<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 March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-10890
HORACE MANN EDUCATORS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 37-0911756
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Horace Mann Plaza, Springfield, Illinois 62715-0001
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: 217-789-2500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
----- -----
As of April 30, 2000, 40,893,657 shares of Common Stock, par value $0.001
per share, were outstanding, net of 18,913,396 shares of treasury stock.
================================================================================
<PAGE>
HORACE MANN EDUCATORS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Auditors' Review Report.......................... 1
Consolidated Balance Sheets as of
March 31, 2000 and December 31, 1999....................... 2
Consolidated Statements of Operations for the
Three Months Ended March 31, 2000 and 1999................. 3
Consolidated Statements of Changes in Shareholders' Equity
for the Three Months Ended March 31, 2000 and 1999......... 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999................. 5
Notes to Consolidated Financial Statements................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 24
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders........ 24
Item 6. Exhibits and Reports on Form 8-K........................... 24
SIGNATURES.................................................................. 25
</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 March 31, 2000 and the related consolidated
statements of operations and cash flows for the three-month periods ended March
31, 2000 and 1999. 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, 1999, 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 25, 2000, 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, 1999, 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
May 4, 2000
1
<PAGE>
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
ASSETS
<S> <C> <C>
Investments
Fixed maturities, available for sale, at market (amortized
cost, 2000, $2,558,600; 1999, $2,575,403).................. $2,495,713 $2,507,280
Short-term and other investments.............................. 155,071 122,929
---------- ----------
Total investments...................................... 2,650,784 2,630,209
Cash............................................................. 18,958 22,848
Accrued investment income and premiums receivable................ 84,014 92,755
Value of acquired insurance in force and goodwill................ 98,702 102,068
Deferred policy acquisition costs................................ 131,251 130,192
Other assets..................................................... 146,819 144,061
Variable annuity assets.......................................... 1,102,391 1,131,713
---------- ----------
Total assets........................................... $4,232,919 $4,253,846
========== ==========
LIABILITIES, REDEEMABLE SECURITIES AND SHAREHOLDERS' EQUITY
Policy liabilities
Fixed annuity contract liabilities............................ $1,225,003 $1,238,379
Interest-sensitive life contract liabilities.................. 452,722 443,309
Unpaid claims and claim expenses.............................. 297,590 309,604
Future policy benefits........................................ 178,897 179,157
Unearned premiums............................................. 167,557 170,845
---------- ----------
Total policy liabilities............................... 2,321,769 2,341,294
Other policyholder funds......................................... 126,611 126,530
Other liabilities................................................ 130,285 110,698
Short-term debt.................................................. 49,000 49,000
Long-term debt................................................... 99,688 99,677
Variable annuity liabilities..................................... 1,096,836 1,126,505
---------- ----------
Total liabilities...................................... 3,824,189 3,853,704
---------- ----------
Preferred stock.................................................. - -
Common stock..................................................... 60 59
Additional paid-in capital....................................... 338,419 333,892
Retained earnings................................................ 457,385 449,023
Accumulated other comprehensive income (loss)
(net unrealized gains (losses) on fixed
maturities and equity securities)............................. (38,353) (40,016)
Treasury stock, at cost.......................................... (348,781) (342,816)
---------- ----------
Total shareholders' equity............................. 408,730 400,142
---------- ----------
Total liabilities, redeemable
securities, and shareholders' equity............. $4,232,919 $4,253,846
========== ==========
</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
March 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Insurance premiums written and contract deposits........ $194,512 $198,065
======== ========
Revenues
Insurance premiums and contract charges earned....... $147,339 $146,244
Net investment income................................ 47,508 46,924
Realized investment gains (losses)................... (2,545) (3,137)
-------- --------
Total revenues..................................... 192,302 190,031
-------- --------
Benefits, losses and expenses
Benefits, claims and settlement expenses............. 103,211 101,260
Interest credited.................................... 22,755 23,133
Policy acquisition expenses amortized................ 13,741 10,729
Operating expenses................................... 29,205 25,736
Amortization of intangible assets.................... 2,401 1,707
Interest expense..................................... 2,511 2,454
-------- --------
Total benefits, losses and expenses................ 173,824 165,019
-------- --------
Income before income taxes.............................. 18,478 25,012
Income tax expense...................................... 5,752 7,961
-------- --------
Net income.............................................. $ 12,726 $ 17,051
======== ========
Net income per share
Basic................................................ $ 0.31 $ 0.41
======== ========
Diluted.............................................. $ 0.31 $ 0.40
======== ========
Weighted average number of shares
and equivalent shares (in thousands)
Basic.............................................. 41,156 41,806
Diluted............................................ 41,325 42,319
</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>
Three Months Ended
March 31,
------------------------
2000 1999
--------- ---------
<S> <C> <C>
Common stock
Beginning balance.................................. $ 59 $ 59
Options exercised, 2000, 515,000 shares;
1999, 5,050 shares............................... 1 -
--------- ---------
Ending balance..................................... 60 59
--------- ---------
Additional paid-in capital
Beginning balance.................................. 333,892 336,686
Options exercised.................................. 4,764 97
Catastrophe-linked equity put option premium....... (237) (237)
--------- ---------
Ending balance..................................... 338,419 336,546
--------- ---------
Retained earnings
Beginning balance.................................. 449,023 420,274
Net income......................................... 12,726 17,051
Cash dividends, 2000, $0.105 per share;
1999, $0.0925 per share.......................... (4,364) (3,856)
--------- ---------
Ending balance..................................... 457,385 433,469
--------- ---------
Accumulated other comprehensive income (loss) (net
unrealized gains (losses) on fixed maturities
and equity securities)
Beginning balance................................ (40,016) 57,327
Increase (decrease) for the period............... 1,663 (22,346)
--------- ---------
Ending balance................................... (38,353) 34,981
--------- ---------
Treasury stock, at cost
Beginning balance, 2000, 18,258,896 shares;
1999, 17,183,596 shares.......................... (342,816) (317,723)
Purchase of 393,800 shares in 2000;
589,700 shares in 1999 (See note 4).............. (5,965) (14,296)
--------- ---------
Ending balance, 2000, 18,652,696 shares;
1999, 17,773,296 shares.......................... (348,781) (332,019)
--------- ---------
Shareholders' equity at end of period................. $ 408,730 $ 473,036
========= =========
Comprehensive income (loss)
Net income......................................... $ 12,726 $ 17,051
Other comprehensive income (loss).................. 1,663 (22,346)
--------- ---------
Total............................................ $ 14,389 $ (5,295)
========= =========
</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
March 31,
------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Premiums collected....................................... $ 156,915 $ 157,177
Policyholder benefits paid............................... (117,889) (113,493)
Policy acquisition and other operating expenses paid..... (43,214) (44,609)
Federal income taxes paid................................ (1,600) (1,500)
Investment income collected.............................. 51,503 48,893
Interest expense paid.................................... (4,123) (4,067)
Other.................................................... (1,149) (697)
--------- ---------
Net cash provided by operating activities............ 40,443 41,704
--------- ---------
Cash flows used in investing activities
Fixed maturities
Purchases.............................................. (101,166) (232,468)
Sales.................................................. 60,339 145,494
Maturities............................................. 60,886 71,526
Net cash received from (used for)
short-term and other investments....................... (32,128) 6,357
--------- ---------
Net cash provided by (used in) investing activities.. (12,069) (9,091)
--------- ---------
Cash flows used in financing activities
Purchase of treasury stock............................... (5,965) (14,296)
Dividends paid to shareholders........................... (4,364) (3,856)
Principal borrowings on Bank Credit Facility............. - 1,000
Exercise of stock options................................ 4,765 97
Catastrophe-linked equity put option premium............. (237) (237)
Annuity contracts, variable and fixed
Deposits............................................... 48,216 51,260
Maturities and withdrawals............................. (84,665) (51,555)
Net transfer from (to) variable annuity assets......... 10,971 (11,443)
Net increase (decrease) in life policy account balances.. (985) 291
--------- ---------
Net cash used in financing activities................ (32,264) (28,739)
--------- ---------
Net increase (decrease) in cash............................. (3,890) 3,874
Cash at beginning of period................................. 22,848 12,044
--------- ---------
Cash at end of period....................................... $ 18,958 $ 15,918
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 1999
(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 March 31,
2000 and December 31, 1999 and the consolidated results of operations, changes
in shareholders' equity and cash flows for the three months ended March 31, 2000
and 1999.
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, 1999 Form 10-K.
The results of operations for the three months ended March 31, 2000 are not
necessarily indicative of the results to be expected for the full year.
Note 2 - Debt
Indebtedness outstanding was as follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Short-term debt:
$65,000 Bank Credit Facility, commitment to
December 31, 2001. (IBOR + 0.325%,
6.6% as of March 31, 2000)................. $ 49,000 $ 49,000
Long-term debt:
6 5/8% Senior Notes, due January 15, 2006.
Face amount less unaccrued discount
of $312 and $323 (6.7% imputed rate)....... 99,688 99,677
-------- --------
Total.................................... $148,688 $148,677
======== ========
</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 March 31, 2000
------------------------ ----------------------
Rating of Fixed March 31, December 31, Carrying Amortized
Maturity Securities(1) 2000 1999 Value Cost
- --------------------- --------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
AAA................... 47.0% 46.3% $1,173,457 $1,195,150
AA.................... 7.5 7.7 188,236 188,251
A..................... 20.1 20.2 500,410 509,363
BBB................... 18.7 18.8 466,961 490,396
BB.................... 1.7 2.0 41,317 43,833
B..................... 4.6 4.7 115,626 121,183
CCC or lower.......... 0.1 - 2,597 2,772
Not rated(2).......... 0.3 0.3 7,109 7,652
----- ----- ---------- ----------
Total............... 100.0% 100.0% $2,495,713 $2,558,600
===== ===== ========== ==========
</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 $1.1 million of publicly traded securities not
currently rated by S&P or Moody's and $6.0 million of private placement
securities not rated by either S&P or Moody's. The National Association of
Insurance Commissioners (the "NAIC") has rated 98.0% 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
------------------------- ----------
March 31, December 31, March 31,
Scheduled Maturity 2000 1999 2000
------------------ --------- ------------ ----------
<S> <C> <C> <C>
Due in 1 year or less................ 8.4% 7.0% $ 208,699
Due after 1 year through 5 years..... 30.1 31.0 752,342
Due after 5 years through 10 years... 30.4 31.5 759,616
Due after 10 years through 20 years.. 16.3 15.9 405,678
Due after 20 years................... 14.8 14.6 369,378
----- ----- ----------
Total.............................. 100.0% 100.0% $2,495,713
===== ===== ==========
</TABLE>
The Company loans fixed income securities to third parties, primarily major
brokerage firms. However, there were no securities on loan at March 31, 2000 and
December 31, 1999. 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
7
<PAGE>
Note 3 - Investments - (Continued)
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. 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 three months of 2000, the Company repurchased 393,800
shares of its common stock, or 1% of the outstanding shares on December 31,
1999, at an aggregate cost of $5,965, or an average cost of $15.15 per share,
under its stock repurchase program. Since early 1997, 7,476,500 shares, or 16%
of the shares outstanding on December 31, 1996, have been repurchased at an
aggregate cost of $194,479, equal to an average cost of $26.01 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 use of cash and, when necessary, the Bank Credit Facility. As of March
31, 2000, $105,521 remained authorized for future share repurchases.
Note 5 - 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 developments in that
process during 1999, it appeared that the Company could be forced to litigate
the issue with the IRS in order to reach a resolution of the issue acceptable to
the Company. Therefore, in the third quarter of 1999, the Company 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 of reaching an acceptable
agreement with the IRS, management believed it prudent to book the maximum
exposure in 1999. None of the $20 million reserve was paid as of March 31, 2000.
This reserve was a charge to net income in 1999.
8
<PAGE>
Note 6 - 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
March 31, 2000
-----------------------
<S> <C> <C> <C> <C>
Premiums written....... $195,990 $7,920 $6,442 $194,512
Premiums earned........ 148,743 5,762 4,358 147,339
Benefits, claims and
settlement expenses.. 105,338 6,674 4,547 103,211
Three months ended
March 31, 1999
-----------------------
Premiums written....... $199,382 $6,045 $4,728 $198,065
Premiums earned........ 147,645 6,078 4,677 146,244
Benefits, claims and
settlement expenses.. 106,451 9,797 4,606 101,260
</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 2000. These programs
are augmented by a $100 million equity put and reinsurance agreement. 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 property 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 excess
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, including catastrophe losses that in the aggregate are less than the
retention levels above, above a retention of $0.5 million up to $2.5 million.
9
<PAGE>
Note 7 - 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
March 31,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Insurance premiums and contract charges earned
Property and casualty.......................... $ 120,428 $ 120,986
Annuity........................................ 4,358 3,974
Life........................................... 22,849 21,284
Intersegment eliminations...................... (296) -
---------- ----------
Total....................................... $ 147,339 $ 146,244
========== ==========
Net investment income
Property and casualty.......................... $ 8,920 $ 9,192
Annuity........................................ 26,177 26,484
Life........................................... 12,373 11,505
Corporate and other............................ 339 33
Intersegment eliminations...................... (301) (290)
---------- ----------
Total....................................... $ 47,508 $ 46,924
========== ==========
Net income
Operating income
Property and casualty......................... $ 9,057 $ 10,475
Annuity....................................... 5,387 5,871
Life.......................................... 2,977 4,827
Corporate and other,
including interest expense.................. (3,041) (2,083)
---------- ----------
Total operating income.................... 14,380 19,090
Realized investment gains (losses), after tax... (1,654) ( 2,039)
---------- ----------
Total....................................... $ 12,726 $ 17,051
========== ==========
Amortization of intangible assets
Value of acquired insurance in force
Property and casualty......................... $ - $ 258
Annuity....................................... 1,489 501
Life.......................................... 507 543
---------- ----------
Subtotal.................................... 1,996 1,302
Goodwill........................................ 405 405
---------- ----------
Total....................................... $ 2,401 $ 1,707
========== ==========
March 31, December 31,
Assets 2000 1999
---------- -----------
Property and casualty........................... $ 686,183 $ 681,432
Annuity......................................... 2,573,397 2,611,766
Life............................................ 853,910 840,594
Corporate and other............................. 153,625 153,493
Intersegment eliminations....................... (34,196) (33,439)
---------- ----------
Total......................................... $4,232,919 $4,253,846
========== ==========
</TABLE>
10
<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 affecting 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.
11
<PAGE>
Three Months Ended March 31, 2000 Compared With Three Months Ended March 31,
1999
Insurance Premiums and Contract Charges
In April 2000, the Company's management announced steps that are being
taken to reenergize the Company's core business and accelerate growth of the
Company's business and profits. These initiatives are intended to expand the
Company's product lines within the personal lines insurance segment and make the
Company's product development efforts more responsive to customer needs and
preferences; grow and strengthen the agent force and make the Company's agents
more productive by improving the products, tools and support the Company
provides to them; broaden the Company's distribution options to complement and
extend the reach of the Company's agent force; increase cross-selling and
improve retention in the existing book of business; and expand the Company's
penetration of targeted geographic areas and new segments of the educator
market.
Insurance Premiums Written and Contract Deposits
<TABLE>
<CAPTION>
Three Months Ended Growth Over
March 31, Prior Year
-------------------- -----------------
2000 1999 Percent Amount
------ ------ ------- -------
<S> <C> <C> <C> <C>
Automobile and property (voluntary)
Before North Carolina settlement... $115.6 $114.4 1.0% $ 1.2
North Carolina settlement.......... (1.7) - (1.7)
------ ------ -----
Total............................ 113.9 114.4 -0.4% (0.5)
Annuity deposits..................... 48.2 51.3 -6.0% (3.1)
Life................................. 29.1 27.8 4.7% 1.3
------ ------ -----
Subtotal - core lines before
North Carolina settlement...... 192.9 193.5 -0.3% (0.6)
Subtotal - core lines............ 191.2 193.5 -1.2% (2.3)
Involuntary and other
property & casualty................ 3.3 4.6 -28.3% (1.3)
------ ------ -----
Total............................ $194.5 $198.1 -1.8% $(3.6)
====== ====== =====
</TABLE>
12
<PAGE>
Insurance Premiums and Contract Charges Earned
(Excludes annuity and life contract deposits)
<TABLE>
<CAPTION>
Three Months Ended Growth Over
March 31, Prior Year
------------------ --------------------
2000 1999 Percent Amount
------- ------- ------- ------
<S> <C> <C> <C> <C>
Automobile and property (voluntary)
Before North Carolina settlement... $117.0 $114.6 2.1% $ 2.4
North Carolina settlement.......... (1.7) - (1.7)
------ ------ -----
Total............................ 115.3 114.6 0.6% 0.7
Annuity.............................. 4.4 4.0 10.0% 0.4
Life................................. 22.6 21.3 6.1% 1.3
------ ------ -----
Subtotal - core lines before
North Carolina settlement...... 144.0 139.9 2.9% 4.1
Subtotal - core lines............ 142.3 139.9 1.7% 2.4
Involuntary and other
property & casualty................ 5.0 6.3 (1.3)
------ ------ -----
Total............................ $147.3 $146.2 0.8% $ 1.1
====== ====== =====
</TABLE>
The property and casualty and life segments both experienced premium growth
for the first three months of 2000 excluding the North Carolina settlement
described below. Nonetheless, total insurance premiums written and contract
deposits decreased 1.8% for the three months because of a decline in new annuity
deposits. For the first three months of 2000, single premium and rollover
annuity deposits declined significantly, ($2.5 million, or 20.4%), compared to
the same period in 1999.
The number of experienced agents in Horace Mann's exclusive agent force,
675, was down 2.3% at March 31, 2000, compared to a year ago. The number of new
agents also declined, as newer agents were more adversely affected by the
current highly competitive insurance environment. This was a significant factor
in the 5.9% decline in the agent total, which stood at 1,033 at March 31, 2000.
Modifications have been made to agent recruiting and the new agents' finance
programs that management believes will have a positive impact on agent growth in
the future.
In March 2000, following lengthy negotiations, the North Carolina Rate
Bureau and that state's Commissioner of Insurance agreed to settle the
outstanding 1994, 1996 and 1999 private passenger automobile insurance rate
filing cases resulting in an adverse impact of approximately $250 million for
the insurance industry. Horace Mann's portion of the adverse settlement was $2.5
million pretax, comprised of $1.7 million premium refunds and $0.8 million
interest charges. North Carolina is the Company's largest property and casualty
state representing approximately 7 percent of total premiums.
Total voluntary automobile and homeowners premium written growth was 1.0%
for the first three months of 2000, excluding the effect of the North Carolina
settlement. The average premium per homeowners policy and the number of
homeowners policies in force both increased, while the number of automobile
policies in force was slightly lower than year-earlier levels. Excluding the
effect of the North Carolina settlement, automobile insurance premium decreased
slightly ($0.4 million) compared to the first three months of last year, and
homeowners premium increased 7.1% ($1.6 million). Nearly one-half of the
property and casualty increase in premiums resulted from unit growth of 1.3%,
bringing policies in force at March 31, 2000 to 874,000.
13
<PAGE>
Compared to December 31, 1999, total property and casualty policies in force
increased 2,000 with the entire increase attributable to homeowners insurance.
The Company's average annual premium per policy for automobile and homeowners
increased less than 1% and approximately 1.5%, respectively, compared to a year
earlier. While automobile policies in force ended the quarter 3,000 policies
below the March 31, 1999 level, the increase in average premium per automobile
policy kept pace with loss cost experience.
Based on policies in force, the property and casualty 12-month retention
rate for new and renewal policies was 88%, a slight decrease compared to the 12
months ended March 31, 1999. The change in property and casualty retention was
primarily caused by greater price competition for automobile insurance which
offset improvement in the retention of homeowners policies.
New annuity deposits decreased 6.0%, compared to the first three months of
1999. The decline was primarily attributable to a 20.4% decrease in new single
premium deposits, compared to the first three months of 1999. The change in new
annuity deposits also included a 1.5% decrease in scheduled deposits received.
New deposits to variable mutual fund annuities decreased 4.5% and new deposits
to fixed annuities were 9.0% lower than last year. Variable annuity accumulated
funds on deposit at March 31, 2000 were $1.1 billion, $5.4 million less than a
year ago, a 0.5% decrease. Variable annuity accumulated deposit retention
decreased 4.5 percentage points over the 12 months to 87.8%. Fixed annuity cash
value retention for the 12 months ended March 31, 2000 was 91.1%, 2.0 percentage
points lower than the same period last year. Over the last 12 months, the number
of annuity contracts outstanding increased 2.5%, or 3,000 contracts.
Life premium growth was 4.7% for the first three months of 2000. The life
insurance in force lapse ratio was 8.7% for the twelve months ended March 31,
2000, compared to 7.4% for the same period last year.
Net Investment Income
Investment income of $47.5 million for the first three months of 2000
increased 1.3%, or $0.6 million, (1.3% after tax) compared to the same period
last year due to growth in the average investment portfolio. Average investments
(excluding the securities lending collateral) increased 1.7% over the past 12
months. The average pretax yield on the investment portfolio was 7.0% (4.7%
after tax) for the first three months of 2000 compared to a pretax yield of 7.1%
(4.8% after tax) last year, a decrease of 10 basis points, or 3.4%. All of the
investment income decrease in the annuity segment was offset by a reduction in
interest credited to fixed annuity deposits. Excluding the cumulative impact of
the use of cash in the share repurchase program since its initiation in 1997
from both periods, net investment income would have increased 1.6%, or $0.8
million, compared to $50.0 million in the first three months of 1999.
Realized Investment Gains and Losses
Net realized investment losses of $2.5 million for the three months ended
March 31, 2000 were comparable to net realized investment losses of $3.1 million
for the first quarter of 1999. For both periods, nearly all of the net realized
gains and losses occurred in the fixed income portfolios.
14
<PAGE>
Benefits, Claims and Settlement Expenses
<TABLE>
<CAPTION>
Three Months Ended Growth Over
March 31, Prior Year
------------------ -------------------
2000 1999 Percent Amount
------ ------ ------- ------
<S> <C> <C> <C> <C>
Property and casualty.................... $ 91.4 $ 91.6 (0.2%) $(0.2)
Life..................................... 11.8 9.7 21.6% 2.1
------ ------ ------
Total.................................. $103.2 $101.3 1.9% $ 1.9
====== ====== =====
Property and casualty
statutory loss ratio:
Before catastrophe losses and
North Carolina settlement.......... 72.7% 73.8% -1.1%
Before catastrophe losses............ 73.7% 73.8% -0.1%
After catastrophe losses and
North Carolina settlement.......... 75.9% 75.7% 0.2%
</TABLE>
Property and casualty claims and settlement costs include an 18.2% increase
in catastrophe losses compared to the first three months of 1999. Catastrophe
losses were $2.6 million in the first quarter of 2000 and $2.2 million in the
first quarter of 1999, an increase of 18.2%. More than offsetting the Company's
higher catastrophe losses, the homeowners loss ratio excluding catastrophes of
79.0% improved nearly 3 percentage points compared to the first three months of
1999.
For the first three months of 2000, the increase in the Company's average
voluntary automobile insurance premium per policy kept pace with loss cost
experience which produced a loss ratio of 69.8% excluding catastrophe losses and
the effect of the North Carolina settlement. This favorable result reflected a
number of operational changes, principally savings realized to date from new
claims evaluation software that was fully installed by June 1999.
Property and casualty results included continuation of favorable
development of prior years reserves. Favorable development of property and
casualty claims occurring in prior years, excluding involuntary business, was
$2.4 million in the first three months of 2000, compared to $1.5 million for the
same period in 1999. Favorable development of total property and casualty claims
occurring in prior years was $2.0 million in the first three months of 2000,
compared to $0.6 million for the same period in 1999.
Life mortality was higher in the first three months of 2000 than in the
same period in 1999. However, the largest single item included in the increase
in life segment benefits resulted from positive experience last year
on a small closed block of individual accident and health policies.
15
<PAGE>
Interest Credited to Policyholders
<TABLE>
<CAPTION>
Three Months Ended Growth Over
March 31, Prior Year
------------------ --------------------
<S> <C> <C> <C> <C>
2000 1999 Percent Amount
----- ----- ------- --------
Annuity.......... $16.5 $17.2 -4.1% $(0.7)
Life............. 6.3 5.9 6.8% 0.4
----- ----- -----
Total.......... $22.8 $23.1 -1.3% $(0.3)
===== ===== =====
</TABLE>
Interest credited to fixed annuity contracts decreased as the fixed annuity
average annual interest rate credited decreased 0.3 percentage points to 4.9% in
the first three months of 2000, compared to the same period in 1999. In
addition, the average accumulated deposits for the three months ended March 31,
2000 decreased slightly compared to the same period in 1999. Life insurance
interest credited increased as a result of continued growth in the interest-
sensitive life insurance reserves.
Operating Expenses
For the first three months of 2000, operating expenses increased $3.5
million, or 13.6%, compared to last year. Current year expenses include a non-
recurring charge of $0.8 million for interest on the North Carolina settlement.
Current period expenses also include $0.7 million, or approximately $0.01 per
share, attributable to the chief executive officer transition, and there will be
a comparable charge in the second quarter of 2000. Operating expenses for the
first three months of 1999 were somewhat lower than typical levels for the
Company reflecting some timing items.
The total corporate expense ratio on a statutory accounting basis excluding
the impact of the North Carolina settlement was 22.8% for the three months ended
March 31, 2000, 1.2 percentage points higher than the same period in 1999. The
property and casualty expense ratio, the 12th lowest of the 100 largest property
and casualty insurance groups for 1998 (the most recent industry ranking
available), was 20.3% for the three months ended March 31, 2000 excluding the
impact of the North Carolina settlement, compared to 19.5% last year. The
increase in these expense ratios primarily reflects the modest level of premium
growth, which was lower than the anticipated growth level, while statutory
expenses increased 5.6%.
Amortization of Policy Acquisition Expenses and Intangible Assets
For the first three months of 2000, the combined amortization of policy
acquisition expenses and intangible assets of $16.1 million increased by $3.7
million, or 29.8%, compared to the same period in 1999.
Amortization of intangible assets increased by $0.7 million to $2.4 million
for the three months ended March 31, 2000, compared to $1.7 million for the same
period in 1999, reflecting the higher level of amortization of the value of
annuity business acquired in the 1989 acquisition of the Company ("Annuity
VIF"). Amortization of Annuity VIF for full year 1999 and 1998 was significantly
reduced due to favorable experience in prior periods. The $1.0 million current
period increase in Annuity VIF amortization is about equally attributed to the
scheduled increase in amortization, the effect of recent experience and trends
identified at December 31, 1999, and the effect of higher than expected annuity
surrenders in the first three months of 2000. Assuming
16
<PAGE>
annuity surrenders return to expected levels, Annuity VIF amortization for full
year 2000 and 2001 is expected to be $5.9 million (versus $4.6 million as
scheduled at December 31, 1999) and $4.4 million, respectively. Annuity VIF
amortization was ($4.2) million, $2.0 million and $5.6 million for the twelve
months ended December 31, 1999, 1998 and 1997, respectively. The negative
Annuity VIF amortization in 1999 included a $6.2 million reduction due to recent
experience and trends identified at December 31, 1999 partially offset by a $3.4
million increase in the amortization of annuity policy acquisition costs
deferred after the 1989 acquisition of the Company. The amortization of the
value of property and casualty business acquired in the 1989 acquisition of the
Company was completed in the third quarter of 1999, amortization was $0.3
million for the first three months of 1999.
Policy acquisition expenses amortized for the three months ended March 31,
1999 of $10.7 million were $3.0 million lower than the current period including
a $1.9 million reduction recorded in 1999 to reflect favorable life mortality
estimates which resulted in higher anticipated future gross profits.
Income Tax Expense
The effective income tax rate was 31.4% for the three months ended March
31, 2000, compared to 31.6% for the same period last year. Income from
investments in tax-advantaged securities reduced the effective income tax rate
5.9 and 4.3 percentage points for the three months ended March 31, 2000 and
1999, respectively.
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 developments in that
process during 1999, it appeared that the Company could be forced to litigate
the issue with the IRS in order to reach a resolution of the issue acceptable to
the Company. Therefore, in the third quarter of 1999, the Company 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 of reaching an acceptable
agreement with the IRS, management believed it prudent to book the maximum
exposure in 1999. None of the $20 million reserve has been paid as of May 12,
2000. This reserve was a charge to net income in 1999 but was excluded from the
determination of reported operating income.
Operating Income
For the first three months of 2000, operating income (net income before the
after-tax impact of realized investment gains and losses) decreased 24.6%, or
$4.7 million, and operating income per share on a diluted basis of $0.35
decreased 22.2%, or $0.10 per share.
Two primary factors explain the difference in operating income between
periods. The Company's portion of the adverse automobile insurance rate
settlement in North Carolina, as described above, was $1.7 million after tax, or
approximately $0.04 per share. In addition, operating income for the first three
months of 1999 was favorably impacted by non-recurring items, primarily in the
life segment, totaling approximately $0.04 per share.
17
<PAGE>
Operating income by segment was as follows:
<TABLE>
<CAPTION>
Three Months Ended Growth Over
March 31, Prior Year
------------------ ---------------------
2000 1999 Percent Amount
----- ----- ------- ------
<S> <C> <C> <C> <C>
Property & casualty
Before catastrophe losses and
North Carolina settlement............. $12.4 $12.0 3.3% $ 0.4
Catastrophe losses, after tax........... 1.7 1.5 13.3% 0.2
North Carolina settlement (including
interest), after tax.................. 1.7 - 1.7
----- ----- -----
Total including catastrophe
losses and North Carolina
settlement........................ 9.0 10.5 -14.3% (1.5)
Annuity................................... 5.4 5.9 -8.5% (0.5)
Life...................................... 3.0 4.9 -38.8% (1.9)
Corporate and other expense............... 1.4 0.6 0.8
Interest expense, after tax............... 1.6 1.6 -
----- ----- -----
Total............................... $14.4 $19.1 -24.6% $(4.7)
===== ===== =====
Total before catastrophe
losses and North Carolina
settlement........................ $17.8 $20.6 -13.6% $(2.8)
===== ===== =====
Property and casualty
statutory combined ratio:
Before catastrophe losses and
North Carolina settlement........... 93.0% 93.3% -0.3%
Before catastrophe losses............. 94.3% 93.3% 1.0%
After catastrophe losses and
North Carolina settlement........... 96.5% 95.2% 1.3%
</TABLE>
Property and casualty segment operating income was lower than in the first
three months of 1999 primarily due to an adverse industry settlement of
outstanding automobile insurance rate filing cases for 1994, 1996 and 1999 in
North Carolina. The Company's portion of this settlement, including interest,
was $1.7 million after tax. Property and casualty segment earnings for the first
three months of 2000 also were affected negatively by lower than expected
business volume in the automobile line, and, less significantly, an 18.2%
increase in catastrophe losses. During the first three months of 2000, the
Company's increase in average voluntary automobile insurance premium kept pace
with loss cost experience.
The property and casualty combined ratio before catastrophes and the North
Carolina settlement of 93.0% was 0.3 percentage points better than the first
three months of 1999, reflecting improvement in both voluntary automobile
results and homeowners results. Favorable development of property and casualty
claims occurring in prior years (excluding involuntary business), was $1.6
million after tax in the first three months of 2000, compared to $1.0 million
after tax for the same period in 1999. Favorable development of total property
and casualty claims occurring in prior years was $1.3 million after tax in the
first three months of 2000, compared to $0.4 million after tax for the same
period in 1999.
18
<PAGE>
Annuity segment operating income was below the year-earlier total.
Increases in both annuity interest rate spreads and contract fees in this year's
first quarter were offset by higher expenses, primarily the increased
amortization of the value of annuity business acquired in the 1989 acquisition
of the Company which included the effect of higher than expected annuity
surrenders during the first quarter of 2000. For the three months, the net
interest margin increased 5.4% and fees and contract charges earned increased
10.0%. Variable annuity accumulated deposits were $1.1 billion at March 31,
2000, $5.4 million, or 0.5%, less than 12 months earlier. Fixed annuity
accumulated cash value of $1.3 billion was $12.4 million, or 0.9%, less than
March 31, 2000.
Life insurance earnings for the first three months of 1999 reflected lower
expenses resulting from a decrease in the amortization of deferred policy
acquisition costs to reflect favorable mortality estimates and positive
experience on a small closed block of accident and health business. Excluding
those items, first quarter 2000 life operating income was $0.6 million less than
a year ago primarily as a result of higher mortality costs.
The cummulative effect of the Company's share repurchase program, since
initiation in 1997, reduced operating income by $2.2 million for the three
months ended March 31, 2000, reflecting utilization of capital and the
corresponding reduction of net investment income, but had no effect on earnings
per share for the period due to the reduction in the number of shares
outstanding.
Net Income
<TABLE>
<CAPTION>
Net Income Per Share, Diluted
Three Months Ended Growth Over
March 31, Prior Year
------------------ -------------------
2000 1999 Percent Amount
------ ------ ------- ------
<S> <C> <C> <C> <C>
Operating income........................ $ 0.35 $ 0.45 -22.2% $(0.10)
Realized investment gains (losses)...... (0.04) (0.05) 20.0% 0.01
------ ------ ------
Net income............................ $ 0.31 $ 0.40 -22.5% $(0.09)
====== ====== ======
</TABLE>
Net income, which includes realized investment gains and losses, for the
first three months of 2000 decreased by 25.7% and net income per diluted share
decreased by 22.5% compared to the same period in 1999, reflecting the $4.7
million decline in operating income. Net income also reflected $1.7 million of
after tax realized investment losses for the first three months of 2000,
compared to $2.0 million of after tax realized investment losses in the same
period last year.
Return on shareholders' equity based on operating income for the last 12
months was 16%. Based on net income, return on equity was 9% for the last 12
months.
Liquidity and Financial Resources
Investments
The Company's investment strategy emphasizes investment grade, publicly
traded fixed income securities. At March 31, 2000, fixed income securities
represented 94.1% of investments. Of the fixed income investment portfolio,
93.3% was investment grade and 99.8% was publicly traded. The average quality of
the total fixed income portfolio was AA- at March 31, 2000.
19
<PAGE>
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 4.0 years at March 31, 2000 and 4.1 years at
December 31, 1999. 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 comparable to the
first three months of 1999. 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 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 2000 without prior approval are approximately $75
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.
20
<PAGE>
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 three months of 2000, receipts from annuity contracts
decreased 6.0% primarily reflecting the reduced level of single premium deposits
received. Annuity contract maturities and withdrawals increased $33.1 million,
or 64.1%, compared to the same period last year due about equally to higher
withdrawals from both the variable and fixed annuity options. Variable annuity
deposit retention decreased 4.5 percentage points over the 12 months to 87.8%.
Net transfers to variable annuity assets decreased $22.4 million compared to the
same period last year reflecting a greater allocation of funds by customers to
fixed annuities rather than variable annuities and the decrease in total annuity
contract receipts. Retention of fixed annuity accumulated cash value was 91.1%
for the 12 months ended March 31, 2000, 2.0 percentage points lower than the
same period last year.
Following the February 23, 2000 removal of the suspension of the Company's
share repurchase program, during March the Company repurchased 393,800 shares of
its common stock, or 1% of the shares outstanding on December 31, 1999, at an
aggregate cost of $6.0 million, or an average cost of $15.15 per share, under
its stock repurchase program. Repurchases in 2000 compare to 589,700 shares
repurchased in the first three months of 1999 at an aggregate cost of $14.3
million. The repurchase of shares was financed through use of cash and, when
necessary, the Bank Credit Facility. As of March 31, 2000, $105.5 million
remained authorized for future share repurchases.
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 National Association of
Insurance Commissioners. 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 service and retire long-term
debt, increase and pay dividends to its shareholders, fund growth initiatives,
repurchase shares of its common stock 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 $557.4 million at March 31, 2000,
including $99.7 million of long-term debt and $49.0 million of short-term debt.
Total debt represented 25.0% of capital (excluding unrealized investment losses)
at March 31, 2000 at the upper end of the Company's target operating range of
20% to 25%.
Shareholders' equity was $408.7 million at March 31, 2000, including an
unrealized loss in the Company's investment portfolio of $38.4 million after
taxes and the related impact on deferred policy acquisition costs and the value
of acquired insurance in force associated with annuity and interest-sensitive
life policies. The market value of the Company's common stock and the market
21
<PAGE>
value per share were $758.8 million and $18 7/16, respectively, at March 31,
2000. Book value per share was $9.93 at March 31, 2000, $10.86 excluding
investment market value adjustments. At March 31, 1999, book value per share was
$11.40, $10.56 excluding investment market value adjustments. The decrease over
the 12 months was entirely due to unrealized investment gains and losses, the
third quarter 1999 non-recurring charge for prior years' taxes and share
repurchases. Excluding these items, book value per share increased 9.4% 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 both March 31, 2000 and December 31, 1999, the Company had short-term
debt of $49.0 million outstanding under the Bank Credit Facility. The Bank
Credit Facility allows unsecured borrowings of up to $65.0 million at Interbank
Offering Rates plus 0.3% to 0.5% or Bank of America National Trust and Savings
Association reference rates. The rate on the borrowings under the Bank Credit
Facility was Interbank Offering Rate plus 0.3%, or 6.6%, as of March 31, 2000.
The commitment for the Bank Credit Facility terminates on December 31, 2001.
The Company's ratio of earnings to fixed charges for the three months ended
March 31, 2000 was 8.4x compared to 11.0x for the same period in 1999. The
decline was primarily attributable to the North Carolina settlement recorded in
the current period as well as the non-recurring favorable items included in
operating income for the first three months of 1999.
Total shareholder dividends were $4.4 million for the three months ended
March 31, 2000. The Company has targeted a dividend payout ratio of
approximately 15% to 20%. In November 1999, the Board of Directors authorized
the eighth increase to the Company's quarterly dividend in the eight years since
the Company's initial public offering in November 1991. The regular quarterly
dividend increased by 13.5% to $0.105 per share.
The Company reinsures 95% of catastrophe losses above a retention of $7.5
million per occurrence up to $80 million per occurrence. These catastrophe
reinsurance programs are augmented by a $100 million equity put and reinsurance
agreement. 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.
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.
22
<PAGE>
The Company manages its market risk by coordinating 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,
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, and not by the Company.
There have been no material changes during the first three months of 2000
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 1999 Form 10-K.
23
<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.
(11) Statement re computation of per share earnings.
(27) Financial Data Schedule.
(b) No reports on Form 8-K were filed by the Company during the first
quarter of 2000.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HORACE MANN EDUCATORS CORPORATION
(Registrant)
Date May 12, 2000 /s/ Louis G. Lower II
--------------------------- ----------------------------------------
Louis G. Lower II
President and Chief Executive Officer
Date May 12, 2000 /s/ Larry K. Becker
--------------------------- ----------------------------------------
Larry K. Becker
Executive Vice President
and Chief Financial Officer
25
<PAGE>
Exhibit 11
Horace Mann Educators Corporation
Computation of Net Income per Share
For the Three Months Ended March 31, 2000 and 1999
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
2000 1999
------- -------
<S> <C> <C>
Basic - assumes no dilution:
Net income (loss) for the period $12,726 $17,051
------- -------
Weighted average number of common
shares outstanding during the period 41,156 41,806
------- -------
Net income (loss) per share - basic $ 0.31 $ 0.41
======= =======
Diluted - assumes full dilution:
Net income (loss) for the period $12,726 $17,051
------- -------
Weighted average number of common
shares outstanding during the period 41,156 41,806
Weighted average number of common
equivalent shares to reflect the dilutive
effect of common stock equivalent securities:
Stock options 88 360
Common stock units related to Deferred
Equity Compensation Plan for Directors 73 51
Common stock units related to Deferred
Compensation Plan for Employees 8 6
Warrants - 96
------- -------
Total common and common equivalent shares
adjusted to calculate diluted earnings per share 41,325 42,319
------- -------
Net income (loss) per share - diluted $ 0.31 $ 0.40
======= =======
Percentage of dilution compared
to basic net income (loss) per share - 2.4%
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 2,495,713<F1>
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 17,387
<REAL-ESTATE> 148
<TOTAL-INVEST> 2,650,784
<CASH> 18,958
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 131,251
<TOTAL-ASSETS> 4,232,919
<POLICY-LOSSES> 2,154,212<F2>
<UNEARNED-PREMIUMS> 167,557
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 126,611
<NOTES-PAYABLE> 148,688
0
0
<COMMON> 60
<OTHER-SE> 408,670
<TOTAL-LIABILITY-AND-EQUITY> 4,232,919
147,339
<INVESTMENT-INCOME> 47,508
<INVESTMENT-GAINS> (2,545)
<OTHER-INCOME> 0
<BENEFITS> 103,211
<UNDERWRITING-AMORTIZATION> 13,741
<UNDERWRITING-OTHER> 29,205
<INCOME-PRETAX> 18,478
<INCOME-TAX> 5,752
<INCOME-CONTINUING> 12,726
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,726
<EPS-BASIC> 0.31
<EPS-DILUTED> 0.31
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> Refer to Note 3 - Investments of the Company's Consolidated Notes to
Financial Statements for March 31, 2000.
<F2> Refer to the Company's Consolidated Balance Sheet as of March 31, 2000.
</FN>
</TABLE>
