<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 September 30, 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 October 31, 2000, 40,515,757 shares of Common Stock, par value $0.001
per share, were outstanding, net of 19,341,296 shares of treasury stock.
================================================================================
<PAGE>
HORACE MANN EDUCATORS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 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
September 30, 2000 and December 31, 1999........................................... 2
Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2000 and 1999............................ 3
Consolidated Statements of Changes in Shareholders' Equity
for the Nine Months Ended September 30, 2000 and 1999.............................. 4
Consolidated Statements of Cash Flows for the
Three and Nine Months Ended September 30, 2000 and 1999............................ 5
Notes to Consolidated Financial Statements............................................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................ 12
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................................ 25
Item 6. Exhibits and Reports on Form 8-K................................................... 25
SIGNATURES........................................................................................... 26
</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, 2000 and the related
consolidated statements of operations and cash flows for the three-month and
nine-month periods ended September 30, 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 auditing standards generally accepted in the United States of
America, 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 accounting principles generally accepted in the
United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, 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
October 20, 2000
1
<PAGE>
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------- ----------
<S> <C> <C>
ASSETS
Investments
Fixed maturities, available for sale, at market (amortized
cost, 2000, $2,582,162; 1999, $2,575,403)....................... $2,529,760 $2,507,280
Short-term and other investments.................................. 131,899 122,929
Short-term investments, loaned securities collateral.............. 152,651 -
---------- ----------
Total investments............................................. 2,814,310 2,630,209
Cash............................................................... 21,498 22,848
Accrued investment income and premiums receivable.................. 96,676 92,755
Value of acquired insurance in force and goodwill.................. 94,442 102,068
Deferred policy acquisition costs.................................. 139,171 130,192
Other assets....................................................... 134,556 144,061
Variable annuity assets............................................ 1,045,367 1,131,713
---------- ----------
Total assets.................................................. $4,346,020 $4,253,846
========== ==========
LIABILITIES, REDEEMABLE SECURITIES AND SHAREHOLDERS' EQUITY
Policy liabilities
Fixed annuity contract liabilities................................. $1,215,052 $1,238,379
Interest-sensitive life contract liabilities....................... 471,200 443,309
Unpaid claims and claim expenses................................... 301,577 309,604
Future policy benefits............................................. 178,679 179,157
Unearned premiums.................................................. 178,314 170,845
---------- ----------
Total policy liabilities....................................... 2,344,822 2,341,294
Other policyholder funds............................................ 123,273 126,530
Other liabilities................................................... 264,918 110,698
Short-term debt..................................................... 49,000 49,000
Long-term debt...................................................... 99,710 99,677
Variable annuity liabilities........................................ 1,045,367 1,126,505
---------- ----------
Total liabilities.............................................. 3,927,090 3,853,704
---------- ----------
Preferred stock..................................................... - -
Common stock........................................................ 60 59
Additional paid-in capital.......................................... 338,455 333,892
Retained earnings................................................... 470,653 449,023
Accumulated other comprehensive income (loss)
(net unrealized gains (losses) on fixed
maturities and equity securities).................................. (32,279) (40,016)
Treasury stock, at cost............................................. (357,959) (342,816)
---------- ----------
Total shareholders' equity..................................... 418,930 400,142
---------- ----------
Total liabilities, redeemable
securities, and shareholders' equity....................... $4,346,020 $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 Nine Months Ended
September 30, September 30,
----------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Insurance premiums written
and contract deposits..................... $210,002 $208,305 $608,980 $614,014
======== ======== ======== ========
Revenues
Insurance premiums and
contract charges earned................. $150,220 $149,283 $448,149 $444,062
Net investment income..................... 48,168 46,573 143,277 140,480
Realized investment losses................ (822) (423) (3,163) (8,896)
-------- -------- -------- --------
Total revenues.......................... 197,566 195,433 588,263 575,646
-------- -------- -------- --------
Benefits, losses and expenses
Benefits, claims and settlement expenses.. 112,196 104,067 329,271 315,994
Interest credited......................... 23,308 22,814 68,818 68,829
Policy acquisition expenses amortized..... 13,498 12,746 40,816 36,498
Operating expenses........................ 31,078 29,479 89,505 79,709
Amortization of intangible assets......... 2,386 1,639 7,186 5,052
Interest expense.......................... 2,593 2,406 7,625 7,283
Litigation settlement..................... - 1,550 100 1,550
-------- -------- -------- --------
Total benefits, losses and expenses..... 185,059 174,701 543,321 514,915
-------- -------- -------- --------
Income before income taxes................. 12,507 20,732 44,942 60,731
Income tax expense......................... 3,100 6,190 13,127 18,716
Provision for prior years' taxes........... (2,800) 20,000 (2,800) 20,000
-------- -------- -------- --------
Net income (loss).......................... $ 12,207 $ (5,458) $ 34,615 $ 22,015
======== ======== ======== ========
Net income (loss) per share
Basic..................................... $ 0.30 $ (0.13) $ 0.85 $ 0.53
======== ======== ======== ========
Diluted................................... $ 0.30 $ (0.12) $ 0.84 $ 0.53
======== ======== ======== ========
Weighted average number of shares
and equivalent shares (in thousands)
Basic................................... 40,550 41,026 40,872 41,318
Diluted................................. 40,708 41,647 41,040 41,881
</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,
-------------------------
2000 1999
---- ----
<S> <C> <C>
Common stock
Beginning balance................................. $ 59 $ 59
Options exercised, 2000, 565,000 shares;
1999, 12,275 shares............................. 1 -
--------- ---------
Ending balance.................................... 60 59
--------- ---------
Additional paid-in capital
Beginning balance................................. 333,892 336,686
Options exercised................................. 5,276 262
Catastrophe-linked equity put option premium...... (713) (712)
Other............................................. - (9)
--------- ---------
Ending balance.................................... 338,455 336,227
--------- ---------
Retained earnings
Beginning balance................................. 449,023 420,274
Net income........................................ 34,615 22,015
Cash dividends, 2000, $0.315 per share;
1999, $0.2775 per share......................... (12,985) (11,448)
--------- ---------
Ending balance.................................... 470,653 430,841
--------- ---------
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.............. 7,737 (73,203)
--------- ---------
Ending balance.................................. (32,279) (15,876)
--------- ---------
Treasury stock, at cost
Beginning balance, 2000, 18,258,896 shares;
1999, 17,183,596 shares......................... (342,816) (317,723)
Purchase of 1,082,400 shares in 2000;
1,075,300 shares in 1999 (See note 4)........... (15,143) (25,085)
--------- ---------
Ending balance, 2000, 19,341,296 shares;
1999, 18,258,896 shares......................... (357,959) (342,808)
--------- ---------
Shareholders' equity at end of period............... $ 418,930 $ 408,443
========= =========
Comprehensive income (loss)
Net income........................................ $ 34,615 $ 22,015
Other comprehensive income (loss)................. 7,737 (73,203)
--------- ---------
Total........................................... $ 42,352 $ (51,188)
========= =========
</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,
---------------------- ----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities
Premiums collected................................. $ 159,003 $ 162,803 $ 470,319 $ 465,906
Policyholder benefits paid......................... (108,429) (114,198) (346,440) (338,832)
Policy acquisition and other
operating expenses paid.......................... (46,854) (42,401) (138,550) (131,465)
Federal income taxes paid.......................... - (100) (16,101) (12,400)
Investment income collected........................ 48,677 49,161 145,978 142,202
Interest expense paid.............................. (4,206) (4,018) (9,156) (8,803)
Other.............................................. (176) (5,945) (2,860) (5,499)
--------- --------- --------- ---------
Net cash provided by operating activities...... 48,015 45,302 103,190 111,109
--------- --------- --------- ---------
Cash flows used in investing activities
Fixed maturities
Purchases........................................ (292,735) (120,176) (588,679) (579,148)
Sales............................................ 235,345 57,260 382,423 342,650
Maturities....................................... 64,612 67,836 198,621 215,575
Net cash used for short-term
and other investments............................ (39,645) (30,541) (5,561) (11,214)
--------- --------- --------- ---------
Net cash used in investing activities.......... (32,423) (25,621) (13,196) (32,137)
--------- --------- --------- ---------
Cash flows used in financing activities
Purchase of treasury stock......................... (4,581) - (15,143) (25,085)
Dividends paid to shareholders..................... (4,293) (3,796) (12,985) (11,448)
Principal repayments on Bank Credit Facility....... - - - (1,000)
Exercise of stock options.......................... 512 139 5,277 262
Catastrophe-linked equity put option premium....... (238) (237) (713) (712)
Annuity contracts, variable and fixed
Deposits......................................... 46,917 45,491 146,394 152,671
Maturities and withdrawals....................... (78,344) (64,637) (244,333) (181,581)
Net transfer from (to) variable annuity assets... 16,543 4,770 33,672 (4,365)
Net increase (decrease) in
life policy account balances..................... (1,238) (1,622) (3,513) (1,012)
--------- --------- --------- ---------
Net cash used in financing activities.......... (24,722) (19,892) (91,344) (72,270)
--------- --------- --------- ---------
Net increase (decrease) in cash..................... (9,130) (211) (1,350) 6,702
Cash at beginning of period......................... 30,628 18,957 22,848 12,044
--------- --------- --------- ---------
Cash at end of period............................... $ 21,498 $ 18,746 $ 21,498 $ 18,746
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 September 30,
2000 and December 31, 1999 and the consolidated results of operations, changes
in shareholders' equity and cash flows for the three and nine months ended
September 30, 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 and nine months ended September 30,
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>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Short-term debt:
$65,000 Bank Credit Facility, commitment to
December 31, 2001. (IBOR + 0.325%, 7.0%
as of September 30, 2000)................... $ 49,000 $ 49,000
Long-term debt:
6 5/8% Senior Notes, due January 15, 2006.
Face amount less unaccrued discount
of $290 and $323 (6.7% imputed rate)........ 99,710 99,677
--------- --------
Total................................. $ 148,710 $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 September 30, 2000
--------------------------- ----------------------
Rating of Fixed September 30, December 31, Carrying Amortized
Maturity Securities(1) 2000 1999 Value Cost
---------------------- ------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
AAA................... 42.8% 46.3% $1,081,555 $1,087,991
AA.................... 7.6 7.7 192,358 191,892
A..................... 20.4 20.2 515,249 520,840
BBB................... 23.1 18.8 584,106 608,335
BB.................... 1.5 2.0 38,787 42,610
B..................... 4.2 4.7 107,564 113,840
CCC or lower.......... 0.1 - 3,499 9,465
Not rated(2).......... 0.3 0.3 6,642 7,189
----- ----- ---------- ----------
Total............. 100.0% 100.0% $2,529,760 $2,582,162
===== ===== ========== ==========
</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 $931 of publicly traded securities not
currently rated by S&P or Moody's and $5,711 of private placement
securities not rated by either S&P or Moody's. The National Association of
Insurance Commissioners (the "NAIC") has rated 97.9% 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
---------------------------- -------------
September 30, December 31, September 30,
Scheduled Maturity 2000 1999 2000
------------------ -------------- ------------ -------------
<S> <C> <C> <C>
Due in 1 year or less................ 7.2% 7.0% $ 182,773
Due after 1 year through 5 years..... 27.1 31.0 686,324
Due after 5 years through 10 years... 30.2 31.5 763,902
Due after 10 years through 20 years.. 15.9 15.9 401,734
Due after 20 years................... 19.6 14.6 495,027
----- ----- ----------
Total.......................... 100.0% 100.0% $2,529,760
===== ===== ==========
</TABLE>
7
<PAGE>
Note 3 - Investments-(Continued)
The Company loans fixed income securities to third parties, primarily major
brokerage firms. As of September 30, 2000, fixed maturities with a fair value of
$152,651 were on loan. There were no securities on loan at 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 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 nine months of 2000, the Company repurchased 1,082,400
shares of its common stock, or 3% of the outstanding shares on December 31,
1999, at an aggregate cost of $15,143, or an average cost of $13.99 per share,
under its stock repurchase program. Since early 1997, 8,165,100 shares, or 17%
of the shares outstanding on December 31, 1996, have been repurchased at an
aggregate cost of $203,657, equal to an average cost of $24.94 per share.
Including shares repurchased in 1995, the Company has repurchased 33% 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
September 30, 2000, $96,343 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 $20,000 representing the maximum
exposure of the Company to the IRS with regard to the issue for all of the past
tax years in question (1994 through 1997). 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. This reserve was a charge to net income in 1999.
In the third quarter of 2000, the Company reached a final resolution with
the IRS for the tax years 1994 and 1995. These years were settled in an amount
that was $2,800 less than was previously accrued and that amount has been
included in net income for the nine months ended September 30, 2000.
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
September 30, 2000
----------------------------------
<S> <C> <C> <C> <C>
Premiums written.............. $211,571 $ 8,458 $ 6,889 $210,002
Premiums earned............... 151,691 6,893 5,422 150,220
Benefits, claims and
settlement expenses......... 115,852 10,051 6,395 112,196
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
Nine months ended
September 30, 2000
----------------------------------
Premiums written.............. $613,764 $25,044 $20,260 $608,980
Premiums earned............... 451,937 19,334 15,546 448,149
Benefits, claims and
settlement expenses......... 337,280 26,432 18,423 329,271
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
</TABLE>
9
<PAGE>
Note 6 - Reinsurance-(Continued)
The Company maintains an excess and catastrophe treaty reinsurance program.
The Company reinsures 95% of catastrophe losses above a retention of $7,500 per
occurrence up to $80,000 per occurrence in 2000. These programs are augmented by
a $100,000 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.
The equity put provides a source of capital for up to $154,000 of catastrophe
losses, before tax benefits, 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 $500 up to $20,000. The Company
also reinsures each property loss above a retention of $500 up to $2,500,
including catastrophe losses that in the aggregate are less than the retention
levels above.
The maximum individual life insurance risk retained by the Company is $200
on any individual life and $100 on each group life policy. Excess amounts are
reinsured.
10
<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 Nine Months Ended
September 30, September 30,
--------------------- ----------------------
2000 1999 2000 1999
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Insurance premiums and
contract charges earned
Property and casualty.................... $ 123,044 $122,776 $366,681 $365,889
Annuity.................................. 4,378 4,273 13,097 12,533
Life..................................... 23,120 22,234 69,305 65,640
Intersegment eliminations................ (322) - (934) -
---------- -------- -------- --------
Total................................ $ 150,220 $149,283 $448,149 $444,062
========== ======== ======== ========
Net investment income
Property and casualty...................... $ 8,831 $ 9,170 $ 26,618 $ 27,561
Annuity.................................... 26,482 25,962 78,740 78,827
Life....................................... 12,813 11,705 37,823 34,879
Corporate and other........................ 342 90 996 185
Intersegment eliminations.................. (300) (354) (900) (972)
---------- -------- -------- --------
Total................................ $ 48,168 $ 46,573 $143,277 $140,480
========== ======== ======== ========
Net income (loss)
Operating income
Property and casualty.................... $ 6,300 $ 9,414 $ 18,266 $ 25,807
Annuity.................................. 5,747 6,077 16,777 18,736
Life..................................... 3,955 3,111 10,682 11,595
Corporate and other,
including interest expense............. (6,061) (2,777) (11,789) (7,333)
---------- -------- -------- --------
Total operating income............... 9,941 15,825 33,936 48,805
Realized investment gains (losses),
after tax................................ (534) (275) (2,056) (5,782)
Litigation settlement, after tax........... - (1,008) (65) (1,008)
Provision for prior years' taxes........... 2,800 (20,000) 2,800 (20,000)
---------- -------- -------- --------
Total................................ $ 12,207 $ (5,458) $ 34,615 $ 22,015
========== ======== ======== ========
Amortization of intangible assets
Value of acquired insurance in force
Property and casualty.................... $ - $ 203 $ - $ 719
Annuity.................................. 1,486 500 4,463 1,502
Life..................................... 495 531 1,509 1,617
---------- -------- -------- --------
Subtotal............................... 1,981 1,234 5,972 3,838
Goodwill................................... 405 405 1,214 1,214
---------- -------- -------- --------
Total................................ $ 2,386 $ 1,639 $ 7,186 $ 5,052
========== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
Assets 2000 1999
------------ -----------
<S> <C> <C>
Property and casualty................. $ 715,106 $ 681,432
Annuity............................... 2,599,431 2,611,766
Life.................................. 924,185 840,594
Corporate and other................... 148,017 153,493
Intersegment eliminations............. (40,719) (33,439)
------------ -----------
Total............................. $ 4,346,020 $ 4,253,846
============ ===========
</TABLE>
11
<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.
12
<PAGE>
Nine Months Ended September 30, 2000 Compared To Nine Months Ended September 30,
1999
Insurance Premiums and Contract Charges
In April 2000, the Company's management announced steps that are being
taken to re-energize 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. Through September 2000, analysis of these strategic initiatives has been
completed. Management expects to begin implementing specific plans that address
these initiatives during the fourth quarter of 2000.
Insurance Premiums Written and Contract Deposits
<TABLE>
<CAPTION>
Nine Months Ended Growth Over
September 30, Prior Year
----------------- ----------------
2000 1999 Percent Amount
------- ------ ------- ------
<S> <C> <C> <C> <C>
Automobile and property (voluntary).. $ 357.2 $354.9 0.6% $ 2.3
Annuity deposits..................... 146.4 152.7 -4.1% (6.3)
Life................................. 88.5 87.1 1.6% 1.4
------- ------ ------
Subtotal - core lines............ 592.1 594.7 -0.4% (2.6)
Involuntary and other
property & casualty................ 16.9 19.3 -12.4% (2.4)
------- ------ ------
Total............................ $ 609.0 $614.0 -0.8% $ (5.0)
======= ====== ======
</TABLE>
Insurance Premiums and Contract Charges Earned
(Excludes annuity and life contract deposits)
<TABLE>
<CAPTION>
Nine Months Ended Growth Over
September 30, Prior Year
----------------- ----------------
2000 1999 Percent Amount
------- ------- ------- ------
<S> <C> <C> <C> <C>
Automobile and property (voluntary)... $ 351.1 $ 347.6 1.0% $ 3.5
Annuity............................... 13.1 12.5 4.8% 0.6
Life.................................. 68.4 65.7 4.1% 2.7
------- ------- ------
Subtotal - core lines............ 432.6 425.8 1.6% 6.8
Involuntary and other
property & casualty................ 15.5 18.3 -15.3% (2.8)
------- ------- ------
Total............................ $ 448.1 $ 444.1 0.9% $ 4.0
======= ======= ======
</TABLE>
Through nine months, premiums written and contract deposits for the
Company's core lines were comparable to a year earlier, as gains in life and
property insurance premiums were offset by a decline in annuity deposits for the
first half of the year. This nine month comparison includes the North Carolina
settlement described below. However, premiums written and contract deposits for
the third quarter of 2000 increased 1.2% over a year earlier, including a 3.1%
growth in annuity deposits.
13
<PAGE>
At September 30, 2000, the Company's exclusive agent force totaled 988, a
6.2% decline from a year ago. The number of experienced agents in the agent
force, 660, was down 4.8% at September 30, 2000, compared to a year ago. The
Company has had higher than normal terminations of new and experienced agents in
2000, but those agents have generally been the Company's less productive agents.
As a result, overall agent productivity is increasing. In addition, hiring of
new agents during the first nine months of 2000 increased 15.2% from the same
period last year. Modifications have been made to agent recruiting and the new
agents' finance programs in 2000 that management believes will have a positive
impact on agent growth in the future. Also, the Company's agency management team
has been strengthened through the promotions of several of its experienced
agents.
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 $2.4
million pretax, comprised of $1.6 million premium refunds and $0.8 million
interest charges. North Carolina is the Company's largest property and casualty
state representing approximately 7% of total premiums.
Total voluntary automobile and homeowners premium written growth was 0.6%
for the first nine months of 2000, including the effect of the North Carolina
settlement. The average premium per policy increased for both automobile and
homeowners, as did the number of homeowners policies in force. The number of
automobile policies in force was slightly lower than year-earlier levels.
Automobile insurance premium decreased slightly ($3.1 million, or 1.1%) compared
to the first nine months of last year, and homeowners premium increased 6.6%
($5.4 million). The property and casualty increase in premiums resulted from
growth in average premium per policy of 1% for automobile and approximately 2.5%
for homeowners, compared to a year earlier. Over the prior 12 months, unit
growth was 0.8%, bringing policies in force at September 30, 2000 to 880,000.
Compared to December 31, 1999, total property and casualty policies in force
increased 8,000 with all of the increase attributable to homeowners insurance.
Based on policies in force, the property and casualty 12-month retention
rate for new and renewal policies was 88%, comparable to the 12 months ended
September 30, 1999.
For the first time since the fourth quarter of 1998, annuity contract
deposits for the quarter exceeded the same period in the prior year. The growth
of 3.1% compared to the third quarter of 1999 included 22.4% growth in new
single premium and rollover deposits, primarily as a result of marketing
programs implemented in the second quarter of 2000. Compared to the first nine
months of 1999, new annuity deposits decreased 4.1%, reflecting a 5.0% decrease
in new single premium and rollover deposits and a 3.7% decrease in scheduled
deposits received. New deposits to variable mutual fund annuities decreased 6.9%
and new deposits to fixed annuities were 0.5% higher than the first nine months
of 1999. Variable annuity accumulated funds on deposit at September 30, 2000
were $1.0 billion, $39.7 million less than a year ago, a 3.7% decrease. Variable
annuity accumulated deposit retention decreased 5.3 percentage points over the
12 months to 84.5%. Fixed annuity cash value retention for the 12 months ended
September 30, 2000 was 88.8%, 4.0 percentage points lower than the same period
last year. Over the last 12 months, the number of annuity contracts outstanding
increased 1.6%, or 2,000 contracts.
14
<PAGE>
At September 30, 2000, approximately 75% of accumulated variable annuity
funds on deposit were in the Company's Equity and Balanced mutual funds.
Investment returns for these two funds have been less than their comparable
Lipper average returns in recent periods contributing to the higher level of
surrenders this year compared to 1999. In 2000, the Company has taken actions to
increase the variable annuity options available to customers. In May 2000, the
Company introduced two additional variable annuity fund options. In September
2000, an additional 21 variable annuity fund options were introduced to the
Company's customers, tripling the number of variable annuity fund options
available and providing increased diversity of investment choices. At the same
time, the Company's sales force began utilizing customized software to support
the financial planning process.
Life premium growth was 1.6% for the first nine months of 2000, compared to
the same period in 1999. The life insurance in force lapse ratio was 8.8% for
the twelve months ended September 30, 2000, compared to 8.1% for the same period
last year.
Net Investment Income
Investment income of $143.3 million for the first nine months of 2000
increased 2.0%, or $2.8 million, (also 2.0% after tax) compared to the same
period last year primarily due to growth in the average investment portfolio.
Average investments (excluding the securities lending collateral) increased
1.3%, compared to the first nine months of 1999. The average pretax yield on the
investment portfolio was 7.1% (4.7% after tax) for the first nine months of
2000, compared to a pretax yield of 7.0% (4.7% after tax) last year. 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 to $154.9 million
for the first nine months of 2000, compared to $150.3 million in the first nine
months of 1999, an increase of 3.1%, or $4.6 million.
Realized Investment Gains and Losses
Net realized investment losses were $3.2 million for the nine months ended
September 30, 2000, compared to net realized investment losses of $8.9 million
for the first nine months of 1999. For both periods, most of the net realized
gains and losses occurred in the fixed income portfolios.
Benefits, Claims and Settlement Expenses
<TABLE>
<CAPTION>
Nine Months Ended Growth Over
September 30, Prior Year
----------------- ----------------
2000 1999 Percent Amount
------ ------ ------- ------
<S> <C> <C> <C> <C>
Property and casualty.......... $295.3 $285.1 3.6% $10.2
Life........................... 34.0 30.9 10.0% 3.1
------ ------ -----
Total........................ $329.3 $316.0 4.2% $13.3
====== ====== =====
Property and casualty
statutory loss ratio:
Before catastrophe losses.. 77.0% 72.8% 4.2%
After catastrophe losses... 80.5% 77.9% 2.6%
</TABLE>
15
<PAGE>
In 2000, the Company had a higher level of non-catastrophe property losses
including: losses on lower value homes; non-catastrophe weather-related property
claims; and greater-than-expected fire losses. The non-catastrophe property loss
ratio was 91.4% in the second quarter of 2000, compared to 72.8% in the same
period last year and 79.0% in the first quarter of 2000. The Company is
addressing the factors that caused the increase in non-catastrophe property
losses through pricing, underwriting and loss control initiatives.
The non-catastrophe property loss ratio was 82.8% in the third quarter of 2000,
compared to 78.1% last year. Although the Company's actions have begun to have
an impact, management expects that the full impact of these changes will not be
realized until well into 2001. Management anticipates that these actions will
enable the Company to improve the profitability of its existing book of
homeowners business and attract new business that meets its profitability
standards.
For the nine months, the increase in non-catastrophe property losses more
than offset the Company's decline in catastrophe losses. Catastrophe losses were
$12.8 million in the first nine months of 2000 and $18.9 million in the first
nine months of 1999, a decrease of 32.3%.
The voluntary automobile loss ratio excluding catastrophe losses was 74.4%
for the first nine months of 2000, 3.3 percentage points higher than the same
period last year. This increase was primarily due to the loss trends experienced
in the third quarter and a reduced level of prior year reserve releases in 2000
compared to the same period last year. On a per-policy basis for the nine
months, average voluntary automobile premium increased 1% and average current
accident year loss costs increased 2% compared to last year. For the third
quarter of 2000, the Company's voluntary automobile line reflected growth in
average per-policy loss costs for the current accident year of 4.7%. This was a
change from results reported for the first six months of 2000 and was primarily
due to loss experience in the month of August. Voluntary automobile loss
experience in September and October 2000 returned to historical levels.
Property and casualty results for the first nine months of 2000 included
continuation of favorable development of prior years reserves, however at
a level that was less than prior year. Favorable development of property and
casualty claims occurring in prior years, excluding involuntary business, was
$2.0 million in the first nine months of 2000, compared to $10.1 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 nine months of 2000,
compared to $8.6 million for the same period in 1999. At September 30, 2000,
property and casualty reserves continue to be conservatively stated, although at
a somewhat reduced level compared to recent periods. The reduced conservatism is
largely due to anomalies observed during the third quarter of 2000, primarily in
the voluntary automobile line, that adversely impacted reserve indications,
including an increase in incurred losses over $100,000. These unusual items are
under review and will continue to be monitored during the fourth quarter of
2000.
Life mortality was slightly higher in the first nine months of 2000 than in
the same period in 1999. 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.
16
<PAGE>
Interest Credited to Policyholders
<TABLE>
<CAPTION>
Nine Months Ended Growth Over
September 30, Prior Year
----------------- ----------------
2000 1999 Percent Amount
------ ---- ------- ------
<S> <C> <C> <C> <C>
Annuity........ $ 49.1 $50.6 -3.0% $ (1.5)
Life........... 19.7 18.2 8.2% 1.5
------ ----- ------
Total........ $ 68.8 $68.8 - $ -
====== ===== ======
</TABLE>
Interest credited to fixed annuity contracts decreased as the fixed annuity
average annual interest rate credited decreased 0.1 percentage points to 5.0% in
the first nine months of 2000, compared to the same period in 1999. In addition,
the average accumulated deposits for the nine months ended September 30, 2000
decreased 1% 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 nine months of 2000, operating expenses increased $9.7
million, or 12.2%, 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 $2.5 million, or approximately $0.04 per
share after tax benefits, attributable to the chief executive officer
transition. In addition, operating expenses for the first nine months of 2000
included a higher level of costs to support business growth initiatives.
The total corporate expense ratio on a statutory accounting basis was 23.5%
for the nine months ended September 30, 2000, 1.7 percentage points higher than
the same period in 1999. The property and casualty expense ratio, the 14th
lowest of the 100 largest property and casualty insurance groups for 1999 (the
most recent industry ranking available), was 19.4% for the nine months ended
September 30, 2000, compared to 19.2% 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 for the Company
increased 6.9%.
Amortization of Policy Acquisition Expenses and Intangible Assets
For the first nine months of 2000, the combined amortization of policy
acquisition expenses and intangible assets of $48.0 million increased by $6.4
million, or 15.4%, compared to the same period in 1999.
Amortization of intangible assets increased by $2.1 million to $7.2 million
for the nine months ended September 30, 2000, compared to $5.1 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 $3.0 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 nine months of 2000. Assuming 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
17
<PAGE>
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 $0.7 million for the first nine months of 1999.
Policy acquisition expenses amortized for the nine months ended September
30, 1999 of $36.5 million were $4.3 million lower than the current period
including a $1.6 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 29.2% for the nine months ended September
30, 2000, compared to 30.8% for the same period last year. Income from
investments in tax-advantaged securities reduced the effective income tax rate
6.7 and 4.5 percentage points for the nine months ended September 30, 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 (1994 through 1997). 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. This reserve was a charge to net income in 1999 but
was excluded from the determination of reported operating income. In the third
quarter of 2000, the Company reached a final resolution with the IRS for the tax
years 1994 and 1995. These years were settled in an amount that was $2.8 million
less than was previously accrued and that amount has been included in net income
for the nine months ended September 30, 2000.
Operating Income
For the first nine months of 2000, operating income (net income before the
after-tax impact of realized investment gains and losses and non-recurring
charges) decreased 30.5%, or $14.9 million, and operating income per share on a
diluted basis of $0.83 decreased 29.1%, or $0.34 per share.
Operating income for the first nine months of 2000 was affected adversely
by five items. (1) In the second quarter of 2000, there was a higher level of
non-catastrophe property losses including: losses on lower value homes; non-
catastrophe weather-related property claims; and greater-than-expected fire
losses. (2) Property and casualty reserve releases in 2000 through September 30
were lower than those for the first nine months of 1999. (3) In the third
quarter of 2000, there was a deterioration in voluntary automobile loss trends.
(4) In the first nine months of 2000, holding company expenses were higher than
the prior year including expenses
18
<PAGE>
attributable to the chief executive officer transition and costs to support
business growth initiatives. And, (5) the Company's portion of the adverse
automobile insurance rate settlement in North Carolina, as described
above, of $1.6 million after tax, or approximately $0.04 per share, was
recorded in the first quarter of 2000. In addition, comparisons to operating
income for the first nine months of 1999 were adversely impacted by
non-recurring items in the first quarter of 1999, primarily in the life
segment, totaling approximately $0.04 per share.
Operating income by segment was as follows:
<TABLE>
<CAPTION>
Nine Months Ended Growth Over
September 30, Prior Year
----------------- ----------------
2000 1999 Percent Amount
----- ------ ------- ------
<S> <C> <C> <C> <C>
Property & casualty
Before catastrophe losses........ $26.6 $ 38.0 -30.0% $(11.4)
Catastrophe losses, after tax.... (8.3) (12.3) 4.0
----- ------ -----
Total including catastrophe
losses..................... 18.3 25.7 -28.8% (7.4)
Annuity............................ 16.8 18.7 -10.2% (1.9)
Life............................... 10.6 11.6 -8.6% (1.0)
Corporate and other expense........ (6.8) (2.5) (4.3)
Interest expense, after tax........ (5.0) (4.7) (0.3)
----- ------ -----
Total........................ $33.9 $ 48.8 -30.5% $(14.9)
===== ====== ======
Total before catastrophe
losses..................... $42.2 $ 61.1 -30.9% $(18.9)
===== ====== ======
Property and casualty
statutory combined ratio:
Before catastrophe losses...... 96.4% 92.0% 4.4%
After catastrophe losses....... 99.9% 97.1% 2.8%
</TABLE>
Property and casualty segment operating income was lower than in the first
nine months of 1999 primarily due to a higher level of non-catastrophe property
losses, a lower level of prior year reserve releases, a deterioration in
voluntary automobile loss trends in the third quarter of 2000, and 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 $1.6 million after tax. Property and
casualty segment earnings for the first nine months of 2000 also were
affected negatively by lower than expected business volume in the automobile
line partially offset by a $4.0 million decrease in after tax catastrophe
losses. During the first nine months of 2000, the Company's average voluntary
automobile insurance premium per policy increased 1% while average loss costs
increased 2%, compared to the same period last year.
The property and casualty combined ratio before catastrophes of 96.4% was
4.4 percentage points higher than the first nine months of 1999, reflecting the
factors cited above. Favorable development of property and casualty claims
occurring in prior years (excluding involuntary business), was $1.3 million
after tax in the first nine months of 2000, compared to $6.6 million after tax
for the same period in 1999. Favorable development of total property and
casualty claims occurring in prior years was also $1.3 million after tax in the
first nine months of 2000, compared to $5.6 million after tax for the same
period in 1999.
19
<PAGE>
Annuity segment operating income was below the year-earlier total.
Increases in both annuity interest rate spreads and contract fees in the first
nine months of 2000 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 half of 2000. In 2000, operating expenses in the
annuity segment include a higher level of new product development costs. For
the nine months, the net interest margin increased 5.0% and fees and contract
charges earned increased 4.8%. Variable annuity accumulated deposits were $1.0
billion at September 30, 2000, $39.7 million, or 3.7%, less than 12 months
earlier. Fixed annuity accumulated cash value of $1.3 billion was $29.1
million, or 2.1%, less than September 30, 1999.
Life insurance earnings for the first nine 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 comparable to a year
ago. Mortality costs for the first nine months of 2000 were slightly higher
than the same period last year.
The cumulative effect of the Company's share repurchase program, since
initiation in 1997, reduced operating income by $7.5 million for the nine months
ended September 30, 2000, reflecting utilization of capital and the
corresponding reduction of net investment income, and reduced earnings per share
by $0.02 for the period including the reduction in the number of shares
outstanding. The negative effect on earnings per share is due to the lower
level of earnings in 2000.
Net Income
Net Income Per Share, Diluted
<TABLE>
<CAPTION>
Nine Months Ended Growth Over
September 30, Prior Year
------------------- ---------------------
2000 1999 Percent Amount
------ ------ ----------- ------
<S> <C> <C> <C> <C>
Operating income.................... $ 0.83 $ 1.17 -29.1% $(0.34)
Realized investment gains (losses).. (0.06) (0.14) 0.08
Litigation settlement............... - (0.02) 0.02
Provision for prior years' taxes.... 0.07 (0.48) 0.55
------ ------ ------
Net income........................ $ 0.84 $ 0.53 58.5% $ 0.31
====== ====== ======
</TABLE>
Net income, which includes realized investment gains and losses and non-
recurring charges, for the first nine months of 2000 increased by 57.3% and net
income per diluted share increased by 58.5% compared to the same period in 1999.
This change includes the $14.9 million decline in operating income offset by
the $2.8 million benefit in the current period related to prior years' taxes
compared to the $20.0 million provision recorded last year (see the description
above). Net income also reflected $2.1 million of after tax realized investment
losses for the first nine months of 2000, compared to $5.8 million of after tax
realized investment losses in the same period last year. During the second
quarter of 2000, all remaining suits that had been filed in Alabama related to
life insurance policies were settled at a cost of $0.1 million after tax and
after receipt of insurance proceeds. For the nine months ended September 30,
1999, a charge of $1.0 million after tax and after receipt of insurance proceeds
was recorded for this litigation in Alabama.
20
<PAGE>
Return on shareholders' equity based on both operating income and net income
for the last 12 months was 14%.
Liquidity and Financial Resources
Investments
The Company's investment strategy emphasizes investment grade, publicly
traded fixed income securities. At September 30, 2000, fixed income securities
represented 95.0% of investments excluding the securities lending collateral.
Of the fixed income investment portfolio, 93.9% was investment grade and 99.8%
was publicly traded. The average quality of the total fixed income portfolio
was A+ at September 30, 2000.
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 4.5 years at September 30, 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. Cash
provided by operating activities primarily reflects net cash generated by the
insurance subsidiaries. Net cash provided by operating activities was
approximately $8 million less than the first nine months of 1999.
Payment of principal and interest on debt, fees related to the catastrophe-
linked equity put option and reinsurance agreement, 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
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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.
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 option and reinsurance
agreement, which augments its other reinsurance program, have been charged
directly to additional paid-in capital.
For the first nine months of 2000, receipts from annuity contracts decreased
4.1% primarily reflecting a similar reduced level of both scheduled annuity
deposits and single premium and rollover deposits received. Annuity contract
maturities and withdrawals increased $62.7 million, or 34.5%, 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 5.3 percentage points over the 12 months to 84.5%. Net transfers to
variable annuity assets decreased $38.0 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 88.8% for the
12 months ended September 30, 2000, 4.0 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 through September 30, 2000, the Company repurchased
1,082,400 shares of its common stock, or 3% of the shares outstanding on
December 31, 1999, at an aggregate cost of $15.1 million, or an average cost of
$13.99 per share, under its stock repurchase program. Repurchases in 2000
compare to 1,075,300 shares repurchased in the first nine months of 1999 at an
aggregate cost of $25.1 million. The Company's share repurchase program was
suspended by its Board of Directors on August 2, 1999 related to the
consideration of strategic alternatives. The repurchase of shares was financed
through use of cash and, when necessary, the Bank Credit Facility. As of
September 30, 2000, $96.3 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
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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 $567.6 million at September 30, 2000,
including $99.7 million of long-term debt and $49.0 million of short-term debt.
Total debt represented 24.8% of capital (excluding unrealized investment losses)
at September 30, 2000 at the upper end of the Company's target operating range
of 20% to 25%.
Shareholders' equity was $418.9 million at September 30, 2000, including an
unrealized loss in the Company's investment portfolio of $32.3 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
value per share were $663.4 million and $16 3/8, respectively, at September 30,
2000. Book value per share was $10.34 at September 30, 2000, $11.14 excluding
investment market value adjustments. At September 30, 1999, book value per
share was $9.96, $10.35 excluding investment market value adjustments. The
increase over the 12 months included the effects of unrealized investment gains
and losses and share repurchases. Excluding these items, book value per share
increased 9% 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-), Fitch, Inc. (formerly Duff & Phelps Credit Rating Co.)
(A), and Moody's Investors Service, Inc. ("Moody's") (Baa1) and are traded on
the New York Stock Exchange (HMN 6 5/8).
As of both September 30, 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 7.0%, as of September 30,
2000. 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, 2000 was 6.9x compared to 9.3x for the same period in 1999. The
decline was primarily attributable to the factors affecting operating income
that were described above.
Total shareholder dividends were $13.0 million for the nine months ended
September 30, 2000. 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
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option to sell shares of the Company's convertible preferred stock with a
floating rate dividend at a pre-negotiated price in the event losses from
catastrophes, individually or in the aggregate during a calendar year, exceed
the catastrophe reinsurance program coverage limit. 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.
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 nine 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.
Recent Accounting Changes
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133" and SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," which is
required to be adopted in 2001. This statement will not have a material impact
on the Company because it does not have significant holdings of derivatives or
hedges, as defined within the context of SFAS No. 133.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities"--a
replacement of FASB SFAS No. 125. SFAS No. 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral, but it carries over most of SFAS No. 125's provisions without
reconsideration. This statement is effective for transactions occurring after
March 31, 2001 but is not expected to have a material impact on the Company's
accounting for its lending of fixed income securities to third parties.
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.
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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
-------- -----------
(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 2000.
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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 13, 2000 /s/ Louis G. Lower II
----------------------------- ------------------------------------------
Louis G. Lower II
President and Chief Executive Officer
Date November 13, 2000 /s/ Peter H. Heckman
---------------------------- ------------------------------------------
Peter H. Heckman
Executive Vice President
and Chief Financial Officer
Date November 13, 2000 /s/ Thomas K. Manion
---------------------------- ------------------------------------------
Thomas K. Manion
Senior Vice President
and Controller
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