<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, 1997
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 April 25, 1997, 23,223,772 shares of Common Stock, par value $0.001
per share, were outstanding, net of 6,180,598 shares of treasury stock.
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<PAGE>
HORACE MANN EDUCATORS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1997 and December 31, 1996................. 1
Consolidated Statements of Operations for the
Three Months Ended March 31, 1997
and March 31, 1996................................... 2
Consolidated Statements of Changes in Shareholders'
Equity for the Three Months Ended March 31, 1997
and March 31, 1996................................... 3
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997
and March 31, 1996................................... 4
Notes to Consolidated Financial Statements............ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 8
PART II - OTHER INFORMATION....................................... 16
Item 4. Submission of Matters to a Vote of Security
Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES........................................................ 17
</TABLE>
<PAGE>
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
<S> <C> <C>
ASSETS
Investments
Fixed maturities, available for sale,
at market (amortized cost, 1997, $2,608,854;
1996, $2,609,077............................ $2,614,091 $2,658,512
Short-term and other investments............. 134,752 125,824
---------- ----------
Total investments.......................... 2,748,843 2,784,336
Cash........................................... 5,850 13,704
Accrued investment income
and premiums receivable...................... 102,302 107,682
Value of acquired insurance
in force and goodwill........................ 115,932 118,638
Other assets................................... 170,274 151,830
Variable annuity assets........................ 716,566 684,836
---------- ----------
Total assets .............................. $3,859,767 $3,861,026
========== ==========
LIABILITIES, REDEEMABLE SECURITIES AND SHAREHOLDERS' EQUITY
Policy liabilities
Annuity contract liabilities................. $1,287,300 $1,286,110
Interest-sensitive life contract
liabilities................................ 336,399 326,955
Unpaid claims and claim expenses............. 352,963 358,853
Future policy benefits....................... 181,088 182,336
Unearned premiums............................ 153,887 155,776
---------- ----------
Total policy liabilities................... 2,311,637 2,310,030
Other policyholder funds....................... 120,281 118,549
Other liabilities.............................. 113,079 129,075
Short-term debt................................ 34,000 34,000
Long-term debt................................. 99,573 99,564
Variable annuity liabilities................... 713,466 684,836
---------- ----------
Total liabilities.......................... 3,392,036 3,376,054
---------- ----------
Warrants, subject to redemption................ 577 577
---------- ----------
Preferred stock................................ - -
Common stock................................... 29 29
Additional paid-in capital..................... 335,977 330,263
Net unrealized gains on fixed
maturities and equity securities............. 3,937 29,736
Retained earnings.............................. 294,861 278,669
Treasury stock, at cost........................ (167,650) (154,302)
---------- ----------
Total shareholders' equity................. 467,154 484,395
---------- ----------
Total liabilities, redeemable
securities, and shareholders' equity .... $3,859,767 $3,861,026
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1997 1996
---- ----
<S> <C> <C>
Insurance premiums written and
contract deposits......................... $179,870 $163,948
======== ========
Revenues
Insurance premiums and contract
charges earned $131,419 $121,875
Net investment income..................... 49,787 49,920
Realized investment gains................. 857 2,054
-------- --------
Total revenues........................ 182,063 173,849
-------- --------
Benefits, losses and expenses
Benefits, claims and settlement expenses.. 90,500 86,919
Interest credited......................... 24,384 23,539
Policy acquisition expenses amortized..... 10,840 9,946
Operating expenses........................ 24,509 23,459
Amortization of intangible assets......... 2,706 2,850
Interest expense.......................... 2,454 2,840
Debt retirement costs..................... - 1,319
-------- --------
Total benefits, losses and expenses... 155,393 150,872
-------- --------
Income from continuing operations before
income taxes and discontinued operations.. 26,670 22,977
Income tax expense.......................... 7,270 6,551
-------- --------
Income from continuing operations........... 19,400 16,426
Discontinued operations:
Loss from operations, net of
applicable income tax benefits.......... - (993)
-------- --------
Net income.................................. $ 19,400 $ 15,433
======== ========
Earnings (loss) per share
Income from continuing operations......... $ 0.82 $0.70
Discontinued operations:
Loss from operations.................... - (0.04)
-------- --------
Net income................................ $ 0.82 $ 0.66
======== ========
Weighted average number of shares
and equivalent shares (in thousands)...... 23,665 23,424
</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)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1997 1996
---- ----
<S> <C> <C>
Common stock
Beginning balance......................... $ 29 $ 29
Options exercised, 1997, 185,972 shares;
1996, 56,500 shares..................... - -
--------- ---------
Ending balance............................ 29 29
--------- ---------
Additional paid-in capital
Beginning balance......................... 330,263 323,920
Options exercised......................... 5,714 1,361
--------- ---------
Ending balance............................ 335,977 325,281
--------- ---------
Net unrealized gains (losses) on
fixed maturities and equity securities
Beginning balance...................... 29,736 76,151
Increase (decrease) for the period..... (25,799) (53,388)
--------- ---------
Ending balance......................... 3,937 22,763
--------- ---------
Retained earnings
Beginning balance......................... 278,669 224,366
Net income................................ 19,400 15,433
Cash dividends, 1997, $0.135; 1996,
$0.11 per share......................... (3,208) (2,579)
--------- ---------
Ending balance............................ 294,861 237,220
--------- ---------
Treasury stock, at cost
Beginning balance, 5,588,098 shares....... (154,302) (154,302)
Purchase of 293,200 shares (See note 4)... (13,348) -
--------- ---------
Ending balance, 5,881,298 shares.......... (167,650) (154,302)
--------- ---------
Shareholders' equity at end of period....... $ 467,154 $ 430,991
========= =========
</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,
------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities
Premiums collected............................ $ 148,861 $ 134,083
Policyholder benefits paid.................... (112,546) (108,558)
Policy acquisition and other
operating expenses paid..................... (40,036) (37,477)
Federal income taxes recovered (paid)......... (30,306) 3,499
Investment income collected................... 51,419 50,963
Interest expense paid......................... (5,201) (2,169)
Other......................................... 2,310 1,834
--------- ---------
Net cash provided
by operating activities................. 14,501 42,175
--------- ---------
Cash flows from investing activities
Fixed maturities
Purchases................................... (265,366) (238,646)
Sales....................................... 217,068 136,007
Maturities.................................. 62,001 61,309
Net cash (used for) received from short-term
and other investments....................... (11,932) 27,220
--------- ---------
Net cash provided by
(used in) investing activities.......... 1,771 (14,110)
--------- ---------
Cash flows from financing activities
Dividends paid to shareholders................ (3,208) (2,579)
Principal payments on
Bank Credit Facility........................ - (8,000)
Purchase of treasury stock.................... (13,348) -
Exercise of stock options..................... 5,714 1,361
Proceeds from issuance of Senior Notes........ - 98,530
Retirement of Convertible Notes............... - (102,890)
Annuity contracts, variable and fixed
Deposits.................................... 46,793 39,666
Maturities and withdrawals.................. (34,210) (32,797)
Net transfer to variable
annuity assets............................ (26,285) (19,881)
Net increase in interest-sensitive
life account balances....................... 418 422
--------- ---------
Net cash used
in financing activities................. (24,126) (26,168)
--------- ---------
Net increase (decrease) in cash................. (7,854) 1,897
Cash at beginning of period..................... 13,704 9,518
--------- ---------
Cash at end of period........................... $ 5,850 $ 11,415
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997 and 1996
(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, 1997 and
December 31, 1996 and the consolidated results of operations, changes in
shareholders' equity and cash flows for the three months ended March 31, 1997
and 1996.
It is suggested that these financial statements be read in conjunction with
the financial statements and the notes thereto contained in the December 31,
1996 Form 10-K filed by the Company.
The results of operations for the three months ended March 31, 1997 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 1997 presentation including the presentation of
discontinued operations for all periods.
Note 2 - Debt
<TABLE>
<CAPTION>
Indebtedness outstanding was as follows:
March 31, December 31,
1997 1996
-------- -----------
<S> <C> <C>
Short-term debt:
$65,000 Bank Credit Facility, IBOR + 0.325%
(6.0% as of March 31, 1997)................. $ 34,000 $ 34,000
Long-term debt:
6 5/8% Senior Notes, due January 15, 2006.
Face amount less unaccrued discount
of $427 and $436 (6.7% imputed rate)........ 99,573 99,564
-------- --------
Total......................................... $133,573 $133,564
======== ========
</TABLE>
5
<PAGE>
Note 3 - 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, 1997
------------------------- ----------------------
Rating of Fixed March 31, December 31, Carrying Amortized
Maturity Securities(1) 1997 1996 Value Cost
- ---------------------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
AAA..................... 45.7% 46.4% $1,194,863 $1,195,700
AA...................... 8.3 9.4 216,246 213,401
A....................... 21.2 22.3 553,971 551,842
BBB..................... 20.2 16.4 527,640 530,547
BB...................... 0.9 1.4 24,423 23,593
B....................... 3.3 3.7 86,525 83,587
CCC or lower............ - - 870 567
Not rated(2)............ 0.4 0.4 9,553 9,617
----- ----- ---------- ----------
Total.................. 100.0% 100.0% $2,614,091 $2,608,854
===== ===== ========== ==========
</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 69.0% of these private placements as
investment grade. $0.8 million of the remaining $1.5 million of private
placements were rated as investment grade by the NAIC in 1995 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 1997 1996 1997
- ------------------ --------- ----------- ----------
<S> <C> <C> <C>
Due in 1 year or less................ 7.7% 5.7% $ 202,697
Due after 1 year through 5 years..... 26.2 28.7% 684,273
Due after 5 years through 10 years... 34.3 32.9% 896,717
Due after 10 years through 20 years.. 18.7 18.9% 487,784
Due after 20 years................... 13.1 13.8% 342,620
----- ----- ----------
Total 100.0% 100.0% $2,614,091
===== ===== ==========
</TABLE>
6
<PAGE>
Note 4 - Shareholders' Equity
Share Repurchase Program
In February 1997, the Company's Board of Directors adopted a repurchase
program for shares of the Company's common stock, with an initial repurchase
limit of $100,000. Based on the market price of the Company's common shares at
the time the Board adopted this program, $100,000 represented approximately 9%
of the Company's outstanding shares. Shares of common stock may be purchased
from time to time through open market and private purchases, as available.
Share repurchases will be financed with cash from operations and, if needed, the
Bank Credit Facility.
As of March 31, 1997, the Company had repurchased 293,200 shares at an
aggregate cost of $13,348, or $45.52 per share, which was financed with cash
from operations.
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, 1997
- -----------------------
Premiums written......... $181,832 $5,990 $4,028 $179,870
Premiums earned.......... 130,809 5,229 5,839 131,419
Benefits, claims and
settlement expenses.... 91,968 8,291 6,823 90,500
Three months ended
March 31, 1996
- -----------------------
Premiums written......... $162,648 $5,384 $6,684 $163,948
Premiums earned.......... 120,556 5,912 7,231 121,875
Benefits, claims and
settlement expenses.... 84,954 5,789 7,754 86,919
</TABLE>
The Company maintains an excess and catastrophe treaty reinsurance program
for its property and casualty subsidiaries. In 1997, the Company reinsures 95%
of catastrophe losses above a retention of $7.5 million per occurrence up to $65
million per occurrence. The Company's catastrophe reinsurance program is
augmented by a $100 million equity put. This equity put provides for an option
to sell shares of the Company's convertible preferred stock with a floating rate
dividend at a pre-negotiated price in the event of losses from a catastrophe,
individually or in the aggregate, which exceed $65 million. For liability
coverages, including the educator professional liability policy, the Company
reinsures each loss up to $20 million above a retention of $500,000. The
Company reinsures each property loss up to $1.5 million above a retention of
$500,000.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking Information
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 and banks
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 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.
Discontinued Operations
On December 9, 1996, the Company announced its strategic decision to
withdraw from the group medical insurance business over the following two years.
The Company stopped writing new group medical insurance policies in January 1997
and intends to stop renewing group medical insurance policies in January 1998.
In the following discussions of results of operations, group medical results are
reported separately as discontinued operations for all periods.
8
<PAGE>
Three Months Ended March 31, 1997 Compared With Three Months Ended March 31,
1996
Insurance Premiums and Contract Charges Earned
Insurance premiums and contract charges earned, which excludes annuity and
life contract deposits, increased 7.8% for the three months ended March 31,
1997, compared to the same period in 1996.
Insurance premiums written and contract deposits of $179.9 million for the
three months ended March 31, 1997 increased 9.7%, compared to $164.0 million for
the same period in 1996, driven principally by 8.3% growth in property and
casualty premiums written and a 17.9% increase in annuity deposits. Insurance
premiums written and contract deposits in the Company's primary product lines,
automobile (excluding involuntary), property, annuity and life, increased 10.2%
to $175.3 million for the three months ended March 31, 1997, compared to $159.1
million for the same period in 1996. Involuntary automobile business includes
allocations of business from state mandatory automobile insurance facilities and
assigned risk business. Involuntary automobile premiums written for the three
months ended March 31, 1997 decreased 10.7% compared to the same period in 1996.
Automobile (excluding involuntary) and homeowners earned premiums increased
7.2% to $101.9 million for the three months ended March 31, 1997, compared to
$95.1 million for the same period in 1996, primarily as a result of a 6.9%
increase in automobile (excluding involuntary) and homeowners policies in force.
The 802,000 automobile (excluding involuntary) and homeowners policies in force
at March 31, 1997 represented an increase of 52,000 policies since March 31,
1996 and an increase of 16,000 policies since December 31, 1996.
Automobile (excluding involuntary) and homeowners premiums written
increased 9.1% to $102.1 million for the three months ended March 31, 1997,
compared to $93.6 million for the same period in 1996. The first quarter 1997
growth in premium follows the 8.8% growth reported for the fourth quarter of
1996. For the three months ended March 31, 1997, new direct premiums written of
$11.8 million increased 28.3% compared to $9.2 million for the same period last
year. Renewal direct premiums written of $91.8 million for the three months
ended March 31, 1997 increased 7.4% compared to $85.5 million for the same
period in 1996.
For the three months ended March 31, 1997, life insurance premiums and
contract charges earned were $20.4 million, compared to $19.7 million for the
same period in 1996, representing an increase of 3.6%. Life insurance in force
on March 31, 1997 increased 4.0% compared to March 31, 1996. The lapse rate of
8.0% for the three months ended March 31, 1997 increased slightly compared to
7.7% for the same period in 1996. In the first quarter of 1997, the Company
began selling five new term life products developed to meet customer needs,
although these products did not contribute significantly to premium growth in
the first quarter.
Annuity contract charges earned increased 30.0% to $2.6 million for the
three months ended March 31, 1997, compared to $2.0 million for the same period
in 1996, due to a 34% increase in variable annuity cash value on deposit. Total
annuity deposits received during the three months ended March 31, 1997 increased
17.9% to $46.8 million, compared to $39.7 million for the same period in 1996,
reflecting a $3.5 million, or 11.3%, increase in scheduled deposits for
retirement annuities and a $3.6 million, or 42.5%, increase in single premiums
and rollover deposits from other companies. Three new variable annuity funds
were added to the Horace Mann family of funds in the first quarter of 1997 in
response to educators' requests for additional investment options. The addition
of a small cap fund, an international fund and a socially responsible fund
brings the total variable annuity fund options to seven.
9
<PAGE>
Net Investment Income
Net investment income of $49.8 million for the three months ended March 31,
1997 was comparable to the same period in 1996. Investments (at amortized cost)
increased 1.2%, or $32.4 million, from March 31, 1996. The pretax yield on
average investments was 7.3% (4.9% after tax) for the three months ended March
31, 1997 compared to a pretax yield of 7.4% (5.0% after tax) for the same period
in 1996.
Realized Investment Gains and Losses
Realized investment gains were $0.9 million for the three months ended
March 31, 1997, compared to $2.1 million for the same period in 1996.
Benefits, Claims and Settlement Expenses
Total benefits, claims and settlement expenses increased 4.1% to $90.5
million for the three months ended March 31, 1997, compared to $86.9 million for
the same period in 1996.
Property and casualty claims and settlement expenses were $80.8 million for
the three months ended March 31, 1997, compared to $78.0 million for the same
period in 1996. The property and casualty loss ratio of 74.4% for the three
months ended March 31, 1997 was 3.5 percentage points less than the 77.9%
reported for the same period in 1996. For 1996, first quarter losses from severe
winter weather were higher than those incurred in the current year. Catastrophe
losses after reinsurance but before federal income tax benefits for the three
months ended March 31, 1997 were $1.2 million, compared to catastrophe losses of
$3.3 million for the same period in 1996. Excluding the effects of catastrophes,
results were also better than the first three months of 1996 due to strong
underwriting. The provision for losses and loss adjustment expenses for insured
events in prior years decreased by $10.9 million and $16.0 million for the three
months ended March 31, 1997 and 1996, respectively.
The Company increased its catastrophe reinsurance coverage for 1997. The
1997 reinsurance program covers 95% of catastrophe losses in excess of $7.5
million up to $65 million for each catastrophe. The Company's catastrophe
reinsurance program is augmented by a $100 million equity put. This equity put
provides for an option to sell shares of the Company's convertible preferred
stock with a floating rate dividend at a pre-negotiated price in the event of
losses from a catastrophe, individually or in the aggregate, which exceed $65
million.
Life benefits were $9.7 million for the three months ended March 31, 1997,
reflecting a 9.0% increase, compared to $8.9 million for the same period in
1996. For the three months ended March 31, 1996, claims for group disability
business were unusually low and returned to more normal levels in the current
year. The first quarter of 1997 also reflected normal individual life mortality
experience compared to unusually low mortality in the same period last year.
Interest Credited to Policyholders
Interest credited to policyholders was $24.4 million for the three months
ended March 31, 1997, 3.8% more than the $23.5 million interest credited for the
same period in 1996. Interest credited to fixed annuity contracts increased 2.6%
to $19.5 million for the three months ended March 31, 1997, from $19.0 million
for the same period in 1996. The increase reflects a slightly higher average
annual interest rate credited of 5.7% for the three months ended March 31, 1997,
compared to 5.6% for the first quarter of 1996, and a growth of fixed rate
annuity accumulated deposits of 0.8%.
10
<PAGE>
Life insurance interest credited increased $0.4 million, or 8.9%, to $4.9
million for the three months ended March 31, 1997, compared to the same period
in 1996, 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 three months ended March 31, 1997, policy
acquisition and operating expenses of $35.3 million increased $1.7 million, or
5.1%, compared to $33.6 million for the first three months of 1996. The 1997
property and casualty expense ratio improved to 19.2%, four tenths of a
percentage point lower than 19.6% for the same period in 1996.
Amortization of Intangible Assets
Amortization of intangible assets decreased by $0.1 million to $2.7 million
for the three months ended March 31, 1997, compared to $2.8 million for the same
period in 1996, as a result of a 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
The Company's interest expense of $2.5 million for the three months ended
March 31, 1997 was $0.3 million, or 10.7%, less than the same period in 1996 as
a result of repayments of borrowings related to the repurchase of shares of its
common stock during the second quarter of 1995. The debt to capital ratio of
22.2% as of March 31, 1997 was within the Company's target operating range of
20% to 25%.
Income Tax Expense
The effective income tax rate was 27% for three months ended March 31, 1997
compared to the 28% effective income tax rate for the same period last year.
Income from investments in tax-advantaged securities reduced the effective
income tax rate 3 percentage points in 1997 and 4 percentage points in 1996 and
acquisition related tax benefits reduced the effective rate 6 percentage points
in 1997 and 4 percentage points in 1996.
Operating Income
Operating income (income from continuing operations before realized
investment gains and losses and 1996 debt retirement costs) was $18.8 million
for the three months ended March 31, 1997, compared to $16.1 million for the
same period in 1996. Operating income in 1997 reflected excellent voluntary
automobile insurance results and milder winter storm losses compared to the
first quarter of 1996.
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 $20.6 million for the
three months ended March 31, 1997 compared to $17.9 million for the same period
in 1996.
Property and casualty segment operating income was $13.8 million for the
three months ended March 31, 1997, compared to $10.3 million for the same period
in 1996. Milder winter weather compared to the same period last year contributed
to these results. Excluding the effects of catastrophes, results were also
better than the first quarter of 1996 due to strong underwriting. For the first
three months, after tax catastrophe losses were $0.8 million in 1997, compared
to $2.1 million for 1996. The property and casualty combined loss
11
<PAGE>
and expense ratio for the three months ended March 31, 1997 was 93.6%, compared
to the 97.5% reported for the same period in 1996.
Life insurance segment operating income of $2.9 million for the first three
months ended March 31, 1997 decreased 25.6% compared to the $3.9 million
reported for the same period in 1996. The 1997 life results reflect modest
growth in business volume offset by a return to more normal levels of both group
disability claims and individual life mortality experience, compared to lower
than average disability claims and life mortality in the first quarter of 1996.
Annuity segment operating income of $4.2 million for the three months ended
March 31, 1997 was equal to the same period in 1996. Annuity segment profit
continues to shift from a slightly decreasing interest margin on fixed annuity
accumulations to fees on variable mutual fund deposits. Total accumulated fixed
and variable annuity deposits of $2,110.3 million increased $192.2 million, or
10.0%, compared to March 31, 1996. This increase resulted from a net increase
in funds on deposit of 10.3% plus net increases in market value of underlying
mutual funds of $2.5 million.
Income from Continuing Operations
Income from continuing operations, which includes realized investment
gains, for the three months ended March 31, 1997 was $19.4 million, or $0.82 per
share, reflecting a 17.6% increase in income and a 17.1% increase in income per
share compared to the same period in 1996. Realized investment gains after tax
were $0.6 million for the three months ended March 31, 1997, compared to $1.3
million for the same period in 1996. Income from continuing operations for the
three months ended March 31, 1996 also reflected the costs of the early
redemption of $100 million of convertible notes of $0.9 million, or $0.04 per
share.
Net Income
Net income, which includes discontinued operations in 1996, was $19.4
million, or $0.82 per share, for the three months ended March 31, 1997 compared
to $15.5 million, or $0.66 per share, for the same period in 1996.
The discontinued group medical business operating loss was $1.0 million for
the three months ended March 31, 1996. The Company's net income for the year
ended December 31, 1996 included an after tax charge of $3.9 million for
anticipated losses during the two year phase-out period for the discontinued
group medical insurance business.
Liquidity and Financial Resources
Investments
The Company's investment strategy emphasizes high quality investment grade,
publicly traded fixed income securities. At March 31, 1997, fixed income
securities comprised 95.1% of total investments. Of the fixed income investment
portfolio, 95.4% was investment grade and 99.6% was publicly traded. The
average quality of the total fixed income portfolio was AA- at March 31, 1997.
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 4.3 years at March 31, 1997 and 4.4
years at December 31, 1996. 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 70% of all outstanding fixed annuity accumulated cash values are
subject in most cases to substantial early withdrawal penalties.
12
<PAGE>
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, retire short-term debt and repurchase shares of the Company's
common stock. 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 $14.5 million for
the three months ended March 31, 1997 compared to $42.2 million for the same
period in 1996 with the decrease primarily due to an increase in federal income
tax payments. In both years, cash provided by operating activities primarily
reflected net cash generated by the insurance subsidiaries.
Payment of principal and interest on debt, fees related to the catastrophe-
linked equity put option, dividends to shareholders and parent company operating
expenses, as well as the share repurchase program, are dependent upon the
ability of the insurance subsidiaries to pay cash dividends or make other cash
payments to HMEC, including tax payments pursuant to tax sharing agreements.
The insurance subsidiaries are subject to various regulatory restrictions which
limit the amount of annual dividends or other distributions, including loans or
cash advances, available to HMEC without prior approval of the insurance
regulatory authorities. Dividends which may be paid by the insurance
subsidiaries to HMEC during 1997 without prior approval are approximately $89
million. In April 1997, the Company filed a request with the Illinois
Department of Insurance for approval of a $48 million extraordinary dividend to
be paid by the property and casualty subsidiaries with approval anticipated
prior to the end of the second quarter. HMEC may use cash from this
extraordinary dividend to repurchase shares of the Company's common stock.
Although regulatory restrictions exist, dividend availability from subsidiaries
has been, and is expected to be, more than adequate for parent Company capital
needs.
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 1997, net cash provided by investing
activities was $1.8 million. This net amount reflects $265.4 million in
purchases of fixed maturity investments, funded by investment sales or
maturities of $267.2 million.
13
<PAGE>
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 three months ended March 31,
1997 were $3.2 million.
For the three months ended March 31, 1997, receipts from annuity contracts
of $46.8 million were greater than contract maturities and withdrawals of $34.2
million. Net transfers to variable annuity assets were $26.3 million during the
first three months of 1997 compared to $19.9 million during the same period in
1996. Interest-sensitive life account balances increased $0.4 million during
the first three months of 1997.
Through March 31, 1997, the Company had repurchased 293,200 shares at a
cost of $13.3 million which was financed with cash from operations. During the
three months ended March 31, 1997, the Company received $5.7 million related to
the exercise of common stock options.
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 $601.4 million at March 31, 1997,
including $99.6 million of long-term debt and $34.0 million of short-term debt.
Long-term debt as a percentage of total shareholders' equity was 21.3% as of
March 31, 1997, compared to 20.6% as of December 31, 1996 with the increase
attributable to a lower level of unrealized investment gains at March 31, 1997.
Shareholders' equity was $467.2 million at March 31, 1997, including an
unrealized gain in the Company's investment portfolio of $3.9 million after
taxes and the related impact on deferred policy acquisition costs associated
with interest-sensitive policies. The market value of the Company's common
stock and the market value per share were $1,037.7 million and $44 1/8,
respectively, at March 31, 1997. Book value per share was $19.86 at March 31,
1997, $19.69 excluding investment market value adjustments.
In January 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%. Interest on the Senior Notes is payable semi-annually. The
Senior Notes are redeemable in whole or in part, at any time at the Company's
option. The net proceeds from the sale of the Senior Notes were used to finance
the redemption of the Company's convertible notes.
As of March 31, 1997 and December 31, 1996, the Company had short-term debt
comprised of $34.0 million outstanding under the Bank Credit Facility. The Bank
Credit Facility allows unsecured borrowings of up to $65.0 million at Interbank
Offering Rates plus 0.3% to 0.5% or Bank of America National Trust and Savings
Association reference rates. The rate on the borrowings under the Bank Credit
Facility was Interbank Offering Rate plus 0.3%, or 6.0%, as of March 31, 1997.
The commitment for the Bank Credit Facility terminates on December 31, 2001.
14
<PAGE>
The Company's ratio of earnings to fixed charges for the three months ended
March 31, 1997 was 11.7x compared to 9.2x for the same period in 1996.
Total shareholder dividends were $3.2 million for the three months ended
March 31, 1997. In February 1997, the Board of Directors authorized the fifth
consecutive annual increase in the Company's dividend. The regular quarterly
dividend increased by 23% to $0.135 per share.
Recent Accounting Changes
Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." SFAS No. 128 supersedes previous accounting guidance on this subject
and specifies the computation, presentation and disclosure requirements for
earnings per share ("EPS"). SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997; earlier application is not
permitted. Upon implementation, SFAS No. 128 requires restatement of all prior-
period EPS data presented.
SFAS No. 128 requires dual presentation of EPS replacing primary EPS with a
presentation of basic EPS and replacing fully diluted EPS with diluted EPS. The
effects on the Company's EPS of implementing SFAS No. 128 are not anticipated to
be material.
Capital Structure Disclosures
In February 1997, the FASB issued SFAS No. 129, "Disclosure
Information about Capital Structure" which is effective for financial statements
for periods ending after December 15, 1997. It is not anticipated that the
implementation of SFAS No. 129 will require significant revision of prior
disclosures because the information required by SFAS No. 129 had been covered in
previous accounting guidance.
15
<PAGE>
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 filed 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 1997.
16
<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, 1997 Paul J. Kardos
--------------------------- -----------------------------------
Paul J. Kardos, President and
Chief Executive Officer
Date May 14, 1997 Larry K. Becker
--------------------------- -----------------------------------
Larry K. Becker, Executive
Vice President and Chief
Financial Officer
17
<PAGE>
Exhibit 11
Horace Mann Educators Corporation
Computation of Net Income per Share
For the Three Months Ended March 31, 1997 and 1996
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1997 1996
------- -------
<S> <C> <C>
Primary - reported:
Weighted average number of common shares
outstanding during the period 23,665 23,424
------- -------
Net income for the period $19,400 $15,433
------- -------
Net income per share - assuming no dilution $ 0.82 $ 0.66
======= =======
Primary:
Weighted average number of common shares
outstanding during the period 23,665 23,424
Weighted average number of common equivalent
shares to reflect the dilutive effect of
common stock equivalent securities:
Warrants 123 117
Stock options 346 324
Common stock units related to Deferred
Equity Compensation Plan for Directors 10 -
------- -------
Total common and common equivalent shares 24,144 23,865
------- -------
Net income per share $ 0.80 $ 0.65
======= =======
Percentage of dilution compared to reported
net income per share 2.4% 1.5%
Fully diluted:
Weighted average number of common shares
outstanding during the period 23,665 23,424
Weighted average number of common equivalent
shares to reflect the dilutive effect of
common stock equivalent securities:
Warrants 123 117
Stock options 356 324
Common stock units related to Deferred
Equity Compensation Plan for Directors 10 -
------- -------
Total common and common equivalent shares
adjusted to calculate fully diluted
earnings per share 24,154 23,865
------- -------
Net income per share -
assuming full dilution $ 0.80 $ 0.65
======= =======
Percentage of dilution compared to
reported net income per share 2.4% 1.5%
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND> THE 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-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 2,614,091<F1>
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 35,109
<REAL-ESTATE> 7,681
<TOTAL-INVEST> 2,748,843
<CASH> 5,850
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 82,344
<TOTAL-ASSETS> 3,859,767
<POLICY-LOSSES> 2,157,750<F2>
<UNEARNED-PREMIUMS> 153,887
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 120,281
<NOTES-PAYABLE> 133,573
<COMMON> 29
0
0
<OTHER-SE> 467,125
<TOTAL-LIABILITY-AND-EQUITY> 3,859,767
131,419
<INVESTMENT-INCOME> 49,787
<INVESTMENT-GAINS> 857
<OTHER-INCOME> 0
<BENEFITS> 114,884
<UNDERWRITING-AMORTIZATION> 10,840
<UNDERWRITING-OTHER> 24,509
<INCOME-PRETAX> 26,670
<INCOME-TAX> 7,270
<INCOME-CONTINUING> 19,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,400
<EPS-PRIMARY> 0.82
<EPS-DILUTED> 0.82
<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 3 - Investments of the Company's Consolidated Notes to
Financial Statements for March 31, 1997.
<F2> Refer to the Company's Consolidated Balance Sheet as of March 31, 1997.
</FN>
</TABLE>
