $131,856 $271,257 $264,456
Net investment income.................. 49,452 49,579 99,559 98,666
Realized investment gains.............. 684 4,005 2,745 4,315
-------- -------- -------- --------
Total revenues....................... 187,009 185,440 373,561 367,437
-------- -------- -------- --------
Benefits, losses and expenses
Benefits, claims and
settlement expenses................... 96,632 96,078 195,861 192,030
Interest credited...................... 23,763 22,548 47,302 44,528
Policy acquisition expenses amortized.. 10,605 10,498 21,210 21,210
Operating expenses..................... 26,573 25,425 51,525 50,384
Amortization of intangible assets...... 3,080 2,951 5,699 5,903
Interest expense....................... 2,630 3,137 5,470 4,778
Debt retirement costs.................. - - 1,319 -
Additional rights relating to
share repurchase...................... - 1,347 - 1,347
-------- -------- -------- --------
Total benefits,
losses and expenses 163,283 161,984 328,386 320,180
-------- -------- -------- --------

Income before income taxes.............. 23,726 23,456 45,175 47,257
Income tax expense...................... 6,645 7,226 12,661 13,911
-------- -------- -------- --------

Net income.............................. $ 17,081 $ 16,230 $ 32,514 $ 33,346
======== ======== ======== ========

Earnings per share
Assuming no dilution................... $ 0.73 $ 0.66 $ 1.39 $ 1.24
======== ======== ======== ========

Assuming full dilution................. $ 0.73 $ 0.62 $ 1.39 $ 1.18
======== ======== ======== ========

Weighted average number of shares
and equivalent shares (in thousands)
Assuming no dilution.................. 23,449 24,747 23,437 26,842
Assuming full dilution................ 23,449 27,867 23,437 29,961
</TABLE>
See accompanying notes to consolidated financial statements.

2
<PAGE>

HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

SIX MONTHS ENDED
JUNE 30,
---------------------------
1996 1995
---- ----

<S> <C> <C>
Common stock
Beginning balance..................................... $ 29 $ 29
Options exercised, 1996, 67,000 shares;
1995, 3,000 shares.................................. - -
--------- ---------
Ending balance........................................ 29 29
--------- ---------

Additional paid-in capital
Beginning balance..................................... 323,920 323,517
Options exercised..................................... 1,647 60
--------- ---------
Ending balance........................................ 325,567 323,577
--------- ---------

Net unrealized gains (losses) on
fixed maturities and equity securities
Beginning balance................................... 76,151 (70,861)
Increase (decrease) for the period.................. (72,167) 104,956
--------- ---------
Ending balance...................................... 3,984 34,095
--------- ---------

Retained earnings
Beginning balance..................................... 224,366 159,278
Net income............................................ 32,514 33,346
Cash dividends, 1996, $0.22 per share;
1995, $0.18 per share............................... (5,159) (4,628)
--------- ---------
Ending balance........................................ 251,721 187,996
--------- ---------

Treasury stock, at cost
Beginning balance..................................... (154,302) -
Purchase of 6,500,000 shares
(See note 2)........................................ - (169,478)
--------- ---------
Ending balance........................................ (154,302) (169,478)
--------- ---------

Shareholders' equity at end of period.................. $ 426,999 $ 376,219
========= =========
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities
Premiums collected..................... $ 145,542 $ 139,164 $ 279,625 $ 275,052
Policyholder benefits paid............. (112,259) (100,338) (220,817) (203,203)
Policy acquisition and other
operating expenses paid.............. (40,188) (37,796) (77,665) (74,514)
Federal income taxes paid.............. (14,150) (15,004) (10,651) (15,004)
Investment income collected............ 49,739 45,456 100,702 98,407
Interest expense paid.................. (987) (3,358) (3,156) (3,451)
Other.................................. 54 (4,248) 1,888 (2,344)
--------- --------- --------- ---------
Net cash provided
by operating activities........... 27,571 23,876 69,926 74,943
--------- --------- --------- ---------

Cash flows from investing activities
Fixed maturities
Purchases............................ (277,429) (365,764) (516,075) (505,616)
Sales................................ 224,273 299,731 360,280 391,740
Maturities........................... 42,064 46,611 103,373 76,344
Reductions in mortgage loans
and real estate...................... 448 14,519 24,853 15,025
Net (increase) decrease in
other investments, principally
short-term investments............... 7,814 9,875 10,629 8,479
--------- --------- --------- ---------
Net cash provided by (used
in) investing activities.......... (2,830) 4,972 (16,940) (14,028)
--------- --------- --------- ---------

Cash flows from financing activities
Dividends paid to shareholders......... (2,580) (2,021) (5,159) (4,628)
Proceeds from issuance of Senior Notes. - - 98,530 -
Principal borrowings (payments) on
Bank Credit Facility................. (9,000) 140,000 (17,000) 140,000
Retirement of Convertible Notes........ - - (102,890) -
Purchase of treasury stock............. - (169,478) - (169,478)
Exercise of stock options.............. 286 - 1,647 -
Annuity contracts, variable and fixed
Deposits............................. 45,877 36,322 85,543 70,749
Maturities and withdrawals........... (33,830) (27,351) (66,627) (58,533)
Net transfer to variable
annuity assets..................... (23,680) (11,082) (43,561) (21,616)
Net increase in interest-sensitive
life account balances................ 303 505 725 1,220
--------- --------- --------- ---------
Net cash used
in financing activities........... (22,624) (33,105) (48,792) (42,286)
--------- --------- --------- ---------
Net increase (decrease) in cash.......... 2,297 (4,257) 4,194 18,629
Cash at beginning of period.............. 11,415 28,883 9,518 5,997
--------- --------- --------- ---------
Cash at end of period.................... $ 13,712 $ 24,626 $ 13,712 $ 24,626
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.

4
<PAGE>

HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 1996 and
December 31, 1995 and the consolidated results of operations, changes in
shareholders' equity and cash flows for the three and six months ended June 30,
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 and six months ended June 30, 1996
are not necessarily indicative of the results to be expected for the full year.

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:
June 30, December 31,
1996 1995
---------- ------------
<S> <C> <C>

Short-term debt:
$100,000 Bank Credit Facility, IBOR + 1/2%
(6.0% as of June 30, 1996).................... $ 58,000 $ 75,000

Long-term debt:
6 5/8% Senior Notes, due January 15, 2006.
Face amount less unaccrued discount
of $454 (6.7% imputed rate)................... 99,546 -
4%/6 1/2% Convertible Notes, redeemed
February 1996................................. - 100,000
-------- --------
Total....................................... $157,546 $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 June 30, 1996
------------------------ ----------------------
Rating of Fixed June 30, December 31, Carrying Amortized
Maturity Securities(1) 1996 1995 Value Cost
- ------------------------ --------- ------------- ---------- ----------
<S> <C> <C> <C> <C>

AAA..................... 47.3% 45.9% $1,225,463 $1,224,515
AA...................... 8.4 10.5 218,173 215,010
A....................... 23.8 24.0 616,817 611,226
BBB..................... 14.8 14.9 382,697 383,166
BB...................... 1.7 1.1 43,841 47,153
B....................... 3.5 3.2 90,026 88,544
CCC or lower............ - - 1,040 1,644
Not rated(2)............ 0.5 0.4 11,502 12,175
----- ----- ---------- ----------
Total........... 100.0% 100.0% $2,589,559 $2,583,433
===== ===== ========== ==========
</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 60.5% of these private placements as
investment grade. $1.7 million of the remaining $3.1 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
------------------------ ----------
June 30, December 31, June 30,
Scheduled Maturity 1996 1995 1996
- -------------------------------------- --------- ------------- ----------
<S> <C> <C> <C>
One year or less...................... 6.1% 4.2% $ 156,630
After one year through five years..... 27.5 30.4 713,047
After five years through ten years.... 34.6 32.4 896,011
After ten years through twenty years.. 18.7 18.7 485,271
After twenty years.................... 13.1 14.3 338,600
----- ----- ----------
Total.............................. 100.0% 100.0% $2,589,559
===== ===== ==========
</TABLE>

<PAGE>

Note 4 - Investments (Continued)

There were no past-due, renegotiated or non-accrual mortgage loans as of June
30, 1996 and December 31, 1995. The Company's valuation reserves for losses on
mortgage loans and real estate totaled $2,640 at June 30, 1996 and December 31,
1995. The Company's investment portfolio included foreclosed real estate of
$10,373 and $10,999 at June 30, 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:

Ceded to Assumed
Gross Other from State
Amount Companies Facilities Net
-------- --------- ---------- --------
<S> <C> <C> <C> <C>
Three months ended
June 30, 1996
- -----------------------

Premiums written....... $188,090 $ 6,497 $ 7,291 $188,884
Premiums earned........ 135,719 6,192 7,346 136,873
Benefits, claims and
settlement expenses.. 96,874 8,011 7,769 96,632

Three months ended
June 30, 1995
- -----------------------

Premiums written....... $170,699 $ 6,145 $ 8,878 $173,432
Premiums earned........ 131,250 5,152 5,758 131,856
Benefits, claims and
settlement expenses.. 99,094 8,430 5,414 96,078

Six months ended
June 30, 1996
- -----------------------

Premiums written....... $363,723 $12,267 $13,975 $365,431
Premiums earned........ 269,170 12,490 14,577 271,257
Benefits, claims and
settlement expenses.. 194,303 13,965 15,523 195,861

Six months ended
June 30, 1995
- -----------------------

Premiums written....... $339,663 $11,290 $14,143 $342,516
Premiums earned........ 262,993 9,820 11,283 264,456
Benefits, claims and
settlement expenses.. 197,242 14,415 9,203 192,030
</TABLE>

8
<PAGE>

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.

9
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Statements made in the following discussion that state the Company's or
management's intentions, hopes, beliefs, expectations or predictions of the
future are forward-looking statements. It is important to note that the
Company's actual results could differ materially from those projected in such
forward-looking statements due to, among other risks and uncertainties inherent
in the Company's business, the following important factors:

. Changes in the composition of the Company's assets and liabilities
through acquisitions or divestitures.

. Prevailing interest rate levels, including the impact of interest rates
on (i) unrealized gains and losses on the Company's investment portfolio
and the related after-tax effect on the Company's shareholders' equity
and total capital and (ii) the book yield of the Company's investment
portfolio.

. The impact of fluctuations in the capital markets on the Company's
ability to refinance outstanding indebtedness or repurchase shares
of the Company's outstanding common stock.

. The frequency and severity of catastrophes such as hurricanes,
earthquakes and storms, and the ability of the Company to maintain
a favorable catastrophe reinsurance program.

. The Company's ability to develop and expand its agency force and its
direct product distribution systems, as well as the Company's ability to
maintain and secure product sponsorships by local, state and national
education associations.

. The competitive impact of new entrants such as mutual funds into the
tax deferred annuity products markets, and the Company's ability to
profitably expand its property and casualty business in highly
competitive environments.

. Changes in insurance regulations, including (i) those effecting the
ability of the Company's insurance subsidiaries to distribute cash to
the holding company and (ii) those impacting the Company's ability to
profitably write property and casualty or health insurance policies in
one or more states.

. Changes in federal income tax laws and changes resulting from federal tax
audits effecting corporate tax rates or taxable income, and regulations
changing the relative tax advantages of the Company's life and annuity
products to customers.

. The Company's ability to maintain favorable claims-paying ability
ratings.

. Adverse changes in policyholder mortality and morbidity rates.

10
<PAGE>

SIX MONTHS ENDED JUNE 30, 1996
COMPARED WITH
SIX MONTHS ENDED JUNE 30, 1995

Insurance Premiums and Contract Charges Earned

Insurance premiums and contract charges earned, which excludes annuity
and life contractholders' deposits, increased 2.6% for the six months ended
June 30, 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,
grew 7.4%, increasing to $324.2 million for the six months ended June 30, 1996,
compared to $301.9 million for the same period in 1995, driven principally by
20.9% growth in annuity deposits. The six month increase in insurance premiums
and contract deposits in the Company's primary product lines of 7.4% included
growth of 9.5%, or $14.5 million, for the second quarter of 1996, resulting
principally from 26.2% growth in annuity deposits. Involuntary automobile
business includes allocations of business from state mandatory automobile
insurance facilities and assigned risk business. Involuntary automobile
premiums written decreased 9.1% compared to the first six months of 1995. For
all product lines, insurance premiums written and contract deposits of $365.4
million for the six months ended June 30, 1996 increased 6.7%, compared to
$342.4 million for the same period in 1995.

Automobile (excluding involuntary) and homeowners earned premiums increased
2.0% to $191.7 million for the six months ended June 30, 1996, compared to
$188.0 million for the same period in 1995, primarily as a result of a 3.5%
increase in automobile (excluding involuntary) and homeowners policies in force,
partially offset by a 1.0% decrease in average premium earned per automobile
policy. The 762,000 automobile (excluding involuntary) and homeowners policies
in force at June 30, 1996 represented an increase of 26,000 policies since June
30, 1995 and an increase of 19,000 policies since December 31, 1995.

Automobile (excluding involuntary) and homeowners premiums written increased
3.2% to $191.6 million for the six months ended June 30, 1996, compared to
$185.6 million for the same period in 1995. For the six months ended June 30,
1996, new direct premiums written of $20.5 million increased 28.1% compared to
$16.0 million for the same period last year. Renewal direct premiums written of
$172.7 million for the six months ended June 30, 1996 were comparable to $173.3
million for the same period in 1995.

For the six months ended June 30, 1996, life insurance premiums and contract
charges earned were $33.9 million, compared to $32.8 million for the same period
in 1995, representing an increase of 3.4%. Life insurance in force increased
4.4% compared to June 30, 1995. These results reflect a lapse rate of 8.0% for
the six months ended June 30, 1996, compared to 7.9% for the same period in
1995.

Annuity contract charges earned increased 40.0% to $4.2 million for the six
months ended June 30, 1996, compared to $3.0 million for the same period in
1995, due to a 41% increase in variable annuity cash value on deposit. Total
annuity deposits received during the six months ended June 30, 1996 increased
20.9% to $85.5 million, compared to $70.7 million for the same period in 1995,
reflecting a $3.7 million, or 6.2%, increase in scheduled deposits for
retirement annuities and an $11.1 million, or

11
<PAGE>

100.4%, increase in single premiums and rollover deposits from other companies.
The six month increase in annuity deposits of 20.9% reflects growth of 26.2%, or
$9.5 million, for the second quarter of 1996 and 15.4%, or $5.3 million,
reported for the first quarter of 1996.

Group insurance segment premiums earned were $30.8 million for the six months
ended June 30, 1996, compared to $27.9 million for the same period in 1995,
primarily reflecting an increase in new business. Average medical insurance
rates, net of changes in benefits, increased 2% during the six months ended June
30, 1996.

Net Investment Income

Net investment income of $99.6 million for the six months ended June 30, 1996
increased 0.9% compared to the same period in 1995. Investments (at amortized
cost) increased 1.2%, or $31.0 million, from June 30, 1995. The pretax yield on
average investments was 7.4% for both the six months ended June 30, 1996 and the
same period in 1995. After tax investment income increased 0.8% to $66.4
million for the six months ended June 30, 1996, the result of a 4.9% after tax
yield, compared to $65.9 million and a 5.0% after tax yield for the same period
in 1995.

Realized Investment Gains and Losses

Realized investment gains were $2.7 million for the first half of 1996,
compared to $4.3 million for the same period in 1995.

Benefits, Claims and Settlement Expenses

Total benefits, claims and settlement expenses increased 2.0% to $195.9
million for the six months ended June 30, 1996, compared to $192.0 million for
the same period in 1995.

Property and casualty claims and settlement costs were $152.2 million for the
six months ended June 30, 1996, compared to $153.0 million for the same period
in 1995. The property and casualty loss ratio was 75.2% for the six months
ended June 30, 1996, compared to 76.1% for the same period in 1995. Higher
first quarter 1996 losses from severe winter weather were offset by continued
favorable trends in voluntary automobile losses.

Life benefits were $17.0 million for the six months ended June 30, 1996,
reflecting a 3.7% increase, compared to $16.4 million for the same period in
1995. Group life and health claims of $26.7 million for the six months ended
June 30, 1996 increased 18.1%, compared to the $22.6 million in claims recorded
in the same period in 1995, due to an increase in group medical claims. The
group segment loss ratio was 86.7% for the six months ended June 30, 1996,
compared to 82.1% for the same period in 1995.

Interest Credited to Policyholders

Interest credited to policyholders was $47.3 million for the six months ended
June 30, 1996, 6.3% more than the $44.5 million interest credited for the first
six months of 1995. Interest credited to annuity contracts increased 4.9% to
$38.3 million for the six months ended June 30, 1996, from $36.5 million for the
same period in 1995. The increase reflects a higher average annual interest
rate credited of 5.6% for the

12
<PAGE>

six months ended June 30, 1996, compared to 5.5% for the first half of 1995, and
a growth of fixed accumulated deposits of 1.8%.

Life insurance interest credited increased $1.0 million, or 12.5%, to $9.0
million for the six months ended June 30, 1996, compared to the same period in
1995, primarily as a result of continued 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 six months ended June 30, 1996, policy
acquisition and operating expenses of $72.7 million increased $1.0 million, or
1.4%, compared to $71.7 million for the first six months of 1995. For the six
months ended June 30, 1996, the property and casualty expense ratio was 19.8%
compared to 19.5% for the same period in 1995.

Amortization of Intangible Assets

Amortization of intangible assets decreased by $0.2 million to $5.7 million
for the six months ended June 30, 1996, compared to $5.9 million for the same
period in 1995, as a result of the scheduled decrease in the non-cash
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 $5.5 million for the six months ended June 30,
1996 was $0.7 million, or 14.6%, greater than the same period in 1995. Interest
expense of $2.7 million for the second quarter of 1996 was $0.5 million less
than the $3.2 million reported for the same period in 1995 and is expected to
decrease in future quarters as the Company continues to repay this short-term
debt.

Income Tax Expense

The 1996 effective income tax rate was 28%, compared to the 1995 effective
income tax rate of 30%. Income from investments in tax-advantaged securities
reduced the effective income tax rate 4 percentage points in both 1996 and 1995.
Acquisition related tax benefits reduced the effective income tax rate 5
percentage points in 1996 and 4 percentage points in 1995. The 1995 effective
income tax rate also reflected the charge for additional rights relating to the
repurchase of shares of the Company's common stock in 1995 that was not
deductible for federal income tax purposes.

Operating Income

Operating income (income before realized investment gains and losses, 1996
debt retirement costs and the 1995 cost of additional rights related to the
share repurchase) was $31.6 million for the six months ended June 30, 1996,
compared to $31.8 million for the same period in 1995. Operating income in the
first six months of 1996 reflected excellent property and casualty segment
results in the second quarter, offsetting high first quarter severe winter storm
losses, and an increase in annuity segment earnings.

13
<PAGE>

Included in the Company's operating income are non-cash charges for the
amortization of the value of acquired insurance in force and goodwill related to
the 1989 acquisition of the Company. Excluding these non-cash charges for the
amortization of intangible assets, operating income was $35.3 million for the
six months ended June 30, 1996 compared to $35.6 million for the first six
months of 1995.

Property and casualty segment operating income was $24.6 million for the six
months ended June 30, 1996, compared to $24.2 million for the same period in
1995. Higher first quarter 1996 losses from severe winter weather were offset
by continued favorable trends in voluntary automobile losses. The property and
casualty combined loss and expense ratio for the six months ended June 30, 1996
was 95.0%, compared to the 95.7% reported for the same period in 1995.

Life insurance segment operating income was $4.4 million for the six months
ended June 30, 1996, comparable to the $4.5 million reported for the same period
in 1995, although 1996 reflected higher mortality experience.

The Company maintained strong annuity net margins in the first half of 1996,
although the net margin percentage declined slightly compared to the same period
in 1995. Annuity segment operating income of $8.1 million for the six months
ended June 30, 1996 increased 14.1%, 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 $1,962.1 million
increased $190.5 million, or 10.8%, compared to June 30, 1995. This increase
resulted from a net increase in funds on deposit of 7.7% plus net increases in
market value of underlying mutual funds of $56.0 million.

The group life and health segment reported an operating loss of $0.4 million
for the six months ended June 30, 1996, compared to operating income of $0.2
million for the same period in 1995. The group life and health combined loss
and expense ratio increased to 109.0% for the six months ended June 30, 1996,
compared to 106.6% for the same period in 1995, primarily due to an increase in
group medical claims.

Net Income

Net income, which includes realized investment gains, for the six months
ended June 30, 1996 was $32.5 million, or $1.39 per share, reflecting a 2.4%
decrease in net income and a 17.8% 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
are reflected in the increase in net income per share. Realized investment gains
after tax were $1.8 million for the six months ended June 30, 1996, compared to
$2.8 million for the same period in 1995. Net income for the six months ended
June 30, 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. Net
income for the six months ended June 30, 1995 included a reduction of $1.3
million, or $0.04 per share, for the cost of the additional rights granted in
connection with the share repurchase.

14
<PAGE>

LIQUIDITY AND FINANCIAL RESOURCES

Investments

The Company's investment strategy emphasizes high quality investment grade,
publicly traded fixed income securities. At June 30, 1996, fixed income
securities comprised 95.6% of total investments. Of the fixed income investment
portfolio, 95.1% was investment grade and 99.4% was publicly traded. The
average quality of the total fixed income portfolio was AA- at June 30, 1996.

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 4.6 years at June 30, 1996 and 4.4
years at December 31, 1995. The Company has included in its annuity products
substantial surrender penalties 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 commercial mortgage obligation ("CMO") segment of the Company's
investment portfolio has more predictable and stable cash flow characteristics
than the broader CMO market and is primarily utilized by the Company to manage
interest rate volatility. At June 30, 1996, approximately 6.1% of the Company's
investment portfolio was invested in CMOs. At June 30, 1996, the credit quality
ratings of the Company's investments in CMOs were AAA and NAIC 1, which are the
highest ratings. The market value of CMOs owned by the Company at June 30, 1996
was $164.1 million, compared to an amortized cost of $164.7 million. The average
duration of the Company's investment in CMOs was 4.2 years at June 30, 1996.

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 has been 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, and retirement of long-term notes.

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 $69.9 million for the six months ended June
30, 1996 compared to $74.9 million for the same period in 1995. In both years,
cash provided by operating activities primarily reflected net cash provided by
the insurance subsidiaries.

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

15
<PAGE>

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 six months of 1996, net cash used in investing activities was $16.9
million. This net amount reflects $516.1 million in purchases of fixed maturity
and other investments, funded by investment sales or maturities of $499.2
million and net cash provided by operating activities.

Financing Activities

Financing activities include the receipt and withdrawal of funds by annuity
policyholders, payment of scheduled dividends, transactions related to the
Company's common stock and borrowings and repayments under the Company's debt
facilities. Shareholder dividends paid for the six months ended June 30, 1996
were $5.2 million.

For the six months ended June 30, 1996, receipts from annuity contracts of
$85.5 million were greater than contract maturities and withdrawals of $66.6
million. Net transfers to variable annuity assets were $43.6 million during the
first six months of 1996 and interest-sensitive life account balances increased
$0.7 million during the same period.

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 full redemption of the $100.0 million of
outstanding convertible notes at an aggregate cost of $102.9 million. The
redemption of the convertible notes extended the maturity of the Company's long-
term debt and eliminated the potential dilutive impact of these securities. 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).

As of June 30, 1996, the Company had short-term debt comprised of $58.0
million outstanding under the Bank Credit Facility. The Company repaid $17.0
million on the Bank Credit Facility during the first six months of 1996.

Capital Resources

Historically, the Company's insurance subsidiaries have generated capital in
excess of what has been needed to support business growth. These excess amounts
have been paid to HMEC through dividends. HMEC has then utilized these dividends
and its access to the capital markets to retire long-term debt, repurchase
shares of its common stock, increase dividends to its shareholders and fulfill
other corporate purposes. Management anticipates that the Company's sources of
capital will continue to generate capital in excess of the needs for business
growth, debt interest payments and shareholder dividends.

The total capital of the Company was $585.1 million at June 30, 1996,
including $99.5 million of long-term debt and $58.0 million of short-term debt.
Long-term debt as a percentage of total shareholders' equity was 23.3% as of
June 30, 1996, compared to 21.3% as of December 31, 1995, with the increase
occurring as a result of a reduction in unrealized gains attributable to the
Company's investment portfolio. The Company's ratio of earnings to fixed charges
for the six months ended June 30, 1996 was 9.2x.

16
<PAGE>

Total shareholder dividends were $5.2 million for the six months ended
June 30, 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.

Shareholders' equity was $427.0 million at June 30, 1996, including an
unrealized gain in the Company's investment portfolio of $4.0 million after tax
($6.1 million pretax). The market value of the Company's common stock and the
market value per share were $744.7 million and $31 3/4, respectively, at June
30, 1996. Book value per share was $18.20 at June 30, 1996, $18.03 excluding
investment market value adjustments.

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. Management contracts
and compensatory plans are indicated by an asterisk (*).

(10) Material contracts:
10.1* Agreement entered by and between HMEC and Paul J.
Kardos as of August 1, 1996.

(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 second
quarter of 1996.

17
<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 August 13, 1996 /s/ Paul J. Kardos
--------------------------- ---------------------------------
Paul J. Kardos, President and
Chief Executive Officer

Date August 13, 1996 /s/ Larry K. Becker
--------------------------- -----------------------------------
Larry K. Becker, Executive
Vice President and Chief
Financial Officer

<PAGE>

Exhibit 10.1
EXECUTION COPY
--------------

EMPLOYMENT AGREEMENT
--------------------

EMPLOYMENT AGREEMENT ("Agreement"), dated as of August 1, 1996, by and
between HORACE MANN EDUCATORS CORPORATION, a Delaware corporation (the
"Company"), and PAUL J. KARDOS, an individual residing at 709 Clipper Road,
Springfield, IL 62707 (the "Executive").

W I T N E S S E T H
-------------------

WHEREAS, the Executive, who has been serving as President and Chief
Executive Officer of the Company since 1979, wishes to continue to serve the
Company and the Company wishes to secure the services of the Executive under the
terms described below.

NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants contained in this Agreement, the parties hereto agree as
follows:

1. Term of Employment. The Company hereby employs the Executive for
a term (the "Term") of three (3) years commencing upon the date hereof. The
obligations and covenants of the parties hereunder shall be of no further force
and effect as of the end of the Term, except those obligations which shall
survive this Agreement as set forth in Section 11, and except for vested fringe
benefits and compensation earned by the Executive pursuant to Section 3 up to
the termination date.

2. Duties of Executive. During the Term, the Executive shall perform
the duties of President and Chief Executive Officer of the Company. Subject to
supervision by the Company's Board of Directors, the Executive shall have
overall charge of the business affairs of the Company, with the duties,
responsibilities and authorities normally associated with such position. The
Executive shall also serve as an officer and/or director of such one or more
affiliates and subsidiaries of the Company as the Company's Board of Directors
shall request, and shall be entitled to no additional remuneration for such
service. In addition to such duties, in anticipation of the Executive's
retirement from employment with the Company at the end of the Term, the
Executive will diligently assist the Board of Directors in searching for a
successor Chief Executive Officer of the
<PAGE>

Company and in managing an orderly transition of leadership of the Company from
the Executive to such successor. During the Term, the Executive shall devote
substantially all of his business time and efforts to the business and affairs
of the Company and will not engage in any activity which interferes with the
performance of his duties hereunder.

3. Compensation.

3.1 Base Salary. In consideration of the Executive's service
hereunder, the Company shall pay to the Executive a base salary at an annual
rate of Four Hundred Ten Thousand Dollars ($410,000) (the "Base Salary"). The
Base Salary shall be payable in accordance with the standard policies of the
Company in existence from time to time, subject to any deductions required by
law.

3.2 Bonus. In addition to the Base Salary, the Executive shall
be entitled to a cash bonus (the "Bonus") within three months after the end of
each fiscal year of the Company, with the amount thereof at the discretion of
the Board of Directors and payable in accordance with the standard policies of
the Company in existence from time to time, subject to any deductions required
by law; provided, however, that (a) each such annual cash bonus shall not be
less than Four Hundred Thousand Dollars ($400,000) and (b) with regard to 1999,
a pro rated portion of such bonus, based on the portion of 1999 during which the
Executive is employed by the Company, shall be paid.

3.3 Additional Benefits. In addition to the compensation
explicitly provided for herein, the Executive shall be entitled to such fringe
benefits as are made available generally to the senior executives of the
Company, including participation in such pension, group life, disability, health
and other similar benefit or insurance programs as are now or hereafter made
available generally to such executives, including any "top hat" pension program
which the Company may adopt for some or all of its senior executives during the
Term. All benefits payable pursuant to this Section 3.3 are herein referred to
as the "Additional Benefits."

3.4 Expenses. The Executive shall be reimbursed by the Company
for all reasonable, out-of-pocket ordinary and necessary business expenses
incurred by the Executive for the purpose of and in connection with the
performance of the Executive's services hereunder. Such reimbursement shall be
made upon presentation of vouchers or other statements itemizing such expenses
in reasonable detail consistent with the Company's policies.

2
<PAGE>

3.5 Vacation. The Executive shall be entitled to such amount of
paid vacation during each year as shall be afforded to the other senior
executives of the Company.

4. Termination.

4.1 Termination Without Cause.

(a) During the Term, the Company may terminate this
Agreement, without Cause, effective upon the occurrence of any of the following
events:

(i) thirty (30) days after written notice is delivered
to the Executive by the Company of the determination of the permanent
disability of the Executive, defined for purposes of this subparagraph (a)
as incapacity of the Executive to fulfill his normal duties and
responsibilities hereunder for a period of one hundred twenty (120) work
days out of one hundred fifty (150) consecutive work days by reason of
physical or mental disability as determined by a medical doctor selected by
the Board of Directors of the Company and acceptable to the Executive or
his personal representative and confirmed in writing by such doctor, which
confirmation shall be submitted to the Board of Directors of the Company
and the Executive or his personal representative;

(ii) the death of the Executive; or

(iii) sixty (60) days after written notice of
termination is delivered to the Executive by the Company for any reason
other than pursuant to subsections (a)(i) or (a)(ii) of this Section or
Section 4.3 hereof.

(b) The Executive may terminate this Agreement at any time
during the Term if there is a material adverse change or diminution in the
Executive's duties or responsibilities or if there is any other material breach
of this Agreement by the Company.

(c) Upon termination of this Agreement pursuant to this
Section 4.1, the obligations and covenants of the parties hereunder shall be of
no further force and effect, except those obligations which shall survive this
Agreement as set forth in Section 11 and except for the payment obligations of
the Company set forth in Section 4.2 below.

3
<PAGE>

4.2 Payment Obligations of the Company upon Termination Without
Cause. The Company shall be obligated to the Executive as follows in the event
of any termination of this Agreement as set forth in Section 4.1:

(a) In the event of termination pursuant to Section 4.1(a)(i) or
(ii), the Executive or his estate shall be entitled to receive all compensation
and other benefits, including, without limitation, the Base Salary, the Bonus
and the Additional Benefits to which the Executive is entitled through the first
to occur of (i) the one-year anniversary of the date of such termination or (ii)
the date which would have been the last day of the Term, in the absence of such
termination.

(b) In the event of termination pursuant to Sections 4.1(a)(iii)
or 4.1(b), the Executive shall (i) promptly receive, in cash and without
discount, the aggregate amount of the Base Salary and the Bonus that he would
have been entitled to receive through the date which would have been the last
day of the Term, in the absence of such termination (the "Remaining Term"); and
(ii) receive the Additional Benefits to which the Executive is entitled through
the Remaining Term. In addition, the Executive shall, for purposes of all
pension and related plans maintained by the Company, be treated as having been
employed by the Company through the Remaining Term.

4.3 Termination for Cause. During the Term, this Agreement may be
terminated for Cause effective upon receipt by the Executive of the Company's
written notice specifying a valid basis for termination of the Executive for
Cause. "Cause" shall mean:

(a) the Executive's criminal conviction for fraud, embezzlement,
misappropriation of assets or any other felony (excluding traffic violations);
or

(b) the continuance of willful and repeated failures by the
Executive to perform his obligations under this Agreement which have not been
cured by the Executive within thirty (30) days following receipt of written
notice from the Board of Directors of the Company specifying such failure and
the action required by the Executive to cure such breach of his obligations
hereunder.

Upon termination by the Company for Cause, the obligations and
covenants of the parties hereunder shall be of no further force and effect,
except those obligations which shall survive this Agreement as set forth in

4
<PAGE>

Section 11, and except for vested fringe benefits and compensation earned by the
Executive pursuant to Section 3 up to the termination date.

5. Non-Competition; Confidentiality.

5.1 Non-Competition. At all times during the Term, and for a
period of (a) three (3) years following thereafter in the event of (i) a
termination governed by the provisions of Section 4.1(a)(i) or 4.3 hereof, (ii)
a voluntary termination by the Executive (other than a termination under Section
4.1(b) hereof) before the end of the Term or (iii) employment of the Executive
hereunder for the entire Term, the Executive shall not commit any of the
Prohibited Acts (as defined in Section 5.2 below).

5.2 Definitions. For purposes of this Agreement, "Products"
shall mean any products, as of the date the Executive's employment hereunder
terminates, in the product lines of companies owned by the Company on June 1,
1996 (the "Subsidiaries").

For purposes of this Agreement, "Direct Competitor" shall mean
any company which is or becomes a significant and direct competitor of any of
the Subsidiaries on or after the date of this Agreement.

For purposes of this Agreement, "Prohibited Acts" shall mean
owning, managing, operating, controlling or participating in the ownership,
management, operation or control of, or being connected as an officer, employee,
partner, director, agent or consultant of, or having any financial interest in,
any Direct Competitor.

5.3 De Minimis Stock Ownership. Notwithstanding any other
provision of this Section 5, ownership of five percent (5%) or less of any class
of voting securities of a company listed on a nationally recognized stock
exchange or for which prices are quoted on the National Association of
Securities Dealers Automated Quotation System shall not constitute a Prohibited
Act.

5.4 Confidentiality. The Executive agrees, at all times during
and after the Executive's employment hereunder, to hold in strictest confidence,
and not to disclose to any person, firm or corporation, without the express
written authorization of the Board of Directors of the Company, any trade
secrets, any financial information or any secret or confidential information
relating to the products, marketing programs, customers, sales or business of
the Company, except as such disclosure or use may be required in connection with
his work for the Company or is published or

5
<PAGE>

otherwise readily available to the public or becomes known to the public other
than by breach by him of this Agreement.

5.5 Remedies. It is recognized that damages in the event of
breach by the Executive of this Section 5 would be difficult, if not impossible,
to ascertain, and it is therefore agreed that the Company, in addition to and
without limiting any other remedy or right it may have, shall have the right to
an injunction or other equitable relief, in any court of competent jurisdiction,
enjoining any such breach, and the Executive hereby waives any and all defenses
he may have on the ground of lack of jurisdiction or competence of the court to
grant such an injunction or other equitable relief. The existence of this right
shall not preclude or impair any other rights and remedies at law or in equity
that the Company may have.

6. Indemnification. The Company will indemnify the Executive against
all costs, charges and expenses (including reasonable attorneys' fees) incurred
or sustained by him in connection with any claim, action, suit or proceeding to
which he may be made a party by reason of his being an officer, director or
employee of the Company or any of its subsidiaries or affiliates, provided the
Executive acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the Company and with respect to any
criminal action or proceeding had no reasonable cause to believe his conduct was
illegal. In addition, the Company shall indemnify the Executive for all costs,
including reasonable attorneys' fees, incurred by the Executive in connection
with any successful action by the Executive to enforce or otherwise determine or
insure compliance by the Company with the terms of this Agreement.

7. Certain Additional Payments by the Company. Anything in this
Agreement to the contrary notwithstanding, in the event it shall be determined
that any payment or distribution by the Company to or for the benefit of the
Executive, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement (a "Payment"), would be subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, or any
interest or penalties with respect to such excise tax (such excise tax, together
with any such interest and penalties, collectively, the "Excise Tax"), then the
Executive shall be entitled to receive an additional payment (the "Excise Tax
Payment") in an amount equal to the Excise Tax imposed upon the Payments. For
purposes of calculating the Excise Tax Payment due hereunder, Payments shall not
include such Excise Tax Payment.

6
<PAGE>

8. Assignabilitv; Binding Nature. This Agreement shall inure to the
benefit of the Company and the Executive and their respective successors, heirs
(in the case of the Executive) and assigns. No rights or obligations of the
Company under this Agreement may be assigned or transferred by the Company
except that any such rights or obligations may be assigned or transferred
pursuant to a merger or consolidation in which the Company is not the continuing
entity, or the sale or liquidation of all or substantially all of the assets of
the Company, provided that the assignee or transferee is the successor to all or
substantially all of the assets of the Company and such assignee or transferee
assumes the liabilities, obligations and duties of the Company, as contained in
this Agreement, either contractually or as a matter of law.

9. Notices. Any notice hereunder shall be properly given if by
personal delivery or registered or certified mail, return receipt requested, as
follows:

If to Executive, at the address first above written,

with a copy to:

Edward F. Michalak, Esq.
McDermott, Will & Emery
227 W. Monroe Street
Chicago, Illinois 60606

If to the Company, to:

Horace Mann Educators Corporation
1 Horace Mann Plaza
Springfield, Illinois 62715-0001
Attention: Secretary

with a copy to:

Conor D. Reilly, Esq.
Gibson, Dunn & Crutcher
200 Park Avenue
New York, N.Y. 10166-0193

or to such other addresses as the parties may designate in writing.

10. Integration; Modification. This Agreement shall supersede all
previous negotiations, commitments and writings with respect to the employment
of the Executive; provided, however, that this Agreement will not affect the
existence and enforceability of the change of control severance agreement and
the change of control continuation of

7
<PAGE>

employment agreement between the Company and the Executive as they exist on the
date hereof. This Agreement may not be released, discharged, abandoned, changed
or modified in any manner, except by an instrument in writing signed on behalf
of each of the parties hereto. The failure of either party hereto to enforce at
any time any of the provisions of this Agreement shall in no way be construed to
be a waiver of any such provisions, nor in any way to affect the validity of
this Agreement or the right of either party thereafter to enforce each and every
such provision. No waiver of any breach of this Agreement shall be held to be a
waiver of any other or subsequent breach.

11. Survival of Certain Obligations. Except as otherwise specifically
provided for herein, the obligations of the parties pursuant to Sections 5, 6
and 7 shall survive the termination of this Agreement.

12. Severability. If any term or provision of this Agreement is
declared invalid by a court of competent jurisdiction, the remaining terms and
provisions of this Agreement shall remain unimpaired. If any term or provision
of Section 5 of this Agreement, or portion thereof, is so broad in scope or
duration as to be unenforceable, such provision or portion thereof shall be
interpreted to be only so broad as is enforceable.

13. Captions. The captions appearing in this Agreement are inserted
only as a matter of convenience and as a reference and in no way define, limit
or describe the scope or intent of this Agreement or any of the provisions
hereof.

14. Governing Law. This Agreement shall be governed by and construed
in accordance with the domestic substantive laws of the State of Illinois
without giving effect to any choice or conflict of laws provision or rule that
would cause the application of the domestic substantive laws of any other
jurisdiction.

15. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

8
<PAGE>

IN WITNESS WHEREOF, each of the parties hereto has duly executed this
Agreement as of the date first above written.

/s/ Paul J. Kardos
-------------------------------
PAUL J. KARDOS

HORACE MANN EDUCATORS CORPORATION

By: /s/ John T. Gurash
--------------------------
Name: John T. Gurash
Title: Chairman of the Board

<PAGE>

Exhibit 11
Horace Mann Educators Corporation
Computation of Net Income per Share
For the Three and Six Months Ended June 30, 1996 and 1995
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- ------------------
June 30, June 30,
-------------------- ------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Primary - reported:

Weighted average number of common shares
outstanding during the period 23,449 24,747 23,437 26,842
------- ------- ------- -------

Net income for the period $17,081 $16,230 $32,514 $33,346
------- ------- ------- -------

Net income per share - assuming no dilution $ 0.73 $ 0.66 $ 1.39 $ 1.24
======= ======= ======= =======
Primary:

Total common and common equivalent shares 23,866 25,005 23,864 27,098
------- ------- ------- -------

Net income per share $ 0.72 $ 0.65 $ 1.36 $ 1.23
======= ======= ======= =======

Percentage of dilution compared to reported
net income per share 1.4% 1.5% 2.2% 0.8%

Fully diluted:

Weighted average number of common shares
outstanding during the period 23,449 24,747 23,437 26,842
Weighted average number of common equivalent
shares to reflect the dilutive effect of
common stock equivalent securities:
Warrants 117 108 117 108
Stock options 308 155 310 154
Weighted average number of common equivalent
shares to reflect the dilutive effect of
convertible notes - 2,857 - 2,857
------- ------- ------- -------
Total common and common equivalent shares
adjusted to calculate fully diluted
earnings per share 23,874 27,867 23,864 29,961
------- ------- ------- -------

Net income for the period $17,081 $16,230 $32,514 $33,346
Interest expense, net of tax,
on convertible notes - 1,005 - 2,011
------- ------- ------- -------

Adjusted net income for the period $17,081 $17,235 $32,514 $35,357
------- ------- ------- -------

Net income per share -
assuming full dilution $ 0.72 $ 0.62 $ 1.36 $ 1.18
======= ======= ======= =======
Percentage of dilution compared to
reported net income per share 1.4% 6.1% 2.2% 4.8%
</TABLE>

<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>

<F1> Refer to Note 4 - Investments of the Company's Consolidated Notes to
Financial Statements for June 30, 1996.

<F2> Refer to the Company's Consolidated Balance Sheet as of June 30, 1996.
</FN>

</TABLE>