-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BP7Sl7uCQ2PzBKz8g+MU2cI5A4b+3boB7YNtaebAZFt5EM0JTNUxNSSewbmsgXuQ 8iMiN6sByIHRG47ZyUUyZw== 0000950131-96-002269.txt : 19960517 0000950131-96-002269.hdr.sgml : 19960517 ACCESSION NUMBER: 0000950131-96-002269 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HORACE MANN EDUCATORS CORP /DE/ CENTRAL INDEX KEY: 0000850141 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 370911756 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10890 FILM NUMBER: 96564833 BUSINESS ADDRESS: STREET 1: 1 HORACE MANN PLZ CITY: SPRINGFIELD STATE: IL ZIP: 62715-0001 BUSINESS PHONE: 2177892500 MAIL ADDRESS: STREET 1: 1 HORACE MANN PLZ CITY: SPRINGFIELD STATE: IL ZIP: 62715-0001 FORMER COMPANY: FORMER CONFORMED NAME: HORACE MANN EDUCATORS CORP DATE OF NAME CHANGE: 19920108 10-Q 1 FORM 10-Q =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [x]QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996 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 May 1, 1996, 23,448,831 shares of Common Stock, par value $0.001 per share, were outstanding, net of 5,588,098 shares of treasury stock. ================================================================================ HORACE MANN EDUCATORS CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 INDEX
Page ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of March 31, 1996 and December 31, 1995.................. 1 Consolidated Statements of Operations for the Three Months Ended March 31, 1996 and March 31, 1995.................................... 2 Consolidated Statements of Changes in Shareholders' Equity for the Three Months Ended March 31, 1996 and March 31, 1995.................................... 3 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1996 and March 31, 1995.................................... 4 Notes to Consolidated Financial Statements.............. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 9 PART II - OTHER INFORMATION............................................ 15 Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K SIGNATURES............................................................. 16
HORACE MANN EDUCATORS CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31, 1996 1995 --------- ------------ ASSETS Investments Fixed maturities, available for sale, at market (amortized cost, 1996, $2,582,673; 1995, $2,527,032).............. $2,617,581 $2,643,060 Mortgage loans and real estate.................... 53,978 77,895 Short-term investments............................ 31,990 34,983 Policy loans and other............................ 42,657 42,611 ---------- ---------- Total investments............................... 2,746,206 2,798,549 Cash............................................... 11,415 9,518 Accrued investment income.......................... 42,359 43,215 Premiums receivable................................ 55,862 51,144 Value of acquired insurance in force and goodwill.. 127,225 129,843 Other assets....................................... 137,359 142,442 Variable annuity assets............................ 535,397 487,543 ---------- ---------- Total assets.................................... $3,655,823 $3,662,254 ========== ========== LIABILITIES, REDEEMABLE SECURITIES AND SHAREHOLDERS' EQUITY Policy liabilities Annuity contract liabilities...................... $1,278,371 $1,275,117 Interest-sensitive life contract liabilities...... 298,046 289,310 Unpaid claims and claim expenses.................. 381,551 385,064 Future policy benefits............................ 185,214 185,449 Unearned premiums................................. 139,368 141,105 ---------- ---------- Total policy liabilities........................ 2,282,550 2,276,045 Other policyholder funds........................... 120,009 119,070 Other liabilities.................................. 119,761 133,855 Short-term debt.................................... 67,000 75,000 Long-term debt..................................... 99,538 100,000 Variable annuity liabilities....................... 535,397 487,543 ---------- ---------- Total liabilities............................... 3,224,255 3,191,513 ---------- ---------- Warrants, subject to redemption.................... 577 577 ---------- ---------- Common stock....................................... 29 29 Additional paid-in capital......................... 325,281 323,920 Net unrealized gains on fixed maturities and equity securities.................. 22,763 76,151 Retained earnings.................................. 237,220 224,366 Treasury stock, at cost............................ (154,302) (154,302) ---------- ---------- Total shareholders' equity...................... 430,991 470,164 ---------- ---------- Total liabilities, redeemable securities and shareholders' equity........... $3,655,823 $3,662,254 ========== ==========
See accompanying notes to consolidated financial statements. 1 HORACE MANN EDUCATORS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, ------------------ 1996 1995 ---- ---- Insurance premiums written and contract deposits.................. $176,547 $169,084 ======== ======== Revenues Insurance premiums and contract charges earned............... $134,384 $132,600 Net investment income.................. 50,107 49,087 Realized investment gains.............. 2,061 310 -------- -------- Total revenues....................... 186,552 181,997 -------- -------- Benefits, losses and expenses Benefits, claims and settlement expenses................... 99,229 95,952 Interest credited...................... 23,539 21,980 Policy acquisition expenses amortized.. 10,605 10,712 Operating expenses..................... 24,952 24,959 Amortization of intangible assets...... 2,619 2,952 Interest expense....................... 2,840 1,641 Debt retirement costs.................. 1,319 - -------- -------- Total benefits, losses and expenses.. 165,103 158,196 -------- -------- Income before income taxes.............. 21,449 23,801 Income tax expense...................... 6,016 6,685 -------- -------- Net income.............................. $ 15,433 $ 17,116 ======== ======== Earnings per share Assuming no dilution................... $ 0.66 $ 0.59 ======== ======== Assuming full dilution................. $ 0.66 $ 0.57 ======== ======== Weighted average number of shares and equivalent shares (in thousands) Assuming no dilution.................. 23,424 28,960 Assuming full dilution................ 23,424 32,071
2 HORACE MANN EDUCATORS CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, ------------------ 1996 1995 ---- ---- Common stock Beginning balance........................ $ 29 $ 29 Options exercised, 1996, 56,500 shares; 1995, 3,000 shares..................... - - --------- -------- Ending balance........................... 29 29 --------- -------- Additional paid-in capital Beginning balance........................ 323,920 323,517 Options exercised........................ 1,361 60 --------- -------- Ending balance........................... 325,281 323,577 --------- -------- Net unrealized gains (losses) on fixed maturities and equity securities Beginning balance...................... 76,151 (70,861) Increase (decrease) for the period..... (53,388) 48,418 --------- -------- Ending balance......................... 22,763 (22,443) --------- -------- Retained earnings Beginning balance........................ 224,366 159,278 Net income............................... 15,433 17,116 Cash dividends, 1996, $0.11 per share; 1995, $0.09 per share.................. (2,579) (2,607) --------- -------- Ending balance........................... 237,220 173,787 --------- -------- Treasury stock, at cost................... (154,302) - --------- -------- Shareholders' equity at end of period..... $ 430,991 $474,950 ========= ========
See accompanying notes to consolidated financial statements. 3 HORACE MANN EDUCATORS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ---------------------- 1996 1995 ---------- ---------- Cash flows from operating activities Premiums collected............................. $ 134,083 $ 135,888 Policyholder benefits paid..................... (108,558) (102,865) Policy acquisition and other operating expenses paid....................... (37,477) (36,718) Federal income taxes recovered................. 3,499 - Investment income collected.................... 50,963 52,951 Interest expense paid.......................... (2,169) (93) Other.......................................... 1,834 1,844 --------- --------- Net cash provided by operating activities.... 42,175 51,007 --------- --------- Cash flows from investing activities Fixed maturities Purchases..................................... (238,646) (139,852) Sales......................................... 136,007 92,009 Maturities.................................... 61,309 29,733 Reductions in mortgage loans and real estate... 24,405 506 Net (increase) decrease in other investments, principally short-term investments............ 2,815 (1,396) --------- --------- Net cash used in investing activities........ (14,110) (19,000) --------- --------- Cash flows from financing activities Dividends paid to shareholders................. (2,579) (2,607) Proceeds from issuance of Senior Notes......... 98,530 - Principal borrowings (payments) on Bank Credit Facility.......................... (8,000) - Retirement of Convertible Notes................ (102,890) - Exercise of stock options...................... 1,361 60 Annuity contracts, variable and fixed Deposits...................................... 39,666 34,427 Maturities and withdrawals.................... (32,797) (31,182) Net transfer to variable annuity assets....... (19,881) (10,534) Net increase in interest-sensitive life account balances......................... 422 715 --------- --------- Net cash used in financing activities........ (26,168) (9,121) --------- --------- Net increase in cash............................ 1,897 22,886 Cash at beginning of period..................... 9,518 5,997 --------- --------- Cash at end of period........................... $ 11,415 $ 28,883 ========= =========
See accompanying notes to consolidated financial statements. 4 HORACE MANN EDUCATORS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996 AND 1995 (DOLLARS IN THOUSANDS) Note 1 - Basis of Presentation The accompanying unaudited consolidated financial statements of Horace Mann Educators Corporation (the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The Company believes that these financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company's consolidated financial position as of March 31, 1996 and December 31, 1995 and the consolidated results of operations, changes in shareholders' equity and cash flows for the three months ended March 31, 1996 and 1995. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto contained in the December 31, 1995 Form 10-K filed by the Company. The results of operations for the three months ended March 31, 1996 are not necessarily indicative of the results to be expected for the full year. The Company has reclassified the presentation of certain prior period information to conform with the current presentation. Note 2 - Purchase of the Company's Common Stock On May 3, 1995, the Company entered into an agreement with The Fulcrum III Limited Partnership and The Second Fulcrum III Limited Partnership (together, "Fulcrum") providing for the disposition of the Company's common stock owned by Fulcrum, constituting 44.5% (12.9 million shares) of the then outstanding common stock. Pursuant to that agreement, on May 3, the Company repurchased from Fulcrum 6.5 million shares of common stock. The shares were purchased at a price of $169,000, before a contingent payment and expenses of the transaction. The Company borrowed $140,000 of the purchase price under its existing Bank Credit Facility and the balance was paid from cash on hand. Also pursuant to the May 3, 1995 agreement, 6.1 million shares of common stock owned by Fulcrum were sold to the public in a secondary public offering which was completed on July 25, 1995 and the remaining 0.3 million shares were distributed to Fulcrum's partners. The secondary public offering also included the sale by the Company of 911,902 over-allotment shares, the $20,568 net proceeds of which were used to reduce borrowings under the Bank Credit Facility. 5 Note 3 - Debt Indebtedness outstanding was as follows:
March 31, December 31, 1996 1995 ------------ ----------- Short-term debt: $100,000 Bank Credit Facility, LIBOR + 1/2% (5.75% as of March 31, 1996)................. $ 67,000 $ 75,000 Long-term debt: 6-5/8% Senior Notes, due January 15, 2006. Face amount less unaccrued discount of $462 (6.7% imputed rate).................. 99,538 - 4%/6-1/2% Convertible Notes, redeemed February 1996................................ - 100,000 -------- -------- Total...................................... $166,538 $175,000 ======== ========
Issuance of 6-5/8% Senior Notes ("Senior Notes") and Redemption of Convertible Notes On January 17, 1996, the Company issued $100,000 face amount of Senior Notes at an effective yield of 6.7%, which will mature on January 15, 2006. The net proceeds from the sale of the Senior Notes were used to finance most of the cost of the redemption of the Convertible Notes. Interest on the Senior Notes is payable semi-annually at a rate of 6-5/8%. The Senior Notes are redeemable in whole or in part, at any time, at the Company's option, at a redemption price equal to the greater of (i) 100% of their principal amount and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted, on a semi-annual basis, at the Treasury Yield (as defined in the indenture) plus 15 basis points, together with accrued interest to the date of redemption. 6 Note 4 - Investments The following sets forth the composition and value of the Company's fixed maturity securities portfolio by rating category. The Company has classified the entire fixed maturity securities portfolio as available for sale, which is carried at market value.
Percent of Carrying Value March 31, 1996 ------------------------- ---------------------- Rating of Fixed March 31, December 31, Carrying Amortized Maturity Securities(1) 1996 1995 Value Cost - ---------------------- ---------- ------------- ---------- ---------- AAA..................... 46.3% 45.9% $1,210,737 $1,196,941 AA...................... 10.1 10.5 264,166 258,387 A....................... 25.0 24.0 654,209 640,792 BBB..................... 13.4 14.9 351,814 348,210 BB...................... 1.4 1.1 36,733 39,662 B....................... 3.4 3.2 89,477 86,983 CCC or lower............ - - 1,104 1,643 Not rated(2)............ 0.4 0.4 9,341 10,055 ----- ----- ---------- ---------- Total........... 100.0% 100.0% $2,617,581 $2,582,673 ===== ===== ========== ==========
(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 is comprised primarily of private placement securities not rated by either S&P or Moody's. The National Association of Insurance Commissioners (the "NAIC") has rated 57.6% of these private placements as investment grade. $1.9 million of the remaining $3.6 million of private placements were rated as investment grade by the NAIC in 1994 and are under review for the assignment of a current rating. 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.
Percent Carrying of Total Value ------------------------- ---------- March 31, December 31, March 31, Scheduled Maturity 1996 1995 1996 - ------------------ ---------- ------------- ---------- One year or less...................... 4.9% 4.2% $ 128,022 After one year through five years..... 29.4 30.4 768,553 After five years through ten years.... 33.5 32.4 878,259 After ten years through twenty years.. 18.0 18.7 470,326 After twenty years.................... 14.2 14.3 372,421 ----- ----- ---------- Total............................... 100.0% 100.0% $2,617,581 ===== ===== ==========
7 Note 4 - Investments (Continued) There were no past-due, renegotiated or non-accrual mortgage loans as of March 31, 1996 and December 31, 1995. The Company's valuation reserves for losses on mortgage loans and real estate totaled $2,640 at March 31, 1996 and December 31, 1995. The Company's investment portfolio included foreclosed real estate of $10,218 and $10,999 at March 31, 1996 and December 31, 1995, respectively. Note 5 - 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:
Ceded to Assumed Gross Other from State Amount Companies Facilities Net -------- --------- ---------- -------- Three months ended March 31, 1996 - ----------------------- Premiums written....... $175,633 $5,770 $6,684 $176,547 Premiums earned........ 133,451 6,298 7,231 134,384 Benefits, claims and settlement expenses... 97,429 5,954 7,754 99,229 Three months ended March 31, 1995 - ----------------------- Premiums written....... $168,964 $5,145 $5,265 $169,084 Premiums earned........ 131,743 4,668 5,525 132,600 Benefits, claims and settlement expenses.. 98,148 5,985 3,789 95,952
The Company maintains an excess and catastrophe treaty reinsurance program. Beginning in 1996, the Company reinsures 95% of catastrophe losses above a retention of $5.5 million per occurrence up to $54 million per occurrence with an aggregate annual deductible of $2.0 million. For liability coverages, the Company reinsures each loss up to $10 million above a retention of $500,000. In addition, the Company reinsures each property loss above a retention of $500,000 up to $1.5 million in 1996. In 1995, the Company reinsured 95% of catastrophe losses above a retention of $6 million per occurrence up to $19 million per occurrence. With regard to liability coverages in 1995, the Company reinsured each loss up to $7 million above a retention of $200,000. The Company reinsured each property loss above a retention of $200,000 up to $1.5 million in 1995. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1996 COMPARED WITH THREE MONTHS ENDED MARCH 31, 1995 Insurance Premiums and Contract Charges Earned Insurance premiums and contract charges earned increased 1.4% for the three months ended March 31, 1996 compared to the same period in 1995. Insurance premiums written and contract deposits in the Company's primary product lines, automobile (excluding involuntary), property, annuity and life, reflected growth of 5.3%, increasing to $156.3 million for the three months ended March 31, 1996, compared to $148.5 million for the same period in 1995, driven principally by 15.4% growth in annuity deposits. For all product lines, insurance premiums written and contract deposits of $176.6 million for the three months ended March 31, 1996 increased 4.5%, compared to $169.0 million for the same period in 1995. This increase was less than the growth in insurance premiums written and contract deposits for the Company's primary product lines primarily due to reduced allocation of business from state mandatory automobile insurance facilities. Involuntary automobile business includes assigned risk business as well as state mandatory insurance facilities. Automobile (excluding involuntary) and homeowners earned premiums increased 1.3% to $95.1 million for the three months ended March 31, 1996, compared to $93.9 million for the same period in 1995, primarily as a result of a 2% increase in automobile (excluding involuntary) and homeowners policies in force partially offset by a 1% decrease in average premium earned per automobile policy. The 750,000 automobile (excluding involuntary) and homeowners policies in force at March 31, 1996 represented an increase of 16,000 policies since March 31, 1995 and an increase of 7,000 policies since December 31, 1995. Automobile (excluding involuntary) and homeowners premiums written increased 1.5% to $93.6 million for the three months ended March 31, 1996 compared to $92.2 million for the same period in 1995. For the three months ended March 31, 1996, new direct premiums written of $9.2 million increased 19.5% compared to $7.7 million for the same period last year. Renewal direct premiums written of $85.5 million for the three months ended March 31, 1996 were equal to the same period in 1995. Partially offsetting this growth in automobile (excluding involuntary) and homeowners premium was a 23.4% decrease in involuntary automobile and other property and casualty premiums written to $4.9 million for the first three months of 1996, compared to $6.4 million for the same period in 1995. For the three months ended March 31, 1996, life insurance premiums and contract charges earned were $16.8 million compared to $16.4 million for the same period in 1995, representing an increase of 2.4%. Life insurance in force increased 4.8% compared to March 31, 1995. These results reflect a lapse rate of 7.7% for the three months ended March 31, 1996, compared to 7.9% for the same period in 1995. Annuity contract charges earned increased 33.3% to $2.0 million for the three months ended March 31, 1996, compared to $1.5 million for the same period in 1995, primarily due to a 45% increase in variable annuity cash value on deposit. Total annuity deposits received during the three months ended March 31, 1996 increased 15.4% to $39.7 million, compared to $34.4 million for the same period in 1995, reflecting a 9 $1.9 million, or 6.4%, increase in scheduled deposits for retirement annuities and a $3.4 million, or 65.9%, increase in single premiums and rollover deposits from other companies. Group insurance segment premiums earned were $15.4 million for the three months ended March 31, 1996, compared to $14.2 million for the same period in 1995, reflecting an increase in new business. Average medical insurance rate increases, net of changes in benefits, were less than 1% during the three months ended March 31, 1996. Net Investment Income Net investment income of $50.1 million for the three months ended March 31, 1996 increased 2.0% compared to the same period in 1995. Investments (at amortized cost) increased 1.6%, or $42.9 million, from March 31, 1995. The pretax yield on average investments was 7.4% for both the three months ended March 31, 1996 and the same period in 1995. After tax investment income increased 1.8% to $33.4 million for the three months ended March 31, 1996, the result of a 5.0% after tax yield, compared to $32.8 million and a 4.9% after tax yield for the same period in 1995. Realized Investment Gains and Losses Realized investment gains were $2.1 million for the first quarter of 1996 compared to $0.3 million for the same period in 1995. Benefits, Claims and Settlement Expenses Total benefits, claims and settlement expenses increased 3.3% to $99.2 million for the three months ended March 31, 1996, compared to $96.0 million for the same period in 1995, reflecting higher losses from natural catastrophes and severe winter weather in 1996 partially offset by improvement in the automobile loss ratio. Property and casualty claims and settlement costs increased 2.1% to $78.0 million for the three months ended March 31, 1996 from $76.4 million for the same period in 1995. The property and casualty loss ratio, including winter weather-related claims, was 77.9% for the three months ended March 31, 1996, compared to 75.9% for the same period in 1995. Winter weather-related claims were $15.9 million for the first three months of 1996 compared to $9.0 million for the same period in 1995. For the three months ended March 31, 1996, the automobile loss ratio was 73.4% compared to 77.6% for the same period in 1995. Life benefits were $7.9 million for the three months ended March 31, 1996, reflecting a 5.3% increase compared to $7.5 million for the same period in 1995. Group life and health claims of $13.3 million for the three months ended March 31, 1996 increased 9.9% compared to the $12.1 million in claims recorded in the same period in 1995. The group segment loss ratio was 86.4% for both the three months ended March 31, 1996 and the same period in 1995. 10 Interest Credited to Policyholders Interest credited to policyholders was $23.5 million for the three months ended March 31, 1996, 6.8% more than the $22.0 million interest credited for the first three months of 1995. Interest credited to annuity contracts increased 5.0% to $19.0 million for the three months ended March 31, 1996 from $18.1 million for the same period in 1995. The increase reflects a higher average annual interest rate credited of 5.7% for the three months ended March 31, 1996, compared to 5.5% for the first quarter of 1995, and a growth of fixed accumulated deposits of 2.5%. Life insurance interest credited increased $0.6 million, or 15.4%, to $4.5 million for the three months ended March 31, 1996, compared to the same period in 1995, primarily as a result of growth in the interest-sensitive whole life insurance reserves and account balances. Policy Acquisition and Operating Expenses Policy acquisition and operating expenses represent the Company's insurance underwriting expenses. For the three months ended March 31, 1996, policy acquisition and operating expenses of $35.7 million were comparable to the first three months of 1995. For the three months ended March 31, 1996, the property and casualty expense ratio was 19.6% compared to 19.1% for the same period in 1995. Amortization of Intangible Assets Amortization of intangible assets decreased by $0.4 million to $2.6 million for the three months ended March 31, 1996, compared to $3.0 million for the same period in 1995. The lower amortization was due to the scheduled decrease in the amortization of the value of acquired insurance in force related to the 1989 acquisition of the Company. Interest Expense As a result of borrowings on the Bank Credit Facility related to the repurchase of shares of its common stock during the second quarter of 1995, the Company's interest expense of $2.8 million for the three months ended March 31, 1996 was $1.2 million, or 75.0%, greater than the same period in 1995. Income Tax Expense The 1996 effective income tax rate of 28% was equal to the 1995 effective income tax rate. Income from investments in tax-advantaged securities reduced the 1996 effective income tax rate 4 percentage points compared to a reduction of 3 percentage points in 1995. Acquisition related tax benefits reduced the effective income tax rate 3 percentage points in 1996 and 4 percentage points in 1995. Operating Income Operating income (income before realized investment gains and losses and 1996 debt retirement costs) was $15.1 million for the three months ended March 31, 1996 compared to $16.9 million for the same period in 1995. The decrease was primarily due to higher property and casualty winter weather-related storm claims in the first quarter of 1996 which offset an increase in operating income from the annuity and life segments. Property and casualty segment operating income was $10.3 million for the three 11 months ended March 31, 1996, compared to $12.5 million for the same period in 1995. This reflected an increase in severe winter weather-related claims of $4.5 million after tax. The property and casualty combined loss and expense ratio for the three months ended March 31, 1996 was 97.5%, compared to the 95.1% reported for the same period in 1995, with the increase attributable to the higher levels of weather-related claims. Life insurance segment operating income increased $0.2 million for the three months ended March 31, 1996 to $2.9 million, compared to $2.7 million for the same period in 1995. The Company maintained strong annuity net margins in the first quarter of 1996 although the net margin percentage declined slightly compared to the same period in 1995. Annuity segment operating income of $4.2 million for the three months ended March 31, 1996 increased 20.0% compared to the same period in 1995 resulting primarily from an increase in cash value on deposit. Total accumulated fixed and variable annuity cash value on deposit of $1,918.1 million increased $199.7 million, or 11.6%, compared to March 31, 1995. This increase resulted from a net increase in funds on deposit of 7.6% plus net increases in market value of underlying mutual funds of $69.6 million. The group life and health segment reported break-even results for the three months ended March 31, 1996, similar to the same period in 1995. The combined loss and expense ratio decreased to 107.1% for the three months ended March 31, 1996, compared to 111.2% for the same period in 1995, primarily due to a decrease in the expense ratio resulting from higher premium volume. Net Income Net income, which includes realized investment gains, for the three months ended March 31, 1996 was $15.5 million, or $0.66 per share, reflecting a 9.4% decrease in net income and a 15.8% increase in net income per share on a fully diluted basis compared to the same period in 1995. The share repurchase completed in 1995 and the redemption of the convertible notes in February 1996 contributed to the increase in net income per share. Net income for the three months ended March 31, 1996 was reduced by $10.3 million due to claims from severe winter weather; by comparison, severe winter weather claims in the first three months of 1995 reduced the Company's net income by $5.8 million. Realized investment gains after tax were $1.3 million for the three months ended March 31, 1996, compared to $0.2 million for the same period in 1995. Net income for the three months ended March 31, 1996 also reflects a reduction of $0.9 million, or $0.04 per share, for the costs of the early redemption of $100 million of convertible notes. LIQUIDITY AND FINANCIAL RESOURCES Investments The Company's investment strategy emphasizes high quality investment grade, publicly traded fixed income securities. At March 31, 1996, fixed income securities comprised 95.3% of total investments. Of the fixed income investment portfolio, 95.1% was investment grade and 99.3% was publicly traded. The average quality of the total fixed income portfolio was A+ at March 31, 1996. As of March 31, 1996, 34.3% of the Company's fixed maturity portfolio was scheduled to mature within five years and 67.8% within 10 years. However, actual 12 maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. 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 4.4 years at both March 31, 1996 and December 31, 1995. The Company has included in its annuity products substantial surrender penalties so as to reduce the likelihood of unexpected increases in policy or contract surrenders. All annuities issued since 1982 and approximately 60% of all outstanding fixed annuity accumulated cash values are subject to surrender penalties. The Company holds a limited position, $129.5 million, in high-yield fixed income securities which are carried at market value. At March 31, 1996, this represented 4.7% of cash and investments, compared to 4.1% held at year-end 1995. The market value of below investment grade securities at March 31, 1996 was $1.7 million less than the amortized cost. The Company's mortgage loan and real estate portfolio represented 2.0% of investments at March 31, 1996, a decrease of 0.8 percentage points from 2.8% at December 31, 1995. Mortgage loans and real estate totaled $54.0 million at March 31, 1996 compared to $77.9 million at December 31, 1995. The Company plans to continue to decrease its investment in commercial mortgage loans and real estate. No significant investment in mortgage loans or real estate has been made since early 1988. There were no mortgage loan foreclosures or restructures during the first three months of 1996. No commercial mortgage loans had interest which was 90 days or more past due at March 31, 1996. The Company's valuation reserves for investment losses totaled $2.6 million at both March 31, 1996 and December 31, 1995. 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 is used to pay dividends to shareholders and retire short-term debt. Long-term liquidity requirements, beyond one year, are principally for the payment of future insurance policy claims and benefits, retirement of notes and future dividends to shareholders. Operating Activities As a holding company, HMEC conducts its principal operations in the personal lines segment of the property and casualty and life insurance industries through its subsidiaries. HMEC's insurance subsidiaries generate cash flow from premium and investment income, generally well in excess of their immediate needs for policy obligations, operating expenses and other cash requirements. Net cash provided by operating activities was $42.2 million for the three months ended March 31, 1996 compared to $51.0 million for the same period in 1995. In both years, cash provided by operating activities primarily reflected net cash provided by the insurance subsidiaries. 13 Investing Activities HMEC's insurance subsidiaries maintain significant investments in fixed maturity securities to meet future contractual obligations to policyholders. In conjunction with its management of liquidity and other asset/liability management objectives, the Company, from time to time, will sell fixed maturity securities prior to maturity and reinvest the proceeds in other investments with different interest rates, maturities or credit characteristics. Accordingly, the Company has classified the entire fixed maturities portfolio as available for sale. During the first three months of 1996, net cash used in investing activities was $14.1 million. This net amount reflects $238.6 million in purchases of fixed maturity and other investments, funded by investment sales or maturities of $224.5 million and net cash provided by operating activities. Financing Activities Financing activities include payment of scheduled dividends, transactions related to the Company's common stock, borrowings and repayments under the Company's various debt facilities and the receipt and withdrawal of funds by annuity policyholders. Shareholder dividends paid for the three months ended March 31, 1996 were $2.6 million. On January 17, 1996, the Company issued $100.0 million face amount of 6-5/8% Senior Notes ("Senior Notes"), which will mature on January 15, 2006, at a discount of 0.5%. The $98.5 million net proceeds from the sale of the Senior Notes were used to finance most of the cost of the February 6, 1996 redemption of $100.0 million of outstanding convertible notes at an aggregate cost of $102.9 million. For the three months ended March 31, 1996, receipts from annuity contracts of $39.7 million were greater than contract maturities and withdrawals of $32.8 million. Net transfers to variable annuity assets were $19.9 million during the first three months of 1996 and interest-sensitive life account balances increased $0.4 million during the same period. Capital Resources Shareholders' equity was $431.0 million at March 31, 1996, including an unrealized gain in the Company's investment portfolio of $22.8 million after tax ($35.0 million pretax). The market value of the Company's common stock and the market value per share were $715.1 million and $30-1/2, respectively, at March 31, 1996. Book value per share was $18.38 at March 31, 1996, $17.41 excluding investment market value adjustments. The total capital of the Company was $598.1 million at March 31, 1996, including $99.5 million of long-term debt and $67.0 million of short-term debt. Long-term debt as a percentage of total shareholders' equity was 23.1% as of March 31, 1996, compared to 21.3% as of December 31, 1995, with the increase occurring as a result of lower unrealized gains attributable to the Company's investment portfolio. As of March 31, 1996, the Company had short-term debt comprised of $67.0 million outstanding under the Bank Credit Facility. The Bank Credit Facility, as amended in January 1996, allows borrowings up to $100.0 million at Interbank Offering Rates plus 0.3% to 2.0% or Bank of America prime rates plus 0% to 1.5%, or 5.8% as of March 31, 1996. Scheduled semi-annual commitment reductions begin in August 1997. 14 On January 17, 1996, the Company issued $100.0 million face amount of 6-5/8% Senior Notes ("Senior Notes"), which will mature on January 15, 2006, at a discount of 0.5%. The net proceeds from the sale of the Senior Notes were used to finance most of the cost of the redemption of $100.0 million of outstanding convertible notes at an aggregate cost of $102.9 million. Interest on the Senior Notes is payable semi-annually at a rate of 6-5/8%. The Senior Notes are redeemable in whole or in part, at any time at the Company's option, at a redemption price equal to the greater of (i) 100% of their principal amount and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted, on a semi-annual basis, at the Treasury yield (as defined in the indenture) plus 15 basis points, together with accrued interest to the date of redemption. The Senior Notes have an investment grade rating from both Standard & Poor's Corporation ("S&P") (A-) and Moody's Investors Service, Inc. ("Moody's") (Baa2) and are traded on the New York Stock Exchange (HMN 6-5/8). The Company's ratio of earnings to fixed charges for the three months ended March 31, 1996 was 8.7x. Total shareholder dividends were $2.6 million for the three months ended March 31, 1996. In February 1996, the Board of Directors authorized the fourth consecutive annual increase in the Company's dividend. The regular quarterly dividend increased by 22% to $0.11 per share. 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 (a) The following items are filled as Exhibits. (11) Statement re computation of per share earnings. (27) Financial Data Schedule. (b) No reports on Form 8-K were filed by the Company during the first quarter of 1996. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HORACE MANN EDUCATORS CORPORATION (Registrant) Date May 14, 1996 Paul J. Kardos -------------------------- ---------------------------------- Paul J. Kardos, President and Chief Executive Officer Date May 14, 1996 Larry K. Becker -------------------------- ---------------------------------- Larry K. Becker, Executive Vice President and Chief Financial Officer 16 EX-11 2 COMPUTATION OF NET INCOME PER SHARE Exhibit 11 Horace Mann Educators Corporation Computation of Net Income per Share For the Three Months Ended March 31, 1996 and 1995 (Amounts in thousands, except per share data)
Three Months Ended March 31, ------------------------------ 1996 1995 -------------- -------------- Primary - reported: Weighted average number of common shares outstanding during the period 23,424 28,960 ------- ------- Net income for the period $15,433 $17,116 ------- ------- Net income per share - assuming no dilution $ 0.66 $ 0.59 ======= ======= Primary: Weighted average number of common shares outstanding during the period 23,424 28,960 Weighted average number of common equivalent shares to reflect the dilutive effect of common stock equivalent securities: Warrants 117 107 Stock options 324 147 ------- ------- Total common and common equivalent shares 23,865 29,214 ------- ------- Net income per share $ 0.65 $ 0.59 ======= ======= Percentage of dilution compared to reported net income per share 1.5% 0.0% Fully diluted: Weighted average number of common shares outstanding during the period 23,424 28,960 Weighted average number of common equivalent shares to reflect the dilutive effect of common stock equivalent securities: Warrants 117 107 Stock options 324 147 Weighted average number of common equivalent shares to reflect the dilutive effect of convertible notes - 2,857 ------- ------- Total common and common equivalent shares adjusted to calculate fully diluted earnings per share 23,865 32,071 ------- ------- Net income for the period $15,433 $17,116 Interest expense, net of tax, on convertible notes - 1,006 ------- ------- Adjusted net income for the period $15,433 $18,122 ------- ------- Net income per share - assuming full dilution $ 0.65 $ 0.57 ======= ======= Percentage of dilution compared to reported net income per share 1.5% 3.4%
EX-27 3 FINANCIAL DATA SCHEDULE
7 This schedule contains summary financial information extracted from the Consolidated Balance Sheet and the Consolidated Statement of Operations and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 2,617,581 0 0 0 43,760 10,218 2,746,206 11,415 0 68,786 3,655,823 2,143,182 139,368 0 120,009 166,538 29 0 0 430,962 3,655,823 134,384 50,107 2,061 0 99,229 10,605 24,952 21,449 6,016 15,433 0 0 0 15,433 0.66 0.66 0 0 0 0 0 0 0 Refer to Note 4 - Investments of the Company's Consolidated Notes to Financial Statements for March 31, 1996. Refer to the Company's Consolidated Balance Sheet as of March 31, 1996.
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