<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 September 30, 1999
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 October 29, 1999, 41,028,069 shares of Common Stock, par value $0.001
per share, were outstanding, net of 18,258,896 shares of treasury stock.
================================================================================
<PAGE>
HORACE MANN EDUCATORS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
----
PART I - FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Independent Auditors' Review Report.............................. 1
Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998....................... 2
Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1999 and 1998........ 3
Consolidated Statements of Changes in Shareholders' Equity
for the Nine Months Ended September 30, 1999 and 1998.......... 4
Consolidated Statements of Cash Flows for the
Three and Nine Months Ended September 30, 1999 and 1998........ 5
Notes to Consolidated Financial Statements....................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk.. 26
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......... 26
Item 6. Exhibits and Reports on Form 8-K............................ 26
SIGNATURES.................................................................... 27
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors and Shareholders
Horace Mann Educators Corporation:
We have reviewed the consolidated balance sheet of Horace Mann Educators
Corporation and subsidiaries as of September 30, 1999 and the related
consolidated statements of operations and cash flows for the three-month and
nine-month periods ended September 30, 1999 and 1998. These consolidated
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Horace Mann Educators Corporation
and subsidiaries as of December 31, 1998, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the year then
ended (not presented herein); and in our report dated January 26, 1999, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 1998, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ KPMG LLP
KPMG LLP
Chicago, Illinois
October 22, 1999
1
<PAGE>
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1988
------------- ------------
ASSETS
Investments
<S> <C> <C>
Fixed maturities, available for sale, at market (amortized
cost, 1999, $2,571,599; 1998, $2,552,537)................. $2,539,358 $2,651,379
Short-term and other investments............................ 114,627 102,049
Short-term investments, loaned securities collateral........ - 87,392
---------- ----------
Total investments....................................... 2,653,985 2,840,820
Cash......................................................... 18,746 12,044
Accrued investment income and premiums receivable............ 102,591 102,661
Value of acquired insurance in force and goodwill............ 96,003 101,055
Deferred policy acquisition costs............................ 132,537 101,658
Other assets................................................. 135,939 114,503
Variable annuity assets...................................... 1,085,116 1,122,739
---------- ----------
Total assets............................................ $4,224,917 $4,395,480
========== ==========
</TABLE>
LIABILITIES, REDEEMABLE SECURITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Policy liabilities
<S> <C> <C>
Fixed annuity contract liabilities.......................... $1,239,731 $1,239,234
Interest-sensitive life contract liabilities................ 432,051 402,490
Unpaid claims and claim expenses............................ 312,892 307,387
Future policy benefits...................................... 179,008 179,693
Unearned premiums........................................... 188,711 179,194
---------- ----------
Total policy liabilities................................ 2,352,393 2,307,998
Other policyholder funds..................................... 129,079 124,820
Other liabilities............................................ 105,298 197,292
Short-term debt.............................................. 49,000 50,000
Long-term debt............................................... 99,667 99,637
Variable annuity liabilities................................. 1,080,817 1,118,890
---------- ----------
Total liabilities....................................... 3,816,254 3,898,637
---------- ----------
Warrants, subject to redemption.............................. 220 220
---------- ----------
Preferred stock.............................................. - -
Common stock................................................. 59 59
Additional paid-in capital................................... 336,227 336,686
Retained earnings............................................ 430,841 420,274
Accumulated other comprehensive income
(net unrealized gains (losses) on fixed
maturities and equity securities)........................... (15,876) 57,327
Treasury stock, at cost...................................... (342,808) (317,723)
---------- ----------
Total shareholders' equity.............................. 408,443 496,623
---------- ----------
Total liabilities, redeemable
securities, and shareholders' equity................ $4,224,917 $4,395,480
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Insurance premiums written
and contract deposits..................... $208,305 $209,686 $614,014 $616,705
======== ======== ======== ========
Revenues
Insurance premiums and
contract charges earned................. $149,283 $144,536 $444,062 $429,094
Net investment income..................... 46,573 47,781 140,480 144,458
Realized investment gains (losses)........ (423) 4,247 (8,896) 13,599
-------- -------- ------- --------
Total revenues........................ 195,433 196,564 575,646 587,151
-------- -------- ------- --------
Benefits, losses and expenses
Benefits, claims and settlement expenses.. 104,067 96,563 315,994 301,308
Interest credited......................... 22,814 23,495 68,829 71,426
Policy acquisition expenses amortized..... 12,746 11,015 36,498 34,149
Operating expenses........................ 29,479 27,057 79,709 80,684
Amortization of intangible assets......... 1,639 1,856 5,052 5,593
Interest expense.......................... 2,406 2,394 7,283 7,098
Litigation settlement..................... 1,550 - 1,550 -
-------- -------- -------- --------
Total benefits, losses and expenses..... 174,701 162,380 514,915 500,258
-------- -------- -------- --------
Income before income taxes................. 20,732 34,184 60,731 86,893
Income tax expense......................... 6,190 9,251 18,716 23,853
Provision for prior years' taxes........... 20,000 - 20,000 -
-------- -------- ------- --------
Net income (loss).......................... $ (5,458) $ 24,933 $ 22,015 $ 63,040
======== ======== ======== ========
Net income (loss) per share
Basic..................................... $ (0.13) $ 0.58 $ 0.53 $ 1.45
======== ======== ======== ========
Diluted................................... $ (0.12) $ 0.57 $ 0.53 $ 1.43
======== ======== ======== ========
Weighted average number of shares
and equivalent shares (in thousands)
Basic................................... 41,026 42,811 41,318 43,523
Diluted................................. 41,647 43,413 41,881 44,141
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Common stock
Beginning balance.......................................... $ 59 $ 59
Options exercised, 1999, 12,275 shares;
1998, 110,182 shares..................................... - -
--------- ---------
Ending balance............................................. 59 59
--------- ---------
Additional paid-in capital
Beginning balance.......................................... 336,686 340,564
Options exercised.......................................... 262 2,163
Catastrophe-linked equity put option premium............... (712) (1,475)
Purchase of 13,650 warrants................................ - (4,603)
Other...................................................... (9) -
--------- ---------
Ending balance........................................... 336,227 336,649
--------- ---------
Retained earnings
Beginning balance.......................................... 420,274 349,274
Net income................................................. 22,015 63,040
Cash dividends, 1999, $0.2775 per share;
1998, $0.24 per share.................................... (11,448) (10,403)
--------- ---------
Ending balance............................................. 430,841 401,911
--------- ---------
Accumulated other comprehensive income (net unrealized
gains (losses) on fixed maturities and equity securities)
Beginning balance........................................ 57,327 62,167
Increase (decrease) for the period....................... (73,203) 9,497
--------- ---------
Ending balance........................................... (15,876) 71,664
--------- ---------
Treasury stock, at cost
Beginning balance, 1999, 17,183,596 shares;
1998, 14,896,796 shares.................................. (317,723) (246,092)
Purchase of 1,075,300 shares in 1999;
1,706,600 shares in 1998 (See note 4).................... (25,085) (55,154)
--------- ---------
Ending balance, 1999, 18,258,896 shares;
1998, 16,603,396 shares.................................. (342,808) (301,246)
--------- ---------
Shareholders' equity at end of period....................... $ 408,443 $ 509,037
========= =========
Comprehensive income
Net income................................................. $ 22,015 $ 63,040
Other comprehensive income................................. (73,203) 9,497
--------- ---------
Total.................................................... $ (51,188) $ 72,537
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Premiums collected................................ $ 162,803 $ 158,449 $ 465,906 $ 465,640
Policyholder benefits paid........................ (114,198) (122,320) (338,832) (349,063)
Policy acquisition and other
operating expenses paid......................... (42,401) (43,646) (131,465) (135,613)
Federal income taxes paid......................... (100) (4,200) (12,400) (24,600)
Investment income collected....................... 49,161 50,655 142,202 150,139
Interest expense paid............................. (4,018) (3,549) (8,803) (8,164)
Other............................................. (5,945) (3,678) (5,499) (3,160)
--------- --------- --------- ---------
Net cash provided by operating activities..... 45,302 31,711 111,109 95,179
--------- --------- --------- ---------
Cash flows used in investing activities
Fixed maturities
Purchases....................................... (120,176) (146,416) (579,148) (629,562)
Sales........................................... 57,260 91,873 342,650 386,322
Maturities...................................... 67,836 85,698 215,575 282,613
Net cash received from (used for)
short-term and other investments................ (30,541) (33,857) (11,214) 148
--------- --------- --------- ---------
Net cash provided by
(used in) investing activities.............. (25,621) (2,702) (32,137) 39,521
--------- --------- --------- ---------
Cash flows used in financing activities
Purchase of treasury stock........................ - (10,059) (25,085) (55,154)
Dividends paid to shareholders.................... (3,796) (3,416) (11,448) (10,403)
Principal borrowings (repayments)
on Bank Credit Facility......................... - - (1,000) 3,000
Repurchase of common stock warrants............... - - - (4,959)
Exercise of stock options......................... 139 273 262 2,163
Catastrophe-linked equity put option premium...... (237) - (712) (1,475)
Annuity contracts, variable and fixed
Deposits........................................ 45,491 49,914 152,671 167,313
Maturities and withdrawals...................... (64,637) (49,127) (181,581) (140,855)
Net transfer from (to) variable annuity assets.. 4,770 (15,454) (4,365) (81,874)
Net increase (decrease) in
life policy account balances.................... (1,622) 194 (1,012) (10)
--------- --------- --------- ---------
Net cash used in financing activities......... (19,892) (27,675) (72,270) (122,254)
--------- --------- --------- ---------
Net increase (decrease) in cash.................... (211) 1,334 6,702 12,446
Cash at beginning of period........................ 18,957 11,465 12,044 353
--------- --------- --------- ---------
Cash at end of period.............................. $ 18,746 $ 12,799 $ 18,746 $ 12,799
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and 1998
(Dollars in thousands)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of Horace Mann
Educators Corporation (the "Company") have been prepared in accordance with 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 September 30,
1999 and December 31, 1998 and the consolidated results of operations, changes
in shareholders' equity and cash flows for the three and nine months ended
September 30, 1999 and 1998.
It is suggested that these financial statements be read in conjunction with
the financial statements and the related notes included in the Company's
December 31, 1998 Form 10-K.
The results of operations for the three and nine months ended September 30,
1999 are not necessarily indicative of the results to be expected for the full
year.
Note 2 - Debt
Indebtedness outstanding was as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Short-term debt:
$65,000 Bank Credit Facility, commitment to
December 31, 2001. (IBOR + 0.325%,
5.8% as of September 30, 1999)............. $ 49,000 $ 50,000
Long-term debt:
6 5/8% Senior Notes, due January 15, 2006.
Face amount less unaccrued discount
of $333 and $363 (6.7% imputed rate)....... 99,667 99,637
-------- --------
Total.................................... $148,667 $149,637
======== ========
</TABLE>
6
<PAGE>
Note 3 - Investments
The following table presents 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 September 30, 1999
---------------------------- -----------------------
Rating of Fixed September 30, December 31, Carrying Amortized
Maturity Securities(1) 1999 1998 Value Cost
- ---------------------- ------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
AAA................... 45.5% 44.0% $1,155,723 $1,164,782
AA.................... 8.2 8.5 209,947 209,028
A..................... 19.1 19.1 484,839 485,347
BBB................... 20.0 21.5 508,131 524,184
BB.................... 2.2 2.0 55,685 61,131
B..................... 4.6 4.1 115,981 117,731
CCC or lower.......... 0.1 0.1 1,563 1,717
Not rated(2).......... 0.3 0.7 7,489 7,679
----- ----- ---------- ----------
Total............. 100.0% 100.0% $2,539,358 $2,571,599
===== ===== ========== ==========
</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 $1.4 million of publicly traded securities not
currently rated by S&P or Moody's and $6.1 million of private placement
securities not rated by either S&P or Moody's. The National Association of
Insurance Commissioners (the "NAIC") has rated 97.2% 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>
Carrying
Percent of Total Value
---------------------------- -------------
September 30, December 31, September 30,
Scheduled Maturity 1999 1998 1999
- ------------------------------------- ------------- ------------ -------------
<S> <C> <C> <C>
Due in 1 year or less................ 7.6% 7.0% $ 192,004
Due after 1 year through 5 years..... 30.8 25.8 782,129
Due after 5 years through 10 years... 31.4 31.8 796,942
Due after 10 years through 20 years.. 15.4 17.3 392,947
Due after 20 years................... 14.8 18.1 375,336
----- ----- ----------
Total............................ 100.0% 100.0% $2,539,358
===== ===== ==========
</TABLE>
The Company loans fixed income securities to third parties, primarily major
brokerage firms. However, there were no securities on loan at September 30,
1999. At December 31, 1998, fixed maturities with a fair value of $87,392 were
loaned. The Company separately maintains a minimum of 100% of the value of the
loaned securities as collateral for each loan. Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No.
7
<PAGE>
Note 3 -Investments-(Continued)
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," requires the securities lending collateral to be
classified as investments. The corresponding liability is included in Other
Liabilities in the Company's consolidated balance sheet.
Note 4 - Shareholders' Equity
Share Repurchase Programs
During the first six months of 1999, the Company repurchased 1,075,300
shares of its common stock, or 3% of the outstanding shares on December 31,
1998, at an aggregate cost of $25,085, or an average cost of $23.33 per share,
under its stock repurchase program. No shares were repurchased during the third
quarter of 1999. Since early 1997, 7,082,700 shares, or 15% of the shares
outstanding on December 31, 1996, have been repurchased at an aggregate cost of
$188,506, equal to an average cost of $26.62 per share. Including shares
repurchased in 1995, the Company has repurchased 32% of the shares outstanding
on December 31, 1994. The repurchase of shares was financed through cash
generated from operations and, when necessary, the Bank Credit Facility. In May
1999, an additional $100,000 share repurchase authorization was announced. As of
September 30, 1999, $111,494 remained authorized for future share repurchases.
On August 2, 1999, the Company announced that its Board of Directors had
retained Morgan Stanley Dean Witter and Credit Suisse First Boston to explore
the strategic alternatives available to the corporation. During the process of
considering strategic alternatives, the Board of Directors has decided to
suspend the Company's share repurchase program.
Note 5 - Deferred Policy Acquisition Costs
Acquisition costs, consisting of commissions, premium taxes and other
costs, which vary with and are primarily related to the production of insurance
business, are capitalized and amortized in proportion to estimated gross profits
for interest-sensitive life and investment (annuity) contracts and over the
terms of the insurance policies for other individual life and property and
casualty contracts.
The Company periodically reviews the assumptions and estimates used in
capitalizing policy acquisition costs. The Company began deferring additional
sales-related costs in 1999 for all new life and annuity contracts, consistent
with common industry accounting practices. The estimated impact of this change
is an increase to net income of approximately $3,200 for 1999, of which $2,401
was recognized during the first nine months of 1999.
8
<PAGE>
Note 6 - Income Taxes
As previously reported, the Company has been contesting proposed additional
federal income taxes relating to a settlement agreement with the Internal
Revenue Service ("IRS") for prior years' taxes. Based on recent developments in
that process, it appears that the Company may be forced to litigate the issue
with the IRS in order to reach a resolution of the issue acceptable to the
Company. Therefore, the Company has, in the third quarter of 1999, recorded an
additional federal income tax provision of $20 million representing the maximum
exposure of the Company to the IRS with regard to the issue for all of the past
tax years in question. While the ultimate resolution of the issue, through
settlement or litigation, may result in the Company paying less than the maximum
exposure, given the vagaries of litigation and the lack of progress in reaching
an acceptable agreement with the IRS, management believes it prudent to book the
maximum exposure at this time. None of the $20 million reserve was paid as of
November 11, 1999. This reserve was a charge to net income in the third quarter
of 1999.
9
<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
-------- --------- ---------- --------
<S> <C> <C> <C> <C>
Three months ended
September 30, 1999
- -----------------------
Premiums written....... $209,068 $ 5,396 $ 4,633 $208,305
Premiums earned........ 151,197 6,395 4,481 149,283
Benefits, claims and
settlement expenses.. 108,302 9,178 4,943 104,067
Three months ended
September 30, 1998
- -----------------------
Premiums written....... $212,259 $ 7,446 $ 4,873 $209,686
Premiums earned........ 147,150 7,068 4,454 144,536
Benefits, claims and
settlement expenses.. 104,477 12,244 4,330 96,563
Nine months ended
September 30, 1999
- -----------------------
Premiums written....... $618,013 $17,689 $13,690 $614,014
Premiums earned........ 449,112 18,885 13,835 444,062
Benefits, claims and
settlement expenses.. 330,352 28,191 13,833 315,994
Nine months ended
September 30, 1998
- -----------------------
Premiums written....... $622,946 $19,903 $13,662 $616,705
Premiums earned........ 435,145 18,864 12,813 429,094
Benefits, claims and
settlement expenses.. 321,819 31,251 10,740 301,308
</TABLE>
The Company maintains an excess and catastrophe treaty reinsurance program.
The Company reinsures 95% of catastrophe losses above a retention of $7.5
million per occurrence up to $80 million per occurrence in 1999. In addition,
the Company reinsures 75% of catastrophe
10
<PAGE>
Note 7 - Reinsurance-(Continued)
losses in Florida above a retention of $6.1 million. These programs are
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 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 is 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 $2.5 million.
11
<PAGE>
Note 8 - Segment Information
The Company conducts and manages its business through four segments. The
three operating segments representing the major lines of insurance business are:
property and casualty insurance, principally personal lines automobile and
homeowners insurance; individual tax-qualified annuity products; and life
insurance. The fourth segment, Corporate and Other, includes primarily debt
service and realized investment gains and losses. Summarized financial
information for these segments is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------ -----------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Insurance premiums and
contract charges earned
Property and casualty............... $122,776 $119,588 $365,889 $ 353,219
Annuity............................. 4,273 3,926 12,533 11,474
Life................................ 22,234 21,022 65,640 64,401
-------- -------- -------- ----------
Total............................. $149,283 $144,536 $444,062 $ 429,094
======== ======== ======== ==========
Net investment income
Property and casualty................. $ 9,170 $ 9,666 $ 27,561 $ 29,296
Annuity............................... 25,962 26,838 78,827 81,257
Life.................................. 11,705 11,532 34,879 34,032
Corporate and other................... 90 17 185 691
Intersegment eliminations............. (354) (272) (972) (818)
-------- -------- -------- ----------
Total............................. $ 46,573 $ 47,781 $140,480 $ 144,458
======== ======== ======== ==========
Net income (loss)
Operating income
Property and casualty............... $ 9,414 $ 15,401 $ 25,807 $ 35,767
Annuity............................. 6,077 5,886 18,736 16,950
Life................................ 3,111 3,410 11,595 8,944
Corporate and other,
including interest expense........ (2,777) (2,524) (7,333) (7,460)
-------- -------- -------- ----------
Total operating income.......... 15,825 22,173 48,805 54,201
Realized investment gains (losses),
after tax........................... (275) 2,760 (5,782) 8,839
Litigation settlement, after tax...... (1,008) - (1,008) -
Provision for prior years' taxes...... (20,000) - (20,000) -
-------- -------- -------- ----------
Total........................... $ (5,458) $ 24,933 $ 22,015 $ 63,040
======== ======== ======== ==========
Amortization of intangible assets
Value of acquired insurance in force
Property and casualty............... $ 203 $ 258 $ 719 $ 774
Annuity............................. 500 624 1,502 1,872
Life................................ 531 569 1,617 1,733
-------- -------- -------- ----------
Subtotal.......................... 1,234 1,451 3,838 4,379
Goodwill.............................. 405 405 1,214 1,214
-------- -------- -------- ----------
Total........................... $ 1,639 $ 1,856 $ 5,052 $ 5,593
======== ======== ======== ==========
September 30, December 31,
Assets 1999 1998
------------- -----------
Property and casualty............................................. $ 709,782 $ 737,260
Annuity........................................................... 2,580,743 2,730,092
Life.............................................................. 832,620 863,864
Corporate and other............................................... 138,477 95,579
Intersegment eliminations......................................... (36,705) (31,315)
---------- ----------
Total....................................................... $4,224,917 $4,395,480
========== ==========
</TABLE>
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions)
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.
. The resolution of legal proceedings and related matters.
Strategic Review
On August 2, 1999, the Company announced that its Board of Directors had
retained Morgan Stanley Dean Witter and Credit Suisse First Boston to explore
the strategic alternatives available to the corporation. As of November 11,
1999, that process is under way and continuing.
13
<PAGE>
Nine Months Ended September 30, 1999 Compared With Nine Months Ended September
30, 1998
Insurance Premiums and Contract Charges
Insurance Premiums Written and Contract Deposits
<TABLE>
<CAPTION>
Nine Months Ended Growth Over
September 30, Prior Year
----------------- -------------------
1999 1998 Percent Amount
------ ------ ------- ---------
<S> <C> <C> <C> <C>
Automobile and property
(voluntary).............. $354.9 $345.3 2.8% $ 9.6
Annuity deposits........... 152.7 167.3 -8.7% (14.6)
Life insurance............. 87.1 83.9 3.8% 3.2
------ ------ ------
Subtotal - core lines.. 594.7 596.5 -0.3% (1.8)
Involuntary and other
property & casualty...... 19.3 20.2 -4.5% (0.9)
------ ------ ------
Total.................. $614.0 $616.7 -0.4% $ (2.7)
====== ====== ======
</TABLE>
Insurance Premiums and Contract Charges Earned
(Excludes annuity and life contract deposits)
<TABLE>
<CAPTION>
Nine Months Ended Growth Over
September 30, Prior Year
----------------- ------------------
1999 1998 Percent Amount
------ ------ ------- ------
<S> <C> <C> <C> <C>
Automobile and property
(voluntary).............. $347.6 $335.4 3.6% $12.2
Annuity.................... 12.5 11.5 8.7% 1.0
Life....................... 65.7 64.4 2.0% 1.3
------ ------ -----
Subtotal - core lines.. 425.8 411.3 3.5% 14.5
Involuntary and other
property & casualty...... 18.3 17.8 2.8% 0.5
------ ------ -----
Total.................. $444.1 $429.1 3.5% $15.0
====== ====== =====
</TABLE>
Premium growth continued in the property and casualty and life segments.
Total insurance premiums written and contract deposits decreased slightly for
the nine months attributable to a decline in new annuity deposits. For the first
nine months of 1999, single premium annuity deposits declined significantly,
- -23.6%, compared to the same period last year. 1998's annuity deposit growth
benefitted from new tax legislation contributing to a high volume of single
premium and rollover deposits to tax-qualified products.
In total, the Company ended the first nine months with 1,053 exclusive
full-time agents, compared to 1,059 agents 12 months earlier. While the total
number of agents decreased slightly compared to a year ago, the number of
experienced agents has increased 3.6%. The number of agents in their first two
years with the Company is lower than 12 months ago as a result of fewer hires
and an increase in terminations. Modifications have been made to the new agents'
financing program that management believes will have a positive impact on agent
growth in future years.
14
<PAGE>
Total voluntary automobile and homeowners premium written growth was 2.8%
for the first nine months of 1999, resulting from growth in both the average
premium per policy and the number of automobile and homeowners policies in
force. Automobile insurance premium increased 1.3%, or $3.5 million, compared to
the first nine months of last year, and homeowners premium increased 8.0%, or
$6.1 million. Nearly one-half of the property and casualty increase in premiums
resulted from unit growth of 1.6% bringing quarter-end policies in force to
873,000. Compared to December 31, 1998, total property and casualty policies in
force increased 14,000, with two-thirds of the growth from homeowners insurance
and the remaining one-third from automobile insurance. The Company's average
annual premium per policy for automobile and homeowners increased approximately
1% and 3%, respectively, compared to a year earlier. Including the impact of
increased deductibles and reduced coverage in coastal areas, the Company's
average effective premium per policy for homeowners insurance increased 5%
compared to the first nine months of 1998.
Based on policies in force, the property and casualty 12-month retention
rate for new and renewal policies was 88%, about 1 percentage point less than
the 12 months ended September 30, 1998. The change in property and casualty
retention was primarily caused by greater price competition for automobile
insurance.
New annuity deposits decreased 8.7% compared to the first nine months of
1998, with a comparable decline in the third quarter. The decline was primarily
attributable to a 23.6% decrease in the first nine months of this year in single
premium deposits, which last year benefitted from new tax legislation
contributing to a high volume of single premium and rollover deposits to tax-
qualified products. Variable annuity accumulated funds on deposit at September
30, 1999 were $1.1 billion, $85.5 million more than a year ago, an 8.6%
increase. However, variable annuity deposit retention decreased 4 percentage
points over the 12 months to 90.0%. Fixed annuity cash value retention for the
12 months ended September 30, 1999 was 92.8%, an improvement of 1 percentage
point compared to a year ago. Over the last 12 months, the number of annuity
contracts in force grew 5.1%, or 6,000 contracts.
Life premium growth was 3.8% for the first nine months of 1999. This growth
included new business from term life products introduced early in 1997 and a new
series of whole life products introduced late in the third quarter of 1998 and
reflects an insurance in force lapse ratio of 8.1%. Customer acceptance of these
new products continues to grow, as they accounted for approximately half of the
Company's new life sales in the first nine months of 1999.
Net Investment Income
Investment income of $140.5 million for the first nine months of 1999
decreased 2.8%, or $4.0 million, (2.2% after tax) compared to last year due to a
decline in interest rates and small growth in the average investment portfolio.
The average pretax yield on the investment portfolio was 7.0% (4.7% after tax)
for the first nine months of 1999 compared to a pretax yield of 7.3% (4.8% after
tax) last year, a decrease of 25 basis points, or 3.4%. Average investments
(excluding the securities lending collateral) increased only slightly over the
past 12 months reflecting the utilization of capital for the share repurchase
program and customers' preference for variable as opposed to fixed annuity
contracts. All of the investment income decrease in the annuity segment was
offset by a decline in interest credited to fixed annuity deposits. Excluding
the effect of the use of cash in the share repurchase program from both periods,
net investment income would have been $150.0 million, a decrease of less than 1%
compared to the first nine months of 1998.
15
<PAGE>
Realized Investment Gains and Losses
Net realized investment losses were $0.4 million for the three months ended
September 30, 1999, and $8.9 million for the nine months ended September 30,
1999. These losses compare to net realized investment gains of $4.2 million and
$13.6 million for the same periods, respectively, in 1998. All of the net
realized gains and losses occurred in the fixed income portfolios. The net
realized investment losses in the first nine months of 1999 were about two-
thirds due to credit decisions and rate of return considerations in the
Company's fixed income investment portfolio and about one-third due to the sale
of U.S. Treasury securities for duration management purposes in a rising
interest rate environment. Realized investment gains in the first nine months of
1998 included calls and tenders in the Company's bond portfolio as well as
credit and rate of return decisions.
Benefits, Claims and Settlement Expenses
<TABLE>
<CAPTION>
Nine Months Ended Growth Over
September 30, Prior Year
------------------- -----------------
1999 1998 Percent Amount
--------- -------- -------- -------
<S> <C> <C> <C> <C>
Property and casualty.... $285.1 $269.2 5.9% $15.9
Life..................... 30.9 32.1 -3.7% (1.2)
------ ------ -----
Total.................. $316.0 $301.3 4.9% $14.7
====== ====== =====
Property and casualty
statutory loss ratio:
Before catastrophes.. 72.8% 69.0% 3.8%
After catastrophes... 77.9% 76.3% 1.6%
</TABLE>
Property and casualty claims and settlement costs reflect a high level of
catastrophe losses in both years and higher than expected claims in property
other than catastrophe claims in 1999. Although catastrophe losses in 1999 were
lower than last year, the second quarter of 1999 was the Company's second-worst
ever, trailing only the record set in the second quarter of 1998, as
policyholders in 23 states incurred damages from 13 separate events. Excluding
catastrophe losses, the third quarter 1999 property loss ratio was 78.1%, an
increase of 10 percentage points compared to the same period last year including
an increase in fire and other non-catastrophe weather losses.
During the third quarter, the Company's average voluntary automobile
insurance premium increased in excess of loss cost developments in the quarter,
and the Company's third quarter 1999 voluntary automobile loss ratio excluding
catastrophes of 68.7% was 3.7 percentage points lower than in the first six
months of 1999. This improvement reflected an increase in average premium per
policy that outpaced loss costs during the third quarter and kept pace with loss
costs for the first nine months of 1999. This favorable loss ratio reflected a
number of operational changes, principally savings realized to date from new
claims evaluation software that was fully installed by June 1999.
Automobile continues to show favorable development of prior years reserves,
although at a lower level than last year and the difference represents most of
the decrease in automobile pretax earnings between years after nine months.
Favorable development of total property and casualty claims occurring in prior
years was $8.6 million in the first nine months of 1999,
16
<PAGE>
compared to $22.0 million in the same period in 1998. For the third quarter,
favorable development of total property and casualty claims occurring in prior
years was $4.1 million for the current year and $6.5 million last year.
Life mortality was less than last year. The decrease in life benefits
resulted from positive experience on a small closed block of individual accident
and health policies.
Interest Credited to Policyholders
<TABLE>
<CAPTION>
Nine Months Ended Growth Over
September 30, Prior Year
------------------- -------------------------
1999 1998 Percent Amount
-------- ------- -------- -----------
<S> <C> <C> <C> <C>
Annuity.. $50.6 $54.4 -7.0% $(3.8)
Life..... 18.2 17.0 7.1% 1.2
----- ----- -----
Total.. $68.8 $71.4 -3.6% $(2.6)
===== ===== =====
</TABLE>
Interest credited to fixed annuity contracts decreased as the fixed annuity
average annual interest rate credited decreased 0.4 percentage points to 5.1% in
the first nine months of 1999, compared to a rate of 5.5% for the same period
last year. In addition, the average accumulated deposits for the nine months
ended September 30, 1999 increased only slightly compared to the same period in
1998. Life insurance interest credited increased as a result of continued growth
in the interest-sensitive life insurance reserves.
Policy Acquisition and Operating Expenses
Policy acquisition and operating expenses represent the Company's insurance
underwriting expenses. For the first nine months of 1999, policy acquisition and
operating expenses increased $1.4 million, or 1.2%, compared to the same period
last year, including the deferral of additional acquisition costs. The Company
began deferring additional sales-related costs in 1999 for all new life and
annuity contracts, consistent with common industry accounting practices. This
increased net acquisition costs deferred by $3.7 million for the nine months
ended September 30, 1999. Full year 1999 expenses are expected to include
approximately $5 million of additional net deferrals. Excluding the net deferral
of additional sales-related costs, policy acquisition and operating expenses for
the first nine months of 1999 increased $5.1 million, or 4.4%, compared to the
same period last year including a decrease in the amortization of life deferred
acquisition costs of $1.9 million to reflect current mortality estimates
resulting in higher anticipated future gross profits. Excluding both of these
items, the Company's policy acquisition and underwriting expenses increased $7.0
million, or 6.1%, compared to the first nine months of 1998.
The total corporate expense ratio on a statutory accounting basis was 21.8%
for the nine months ended September 30, 1999, 0.2 percentage points higher than
the same period in 1998. The property and casualty expense ratio, the 10th
lowest of the 100 largest property and casualty insurance groups for 1998, was
19.2% for the nine months ended September 30, 1999, compared to 18.9% last year.
The increase in these expense ratios primarily reflects the modest level of
premium growth.
17
<PAGE>
Income Tax Expense
Excluding the $20.0 million additional provision for prior years' taxes,
the effective income tax rate was 30.8% for the nine months ended September 30,
1999, compared to 27.5% for the same period last year. Income from investments
in tax-advantaged securities reduced the effective income tax rate 4.5 and 3.7
percentage points in the nine months ended September 30, 1999 and 1998,
respectively. In the first nine months of last year, non-recurring tax benefits
reduced the effective rate 5.9 percentage points and contributed $4.3 million,
or $0.10 per share, to operating income for that period.
As previously reported, the Company has been contesting proposed additional
federal income taxes relating to a settlement agreement with the Internal
Revenue Service ("IRS") for prior years' taxes. Based on recent developments in
that process, it appears that the Company may be forced to litigate the issue
with the IRS in order to reach a resolution of the issue acceptable to the
Company. Therefore, the Company has, in the third quarter of 1999, recorded an
additional federal income tax provision of $20 million representing the maximum
exposure of the Company to the IRS with regard to the issue for all of the past
tax years in question. While the ultimate resolution of the issue, through
settlement or litigation, may result in the Company paying less than the maximum
exposure, given the vagaries of litigation and the lack of progress in reaching
an acceptable agreement with the IRS, management believes it prudent to book the
maximum exposure at this time. None of the $20 million reserve was paid as of
November 11, 1999. This reserve was a charge to net income in the third quarter
but was excluded from the determination of reported operating income.
18
<PAGE>
Operating Income
For the first nine months of 1999, operating income (net income before the
after-tax impact of realized investment gains and losses and non-recurring
charges) decreased 10.0%, or $5.4 million, and operating income per share on a
diluted basis of $1.17 decreased 4.9%, or $0.06 per share. The decrease was
primarily due to prior year tax benefits and voluntary automobile reserve
developments partially offset by lower catastrophe losses this year. Third
quarter 1999 operating income was impacted by the Company's property business,
including catastrophe losses from Hurricane Floyd and higher than expected non-
catastrophe property claims. Current year earnings and investment income were
reduced compared to the first nine months of 1998 due to the utilization of
capital in the Company's share repurchase programs. Operating income by segment
was as follows:
<TABLE>
<CAPTION>
Nine Months Ended Growth Over
September 30, Prior Year
-------------------- -----------------------
1999 1998 Percent Amount
------ ------ ------- --------
<S> <C> <C> <C> <C>
Property & casualty
Before catastrophe losses and
non-recurring tax benefits.......... $38.0 $48.1 -21.0% $(10.1)
Catastrophe losses, after tax......... 12.3 16.7 -26.3% (4.4)
Non-recurring tax benefits............ - 4.3 -100.0% (4.3)
----- ----- ------
Total including catastrophe losses.. 25.7 35.7 -28.0% (10.0)
Annuity................................. 18.7 17.1 9.4% 1.6
Life.................................... 11.6 8.9 30.3% 2.7
Corporate and other expense............. 2.5 2.9 (0.4)
Interest expense........................ 4.7 4.6 0.1
----- ----- ------
Total............................... $48.8 $54.2 -10.0% $ (5.4)
===== ===== ======
Total before catastrophe losses
and non-recurring tax benefits.... $61.1 $66.6 -8.3% $ (5.5)
===== ===== ======
Property and casualty
statutory combined ratio:
Before catastrophe losses........... 92.0% 87.8% 4.2%
After catastrophe losses............ 97.1% 95.1% 2.0%
</TABLE>
Property and casualty segment operating income was lower than the first
nine months of last year including higher than expected claims in property other
than catastrophe claims. Also, 1998 included a non-recurring tax benefit.
Property and casualty results continue to show favorable development of prior
years reserves, although at a lower level than last year. Favorable development
of total property and casualty claims occurring in prior years was $5.6 million
after tax in the first nine months of 1999, compared to $14.3 million after tax
in the same period last year. Automobile results for the first nine months of
1999 produced a combined ratio of 91.1%, 3.4 percentage points higher than the
same period last year. During the third quarter of 1999, the Company's average
voluntary automobile insurance premium increased in excess of loss cost
developments in the quarter, and its automobile loss ratio in the third quarter
was lower than the loss ratio for the first half of the year. The homeowners
combined ratio of 116.9% was 6.8 percentage points better than the first nine
months of 1998, reflecting the decline in catastrophe losses. However,
catastrophe losses in both years were significant as the second quarter of 1999
represented the Company's second-worst ever for catastrophe losses, trailing
only the record set in last year's second quarter, with an unusually large
number of catastrophes that were
19
<PAGE>
widespread across the country. Excluding catastrophe losses, the third quarter
1999 property loss ratio increased 10 percentage points compared to the same
period in 1998, including an increase in fire and other non-catastrophe weather
losses, representing about $0.04 per share.
The 9.4% increase in annuity segment operating income was driven by an 8.6%
growth in variable annuity funds on deposit, 5.2% growth in the interest margin
on fixed annuity funds and deferral of additional sales-related costs. The net
deferral of additional sales-related costs contributed $1.0 million to operating
income for the first nine months of 1999. Variable annuity accumulated deposits
were $1.1 billion at September 30, 1999, $85.5 million more than 12 months
earlier. Fixed annuity accumulated cash value of $1.4 billion increased slightly
compared to September 30, 1998.
Life insurance earnings showed solid growth with life mortality costs less
than last year. The increase in life operating earnings was partly due to the
$1.4 million net deferral of additional sales-related costs and the impact of
better mortality versus prior assumptions in the amortization of deferred
acquisition costs.
Net Income
Net Income Per Share, Diluted
<TABLE>
<CAPTION>
Nine Months Ended Growth Over
September 30, Prior Year
------------------ -----------------------
1999 1998 Percent Amount
------- ------ ------- -------
<S> <C> <C> <C> <C>
Operating income.................... $ 1.17 $ 1.23 -4.9% $(0.06)
Realized investment gains (losses).. (0.14) 0.20 (0.34)
Litigation settlement............... (0.02) - (0.02)
Provision for prior years' taxes.... (0.48) - (0.48)
------ ------ ------
Net income.......................... $ 0.53 $ 1.43 -62.9% $(0.90)
====== ====== ======
</TABLE>
Net income, which includes realized investment gains and losses and non-
recurring charges, for the first nine months of 1999 decreased by 65.1% and net
income per diluted share decreased by 62.9% compared to the same period in 1998.
Net income in the third quarter and first nine months of 1999 reflected non-
recurring charges for a $20.0 million provision for the maximum liability of
Horace Mann with regard to an IRS examination of past tax years ($0.48 per
share) and a cost of $1.0 million after tax and after receipt of insurance
proceeds for the settlement of certain litigation related to life insurance
policies in Alabama ($0.02 per share). The settlement of litigation in Alabama
includes the lawsuit in which a verdict of $12.35 million was rendered against
the Company on June 25, 1999 as well as 39 other suits brought by the same law
firm. Net income also reflected $5.8 million of after tax realized investment
losses for the nine months, compared to $8.8 million of after tax realized
investment gains in the same period last year. The net realized investment
losses in the first nine months of 1999 were about two-thirds due to credit
decisions and rate of return considerations in the Company's fixed income
investment portfolio and about one-third due to the sale of U.S. Treasury
securities for duration management purposes in a rising interest rate
environment. Realized investment gains in the first nine months of 1998 included
calls and tenders in the bond portfolio as well as credit and rate of
20
<PAGE>
return decisions. The Company's share repurchase program reduced net income by
$6.2 million for the first nine months of 1999 reflecting utilization of capital
and the corresponding reduction of net investment income, but resulted in an
increase of $0.04 in earnings per share for the period due to the reduction in
the number of shares outstanding.
Return on shareholders' equity based on operating income for the last 12
months was 16%. After including realized investment losses and non-recurring
charges, return on equity based on net income was 10% for the last 12 months.
Liquidity and Financial Resources
Investments
The Company's investment strategy emphasizes investment grade, publicly
traded fixed income securities. At September 30, 1999, fixed income securities
represented 95.7% of investments excluding the securities lending collateral. Of
the fixed income investment portfolio, 92.8% was investment grade and 99.8% was
publicly traded. The average quality of the total fixed income portfolio was
AA-/A+ at September 30, 1999.
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 4.2 years at September 30, 1999 and 4.4 years
at December 31, 1998. 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 greater than the
first nine months of 1998 primarily as a result of lower federal income taxes
paid. Cash provided by operating activities primarily reflects 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
21
<PAGE>
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 1999 without prior approval are
approximately $67 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 maturity securities portfolio as
available for sale. For the nine months ended September 30, 1999, purchases and
sales of fixed maturity securities were comparable to last year while maturities
decreased reflecting timing of scheduled maturities and a higher level of calls
during the first nine months of 1998 due to market conditions conducive to
refinancing securities compared to the previous several years.
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.
Fees related to the catastrophe-linked equity put which augments its reinsurance
program have been charged directly to additional paid-in capital.
For the first nine months of 1999, receipts from annuity contracts
decreased 8.7% reflecting the reduced level of single premium deposits received.
Annuity contract maturities and withdrawals increased $40.7 million, or 28.9%,
compared to the first nine months of 1998 due to higher withdrawals from the
variable annuity option. Variable annuity deposit retention decreased 4
percentage points over the 12 months to 90.0%. Retention of fixed annuity
accumulated cash value was 92.8% for the 12 months ended September 30, 1999.
During the first six months of 1999, the Company repurchased 1,075,300
shares of its common stock, or 3% of the shares outstanding on December 31,
1998, at an aggregate cost of $25.1 million, or an average cost of $23.33 per
share, under its stock repurchase program. No shares were repurchased during the
third quarter of 1999. This year's repurchases compare to 1,706,600 shares
repurchased in the first nine months of 1998 at an aggregate cost of $55.2
million. The repurchase of shares was financed through cash generated from
operations and, when necessary, the Bank Credit Facility. In May 1999, an
additional $100 million share repurchase authorization was announced. As of
September 30, 1999, $111.5 million remained authorized for future share
repurchases.
On August 2, 1999, the Company announced that its Board of Directors had
retained Morgan Stanley Dean Witter and Credit Suisse First Boston to explore
the strategic alternatives available to the corporation. During the process of
considering strategic alternatives, the Board of Directors has decided to
suspend the Company's share repurchase program.
22
<PAGE>
Capital Resources
The Company has determined the amount of capital which is needed to
adequately fund and support business growth, primarily based on risk-based
capital formulas including those developed by the NAIC. Historically, the
Company's insurance subsidiaries have generated capital in excess of such needed
capital. 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 $557.3 million at September 30, 1999,
including $99.7 million of long-term debt and $49.0 million of short-term debt.
Total debt represented 26.7% of capital at the end of September, exceeding the
upper end of the Company's target operating range of 20% to 25% due to the
provision for prior years' taxes recorded in September.
Shareholders' equity was $408.4 million at September 30, 1999, including an
unrealized loss in the Company's investment portfolio of $15.9 million after
taxes and the related impact on deferred policy acquisition costs associated
with annuity and interest-sensitive life policies. The market value of the
Company's common stock and the market value per share were $1,059.0 million and
$25 13/16, respectively, at September 30, 1999. Book value per share was $9.96
at September 30, 1999, $10.35 excluding investment market value adjustments. At
September 30, 1998, book value per share was $11.93, $10.25 excluding investment
market value adjustments. The decrease over the 12 months was entirely due to
the share repurchases, unrealized investment gains and losses and the non-
recurring charge for prior years' taxes. Excluding these items, book value per
share increased 11.4% over the 12-month period.
In January 1996, the Company issued $100.0 million face amount of 6 5/8%
Senior Notes ("Senior Notes") at a discount of 0.5% which will mature on January
15, 2006. 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).
As of September 30, 1999 and December 31, 1998, the Company had short-term
debt of $49.0 million and $50.0 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 5.8%, as of September 30, 1999. The commitment for the Bank Credit Facility
terminates on December 31, 2001.
The Company's ratio of earnings to fixed charges for the nine months ended
September 30, 1999 was 9.3x compared to 13.2x for the same period in 1998, with
the decline primarily attributable to realized investment losses recorded in the
current period compared to realized investment gains recorded in the first nine
months of 1998.
23
<PAGE>
Total shareholder dividends were $11.4 million for the first nine months of
1999. The Company has targeted a dividend payout ratio of approximately 15%. In
November 1998, the Board of Directors authorized the seventh increase to the
Company's quarterly dividend since the Company's initial public offering in
November 1991. The regular quarterly dividend increased by 16% to $0.0925 per
share.
The Company reinsures 95% of catastrophe losses above a retention of $7.5
million per occurrence up to $80 million per occurrence in 1999. In addition,
the Company reinsures 75% of catastrophe losses in Florida above a retention of
$6.1 million. These catastrophe reinsurance programs are augmented by a $100
million equity put. This equity put 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 $80 million coverage limit. The
equity put provides a source of capital for up to $154 million of catastrophe
losses, before tax benefits, above the reinsurance coverage limit.
At September 30, 1999, warrants to purchase 107,537 shares of the Company's
common stock at $2.70 per share were outstanding. During the fourth quarter of
1999, the Company will repurchase all of its remaining outstanding warrants for
$2.4 million.
Market Risk
Market risk is the risk that the Company will incur losses due to adverse
changes in market rates. The Company's primary market risk exposure is the risk
that the Company will incur economic losses due to adverse changes in interest
rates. This risk arises as the Company's profitability is affected by the
spreads between interest yields on investments and rates credited on insurance
liabilities.
The Company manages its market risk by matching the projected cash outflows
of assets with the projected cash outflows of liabilities. For all its assets
and liabilities, the Company seeks to maintain reasonable durations to pay
future policyholder obligations as they become due, consistent with the
maximization of income without sacrificing investment quality and providing for
liquidity and diversification. The risks associated with mutual fund investments
supporting variable annuity products are assumed by those contractholders, not
by the Company.
There have been no material changes during the first nine months of 1999 in
the market risks the Company is exposed to and the management of those risks,
which are described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company's 1998 Form 10-K.
Year 2000
All of the Company's mainframe computer systems critical to its business
are year 2000 compliant. The Company has contacted its vendors inquiring with
regard to their year 2000 compliance status and plans and the Company has
received responses indicating that major vendors believe that they are, or will
be before the end of 1999, year 2000 compliant. In the remainder of 1999,
additional testing of systems, final review of individual personal computer
applications and contingency plans will be completed.
24
<PAGE>
Because of the extent of systems conversion already completed, the Company
believes the worst-case scenario would be limited to major vendor conversions
that fail to achieve compliance by the end of 1999. The result of this worst-
case scenario would be to interrupt the Company's ability to process certain
business transactions which could have a significant effect on its business,
results of operations and financial condition. Contingency plans are being
completed to mitigate the risks of vendor failures to achieve compliance by the
end of the year.
In addition, non-system contingency plans have been developed for possible
lapse in service from utility suppliers and other third party service providers.
These contingency plans include efforts to minimize business interruption
through back-up processes that utilize alternative suppliers and third party
service providers, where appropriate.
Costs for this compliance project represent the allocation of existing
internal information technology resources to address year 2000 compliance and
are not incremental costs to the Company. The total cost of the compliance
project is being funded through operating cash flows. The Company is expensing
all costs associated with these system changes and through September 30, 1999
has expensed $6.3 million before tax benefits, including a cost of $0.9 million
for the first nine months of 1999. Costs to complete the remaining testing and
contingency planning are estimated to be less than $0.5 million before tax
benefits.
25
<PAGE>
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The information required by Item 305 of Regulation S-K is contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in this Form 10-Q.
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
Exhibit
No. Description
-------- -----------
(a) The following items are filed as Exhibits.
(10) Material contracts:
10.1 Catastrophe Equity Securities Issuance Option Agreement
(Catastrophe Equity Securities Issuance Option and
Reinsurance Option Agreement) entered by and between
HMEC and Centre Reinsurance, dated February 15, 1997
and related letter from Centre Reinsurance,
incorporated by reference to Exhibit 10.12 to HMEC's
Annual Report on Form 10-K for the year ended December
31, 1996, filed with the SEC on March 26, 1997.
10.1(a) Amendment effective February 15, 1997 to Catastrophe
Equity Securities Issuance Option Agreement
(Catastrophe Equity Securities Issuance Option and
Reinsurance Option Agreement), incorporated by
reference to Exhibit 10.1(a) to HMEC's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998,
filed with the SEC on May 15, 1998.
10.1(b) Amendment effective February 15, 1997 to Catastrophe
Equity Securities Issuance Option and Reinsurance
Option Agreement, incorporated by reference to Exhibit
10.12(b) to HMEC's Annual Report on Form 10-K for the
year ended December 31, 1998, filed with the SEC on
March 31, 1999.
10.1(c) Amendment effective June 1, 1999 to Catastrophe Equity
Securities Issuance Option and Reinsurance Option
Agreement.
(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 third
quarter of 1999.
26
<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 November 11, 1999 /s/ Paul J. Kardos
------------------------------ -------------------------------
Paul J. Kardos
Chairman of the Board,
President and Chief Executive Officer
Date November 11, 1999 /s/ Larry K. Becker
----------------------------- ------------------------------
Larry K. Becker
Executive Vice President
and Chief Financial Officer
Date November 11, 1999 /s/ Roger W. Fisher
------------------------------ -----------------------------
Roger W. Fisher
Senior Vice President,
Financial Information and Control
27
<PAGE>
Exhibit 10.1 (c)
AMENDMENT NO. 3 TO, AND ASSIGNMENT OF, CATASTROPHE EQUITY SECURITIES
ISSUANCE OPTION AND REINSURANCE OPTION AGREEMENT
This Amendment No. 3 to, and Assignment of, Catastrophe Equity Securities
Issuance Option and Reinsurance Option Agreement (the "Amendment No. 3") is
entered into and effective as of June 1, 1999 between Horace Mann Educators
Corporation, a Delaware corporation ("HM"), Centre Reinsurance (U.S.) Limited, a
Bermuda corporation ("Centre Re"), and Zurich Insurance Company, a corporation
organized under the laws of Switzerland ("Zurich"), as assignee of Centre Re,
with respect to that certain Catastrophe Equity Securities Issuance Option and
Reinsurance Option Agreement dated February 15, 1997, as amended by Amendment
No. 1 and Amendment No. 2 between HM and Centre Re (as the same may be further
amended, supplemented, and restated or otherwise modified, together with all the
Exhibits and Schedules and all ancillary, related or supporting documents, the
"Agreement"). Unless otherwise defined herein or the context otherwise requires,
capitalized terms used herein have the meanings specified in the Agreement.
RECITALS
WHEREAS, Centre Re and Zurich wish to transfer and assign the Agreement,
such that Centre Re will have no further obligations or liabilities to HM under
the Agreement in respect of the period commencing 12:00 A.M., Central Time, June
1, 1999 through to 11:59:59 P.M., Central Time, December 31, 1999, and all
Agreement Years commencing thereafter;
WHEREAS, HM wishes to consent to such assignment; and
WHEREAS, in the event of multiple Events taking place during the Agreement
Year commencing 12:00 A.M. Central Time, January 1, 1999 ("Agreement Year 1999")
which develop into a Qualifying Catastrophic Event, and such multiple Events
take place both prior to 12:00 A.M. Central Time June 1, 1999 and after 12:00
A.M. Central Time, June 1, 1999 (but during Agreement Year 1999), this Amendment
No. 3 shall not prohibit HM from exercising the Securities Issuance Option
because such multiple Events happened both prior to 12:00 A.M. Central Time June
1, 1999 and after 12:00 A.M. Central Time, June 1, 1999.
NOW, THEREFORE, for good and valuable consideration, receipt of which is
hereby acknowledged, HM, Centre Re and Zurich agree as follows:
AGREEMENT
1. Assignment and Assumption. Effective at 12:00 A.M. Central Time on June
1, 1999, Centre Re and Zurich agree that (A) Centre Re hereby transfers and
assigns to Zurich, and (B) Zurich hereby assumes and undertakes from Centre Re,
without recourse and without representation or warranty (except as provided in
this Amendment No. 3), (i) 100% of all obligations, duties, liabilities, and
promises, whether contingent or otherwise, of Centre Re under and in connection
with the Agreement in respect of, arising out of, or related to (a) the period
commencing 12:00 A.M., Central Time, June 1, 1999 through 11:59:59 P.M., Central
Time,
1
<PAGE>
December 31, 1999, and (b) the Agreement Year commencing 12:00 A.M., Central
Time, January 1, 2000 ("Agreement Year 2000"), and the Agreement Year commencing
12:00 A.M., Central Time, January 1, 2001 ("Agreement Year 2001"), and (c) the
period thereafter, if any, and (ii) 100% of all related rights and benefits
under and in connection with the Agreement in respect of, arising out of, or
related to (a) the period commencing 12:00 A.M., Central Time, June 1, 1999
through to 11:59:59 P.M., Central Time, December 31, 1999, and (b) Agreement
Years 2000 and 2001, and (c) the period thereafter, if any, including the right
to receive the Option Fee and Option Exercise Fee, if any, in respect of the
period commencing 12:00 A.M., Central Time, June 1, 1999 through to 11:59:59
P.M., Central Time, December 31, 1999, and Agreement Years 2000 and 2001, and
the period thereafter, if any.
For purposes of clarification, with respect to any exercise of the
Securities Issuance Option relating to multiple events occurring both prior to
12:00AM Central Time, June 1, 1999 and after 12:00 AM Central Time, June 1, 1999
(but during Agreement Year 1999) which develop into a Qualifying Catastrophic
Event, such exercise shall be made against Zurich, or an affiliate of Zurich, as
such designation and/or assignment by Zurich may be permitted under the
Agreement.
Accordingly, the Agreement is hereby amended by substituting all previous
references to Centre Re with Zurich.
2. Payments; Correspondence. Centre Re and Zurich agree and acknowledge
that all payments of the Option Fee, Option Exercise Fee, if any, and any other
amounts due or that may become due in connection with, or relating to the period
commencing 12:00 A.M., Central Time, June 1, 1999 through to 11:59:59 P.M.,
Central Time, December 31, 1999, and Agreement Years 2000 and 2001 (collectively
or individually the "Payments") are the property of Zurich and not Centre Re and
HM shall remit all such Payments to Zurich or to any entity designated in
writing by Zurich. HM shall also send any and all notices, advices or other
correspondence in connection with the Agreement affecting or relating to the
period commencing 12:00 A.M., Central Time, June 1, 1999 through to 11:59:59
P.M., Central Time, December 31, 1999, or the Agreement Year 2000, or the
Agreement Year 2001 and Zurich's rights and obligations in respect of such
periods to Zurich or to any entity designated in writing by Zurich.
3. Release. HM consents to and acknowledges such assignment to, and
assumption by, Zurich of all of the rights, benefits, obligations and
liabilities of Centre Re under the Agreement, as set forth in this Amendment No.
3, and HM hereby releases Centre Re from any and all obligations, duties,
liabilities, claims, and promises, whether contingent or otherwise, of Centre Re
under and in connection with the Agreement in respect of, arising out of, or
related to the period commencing 12:00 A.M., Central Time, June 1, 1999 through
to 11:59:59 P.M., Central Time, December 31, 1999, and Agreement Year 2000, and
Agreement Year 2001, and the period thereafter, if any.
4. No Warranty or Recourse. The transfer and assignment of the Agreement
in respect of the period commencing 12:00 A.M., Central Time, June 1, 1999
through to 11:59:59 P.M., Central Time, December 31, 1999, and the Agreement
Year 2000, and the Agreement Year 2001,
2
<PAGE>
and the period thereafter, if any, is made without warranty or recourse against
Centre Re of any kind, except for the willful misconduct, gross negligence, or
fraud of Centre Re, and except that Centre Re warrants that it has not sold or
otherwise transferred any other interest in the Agreement in respect of the
period commencing 12:00 A.M., Central Time, June 1, 1999 through to 11:59:59
P.M., Central Time, December 31, 1999, the Agreement Year 2000, and the
Agreement Year 2001 to any other party.
5. Covenants and Warranties. HM, Centre Re and Zurich each warrants and
covenants with respect to itself that (a) it is validly existing and organized
and in good standing under the laws of its jurisdiction; (b) it is duly
authorized to execute, deliver, and perform this Amendment No. 3; (c) the
execution, delivery and performance of this Amendment No. 3 does not conflict
with any provision of law or of the charter or by-laws (or equivalent
constituent documents) of such party, or of any agreement binding upon it; and
(d) this Amendment No. 3 constitutes the legal, valid and binding obligation of
HM, Centre Re and Zurich, enforceable in accordance with its terms.
6. Successors and Assigns. This Amendment No. 3 shall be binding on the
parties hereto and their respective permitted successors and assigns. This
Amendment No. 3 may be amended, changed, modified, altered or terminated only
upon the written consent of the parties hereto (or their permitted successors
and assigns). This Amendment No. 3 shall be assigned to any entity to which the
Agreement is assigned in accordance with the terms of the Agreement.
7. Counterparts. This Amendment No. 3 may be executed in one or more
counterparts, each of which when so executed and delivered shall be an original,
but all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned parties have caused this Amendment No. 3 to
be duly executed as of the date first written above.
Horace Mann Educators Corporation Centre Reinsurance (U.S.) Limited
By: /s/ Paul J. Kardos By: /s/ Paul Hellmers
------------------------------- ---------------------------------
Printed Name: Paul J. Kardos Printed Name: Paul Hellmers
----------------------- -----------------------
Title: President & CEO Title: President
----------------------------- ------------------------------
3
<PAGE>
By: /s/ George J. Zock
----------------------------------
Printed Name: George Zock
-----------------------
Title: Executive Vice President
------------------------------
Zurich Insurance Company
By: /s/ Dirk Lohmann
----------------------------------
Printed Name: Dirk Lohmann
-----------------------
Title: CEO - Reinsurance
-------------------------------
4
<PAGE>
Exhibit 11
Horace Mann Educators Corporation
Computation of Net Income per Share
For the Three and Nine Months Ended September 30, 1999 and 1998
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
1999 1998 1999 1998
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic - assumes no dilution:
Net income (loss) for the period $(5,458) $24,933 $22,015 $63,040
------- ------- ------- -------
Weighted average number of common
shares outstanding during the period 41,026 42,811 41,318 43,523
------- ------- ------- -------
Net income (loss) per share - basic $ (0.13) $ 0.58 $ 0.53 $ 1.45
======= ======= ======= =======
Diluted - assumes full dilution:
Net income (loss) for the period $(5,458) $24,933 $22,015 $63,040
------- ------- ------- -------
Weighted average number of common
shares outstanding during the period 41,026 42,811 41,318 43,523
Weighted average number of common
equivalent shares to reflect the dilutive
effect of common stock equivalent securities:
Warrants 98 98 96 99
Stock options 451 456 395 472
Common stock units related to Deferred
Equity Compensation Plan for Directors 66 46 66 46
Common stock units related to Deferred
Compensation Plan for Employees 6 2 6 1
------- ------- ------- -------
Total common and common equivalent shares
adjusted to calculate diluted earnings per share 41,647 43,413 41,881 44,141
------- ------- ------- -------
Net income (loss) per share - diluted $ (0.12) $ 0.57 $ 0.53 $ 1.43
======= ======= ======= =======
Percentage of dilution compared
to basic net income (loss) per share 7.7% 1.7% 0.0% 1.4%
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 2,539,358<F1>
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 17,310
<REAL-ESTATE> 159
<TOTAL-INVEST> 2,653,985
<CASH> 18,746
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 132,537
<TOTAL-ASSETS> 4,224,917
<POLICY-LOSSES> 2,163,682<F2>
<UNEARNED-PREMIUMS> 188,711
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 129,079
<NOTES-PAYABLE> 148,667
0
0
<COMMON> 59
<OTHER-SE> 408,384
<TOTAL-LIABILITY-AND-EQUITY> 4,224,917
444,062
<INVESTMENT-INCOME> 140,480
<INVESTMENT-GAINS> (8,896)
<OTHER-INCOME> 0
<BENEFITS> 315,994
<UNDERWRITING-AMORTIZATION> 36,498
<UNDERWRITING-OTHER> 79,709
<INCOME-PRETAX> 60,731
<INCOME-TAX> 38,716
<INCOME-CONTINUING> 22,015
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,015
<EPS-BASIC> 0.53
<EPS-DILUTED> 0.53
<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 September 30, 1999.
<F2> Refer to the Company's Consolidated Balance Sheet as of September 30, 1999.
</FN>
</TABLE>
