<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[x]QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 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 JUNE 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
June 30, 2000 and December 31, 1999.................................. 2
Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2000 and 1999.................... 3
Consolidated Statements of Changes in Shareholders' Equity
for the Six Months Ended June 30, 2000 and 1999...................... 4
Consolidated Statements of Cash Flows for the
Three and Six Months Ended June 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.................................... 26
SIGNATURES............................................................................ 28
</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 June 30, 2000 and the related consolidated
statements of operations and cash flows for the three-month and six-month
periods ended June 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 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
July 31, 2000
1
<PAGE>
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Investments
Fixed maturities, available for sale, at market (amortized
cost, 2000, $2,584,099; 1999, $2,575,403)........................... $ 2,507,064 $ 2,507,280
Short-term and other investments....................................... 89,015 122,929
Short-term investments, loaned securities collateral................... 112,710 -
----------- -----------
Total investments................................................ 2,708,789 2,630,209
Cash ...................................................................... 30,628 22,848
Accrued investment income and premiums receivable.......................... 86,562 92,755
Value of acquired insurance in force and goodwill.......................... 96,566 102,068
Deferred policy acquisition costs.......................................... 134,987 130,192
Other assets............................................................... 163,444 144,061
Variable annuity assets.................................................... 1,059,674 1,131,713
----------- -----------
Total assets..................................................... $ 4,280,650 $ 4,253,846
=========== ===========
LIABILITIES, REDEEMABLE SECURITIES AND SHAREHOLDERS' EQUITY
Policy liabilities
Fixed annuity contract liabilities..................................... $ 1,217,181 $ 1,238,379
Interest-sensitive life contract liabilities........................... 461,962 443,309
Unpaid claims and claim expenses....................................... 301,043 309,604
Future policy benefits................................................. 178,909 179,157
Unearned premiums...................................................... 167,025 170,845
----------- -----------
Total policy liabilities ........................................ 2,326,120 2,341,294
Other policyholder funds................................................... 123,257 126,530
Other liabilities.......................................................... 227,681 110,698
Short-term debt............................................................ 49,000 49,000
Long-term debt............................................................. 99,699 99,677
Variable annuity liabilities............................................... 1,054,458 1,126,505
----------- -----------
Total liabilities................................................ 3,880,215 3,853,704
----------- -----------
Preferred stock............................................................ - -
Common stock............................................................... 60 59
Additional paid-in capital................................................. 338,181 333,892
Retained earnings ......................................................... 462,739 449,023
Accumulated other comprehensive income (loss)
(net unrealized gains (losses) on fixed
maturities and equity securities)...................................... (47,167) (40,016)
Treasury stock, at cost.................................................... (353,378) (342,816)
----------- -----------
Total shareholders' equity....................................... 400,435 400,142
----------- -----------
Total liabilities, redeemable
securities, and shareholders' equity...................... $ 4,280,650 $ 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 Six Months Ended
June 30, June 30,
--------------------------- ----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Insurance premiums written
and contract deposits....................................... $204,466 $207,644 $398,978 $405,709
======== ======== ======== ========
Revenues
Insurance premiums and
contract charges earned.................................. $150,590 $148,535 $297,929 $294,779
Net investment income....................................... 47,601 46,983 95,109 93,907
Realized investment gains (losses).......................... 204 (5,336) (2,341) (8,473)
-------- -------- -------- --------
Total revenues........................................... 198,395 190,182 390,697 380,213
-------- -------- -------- --------
Benefits, losses and expenses
Benefits, claims and settlement expenses.................... 113,864 110,667 217,075 211,927
Interest credited........................................... 22,755 22,882 45,510 46,015
Policy acquisition expenses amortized....................... 13,577 13,023 27,318 23,752
Operating expenses.......................................... 29,222 24,494 58,427 50,230
Amortization of intangible assets........................... 2,399 1,706 4,800 3,413
Interest expense............................................ 2,521 2,423 5,032 4,877
Litigation settlement....................................... 100 - 100 -
-------- -------- -------- --------
Total benefits, losses and expenses...................... 184,438 175,195 358,262 340,214
-------- -------- -------- --------
Income before income taxes...................................... 13,957 14,987 32,435 39,999
Income tax expense.............................................. 4,275 4,565 10,027 12,526
-------- -------- -------- --------
Net income...................................................... $ 9,682 $ 10,422 $ 22,408 $ 27,473
-------- -------- -------- --------
Net income per share
Basic ...................................................... $ 0.24 $ 0.25 $ 0.55 $ 0.66
======== ======== ======== =========
Diluted..................................................... $ 0.23 $ 0.25 $ 0.54 $ 0.65
======== ======== ======== =========
Weighted average number of shares
and equivalent shares (in thousands)
Basic.................................................... 40,913 41,131 41,034 41,467
Diluted.................................................. 41,085 41,663 41,218 41,996
</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>
Six Months Ended
June 30,
-------------------------------------
2000 1999
---- ----
<S> <C> <C>
Common stock
Beginning balance...................................................... $ 59 $ 59
Options exercised, 2000, 515,000 shares;
1999, 6,550 shares.................................................. 1 -
---------- -----------
Ending balance......................................................... 60 59
---------- -----------
Additional paid-in capital
Beginning balance...................................................... 333,892 336,686
Options exercised...................................................... 4,764 123
Catastrophe-linked equity put option premium........................... (475) (475)
---------- -----------
Ending balance......................................................... 338,181 336,334
---------- -----------
Retained earnings
Beginning balance...................................................... 449,023 420,274
Net income............................................................. 22,408 27,473
Cash dividends, 2000, $0.21 per share;
1999, $0.185 per share.............................................. (8,692) (7,652)
---------- -----------
Ending balance......................................................... 462,739 440,095
---------- -----------
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.................................. (7,151) (57,490)
---------- -----------
Ending balance...................................................... (47,167) (163)
---------- -----------
Treasury stock, at cost
Beginning balance, 2000, 18,258,896 shares;
1999, 17,183,596 shares............................................. (342,816) (317,723)
Purchase of 720,000 shares in 2000;
1,075,300 shares in 1999 (See note 4)............................... (10,562) (25,021)
---------- -----------
Ending balance, 2000, 18,978,896 shares;
1999, 18,258,896 shares............................................. (353,378) (342,744)
---------- -----------
Shareholders' equity at end of period...................................... $ 400,435 $ 433,581
========== ===========
Comprehensive income (loss)
Net income............................................................. $ 22,408 $ 27,473
Other comprehensive income (loss)...................................... (7,151) (57,490)
---------- -----------
Total ............................................................. $ 15,257 $ (30,017)
========== ===========
</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 Six Months Ended
June 30, June 30,
---------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities
Premiums collected......................................... $ 154,401 $ 145,926 $ 311,316 $ 303,103
Policyholder benefits paid................................. (120,122) (111,141) (238,011) (224,634)
Policy acquisition and other operating expenses paid....... (48,482) (44,455) (91,696) (89,064)
Federal income taxes paid.................................. (14,501) (10,800) (16,101) (12,300)
Investment income collected................................ 45,798 44,148 97,301 93,041
Interest expense paid...................................... (827) (718) (4,950) (4,785)
Other ..................................................... (1,535) 1,079 (2,684) 382
--------- --------- --------- ---------
Net cash provided by operating activities.............. 14,732 24,039 55,175 65,743
--------- --------- --------- ---------
Cash flows used in investing activities
Fixed maturities
Purchases................................................ (194,778) (226,504) (295,944) (458,972)
Sales .................................................. 86,739 139,896 147,078 285,390
Maturities............................................... 73,123 76,213 134,009 147,739
Net cash received from (used for) short-term and other
investments.............................................. 66,212 12,970 34,084 19,327
--------- --------- --------- ---------
Net cash provided by (used in) investing activities.... 31,296 2,575 19,227 (6,516)
--------- --------- --------- ---------
Cash flows used in financing activities
Purchase of treasury stock................................. (4,597) (10,725) (10,562) (25,021)
Dividends paid to shareholders............................. (4,328) (3,796) (8,692) (7,652)
Principal repayments on Bank Credit Facility............... - (2,000) - (1,000)
Exercise of stock options.................................. - 26 4,765 123
Catastrophe-linked equity put option premium............... (238) (238) (475) (475)
Annuity contracts, variable and fixed
Deposits................................................. 51,261 55,920 99,477 107,180
Maturities and withdrawals............................... (81,324) (65,389) (165,989) (116,944)
Net transfer from (to) variable annuity assets........... 6,158 2,308 17,129 (9,135)
Net increase (decrease) in life policy account balances.... (1,290) 319 (2,275) 610
Net cash used in financing activities.................. --------- --------- --------- ---------
(34,358) (23,575) (66,622) (52,314)
--------- --------- --------- ---------
Net increase in cash......................................... 11,670 3,039 7,780 6,913
Cash at beginning of period.................................. 18,958 15,918 22,848 12,044
--------- --------- --------- ---------
Cash at end of period........................................ $ 30,628 $ 18,957 $ 30,628 $ 18,957
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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 June 30, 2000
and December 31, 1999 and the consolidated results of operations, changes in
shareholders' equity and cash flows for the three and six months ended June 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 six months ended June 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>
June 30, December 31,
2000 1999
-------- -----------
<S> <C> <C>
Short-term debt:
$65,000 Bank Credit Facility, commitment to
December 31, 2001. (IBOR + 0.325%,
7.1% as of June 30, 2000)................... $ 49,000 $ 49,000
Long-term debt:
6 5/8% Senior Notes, due January 15, 2006.
Face amount less unaccrued discount
of $301 and $323 (6.7% imputed rate)........ 99,699 99,677
-------- --------
Total.................................... $148,699 $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 June 30, 2000
--------------------------- ---------------------------
Rating of Fixed June 30, December 31, Carrying Amortized
Maturity Securities(1) 2000 1999 Value Cost
---------------------- -------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
AAA.............................. 47.3% 46.3% $1,185,824 $1,205,660
AA............................... 6.8 7.7 170,055 171,767
A................................ 19.7 20.2 494,039 507,527
BBB.............................. 19.2 18.8 481,129 509,842
BB............................... 3.1 2.0 78,167 84,421
B................................ 3.5 4.7 88,466 94,567
CCC or lower..................... 0.1 - 2,488 2,785
Not rated(2)..................... 0.3 0.3 6,896 7,530
----- ----- ---------- ----------
Total........................ 100.0% 100.0% $2,507,064 $2,584,099
===== ===== ========== ==========
</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 $0.9 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
---------------------------- ----------
June 30, December 31, June 30,
Scheduled Maturity 2000 1999 2000
------------------ ---------- ------------ ----------
<S> <C> <C> <C>
Due in 1 year or less............................. 8.2% 7.0% $ 205,342
Due after 1 year through 5 years.................. 29.9 31.0 750,514
Due after 5 years through 10 years................ 31.1 31.5 779,716
Due after 10 years through 20 years............... 15.9 15.9 397,195
Due after 20 years................................ 14.9 14.6 374,297
----- ----- ----------
Total.......................................... 100.0% 100.0% $2,507,064
===== ===== ==========
</TABLE>
7
<PAGE>
Note 3 - Investments-(Continued)
The Company loans fixed income securities to third parties, primarily major
brokerage firms. As of June 30, 2000, fixed maturities with a fair value of
$112,710 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 six months of 2000, the Company repurchased 720,000 shares
of its common stock, or 2% of the outstanding shares on December 31, 1999, at an
aggregate cost of $10,562, or an average cost of $14.67 per share, under its
stock repurchase program. Since early 1997, 7,802,700 shares, or 17% of the
shares outstanding on December 31, 1996, have been repurchased at an aggregate
cost of $199,075, equal to an average cost of $25.51 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 June 30, 2000, $100,925
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 June 30, 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
-------- --------- ---------- ---
<S> <C> <C> <C> <C>
Three months ended
June 30, 2000
------------------
Premiums written.................................. $206,203 $8,666 $6,929 $204,466
Premiums earned................................... 151,503 6,679 5,766 150,590
Benefits, claims and
settlement expenses............................ 116,090 9,707 7,481 113,864
Three months ended
June 30, 1999
------------------
Premiums written.................................. $209,563 $6,248 $4,329 $207,644
Premiums earned................................... 150,270 6,412 4,677 148,535
Benefits, claims and
settlement expenses............................ 115,599 9,216 4,284 110,667
Six months ended
June 30, 2000
----------------
Premiums written.................................. $402,193 $16,586 $13,371 $398,978
Premiums earned................................... 300,246 12,441 10,124 297,929
Benefits, claims and
settlement expenses............................ 221,428 16,381 12,028 217,075
Six months ended
June 30, 1999
----------------
Premiums written.................................. $408,945 $12,293 $9,057 $405,709
Premiums earned................................... 297,915 12,490 9,354 294,779
Benefits, claims and
settlement expenses............................ 222,050 19,013 8,890 211,927
</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 $7.5
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. The equity put provides a source of capital for up to
$154 million 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 $0.5 million up to $20 million. The Company also reinsures each property loss
above a retention of $0.5 million up to $2.5 million, 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 $0.2
million on any individual life and $0.1 million 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 Six Months Ended
June 30, June 30,
------------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Insurance premiums and contract charges earned
Property and casualty.................... $123,209 $122,127 $243,637 $243,113
Annuity.................................. 4,361 4,286 8,719 8,260
Life..................................... 23,336 22,122 46,185 43,406
Intersegment eliminations................ (316) - (612) -
-------- -------- -------- --------
Total.............................. $150,590 $148,535 $297,929 $294,779
======== ======== ======== ========
Net investment income
Property and casualty........................ $ 8,867 $ 9,199 $ 17,787 $ 18,391
Annuity...................................... 26,081 26,381 52,258 52,865
Life......................................... 12,637 11,669 25,010 23,174
Corporate and other.......................... 315 62 654 95
Intersegment eliminations.................... (299) (328) (600) (618)
-------- -------- -------- --------
Total.............................. $ 47,601 $ 46,983 $ 95,109 $ 93,907
======== ======== ======== ========
Net income
Operating income
Property and casualty.................... $ 2,909 5,918 $ 11,966 $ 16,393
Annuity.................................. 5,643 6,788 11,030 12,659
Life..................................... 3,750 3,657 6,727 8,484
Corporate and other, including interest
expense.............................. (2,687) (2,473) (5,728) (4,556)
-------- -------- -------- --------
Total operating income............. 9,615 13,890 23,995 32,980
Realized investment gains (losses), after
tax.................................. 132 (3,468) (1,522) (5,507)
Litigation settlement, after tax............. (65) - (65) -
-------- -------- -------- --------
Total.............................. $ 9,682 $ 10,422 $ 22,408 $ 27,473
======== ======== ======== ========
Amortization of intangible assets
Value of acquired insurance in force
Property and casualty.................... $ - $ 258 $ - $ 516
Annuity.................................. 1,488 501 2,977 1,002
Life..................................... 507 543 1,014 1,086
-------- -------- -------- --------
Subtotal.............................. 1,995 1,302 3,991 2,604
Goodwill..................................... 404 404 809 809
-------- -------- -------- --------
Total.............................. $ 2,399 $ 1,706 $ 4,800 $ 3,413
======== ======== ======== ========
<CAPTION>
June 30, December 31,
Assets 2000 1999
---------- ------------
Property and casualty........................................... $ 687,176 $ 681,432
Annuity......................................................... 2,587,458 2,611,766
Life............................................................ 894,667 840,594
Corporate and other............................................. 150,794 153,493
Intersegment eliminations....................................... (39,445) (33,439)
---------- -----------
Total.................................................... $4,280,650 $ 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>
Six Months Ended June 30, 2000 Compared With Six Months Ended June 30, 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>
Six Months Ended Growth Over
June 30, Prior Year
---------------- -----------------
2000 1999 Percent Amount
------ ------ ------- ------
<S> <C> <C> <C> <C>
Automobile and property (voluntary)
Before North Carolina settlement............... $234.6 $231.9 1.2% $ 2.7
North Carolina settlement...................... (1.7) - (1.7)
------ ------ -----
Total...................................... 232.9 231.9 0.4% 1.0
Annuity deposits.................................. 99.5 107.2 -7.2% (7.7)
Life.............................................. 59.7 58.0 2.9% 1.7
------ ------ -----
Subtotal - core lines before
North Carolina settlement............... 393.8 397.1 -0.8% (3.3)
Subtotal - core lines...................... 392.1 397.1 -1.3% (5.0)
Involuntary and other
property & casualty............................ 6.9 8.6 -19.8% (1.7)
------ ------ -----
Total...................................... $399.0 $405.7 -1.7% $(6.7)
====== ====== =====
</TABLE>
13
<PAGE>
Insurance Premiums and Contract Charges Earned
(Excludes annuity and life contract deposits)
<TABLE>
<CAPTION>
Six Months Ended Growth Over
June 30, Prior Year
----------------------- ---------------------
2000 1999 Percent Amount
---- ---- ------- ------
<S> <C> <C> <C> <C>
Automobile and property (voluntary)
Before North Carolina settlement............... $234.4 $230.6 1.6% $ 3.8
North Carolina settlement...................... (1.7) - (1.7)
------ ------ -----
Total...................................... 232.7 230.6 0.9% 2.1
Annuity........................................... 8.7 8.3 4.8% 0.4
Life.............................................. 45.6 43.4 5.1% 2.2
------ ------ -----
Subtotal - core lines before
North Carolina settlement............... 288.7 282.3 2.3% 6.4
Subtotal - core lines...................... 287.0 282.3 1.7% 4.7
Involuntary and other property & casualty......... 10.9 12.5 -12.8% (1.6)
------ ------ -----
Total...................................... $297.9 $294.8 1.1% $ 3.1
====== ====== =====
</TABLE>
The property and casualty and life segments both experienced premium
growth for the first six months of 2000 excluding the North Carolina settlement
described below. Nonetheless, total insurance premiums written and contract
deposits decreased 1.7% for the six months because of a decline in new annuity
deposits. For the first six months of 2000, single premium and rollover annuity
deposits declined significantly, ($5.5 million, or 20.8%), compared to the same
period in 1999.
The number of experienced agents in Horace Mann's exclusive agent force,
672, was down 1.0% at June 30, 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 6.1% decline in the agent total, which stood at 1,005 at June 30, 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
1.2% for the first six months of 2000, excluding 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. Excluding the effect of the North Carolina settlement, automobile
insurance premium decreased slightly ($1.3 million, or 0.7%) compared to the
first six months of last year, and homeowners premium increased 7.9% ($4.0
million). Nearly all of the property and casualty increase in premiums resulted
from growth in average premium per policy. The Company's
14
<PAGE>
average annual premium per policy for automobile and homeowners increased less
than 1% and approximately 2.5%, respectively, compared to a year earlier. Over
the prior 12 months, unit growth was 1.0%, bringing policies in force at June
30, 2000 to 879,000. Compared to December 31, 1999, total property and casualty
policies in force increased 7,000 with 6,000 policies of the increase
attributable to homeowners insurance. While automobile policies in force ended
the quarter 4,000 policies below the June 30, 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 June 30, 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 7.2%, compared to the first six months of
1999. The decline was primarily attributable to a 20.8% decrease in new single
premium and rollover deposits, compared to the first six months of 1999. The
change in new annuity deposits also included a 2.7% decrease in scheduled
deposits received. New deposits to variable mutual fund annuities decreased 6.9%
and new deposits to fixed annuities were 7.7% lower than last year. Variable
annuity accumulated funds on deposit at June 30, 2000 were $1.1 billion, $139.4
million less than a year ago, an 11.6% decrease. Variable annuity accumulated
deposit retention decreased 5.2 percentage points over the 12 months to 85.5%.
Fixed annuity cash value retention for the 12 months ended June 30, 2000 was
89.5%, 3.5 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.
In May 2000, the Company introduced two additional variable annuity fund
options. In September 2000, an additional 22 variable annuity fund options will
be made available 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 will begin utilizing
customized software to support the financial planning process. At June 30, 2000,
approximately 80% of accumulated variable annuity funds on deposit were in the
Company's Equity and Balanced mutual funds, and investment returns for these two
funds have been less than their comparable Lipper average returns in recent
periods.
Life premium growth was 2.9% for the first six 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 June 30, 2000, compared to 8.0% for the same period last
year.
Net Investment Income
Investment income of $95.1 million for the first six months of 2000
increased 1.3%, or $1.2 million, (1.4% 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 1.3%, compared to the
first six months of 1999. The average pretax yield on the investment portfolio
was 7.1% (4.8% after tax) for the first six months of 2000, equal to the same
period 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 $102.9 million for the first half of 2000, compared to
$100.5 million in the first six months of 1999, an increase of 2.4%, or $2.4
million.
15
<PAGE>
Realized Investment Gains and Losses
Net realized investment losses were $2.3 million for the six months
ended June 30, 2000, compared to net realized investment losses of $8.5 million
for the first six months of 1999. For both periods, nearly all of the net
realized gains and losses occurred in the fixed income portfolios.
Benefits, Claims and Settlement Expenses
<TABLE>
<CAPTION>
Six Months Ended Growth Over
June 30, Prior Year
--------------------- ---------------------
2000 1999 Percent Amount
---- ---- ------- ------
<S> <C> <C> <C> <C>
Property and casualty............................. $194.2 $191.0 1.7% $3.2
Life.............................................. 22.9 20.9 9.6% 2.0
------ ------ ----
Total.......................................... $217.1 $211.9 2.5% $5.2
====== ====== ====
Property and casualty statutory loss ratio:
Before catastrophe losses and
North Carolina settlement............... 75.4% 73.5% 1.9%
Before catastrophe losses.................. 75.9% 73.5% 2.4%
After catastrophe losses and
North Carolina settlement............... 79.7% 78.6% 1.1%
</TABLE>
In the second quarter of 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 with 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 aggressive pricing, underwriting and
loss control initiatives. Management expects these actions to begin having an
impact in the latter half of 2000, however, 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.
The increase in non-catastrophe property losses more than offset the
Company's decline in catastrophe losses. Catastrophe losses were $9.2 million in
the first six months of 2000 and $12.2 million in the first half of 1999, a
decrease of 24.6%.
For the first six 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 71.7% 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 for the first six months of 2000 included
continuation of favorable development of prior years reserves, with reserve
releases somewhat less than prior year. Favorable development of property and
casualty claims occurring in prior years, excluding involuntary business, was
$2.7 million in the first six months of 2000, compared to $5.2 million for the
same period in 1999. Favorable development of total property and casualty claims
occurring
16
<PAGE>
in prior years was $2.3 million in the first six months of 2000, compared to
$4.5 million for the same period in 1999.
Life mortality was slightly lower in the first six 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.
Interest Credited to Policyholders
<TABLE>
<CAPTION>
Six Months Ended Growth Over
June 30, Prior Year
---------------- ----------------
2000 1999 Percent Amount
---- ---- ------- ------
<S> <C> <C> <C> <C>
Annuity...................... $32.6 $34.0 -4.1% $(1.4)
Life......................... 12.9 12.0 7.5% 0.9
----- ----- -----
Total..................... $45.5 $46.0 -1.1% $(0.5)
===== ===== =====
</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 six months of 2000, compared to the same period in 1999. In
addition, the average accumulated deposits for the six months ended June 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 six months of 2000, operating expenses increased $8.3
million, or 16.5%, 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 $1.9 million, or approximately
$0.03 per share after tax benefits, attributable to the chief executive officer
transition, and there will be an additional pension-related charge of
approximately $0.01 per share in the second half of 2000.
The total corporate expense ratio on a statutory accounting basis
excluding the impact of the North Carolina settlement was 23.0% for the six
months ended June 30, 2000, 2.0 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 six months ended June 30, 2000
excluding the impact of the North Carolina settlement, compared to 19.4% 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 8.5%.
Amortization of Policy Acquisition Expenses and Intangible Assets
For the first six months of 2000, the combined amortization of policy
acquisition expenses and intangible assets of $32.1 million increased by $4.9
million, or 18.0%, compared to the same period in 1999.
Amortization of intangible assets increased by $1.4 million to $4.8 million
for the six months ended June 30, 2000, compared to $3.4 million for the same
period in 1999, reflecting the higher
17
<PAGE>
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 $2.0 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
six 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 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 $0.5 million for the first six months of 1999.
Policy acquisition expenses amortized for the six months ended June 30,
1999 of $23.8 million were $3.5 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 30.9% for the six months ended June 30,
2000, compared to 31.3% for the same period last year. Income from investments
in tax-advantaged securities reduced the effective income tax rate 6.2 and 4.3
percentage points for the six months ended June 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. 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 August 11,
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 six months of 2000, operating income (net income before the
after-tax impact of realized investment gains and losses and non-recurring
charges) decreased 27.3%, or $9.0 million, and operating income per share on a
diluted basis of $0.58 decreased 26.6%, or $0.21 per share.
18
<PAGE>
Operating income for the first six months of 2000 was affected adversely by
two items. 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. And, the Company's portion of the adverse automobile insurance rate
settlement in North Carolina, as described above, of $1.7 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 six 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>
Six Months Ended Growth Over
June 30, Prior Year
---------------------- ------------------------
2000 1999 Percent Amount
---- ---- ------- ------
<S> <C> <C> <C> <C>
Property & casualty
Before catastrophe losses and
North Carolina settlement..................... $19.6 $24.3 -19.3% $(4.7)
Catastrophe losses, after tax..................... (6.0) (7.9) -24.1% 1.9
North Carolina settlement (including
interest), after tax.......................... (1.7) - (1.7)
----- ----- -----
Total including catastrophe
losses and North Carolina
settlement.............................. 11.9 16.4 -27.4% (4.5)
Annuity ........................................... 11.0 12.7 -13.4% (1.7)
Life................................................. 6.8 8.5 -20.0% (1.7)
Corporate and other expense.......................... (2.4) (1.4) (1.0)
Interest expense, after tax.......................... (3.3) (3.2) (0.1)
----- ----- -----
Total...................................... $24.0 $33.0 -27.3% $(9.0)
===== ===== =====
Total before catastrophe
losses and North Carolina
settlement.............................. $31.7 $40.9 -22.5% $(9.2)
===== ===== =====
Property and casualty statutory combined ratio:
Before catastrophe losses and
North Carolina settlement..................... 95.7% 92.9% 2.8%
Before catastrophe losses......................... 96.4% 92.9% 3.5%
After catastrophe losses and
North Carolina settlement..................... 100.2% 98.0% 2.2%
</TABLE>
Property and casualty segment operating income was lower than in the first
six months of 1999 primarily due to a higher level of non-catastrophe property
losses 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 $1.7 million after tax.
Property and casualty segment earnings for the first six months of 2000 also
were affected negatively by lower than expected business volume in the
automobile line partially offset by a $1.9 million decrease in after tax
catastrophe losses. During the first six months of 2000, the Company's increase
in average voluntary automobile insurance premium kept pace with loss cost
experience.
19
<PAGE>
The property and casualty combined ratio before catastrophes and the North
Carolina settlement of 95.7% was 2.8 percentage points higher than the first six
months of 1999, primarily reflecting the higher level of non-catastrophe
property losses. Favorable development of property and casualty claims occurring
in prior years (excluding involuntary business), was $1.8 million after tax in
the first six months of 2000, compared to $3.4 million after tax for the same
period in 1999. Favorable development of total property and casualty claims
occurring in prior years was $1.5 million after tax in the first six months of
2000, compared to $2.9 million after tax for the same period in 1999.
Annuity segment operating income was below the year-earlier total.
Increases in both annuity interest rate spreads and contract fees in the first
six 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. For the six months, the net interest
margin increased 3.7% and fees and contract charges earned increased 4.8%.
Variable annuity accumulated deposits were $1.1 billion at June 30, 2000, $139.4
million, or 11.6%, less than 12 months earlier. Fixed annuity accumulated cash
value of $1.3 billion was $27.8 million, or 2.0%, less than June 30, 2000.
Life insurance earnings for the first six 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 six months of 2000 were slightly lower than
the same period last year.
The cumulative effect of the Company's share repurchase program, since
initiation in 1997, reduced operating income by $5.1 million for the six months
ended June 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>
Six Months Ended Growth Over
June 30, Prior Year
---------------- ----------------
2000 1999 Percent Amount
---- ---- ------- -------
<S> <C> <C> <C> <C>
Operating income.......................... $ 0.58 $ 0.79 -26.6% $(0.21)
Realized investment gains (losses)........ (0.04) (0.14) 0.10
Litigation settlement..................... - -
------ ------ ------
Net income............................. $ 0.54 $ 0.65 -16.9% $(0.11)
====== ====== ======
</TABLE>
Net income, which includes realized investment gains and losses and
non-recurring charges, for the first six months of 2000 decreased by 18.5% and
net income per diluted share decreased by 16.9% compared to the same period in
1999, reflecting the $9.0 million decline in operating income. Net income also
reflected $1.5 million of after tax realized investment losses
20
<PAGE>
for the first six months of 2000, compared to $5.5 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.
Return on shareholders' equity based on operating income for the last 12
months was 15%. Based on net income, return on equity was 10% for the last 12
months.
Liquidity and Financial Resources
Investments
The Company's investment strategy emphasizes investment grade, publicly
traded fixed income securities. At June 30, 2000, fixed income securities
represented 96.6% of investments excluding the securities lending collateral. Of
the fixed income investment portfolio, 93.0% was investment grade and 99.8% was
publicly traded. The average quality of the total fixed income portfolio was AA-
at June 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 4.1 years at both June 30, 2000 and
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 $10 million less than the first six months of 1999.
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
21
<PAGE>
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.
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 six months of 2000, receipts from annuity contracts
decreased 7.2% primarily reflecting the reduced level of single premium and
rollover deposits received. Annuity contract maturities and withdrawals
increased $49.1 million, or 42.0%, 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 5.2 percentage points over
the 12 months to 85.5%. Net transfers to variable annuity assets decreased $26.3
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 89.5% for the 12 months ended June 30, 2000, 3.5
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 June 30, 2000, the Company
repurchased 720,000 shares of its common stock, or 2% of the shares outstanding
on December 31, 1999, at an aggregate cost of $10.6 million, or an average cost
of $14.67 per share, under its stock repurchase program. Repurchases in 2000
compare to 1,075,300 shares repurchased in the first six months of 1999 at an
aggregate cost of $25.0 million. The repurchase of shares was financed through
use of cash and, when necessary, the Bank Credit Facility. As of June 30, 2000,
$100.9 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
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<PAGE>
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 $549.1 million at June 30, 2000,
including $99.7 million of long-term debt and $49.0 million of short-term debt.
Total debt represented 24.9% of capital (excluding unrealized investment losses)
at June 30, 2000 at the upper end of the Company's target operating range of 20%
to 25%.
Shareholders' equity was $400.4 million at June 30, 2000, including an
unrealized loss in the Company's investment portfolio of $47.2 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 $612.4 million and $15, respectively, at June 30, 2000.
Book value per share was $9.81 at June 30, 2000, $10.97 excluding investment
market value adjustments. At June 30, 1999, book value per share was $10.57,
both including and 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% 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 June 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 7.1%, as of June 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 six months
ended June 30, 2000 was 7.5x compared to 9.2x for the same period in 1999. The
decline was primarily attributable to the increase in non-catastrophe property
losses and the North Carolina settlement recorded in the current period as well
as the non-recurring favorable items included in operating income for the first
six months of 1999.
Total shareholder dividends were $8.7 million for the six months ended
June 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.
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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 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 six 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.
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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<PAGE>
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on May 25,
2000, 34,169,811 shares of Common Stock were represented and entitled to vote.
The results of the matters submitted to a vote of security holders are shown in
the table below.
<TABLE>
<CAPTION> Votes Votes
For Against Abstentions
---------- --------- -----------
<S> <C> <C> <C>
Election of the following nominees to hold
the office of Director until the next
Annual Meeting of Shareholders and until
their respective successors have been duly
elected and qualified:
William W. Abbott 32,947,570 1,222,241 -
Dr. Emita B. Hill 33,127,620 1,042,191 -
Donald E. Kiernan 33,127,620 1,042,191 -
Louis G. Lower II 33,090,025 1,079,786 -
Jeffrey L. Morby 32,947,570 1,222,241 -
Shaun F. O'Malley 33,127,620 1,042,191 -
Charles A. Parker 32,947,570 1,222,241 -
Ralph S. Saul 32,947,190 1,222,621 -
William J. Schoen 33,127,620 1,042,191 -
Approval of an amendment to the Company's
Certificate of Incorporation provision
which requires the retirement of any
Director who is 72 or more years of age
following the completion of his or her
then current term in office. The amendment
permits Ralph S. Saul, who has served as a
member of the Board of Directors, to be
eligible for re-election to the Board of
Directors at the Annual Meeting of
Shareholders held on May 25, 2000 for one
additional year of service on the Board. 31,184,933 2,744,646 240,232
Approval of an amendment to the Company's
1991 Stock Incentive Plan which makes
2,000,000 additional shares of the
Company's common stock available under the
Plan. 28,701,989 5,009,672 458,150
Ratification of the appointment of KPMG
LLP, independent certified public
accountants, to serve as the Company's
auditors for the fiscal year ending
December 31, 2000. 33,902,308 15,180 252,323
</TABLE>
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<PAGE>
Item 6: Exhibits and Reports on Form 8-K
Exhibit
No. Description
------- -----------
(a) The following items are filed as Exhibits.
(3) Articles of incorporation and bylaws:
3.1 Restated Certificate of Incorporation of HMEC,
filed with the Delaware Secretary of State on
October 6, 1989, incorporated by reference to
Exhibit 3.1 to HMEC's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996,
filed with the Securities and Exchange
Commission (the "SEC") on November 14, 1996.
3.1(a) Certificate of Amendment to Restated Certificate
of Incorporation of HMEC, filed with the
Delaware Secretary of State on October 18, 1991,
incorporated by reference to Exhibit 3.2 to
HMEC's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996, filed with the
SEC on November 14, 1996.
3.1(b) Certificate of Amendment to Restated Certificate
of Incorporation of HMEC, filed with the
Delaware Secretary of State on August 23, 1995,
incorporated by reference to Exhibit 3.3 to
HMEC's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996, filed with the
SEC on November 14, 1996.
3.1(c) Certificate of Amendment to Restated Certificate
of Incorporation of HMEC, filed with the
Delaware Secretary of State on September 23,
1996, incorporated by reference to Exhibit 3.4
to HMEC's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996, filed with the
SEC on November 14, 1996.
3.1(d) Certificate of Amendment to Restated Certificate
of Incorporation of HMEC, filed with the
Delaware Secretary of State on June 5, 1998,
incorporated by reference to Exhibit 3.1 to
HMEC's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998, filed with the SEC
on August 13, 1998.
3.1(e) Certificate of Amendment to Restated Certificate
of Incorporation of HMEC, filed with the
Delaware Secretary of State on June 22, 2000.
(10) Material contracts. Management contracts and compensatory
plans are indicated by an asterisk (*).
10.1* Amended and Restated Horace Mann Educators
Corporation 1991 Stock Incentive Plan, incorporated
by reference to Exhibit 10.5 to HMEC's Annual Report
on Form 10-K for the year ended December 31, 1999,
filed with the SEC on March 30, 2000.
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<PAGE>
Exhibit
No. Description
------- -----------
10.1(a)* Amendment to Amended and Restated Horace Mann
Educators Corporation 1991 Stock Incentive Plan.
10.1(b)* Specimen Employee Stock Option Agreement under
the Horace Mann Educators Corporation 1991 Stock
Incentive Plan, incorporated by reference to
Exhibit 10.5(a) to HMEC's Annual Report on Form
10-K for the year ended December 31, 1999, filed
with the SEC on March 30, 2000.
10.1(c)* Specimen Director Stock Option Agreement under
the Horace Mann Educators Corporation 1991 Stock
Incentive Plan, incorporated by reference to
Exhibit 10.5(b) to HMEC's Annual Report on Form
10-K for the year ended December 31, 1999, filed
with the SEC on March 30, 2000.
10.2* Severance Agreements between HMEC and certain
officers of HMEC, incorporated by reference to
Exhibit 10.9 to HMEC's Annual Report on Form 10-
K for the year ended December 31, 1993, filed
with the SEC on March 31, 1994.
10.2(a)* Revised Schedule to Severance Agreements
between HMEC and certain officers of HMEC.
10.3* Specimen Continuation of Employment Agreement
between HMEC and certain officers, incorporated
by reference to Exhibit 10.21(a) to HMEC's
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1994, filed with the SEC on
November 14, 1994.
10.3(a)* Schedule of Continuation of Employment
Agreements between HMEC and certain officers.
10.4* Separation Agreement entered by and between HMEC
and Larry K. Becker as of June 20, 2000.
10.5* Letter of Employment entered by and between HMEC
and Thomas K. Manion effective July 6, 2000.
(11) Statement re computation of per share earnings.
(27) Financial Data Schedule.
(b) No reports on Form 8-K were filed by the Company during the
second quarter of 2000.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HORACE MANN EDUCATORS CORPORATION
(Registrant)
Date August 11, 2000 /s/ Louis G. Lower II
------------------------- --------------------------------------
Louis G. Lower II
President and Chief Executive Officer
Date August 11, 2000 /s/ Peter H. Heckman
------------------------ --------------------------------------
Peter H. Heckman
Executive Vice President
and Chief Financial Officer
Date August 11, 2000 /s/ Thomas K. Manion
----------------------- --------------------------------------
Thomas K. Manion
Senior Vice President
and Controller
28
