<PAGE>
================================================================================
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, 1998
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 July 31, 1998, 42,904,094 shares of Common Stock, par value
$0.001 per share, were outstanding, net of 16,361,596 shares of treasury stock.
================================================================================
<PAGE>
HORACE MANN EDUCATORS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997............................................. 1
Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1998 and 1997............................... 2
Consolidated Statements of Changes in Shareholders'
Equity for the Six Months Ended June 30, 1998 and 1997.......................... 3
Consolidated Statements of Cash Flows for the
Three and Six Months Ended June 30, 1998 and 1997............................... 4
Notes to Consolidated Financial Statements......................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................... 11
PART II - OTHER INFORMATION......................................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES............................................................................................... 23
</TABLE>
<PAGE>
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Investments
Fixed maturities, available for sale, at market (amortized
cost, 1998, $2,538,599; 1997, $2,535,538)............................ $2,641,683 $2,638,794
Short-term and other investments....................................... 96,756 130,252
Short-term investments, loaned securities collateral................... 55,027 -
------------ ------------
Total investments.................................................. 2,793,466 2,769,046
Cash...................................................................... 11,465 353
Accrued investment income and premiums receivable......................... 94,853 103,951
Value of acquired insurance in force and goodwill......................... 104,239 107,976
Deferred policy acquisition costs......................................... 91,767 85,883
Other assets.............................................................. 120,793 104,943
Variable annuity assets................................................... 1,081,751 959,760
------------ ------------
Total assets....................................................... $4,298,334 $4,131,912
============ ============
LIABILITIES, REDEEMABLE SECURITIES AND SHAREHOLDERS' EQUITY
Policy liabilities
Fixed annuity contract liabilities..................................... $1,230,975 $1,245,459
Interest-sensitive life contract liabilities........................... 382,655 364,205
Unpaid claims and claim expenses....................................... 324,909 322,335
Future policy benefits................................................. 180,246 179,562
Unearned premiums...................................................... 167,132 166,996
------------ ------------
Total policy liabilities .......................................... 2,285,917 2,278,557
Other policyholder funds.................................................. 123,300 122,107
Other liabilities......................................................... 180,355 126,847
Short-term debt........................................................... 45,000 42,000
Long-term debt............................................................ 99,618 99,599
Variable annuity liabilities.............................................. 1,077,841 956,253
------------ ------------
Total liabilities.................................................. 3,812,031 3,625,363
------------ ------------
Warrants, subject to redemption........................................... 220 577
------------ ------------
Preferred stock........................................................... - -
Common stock.............................................................. 59 59
Additional paid-in capital................................................ 336,376 340,564
Retained earnings ........................................................ 380,394 349,274
Accumulated other comprehensive income (Net
unrealized gains on fixed maturities and equity securities)............ 60,441 62,167
Treasury stock, at cost................................................... (291,187) (246,092)
------------ ------------
Total shareholders' equity......................................... 486,083 505,972
------------ ------------
Total liabilities, redeemable
securities, and shareholders' equity....................... $4,298,334 $4,131,912
============ ============
</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,
---------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Insurance premiums written and contract deposits................ $210,065 $195,053 $407,019 $374,923
======== ======== ======== ========
Revenues
Insurance premiums and contract charges earned............... $143,351 $135,888 $284,558 $267,307
Net investment income........................................ 48,157 49,921 96,677 99,708
Realized investment gains.................................... 2,981 788 9,352 1,645
-------- -------- -------- --------
Total revenues........................................... 194,489 186,597 390,587 368,660
-------- -------- -------- --------
Benefits, losses and expenses
Benefits, claims and settlement expenses..................... 107,315 91,289 204,745 181,789
Interest credited............................................ 23,802 24,471 47,931 48,855
Policy acquisition expenses amortized........................ 11,688 11,258 23,134 22,098
Operating expenses........................................... 26,402 25,097 53,627 49,606
Amortization of intangible assets............................ 1,901 2,705 3,737 5,411
Interest expense............................................. 2,344 2,771 4,704 5,225
-------- -------- -------- --------
Total benefits, losses and expenses...................... 173,452 157,591 337,878 312,984
-------- -------- -------- --------
Income before income taxes...................................... 21,037 29,006 52,709 55,676
Income tax expense.............................................. 5,389 8,110 14,602 15,380
-------- -------- -------- --------
Net income...................................................... $ 15,648 $ 20,896 $ 38,107 $ 40,296
======== ======== ======== ========
Net income per share
Basic ....................................................... $ 0.36 $ 0.45 $ 0.87 $ 0.86
======== ======== ======== ========
Diluted...................................................... $ 0.36 $ 0.45 $ 0.86 $ 0.85
======== ======== ======== ========
Weighted average number of shares
and equivalent shares
Basic...................................................... 43,597 46,192 43,885 46,758
Diluted.................................................... 44,225 46,897 44,513 47,440
</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>
Six Months Ended
June 30,
-------------------------------------------
1998 1997
---- ----
<S> <C> <C>
Common stock
Beginning balance...................................................... $ 59 $ 58
Options exercised, 1998, 97,782 shares;
1997, 599,924 shares................................................. - 1
Conversion of Director Stock Plan units,
1997, 2,288 shares................................................... - -
------------ ------------
Ending balance......................................................... 59 59
------------ ------------
Additional paid-in capital
Beginning balance...................................................... 340,564 330,234
Options exercised and conversion of
Director Stock Plan units............................................ 1,890 9,472
Catastrophe-linked equity put option premium........................... (1,475) -
Purchase of 13,650 warrants............................................ (4,603) -
------------ ------------
Ending balance......................................................... 336,376 339,706
------------ ------------
Retained earnings
Beginning balance...................................................... 349,274 278,669
Net income............................................................. 38,107 40,296
Cash dividends, 1998, $0.16 per share;
1997, $0.135 per share............................................... (6,987) (6,355)
------------ -----------
Ending balance......................................................... 380,394 312,610
------------ ------------
Accumulated other comprehensive income (Net unrealized gains (losses) on fixed
maturities and equity securities)
Beginning balance.................................................... 62,167 29,736
Increase (decrease) for the period................................... (1,726) (160)
------------ ------------
Ending balance....................................................... 60,441 29,576
------------ ------------
Treasury stock, at cost
Beginning balance, 1998, 14,896,796 shares;
1997, 11,176,196 shares.............................................. (246,092) (154,302)
Purchase of 1,379,100 shares in 1998;
2,640,200 shares in 1997 (See note 4)................................ (45,095) (61,435)
------------ ------------
Ending balance, 1998, 16,275,896 shares;
1997, 13,816,396 shares.............................................. (291,187) (215,737)
------------ ------------
Shareholders' equity at end of period..................................... $ 486,083 $ 466,214
============ ============
Comprehensive income
Net income............................................................. $ 38,107 $ 40,296
Other comprehensive income............................................. (1,726) (160)
------------ ------------
Total................................................................ $ 36,381 $ 40,136
============ ============
</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,
---------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities
Premiums collected........................................... $ 150,856 $ 156,315 $ 307,191 $ 305,543
Policyholder benefits paid................................... (113,623) (122,790) (227,937) (236,495)
Policy acquisition and other
operating expenses paid.................................... (51,452) (44,339) (91,967) (85,323)
Federal income taxes paid.................................... (19,600) (13,771) (20,400) (44,077)
Investment income collected.................................. 45,730 48,323 99,484 99,742
Interest expense paid........................................ (1,296) (612) (4,615) (4,563)
Other ....................................................... 171 (970) 1,712 3,080
---------- ---------- ---------- ----------
Net cash provided by
operating activities................................... 10,786 22,156 63,468 37,907
---------- ---------- ---------- ----------
Cash flows from investing activities
Fixed maturities
Purchases.................................................. (153,016) (314,023) (483,146) (579,389)
Sales...................................................... 95,522 239,559 294,449 456,627
Maturities................................................. 91,798 69,306 196,915 131,307
Net cash received from
short-term and other investments........................... 18,896 33,121 34,005 21,189
---------- ---------- ---------- ----------
Net cash provided by investing activities................ 53,200 27,963 42,223 29,734
---------- ---------- ---------- ----------
Cash flows from financing activities
Purchase of treasury stock................................... (34,896) (48,087) (45,095) (61,435)
Dividends paid to shareholders............................... (3,451) (3,147) (6,987) (6,355)
Principal borrowing (payments)
on Bank Credit Facility.................................... 3,000 8,000 3,000 8,000
Repurchase of common stock warrants.......................... (4,959) - (4,959) -
Exercise of stock options.................................... 476 3,759 1,890 9,473
Catastrophe-linked equity put option premium................. - - (1,475) (1,250)
Annuity contracts, variable and fixed
Deposits................................................... 63,056 54,989 117,399 101,782
Maturities and withdrawals................................. (46,619) (35,900) (91,728) (70,110)
Net transfer to variable annuity assets.................... (39,213) (27,782) (66,420) (54,067)
Net increase (decrease) in interest-sensitive
life account balances...................................... (102) 575 (204) 993
---------- ---------- ---------- ----------
Net cash used in financing activities.................... (62,708) (47,593) (94,579) (72,969)
---------- ---------- ---------- ----------
Net increase (decrease) in cash................................. 1,278 2,526 11,112 (5,328)
Cash at beginning of period..................................... 10,187 5,850 353 13,704
---------- ---------- ---------- ----------
Cash at end of period........................................... $ 11,465 $ 8,376 $ 11,465 $ 8,376
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
(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, 1998
and December 31, 1997 and the consolidated results of operations, changes in
shareholders' equity and cash flows for the three and six months ended June 30,
1998 and 1997.
It is suggested that these financial statements be read in conjunction
with the financial statements and the notes thereto contained in the December
31, 1997 Form 10-K filed by the Company.
The results of operations for the three and six months ended June 30,
1998 are not necessarily indicative of the results to be expected for the full
year.
Note 2 - Debt
Indebtedness outstanding was as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- ------------
<S> <C> <C>
Short-term debt:
$65,000 Bank Credit Facility, IBOR + 0.325%
(6.0% as of June 30, 1998)................................. $ 45,000 $ 42,000
Long-term debt:
6 5/8% Senior Notes, due January 15, 2006.
Face amount less unaccrued discount
of $382 and $401 (6.7% imputed rate)....................... 99,618 99,599
---------- ----------
Total................................................... $ 144,618 $ 141,599
========== ==========
</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 June 30, 1998
------------------------------- ---------------------------------
Rating of Fixed June 30, December 31, Carrying Amortized
Maturity Securities(1) 1998 1997 Value Cost
---------------------- --------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
AAA.............................. 40.6% 42.7% $ 1,073,631 $ 1,037,824
AA............................... 7.4 7.1 195,502 186,481
A................................ 19.7 20.3 521,079 496,258
BBB.............................. 25.5 23.3 672,079 644,600
BB............................... 1.5 1.6 39,639 37,724
B................................ 4.2 4.0 110,855 105,856
CCC or lower..................... 0.1 0.1 2,457 4,632
Not rated(2)..................... 1.0 0.9 26,441 25,224
----- ----- ------------- -------------
Total........................ 100.0% 100.0% $ 2,641,683 $ 2,538,599
===== ===== ============= =============
</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 includes $18.0 million of publicly traded securities not
currently rated by S&P or Moody's and $8.4 million of private placement
securities not rated by either S&P or Moody's. The National Association
of Insurance Commissioners (the "NAIC") has rated 90.0% of these private
placements as investment grade.
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 1998 1997 1998
- ------------------ ---------- ------------ -----------
<S> <C> <C> <C>
Due in 1 year or less............................................. 4.8% 5.6% $ 127,442
Due after 1 year through 5 years.................................. 24.5 24.2 646,376
Due after 5 years through 10 years................................ 33.6 34.8 888,915
Due after 10 years through 20 years............................... 19.8 19.6 522,313
Due after 20 years................................................ 17.3 15.8 456,637
----- ----- ----------
Total......................................................... 100.0% 100.0% $2,641,683
===== ===== ==========
</TABLE>
The Company loans fixed income securities to third parties, primarily
major brokerage firms. As of June 30, 1998 and December 31, 1997, fixed
maturities with a fair value of $55,027 and $60,388, respectively, were loaned.
The Company separately maintains a minimum of 100% of the value of the
6
<PAGE>
Note 3 - Investments-(Continued)
loaned securities as collateral for each loan. Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities," requires the securities lending collateral to be classified as
investments beginning in 1998 and does not permit restatement of prior period
financial statements. As of June 30, 1998, the corresponding escrow liability is
included in Other Liabilities in the Company's consolidated balance sheet.
Note 4 - Shareholders' Equity
Share Repurchase Programs
During 1997, the Company repurchased 3,720,600 shares, 8% of the
Company's outstanding shares at December 31, 1996, at an aggregate cost of
$91,790 under a $100,000 stock repurchase program announced in February 1997. In
January 1998, the Company's Board of Directors authorized an additional
repurchase of shares of the Company's common stock up to $100,000. Based on the
market price of the Company's common shares at the time, $100,000 represented
approximately 8% of the Company's then outstanding shares. Shares of common
stock may be purchased from time to time through open market and private
purchases, as available. The repurchase of shares is financed through use of
cash and, if needed, the Bank Credit Facility.
During the six months ended June 30, 1998, the Company repurchased
1,379,100 shares at an aggregate cost of $45,095 which was financed with cash
from operations.
Note 5 - Value of Annuity Business Acquired
The value of annuity business acquired was recorded as an asset as a
result of the application of purchase accounting at the time the Company was
acquired in 1989 and that asset is being amortized over 20 years in proportion
to projected future gross profits of that business. Recent significant market
appreciation and the resultant growth in annuity assets and the retention of the
Company's annuity business have favorably impacted projected future gross
profits for the business. Therefore, scheduled annual amortization of the
December 31, 1997 balance has been revised as follows: 1998, $2,494; 1999,
$2,494; 2000, $3,855; 2001, $3,732; and 2002, $3,523. Such amounts will be
evaluated at least annually and amortization schedules updated as indicated. At
June 30, 1998, the value of annuity business acquired, net of amortization, was
$32,305.
Note 6 - Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income. Comprehensive income represents the change in
shareholders' equity during a reporting period from transactions and other
events and circumstances from non-shareholder sources. For the Company,
comprehensive income is equal to net income plus the change in net unrealized
gains and losses on fixed maturities and equity securities for the period as
shown in the Statement of Changes in Shareholders' Equity in prior periods. The
adoption of SFAS No. 130 resulted in revised and additional disclosures but had
no effect on the financial position, results of operations, or liquidity of the
Company.
7
<PAGE>
Note 7 - 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
-------- ----------- ------------ --------
Three months ended
June 30, 1998
- ------------------------
<S> <C> <C> <C> <C>
Premiums written................................. $212,817 $7,195 $4,443 $210,065
Premiums earned.................................. 145,500 6,551 4,402 143,351
Benefits, claims and
settlement expenses.......................... 115,958 11,505 2,862 107,315
Three months ended
June 30, 1997
- ------------------------
Premiums written................................. $195,547 $4,971 $4,477 $195,053
Premiums earned.................................. 134,691 4,747 5,944 135,888
Benefits, claims and
settlement expenses.......................... 94,145 8,917 6,061 91,289
Six months ended
June 30, 1998
- ------------------------
Premiums written................................. $410,687 $12,457 $8,789 $407,019
Premiums earned.................................. 287,995 11,796 8,359 284,558
Benefits, claims and
settlement expenses.......................... 217,342 19,007 6,410 204,745
Six months ended
June 30, 1997
- ------------------------
Premiums written................................. $377,379 $10,961 $8,505 $374,923
Premiums earned.................................. 265,500 9,976 11,783 267,307
Benefits, claims and
settlement expenses.......................... 186,113 17,208 12,884 181,789
</TABLE>
8
<PAGE>
Note 7 - Reinsurance-(Continued)
The Company maintains an excess and catastrophe treaty reinsurance
program for its property and casualty subsidiaries. The Company reinsures 95% of
catastrophe losses above a retention of $7.5 million per occurrence up to $80
million per occurrence. This program is augmented by a $100 million equity put
that provides 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
losses from catastrophes, individually or in the aggregate during a calendar
year, exceed the catastrophe reinsurance program coverage limit. Before tax
benefits, the equity put provides a source of capital for up to $154 million of
catastrophe losses above the reinsurance coverage limit. The fee for the equity
put has been charged directly to additional paid-in capital. For liability
coverages, including the educator professional liability policy, the Company
reinsures each loss above a retention of $0.5 million up to $20 million. The
Company also reinsures each property loss above a retention of $0.5 million up
to $1.5 million.
Note 8 - Segment Information
Effective January 1, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 specifies the presentation and disclosure of operating segment information
reported in the annual and interim reports issued to shareholders and requires
that reported segment information be consistent with what the Company's
management uses to make operating decisions and assess performance. The adoption
of SFAS No. 131 had no effect on the financial position, results of operations,
or liquidity of the Company. Adoption of SFAS No. 131 resulted in no changes in
the way the Company has reported its segment results with the exception of
realized investment gains and losses which are managed in the aggregate and
accordingly have been reclassified to the Corporate and Other segment. Segment
information for prior periods has been restated to conform to this presentation.
The Company's operations include the following operating segments:
property and casualty, annuity and life insurance. The property and casualty
insurance segment includes primarily personal lines automobile and homeowners
products. The annuity segment includes primarily fixed and variable
tax-qualified annuity products. The life insurance segment includes primarily
interest-sensitive life and traditional life products.
9
<PAGE>
Note 8 - Segment Information-(Continued)
Summarized financial information for these segments is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Property and casualty............................ $127,296 $122,504 $253,261 $242,150
Annuity.......................................... 31,046 31,669 61,967 62,504
Life............................................. 33,168 31,285 65,879 62,083
Corporate and other, including
realized investment gains.................... 3,251 1,415 10,026 2,476
Intersegment eliminations........................ (272) (276) (546) (553)
--------- --------- --------- ---------
Total.................................. $ 194,489 $ 186,597 $ 390,587 $ 368,660
========= ========= ========= =========
Net income
Operating income
Property and casualty........................ $ 7,827 $ 15,267 $ 20,366 $ 28,990
Annuity...................................... 5,765 4,532 11,064 8,786
Life......................................... 2,888 2,918 5,534 5,868
Corporate and other,
including interest expense................ (2,770) (2,333) (4,936) (4,417)
--------- --------- --------- ---------
Total operating income................. 13,710 20,384 32,028 39,227
Realized investment gains, after tax............. 1,938 512 6,079 1,069
--------- --------- --------- ---------
Total.................................. $ 15,648 $ 20,896 $ 38,107 $ 40,296
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Assets
Property and casualty......................................... $ 743,643 $ 742,487
Annuity....................................................... 2,662,765 2,531,309
Life.......................................................... 827,546 777,488
Corporate and other........................................... 96,958 125,624
Intersegment eliminations..................................... (32,578) (44,996)
----------- -----------
Total.................................................. $ 4,298,334 $ 4,131,912
=========== ===========
</TABLE>
Revenues include insurance premiums and contract charges earned, net
investment income and realized investment gains and losses. Operating income is
equal to net income before realized investment gains, after tax.
10
<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.
. Future property and casualty loss experience and its impact on
estimated claims and claim adjustment expenses for losses
occurring in prior years.
. 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.
11
<PAGE>
Six Months Ended June 30, 1998 Compared With Six Months Ended June 30, 1997
Insurance Premiums and Contract Charges
Insurance Premiums Written and Contract Deposits
<TABLE>
<CAPTION>
Six Months Ended Increase (Decrease)
June 30, from Prior Year
------------------------- -----------------------
1998 1997 Percent Amount
---- ---- ------- ------
<S> <C> <C> <C> <C>
Automobile and property
(voluntary)........................................ $224.8 $208.1 8.0% $16.7
Annuity deposits...................................... 117.4 101.8 15.3% 15.6
Life insurance........................................ 56.1 54.8 2.4% 1.3
------ ------ -----
Subtotal - core lines.......................... 398.3 364.7 9.2% 33.6
Involuntary and other
property & casualty................................ 8.7 10.2 -14.7% (1.5)
------ ------ -----
Total.......................................... $407.0 $374.9 8.6% $32.1
====== ====== =====
</TABLE>
Insurance Premiums and Contract Charges Earned
(Excludes annuity and life contract deposits)
<TABLE>
<CAPTION>
Six Months Ended Increase (Decrease)
June 30, from Prior Year
------------------------ -----------------------
1998 1997 Percent Amount
---- ---- ------- ------
<S> <C> <C> <C> <C>
Automobile and property
(voluntary)........................................ $221.5 $206.1 7.5% $15.4
Annuity............................................... 7.5 5.7 31.6% 1.8
Life ............................................... 43.4 41.3 5.1% 2.1
------ ------ -----
Subtotal - core lines.......................... 272.4 253.1 7.6% 19.3
Involuntary and other
property & casualty................................ 12.2 14.2 -14.1% (2.0)
------ ------ -----
Total.......................................... $284.6 $267.3 6.5% $17.3
====== ====== =====
</TABLE>
Insurance premiums written and contract deposit growth of 8.6% was
principally driven by annuity deposits and property and casualty premiums
(excluding involuntary). The total property and casualty growth rate was
impacted by a lower allocation from state automobile insurance pools.
Property and casualty premium growth was driven by two factors in
roughly equal proportion: automobile (excluding involuntary) and homeowners
policies in force increased 4.7% and average premium per policy increased 3% to
4%. The 854,000 automobile and homeowners policies in force at June 30, 1998
represented an increase of 38,000 policies since June 30, 1997 and an increase
of 17,000 policies since December 31, 1997. For the six months ended June 30,
1998, automobile and homeowners new direct premiums written of $23.4 million
were comparable to the same period last year. Renewal direct premiums written of
$204.3 million for the six months ended June 30, 1998 increased 8.7% over the
first six months of 1997.
Annuity contract charges earned increased due to a 30% increase in
variable annuity cash value on deposit at the end of the period compared to a
year earlier. The increase in total annuity deposits received reflected a $9.7
million, or 13.3%, increase in scheduled deposits for retirement annuities and
12
<PAGE>
a $5.9 million, or 20.5%, increase in rollover deposits from other companies and
single premiums. In response to changes in the tax law, the Company introduced
new IRA annuities during the first quarter of 1998. Annuity deposits received
for these new IRA retirement options represented approximately 2.6 percentage
points of the 15.3% growth in annuity deposits received.
The growth in life insurance premiums and contract charges earned
reflects the 5.8% growth in life insurance in force. The lapse rate for ordinary
life insurance in force of 7.0% for the first six months of 1998 improved 1.0
percentage point compared to 8.0% reported for the first half of 1997.
Net Investment Income
Net investment income of $96.7 million for the six months ended June 30,
1998 decreased 3.0% compared to $99.7 million for the same period in 1997. The
decrease in net investment income was due primarily to utilization of capital
for the share repurchase program and customers' preference for variable as
opposed to fixed annuity contracts. Investments (at amortized cost) decreased
2.2%, or $60.3 million, from June 30, 1997 excluding $55.0 million of short-term
investments held at June 30, 1998 as securities lending collateral required to
be classified as investments beginning in 1998 under Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." The pretax yield on average investments
(excluding the securities lending collateral) was 7.3% (4.9% after tax) for the
six months ended June 30, 1998 compared to a pretax yield of 7.4% (4.9% after
tax) for the same period in 1997.
Realized Investment Gains and Losses
Realized investment gains were $9.4 million for the six months ended
June 30, 1998, compared to $1.6 million for the same period in 1997.
Benefits, Claims and Settlement Expenses
<TABLE>
<CAPTION>
Six Months Ended Increase (Decrease)
June 30, from Prior Year
------------------------ -----------------------
1998 1997 Percent Amount
---- ---- ------- ------
<S> <C> <C> <C> <C>
Property and casualty................................. $182.6 $162.1 12.6% $20.5
Life.................................................. 22.1 19.7 12.2% 2.4
------ ------ -----
Total.............................................. $204.7 $181.8 12.6% $22.9
====== ====== =====
Property and casualty statutory loss ratio:
Before catastrophes............................ 69.7% 71.7% -2.0%
After catastrophes............................. 78.3% 73.6% 4.7%
</TABLE>
The property and casualty loss ratio for 1998 included a 6.7 percentage
point increase compared to the first half of 1997 attributable to higher
catastrophe losses in 1998. Severe weather-related losses in the first six
months of 1998 more than offset reductions in the severity of
non-weather-related claims. A series of severe storms struck the Northern
Plains, Upper Midwest, Southeast and Northeast during the second quarter of
1998, with Minnesota being the hardest hit state, resulting in a record level of
weather-related catastrophe claims for the property-casualty insurance industry
and for the Company. Catastrophe losses in Minnesota during this period were the
worst in that state's history for the industry
13
<PAGE>
as well as the Company. Losses from severe weather in the first six months of
1997 were unusually low. Catastrophe losses after reinsurance but before federal
income tax benefits for the six months ended June 30, 1998 were $20.2 million
and accounted for 8.6 points on the loss ratio, compared to catastrophe losses
of $4.1 million, 1.9 points on the loss ratio, for the same period in 1997.
Compared to 1997, a larger proportion of the catastrophe losses in the first
half of 1998 were from automobile policies due to the nature of the storms. The
provision for claims and claim adjustment expenses for insured events in prior
years continued to reflect favorable development in the first six months of both
1998 and 1997. Property and casualty claims and settlement expenses were reduced
by a decrease in estimated losses and loss adjustment expenses for claims
occurring in prior years of $15.5 million and $26.9 million for the six months
ended June 30, 1998 and 1997, respectively.
The Company's catastrophe reinsurance program covers 95% of catastrophe
losses above a retention of $7.5 million up to $80 million for each catastrophe
in 1998. The Company's catastrophe reinsurance program is augmented by a $100
million equity put that provides 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 losses from catastrophes, individually or in the aggregate
during a calendar year, exceed the catastrophe reinsurance program coverage
limit. Before tax benefits, the equity put provides a source of capital for up
to $154 million of catastrophe losses above the reinsurance coverage limit.
The increase in life benefits reflected higher individual life mortality
experience compared to the first half of 1997.
Interest Credited to Policyholders
<TABLE>
<CAPTION>
Six Months Ended Increase (Decrease)
June 30, from Prior Year
----------------------- -----------------------
1998 1997 Percent Amount
---- ---- ------- ------
<S> <C> <C> <C> <C>
Annuity............................................... $36.9 $38.8 -4.9% $(1.9)
Life.................................................. 11.0 10.1 8.9% 0.9
----- ----- -----
Total.............................................. $47.9 $48.9 -2.0% $(1.0)
===== ===== =====
</TABLE>
Interest credited to fixed annuity contracts decreased as accumulated
deposits decreased 4.2% over the 12 months ended June 30, 1998. The fixed
annuity average annual interest rate credited was 5.6% for the six months ended
June 30, 1998, compared to a rate of 5.7% for the same period in 1997.
Life insurance interest credited increased 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, 1998, policy
acquisition and operating expenses of $77.0 million increased $5.4 million, or
7.5%, compared to $71.6 million for the first six months of 1997. The property
and casualty expense ratio was 19.5% for the six months ended June 30, 1998,
compared to 19.3% for the same period last year.
Effective January 1, 1998, the Company adopted the accounting treatment
required by the American Institute of Certified Public Accountants' Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." It is anticipated that adoption of this
14
<PAGE>
statement will initially decrease the Company's operating expenses by
approximately $2.5 million before income taxes for the year ended December 31,
1998 as costs incurred to develop internal-use software are capitalized and
depreciated over their expected useful lives. For the first six months of 1998,
capitalized costs were $1.2 million before income taxes, less than $0.02 per
share.
Amortization of Intangible Assets
Amortization of intangible assets decreased by $1.7 million to $3.7
million for the six months ended June 30, 1998, compared to $5.4 million for the
same period in 1997. This decrease resulted from lower amortization of the value
of annuity business acquired in the 1989 acquisition of the Company. The value
of annuity business acquired is amortized in relation to the present value of
the estimated future gross profit amounts expected to be realized over the life
of the book of contracts. The estimates of expected gross profit are evaluated
periodically, and the amortization is adjusted when actual experience or other
evidence suggests that earlier estimates should be revised. Accordingly, the
amortization has been decreased as the estimated expected future gross profits
of the business have increased due to recent significant market appreciation and
the resultant growth in annuity assets and the retention of the Company's
annuity business.
Interest Expense
The Company's interest expense of $4.7 million for the six months ended
June 30, 1998 decreased $0.5 million, or 9.6%, compared to the same period last
year. The debt to capital ratio of 22.9% as of June 30, 1998 was within the
Company's target operating range of 20% to 25%.
Income Tax Expense
The effective income tax rate was 27.7% for the six months ended June
30, 1998 compared to the 27.6% effective income tax rate for the same period
last year. Income from investments in tax-advantaged securities reduced the
effective income tax rate 4 and 3 percentage points in the six months ended June
30, 1998 and 1997, respectively, and acquisition related tax benefits reduced
the effective rate 6 percentage points in the six months ended June 30, 1998 and
1997.
15
<PAGE>
Operating Income
Operating income (net income before realized investment gains and
losses) in 1997 was helped by unusually mild weather and a low level of
weather-related property insurance claims which benefited property insurance
results. Earnings for 1998 were impacted by severe weather-related catastrophe
losses. Earnings and investment income were also reduced compared to last year
due to the utilization of capital in the Company's share repurchase programs.
Operating income by segment was as follows:
<TABLE>
<CAPTION>
Six Months Ended Increase (Decrease)
June 30, from Prior Year
----------------------- -----------------------
1998 1997 Percent Amount
---- ---- ------- ------
<S> <C> <C> <C> <C>
Property & casualty:
Before catastrophe losses.......................... $33.3 $31.6 5.4% $ 1.7
Catastrophe losses, after tax...................... (13.1) (2.6) 403.8% (10.5)
----- ----- ------
20.2 29.0 -30.3% (8.8)
Annuity............................................... 11.0 8.8 25.0% 2.2
Life.................................................. 5.7 5.9 -3.4% (0.2)
Corporate and other................................... (1.8) (1.1) (0.7)
Interest expense...................................... (3.1) (3.4) 0.3
----- ----- ------
Total.......................................... $32.0 $39.2 -18.4% $ (7.2)
===== ===== ======
Property and casualty statutory combined ratio:
Before catastrophes............................ 89.1% 91.0% -1.9%
After catastrophes............................. 97.7% 92.9% 4.8%
</TABLE>
Property and casualty segment operating income was primarily impacted by
the significant increase in weather-related catastrophe losses. It was also
adversely affected by a reduction in investment income in the first six months
of 1998 as compared to the same period in 1997 which resulted from utilization
of capital of the Company in its share repurchase program. The property and
casualty combined loss and expense ratio for 1998 reflected the higher
weather-related claims.
Annuity segment operating income for 1998 reflected 30.3% growth in
variable annuity deposits and a fixed net interest margin that was comparable to
the same period last year. Annuity segment profit continues to shift from the
interest margin on fixed annuity accumulations to fees on variable mutual fund
deposits. Variable annuity deposits were $1.1 billion at June 30, 1998. Total
accumulated fixed and variable annuity deposits of $2,424.2 million increased
$193.6 million, or 8.7%, compared to June 30, 1997. This increase resulted from
a net increase in variable funds on deposit of $264.8 million, or 39.3%,
partially offset by net decreases in market value of underlying mutual funds of
$13.0 million and a decrease in fixed annuity funds on deposit of $58.2 million,
or 4.2%.
Life insurance segment operating income for 1998 reflected higher
individual life mortality experience, compared to 1997.
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 $34.4 million for the
first six months of 1998, compared to $42.7 million for the same period in 1997.
16
<PAGE>
Net Income
Net income, which includes realized investment gains, for the six months
ended June 30, 1998 was $38.1 million, or $0.86 per diluted share, reflecting a
5.5% decrease in net income and a 1.2% increase in net income per diluted share
compared to the same period in 1997. The Company's share repurchase program
reduced net income by $2.6 million for 1998 but resulted in an increase of $0.01
in earnings per share for the period. After tax realized investment gains were
$6.1 million for 1998, compared to $1.1 million for the first half of 1997.
Liquidity and Financial Resources
Investments
The Company's investment strategy emphasizes investment grade, publicly
traded fixed income securities. At June 30, 1998, fixed income securities
comprised 96.4% of investments excluding the securities lending collateral. Of
the fixed income investment portfolio, 93.2% was investment grade and 99.7% was
publicly traded. The average quality of the total fixed income portfolio was A+
at June 30, 1998.
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 both June 30, 1998 and
December 31, 1997. 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 75% of
all outstanding fixed annuity accumulated cash values are subject in most cases
to substantial early withdrawal penalties.
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 fund business growth,
retire short-term debt, pay dividends to shareholders 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 $63.5 million for
the six months ended June 30, 1998 compared to $37.9 million for the same period
in 1997 with the increase primarily due to a decrease in federal income tax
payments. In both years, cash provided by operating activities primarily
reflected net cash generated by the insurance subsidiaries.
17
<PAGE>
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 1998 without prior approval are
approximately $82 million. Although regulatory restrictions exist, dividend
availability from subsidiaries has been, and is expected to be, more than
adequate for HMEC's 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 six months of 1998, net cash provided by investing
activities was $42.2 million. This net amount reflects $483.1 million in
purchases of fixed maturity investments, funded by net investment sales or
maturities of $525.3 million.
Financing Activities
Financing activities include primarily repurchases of the Company's
common stock, payment of dividends, the receipt and withdrawal of funds by
annuity policyholders and borrowings and repayments under the Company's debt
facilities. Shareholder dividends paid for the six months ended June 30, 1998
were $7.0 million. In the six months ended June 30, 1998, the Company paid fees
of $1.5 million related to the catastrophe-linked equity put which augments its
reinsurance program and such fees were charged directly to additional paid-in
capital.
For the six months ended June 30, 1998, receipts from annuity contracts
of $117.4 million were greater than contract maturities and withdrawals of $91.7
million. Net transfers to variable annuity assets were $66.4 million during the
first six months of 1998, compared to $54.1 million during the same period in
1997. Interest-sensitive life account balances decreased $0.2 million during the
first six months of 1998.
During the six months ended June 30, 1998, the Company repurchased
1,379,100 shares of its common stock at an aggregate cost of $45.1 million, or
$32.70 per share. $8 million of those purchases completed the $100 million share
repurchase program announced in 1997 and the remainder was acquired under an
additional $100 million share repurchase program announced in January 1998. Of
the treasury shares purchased in 1998, 297,000 and 1,082,100 were repurchased in
the first and second quarters, respectively. The repurchase of these shares was
financed with cash from operations. During the six months ended June 30, 1998,
the Company received $2.0 million related to the exercise of common stock
options including tax benefits. During the second quarter of 1998, the Company
also repurchased 60% of its outstanding common stock warrants for $5.0 million.
18
<PAGE>
Capital Resources
Historically, the Company's insurance subsidiaries have generated
capital in excess of what has been needed to fund 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 and pay dividends to its
shareholders and for 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 $630.9 million at June 30, 1998,
including $99.6 million of long-term debt and $45.0 million of short-term debt.
Long-term debt as a percentage of total shareholders' equity was 20.5% as of
June 30, 1998, compared to 19.7% as of December 31, 1997 with the change
including the effects of the repurchase of shares for treasury stock. Total debt
to capital at June 30, 1998 was 22.9%, within the Company's target operating
range of 20% to 25%.
Shareholders' equity was $486.1 million at June 30, 1998, including an
unrealized gain in the Company's investment portfolio of $60.4 million after
taxes and the related impact on deferred policy acquisition costs associated
with interest-sensitive policies. In December 1997, the Company's common stock
was split two-for-one. The market value of the Company's common stock and the
market value per share were $1,482.9 million and $34 1/2, respectively, at June
30, 1998. Book value per share was $11.31 at June 30, 1998, $9.90 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 Senior Notes have an investment grade rating from Standard & Poor's
Corporation ("S&P") (A-), Duff & Phelps Credit Rating Co. ("Duff & Phelps") (A),
and Moody's Investors Service, Inc. ("Moody's") (Baa2) and are traded on the New
York Stock Exchange (HMN 6 5/8). The net proceeds from the sale of the Senior
Notes were used to finance the redemption of the Company's convertible notes.
As of June 30, 1998 and December 31, 1997, the Company had short-term
debt comprised of $45.0 million and $42.0 million, respectively, 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 June 30, 1998. The commitment for the Bank Credit
Facility terminates on December 31, 2001.
The Company's ratio of earnings to fixed charges for the six months
ended June 30, 1998 was 12.2x compared to 11.7x for the same period in 1997.
Total shareholder dividends were $7.0 million for the six months ended
June 30, 1998. In February 1997, the Board authorized the fifth consecutive
annual increase in the Company's dividend since the Company's initial public
offering in 1991 and increased the quarterly dividend by 22.7% to $0.0675 per
share. In November 1997, in conjunction with the Company's two-for-one stock
split, the Board of Directors authorized the sixth increase to the Company's
quarterly dividend, the second increase in 1997. The regular quarterly dividend
increased by 19% to $0.08 per share.
19
<PAGE>
In January 1998, the Company's Board of Directors adopted an additional
repurchase program for shares of the Company's common stock of up to $100
million. Based on the market price of the Company's common shares at the time
the Board adopted this program, $100 million would represent approximately 8% 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. The
repurchase program will be financed through use of cash and, if needed, the Bank
Credit Facility. As of June 30, 1998, $63 million remained authorized for share
repurchases.
During the first six months of 1998, options were exercised for the
issuance of 97,782 shares, 0.2% of the Company's shares outstanding at December
31, 1997.
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 losses from catastrophes, individually or in
the aggregate during a calendar year, exceed $80 million, the 1998 coverage
limit of the reinsurance program.
Year 2000
In 1990, the Company established programming standards to address the
year 2000 for new computer systems. By early 1995, the Company had developed a
comprehensive plan to address the issue and began converting its existing
computer systems to be year 2000 compliant. At June 30, 1998, nearly 70% of all
business applications, representing more than 60% of all of the Company's
program code, were year 2000 compliant. Management anticipates completing
conversion of the remaining internal business applications by the end of 1998.
Vendors that have not already completed conversion have indicated their plans to
become year 2000 compliant by the end of 1998. During 1999, additional testing
of all systems and final reviews of individual personal computer applications
will be completed.
Costs for this compliance project represent the allocation of existing
internal information technology resources to address year 2000 compliance and
are not expected to be incremental costs to the Company. The total cost of the
compliance project is estimated to be $6 million, before tax benefits, and is
being funded through operating cash flows. The Company is expensing all costs
associated with these system changes and through June 30, 1998 has expensed $4.3
million before tax benefits, including a cost of $1.0 million for the six months
ended June 30, 1998.
Recent Accounting Changes
Employers' Disclosures about Pensions and Other Postretirement Benefits
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which will be implemented in
the Company's December 31, 1998 financial statements. SFAS No. 132 will not
affect employee benefits expense or net income. SFAS No. 132 standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful as
they were when SFAS No. 87, 88 and 106 were issued.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted in 2000.
Because the Company does not have any derivatives or hedges, as defined within
the context of SFAS No. 133, this statement does not apply.
20
<PAGE>
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on May
22, 1998, 40,077,853 shares of Common Stock were represented and
entitled to vote. The results of the matters submitted to a vote of
security holders are shown in the table below.
<TABLE>
<CAPTION>
Votes Votes
For Against Abstentions
--- ------- -----------
<S> <C> <C> <C>
Election of the following nominees to hold
the office of Director until the next Annual
Meeting of Shareholders and until their
respective successors have been duly
elected and qualified:
William W. Abbott 40,054,996 22,857 -
Dr. Emita B. Hill 40,054,996 22,857 -
Paul J. Kardos 40,054,996 22,857 -
Donald E. Kiernan 40,054,996 22,857 -
Jeffrey L. Morby 40,054,996 22,857 -
Shaun F. O'Malley 40,054,996 22,857 -
Charles A. Parker 40,054,926 22,927 -
Ralph S. Saul 40,054,576 23,277 -
William J. Schoen 40,054,996 22,857 -
Approval of an amendment to the
Company's Certificate of Incorporation
provision which requires the retirement of
any Director who is 72 or more years of age
following the completion of his or her then
current term in office. The amendment
permits Ralph S. Saul, who has served as
Chairman of the Board of Directors, to be
eligible for re-election to the Board of
Directors at the Annual Meeting of
Shareholders held on May 22, 1998 and at
the 1999 Annual Meeting of Shareholders. 36,775,163 2,948,548 354,142
Ratification of the appointment of KPMG
Peat Marwick LLP, independent certified
public accountants, to serve as the
Company's auditors for the fiscal year
ending December 31, 1998. 39,649,256 7,957 420,640
</TABLE>
21
<PAGE>
Item 6: Exhibits and Reports on Form 8-K
Exhibit
No. Description
------- -----------
(a) The following items are filed as Exhibits.
(3) Articles of incorporation and bylaws:
3.1 Certificate of Amendment to Restated
Certificate of Incorporation, filed with
the Delaware Secretary of State on June 5,
1998.
(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 1998.
22
<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, 1998 /s/ Paul J. Kardos
--------------------------- --------------------------------------
Paul J. Kardos, Chairman of the Board,
President and Chief Executive Officer
Date August 13, 1998 /s/ Larry K. Becker
--------------------------- --------------------------------------
Larry K. Becker, Executive
Vice President and Chief
Financial Officer
23
<PAGE>
Secretary of State Exhibit 3.1
Division of Corporations
Filed 09:00 AM 06/05/1998
981218586 - 0672105
CERTIFICATE OF AMENDMENT OF THE
CERTIFICATE OF INCORPORATION OF
HORACE MANN EDUCATORS CORPORATION
HORACE MANN EDUCATORS CORPORATION (the "Corporation"), a corporation organized
and existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify:
First, that at a meeting of the Board of Directors of the Corporation held on 18
February 1998, a resolution was adopted setting forth the proposed Amendment to
the Certificate of Incorporation of said Corporation, declaring said Amendment
to be advisable and calling for submission for consideration of the Amendment to
the Stockholders of said Corporation. The resolution setting forth the proposed
Amendment is as follows:
RESOLVED the agenda for the Annual Meeting of the Stockholders shall include the
approval of an amendment to the Company's Certificate of Incorporation provision
which required the retirement of any Director who is 72 or more years of age
following the completion of his or her then current term in office. The
Amendment would permit Ralph S. Saul to be eligible for re-election to the Board
at the 1998 Annual Meeting and at the 1999 Annual Meeting.
Second, that the proposed amendment to the Certificate of Incorporation was
submitted for consideration to the Stockholders at their Annual Meeting held on
22 May 1998 and the Stockholders did approve said amendment by amending ARTICLE
FOURTEENTH.
"FOURTEENTH. Any Director who is 72 or more years of age shall retire following
completion of his or her then current term in office; however, Ralph S. Saul
will be eligible for re-election to the Board of Directors for the 1998 Annual
Meeting and the 1999 Annual Meeting, provided he will not be eligible for
re-election at the 2000 Annual Meeting of Shareholders."
Third, that the aforesaid Amendment was duly adopted in accordance with the
applicable provisions of Section 242 of the General Corporation Law of the State
of Delaware.
IN WITNESS WHEREOF, said HORACE MANN EDUCATORS CORPORATION has caused this
Certificate of Amendment of the Certificate of Incorporation to be signed by
Paul J. Kardos, its Chairman of the Board, President, and Chief Executive
Officer and attested by Ann M. Caparros, its Corporate Secretary, this 03 day of
June 1998.
HORACE MANN EDUCATORS CORPORATION
By: /s/ Paul J. Kardos
-------------------------------------------------
Paul J. Kardos, Chairman of the Board, President
and Chief Executive Officer
ATTEST:
By: /s/ Ann M. Caparros
---------------------------------------
Ann M. Caparros, Corporate Secretary
<PAGE>
Exhibit 11
Horace Mann Educators Corporation
Computation of Net Income per Share
For the Three and Six Months Ended June 30, 1998 and 1997
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic - assumes no dilution:
Net income for the period $ 15,648 $ 20,896 $ 38,107 $ 40,296
--------- --------- --------- ---------
Weighted average number of common
shares outstanding during the period 43,597 46,192 43,885 46,758
--------- --------- --------- ---------
Net income per share - basic $ 0.36 $ 0.45 $ 0.87 $ 0.86
========= ========= ========= =========
Diluted - assumes full dilution:
Net income for the period $ 15,648 $ 20,896 $ 38,107 $ 40,296
--------- --------- --------- ---------
Weighted average number of common
shares outstanding during the period 43,597 46,192 43,885 46,758
Weighted average number of common
equivalent shares to reflect the dilutive
effect of common stock equivalent securities:
Warrants 99 249 99 248
Stock options 483 426 484 404
Common stock units related to Deferred
Equity Compensation Plan for Directors 44 30 44 30
Common stock units related to Deferred
Compensation Plan for Employees 2 - 1 -
--------- --------- --------- ---------
Total common and common equivalent shares
adjusted to calculate diluted earnings per share 44,225 46,897 44,513 47,440
--------- --------- --------- ---------
Net income per share - diluted $ 0.36 $ 0.45 $ 0.86 $ 0.85
========= ========= ========= =========
Percentage of dilution compared to
basic net income per share 0.0% 0.0% 1.1% 1.2%
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 2,641,683<F1>
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 28,549
<REAL-ESTATE> 1,284
<TOTAL-INVEST> 2,793,466
<CASH> 11,465
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 91,767
<TOTAL-ASSETS> 4,298,334
<POLICY-LOSSES> 2,118,785<F2>
<UNEARNED-PREMIUMS> 167,132
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 123,300
<NOTES-PAYABLE> 144,618
0
0
<COMMON> 59
<OTHER-SE> 486,024
<TOTAL-LIABILITY-AND-EQUITY> 4,298,334
284,558
<INVESTMENT-INCOME> 96,677
<INVESTMENT-GAINS> 9,352
<OTHER-INCOME> 0
<BENEFITS> 204,745
<UNDERWRITING-AMORTIZATION> 23,134
<UNDERWRITING-OTHER> 53,627
<INCOME-PRETAX> 52,709
<INCOME-TAX> 14,602
<INCOME-CONTINUING> 38,107
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,107
<EPS-PRIMARY> 0.87
<EPS-DILUTED> 0.86
<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 JUNE 30, 1998.
<F2>REFER TO THE COMPANY'S CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998.
</FN>
</TABLE>
