-----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, CRe0q2FJtn9h3lsNhJDbRBBwgWm49sPqAG2kHRNCrdGxCsyw6n1fsryYOVX1qKkx VG9Gz3q5WAzWsg5z6wLjEQ== 0000950131-97-005082.txt : 19970815 0000950131-97-005082.hdr.sgml : 19970815 ACCESSION NUMBER: 0000950131-97-005082 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 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: 97662061 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 June 30, 1997 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, 1997, 22,603,856 shares of Common Stock, par value $0.001 per share, were outstanding, net of 6,934,398 shares of treasury stock. ================================================================================ HORACE MANN EDUCATORS CORPORATION FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997 INDEX Page ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996 . . . . . . . . . . . . . . 1 Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1997 and June 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . 2 Consolidated Statements of Changes in Shareholders' Equity for the Six Months Ended June 30, 1997 and June 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . 3 Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 1997 and June 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . 4 Notes to Consolidated Financial Statements . . . . . . . . . . . 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . 10 PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 20 Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 HORACE MANN EDUCATORS CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
June 30, December 31, 1997 1996 ---------- ------------ ASSETS Investments Fixed maturities, available for sale, at market (amortized cost, 1997, $2,593,613; 1996, $2,609,077)............... $2,643,078 $2,658,512 Short-term and other investments.......................... 101,691 125,824 ---------- ---------- Total investments...................................... 2,744,769 2,784,336 Cash......................................................... 8,376 13,704 Accrued investment income and premiums receivable............ 95,947 107,682 Value of acquired insurance in force and goodwill............ 113,227 118,638 Other assets................................................. 176,203 151,830 Variable annuity assets...................................... 829,894 684,836 ---------- ---------- Total assets........................................... $3,968,416 $3,861,026 ========== ========== LIABILITIES, REDEEMABLE SECURITIES AND SHAREHOLDERS' EQUITY Policy liabilities Annuity contract liabilities.............................. $1,294,910 $1,286,110 Interest-sensitive life contract liabilities.............. 345,964 326,955 Unpaid claims and claim expenses.......................... 341,953 358,853 Future policy benefits.................................... 181,067 182,336 Unearned premiums......................................... 153,984 155,776 ---------- ---------- Total policy liabilities............................... 2,317,878 2,310,030 Other policyholder funds..................................... 119,091 118,549 Other liabilities............................................ 96,281 129,075 Short-term debt.............................................. 42,000 34,000 Long-term debt............................................... 99,581 99,564 Variable annuity liabilities................................. 826,794 684,836 ---------- ---------- Total liabilities...................................... 3,501,625 3,376,054 ---------- ---------- Warrants, subject to redemption.............................. 577 577 ---------- ---------- Preferred stock.............................................. - - Common stock................................................. 30 29 Additional paid-in capital................................... 339,735 330,263 Net unrealized gains on fixed maturities and equity securities.......................... 29,576 29,736 Retained earnings............................................ 312,610 278,669 Treasury stock, at cost...................................... (215,737) (154,302) ---------- ---------- Total shareholders' equity............................. 466,214 484,395 ---------- ---------- Total liabilities, redeemable securities, and shareholders' equity................. $3,968,416 $3,861,026 ========== ==========
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 Six Months Ended June 30, June 30, ---------------------- ---------------------- 1997 1996 1997 1996 ---- ---- ---- ---- Insurance premiums written and contract deposits........................... $195,053 $176,395 $374,923 $340,343 ======== ======== ======== ======== Revenues Insurance premiums and contract charges earned................... $135,888 $124,455 $267,307 $246,330 Net investment income....................... 49,921 49,271 99,708 99,191 Realized investment gains................... 788 681 1,645 2,735 -------- -------- -------- -------- Total revenues........................... 186,597 174,407 368,660 348,256 -------- -------- -------- -------- Benefits, losses and expenses Benefits, claims and settlement expenses....................... 91,289 85,231 181,789 172,150 Interest credited........................... 24,471 23,763 48,855 47,302 Policy acquisition expenses amortized........................ 11,258 9,984 22,098 19,930 Operating expenses.......................... 25,097 24,660 49,606 48,119 Amortization of intangible assets........... 2,705 2,849 5,411 5,699 Interest expense............................ 2,771 2,630 5,225 5,470 Debt retirement costs....................... - - - 1,319 -------- -------- -------- -------- Total benefits, losses and expenses............................ 157,591 149,117 312,984 299,989 -------- -------- -------- -------- Income from continuing operations before income taxes and discontinued operations..................... 29,006 25,290 55,676 48,267 Income tax expense............................. 8,110 7,193 15,380 13,744 -------- -------- -------- -------- Income from continuing operations.............. 20,896 18,097 40,296 34,523 Discontinued operations: Loss from operations, net of applicable income tax benefits............ - (1,016) - (2,009) -------- -------- -------- -------- Net income..................................... $ 20,896 $ 17,081 $ 40,296 $ 32,514 ======== ======== ======== ======== Earnings (loss) per share Income from continuing operations........... $ 0.90 $ 0.77 $ 1.72 $ 1.47 Discontinued operations: Loss from operations...................... - (0.04) - (0.08) -------- -------- -------- -------- Net income.................................. $ 0.90 $ 0.73 $ 1.72 $ 1.39 ======== ======== ======== ======== Weighted average number of shares and equivalent shares (in thousands)........ 23,096 23,449 23,379 23,437
See accompanying notes to consolidated financial statements. 2 HORACE MANN EDUCATORS CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Dollars in thousands, except per share data) Six Months Ended June 30, -------------------- 1997 1996 ---- ---- Common stock Beginning balance . . . . . . . . . . . . . . $ 29 $ 29 Options exercised, 1997, 299,962 shares; 1996, 67,000 shares . . . . . . . . . . . . 1 - Conversion of Director Stock Plan units, 1997, 1,144 shares. . . . . . . - - --------- --------- Ending balance. . . . . . . . . . . . . . . . 30 29 --------- --------- Additional paid-in capital Beginning balance . . . . . . . . . . . . . . 330,263 323,920 Options exercised . . . . . . . . . . . . . . 9,431 1,647 Conversion of Director Stock Plan units . . . 41 - --------- --------- Ending balance. . . . . . . . . . . . . . . . 339,735 325,567 --------- --------- Net unrealized gains (losses) on fixed maturities and equity securities Beginning balance . . . . . . . . . . . . . 29,736 76,151 Decrease for the period . . . . . . . . . . (160) (72,167) --------- --------- Ending balance. . . . . . . . . . . . . . . 29,576 3,984 --------- --------- Retained earnings Beginning balance . . . . . . . . . . . . . . 278,669 224,366 Net income. . . . . . . . . . . . . . . . . . 40,296 32,514 Cash dividends, 1997, $0.27; 1996, $0.22 per share . . . . . . . . . . . . . . (6,355) [5,159) --------- --------- Ending balance. . . . . . . . . . . . . . . . 312,610 251,721 --------- --------- Treasury stock, at cost Beginning balance, 5,588,098 shares . . . . . (154,302) (154,302) Purchase of 1,320,100 shares (See note 4) . . (61,435) - --------- --------- Ending balance, 6,908,198 shares. . . . . . . (215,737) (154,302) --------- --------- Shareholders' equity at end of period. . . . . . $ 466,214 $ 426,999 ========= ========= See accompanying notes to consolidated financial statements. 3 HORACE MANN EDUCATORS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 1997 1996 1997 1996 ---- ---- ---- ---- Cash flows from operating activities Premiums collected....................... $ 156,315 $ 145,542 $ 305,543 $ 279,625 Policyholder benefits paid............... (122,790) (112,259) (236,495) (220,817) Policy acquisition and other operating expenses paid................ (44,339) (40,188) (85,323) (77,665) Federal income taxes paid................ (13,771) (14,150) (44,077) (10,651) Investment income collected.............. 48,323 49,739 99,742 100,702 Interest expense paid.................... (612) (987) (5,813) (3,156) Other.................................... (970) 54 3,080 1,888 --------- --------- --------- --------- Net cash provided by operating activities.............. 22,156 27,751 36,657 69,926 --------- --------- --------- --------- Cash flows from investing activities Fixed maturities Purchases.............................. (314,023) (277,429) (579,389) (516,075) Sales.................................. 239,559 224,273 456,627 360,280 Maturities............................. 69,306 42,064 131,307 103,373 Net cash received from short-term and other investments....... 33,121 8,262 21,189 35,482 --------- --------- --------- --------- Net cash provided by (used in) investing activities....... 27,963 (2,830) 29,734 (16,940) --------- --------- --------- --------- Cash flows from financing activities Dividends paid to shareholders........... (3,147) (2,580) (6,355) (5,159) Principal borrowing (payments) on Bank Credit Facility................... 8,000 (9,000) 8,000 (17,000) Purchase of treasury stock............... (48,087) - (61,435) - Exercise of stock options................ 3,759 286 9,473 1,647 Proceeds from issuance of Senior Notes........................ - - - 98,530 Retirement of Convertible Notes.......... - - - (102,890) Annuity contracts, variable and fixed Deposits............................... 54,989 45,877 101,782 85,543 Maturities and withdrawals............. (35,900) (33,830) (70,110) (66,627) Net transfer to variable annuity assets........................ (27,782) (23,680) (54,067) (43,561) Net increase in interest-sensitive life account balances.................. 575 303 993 725 --------- --------- --------- --------- Net cash used in financing activities.............. (47,593) (22,624) (71,719) (48,792) --------- --------- --------- --------- Net increase (decrease) in cash........... 2,526 2,297 (5,328) 4,194 Cash at beginning of period............... 5,850 11,415 13,704 9,518 --------- --------- --------- --------- Cash at end of period..................... $ 8,376 $ 13,712 $ 8,376 $ 13,712 ========= ========= ========= =========
See accompanying notes to consolidated financial statements. 4 HORACE MANN EDUCATORS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 and 1996 (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 June 30, 1997 and December 31, 1996 and the consolidated results of operations, changes in shareholders' equity and cash flows for the three and six months ended June 30, 1997 and 1996. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto contained in the December 31, 1996 Form 10-K filed by the Company. The results of operations for the three and six months ended June 30, 1997 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 1997 presentation including the presentation of discontinued operations for all periods. Note 2 - Debt
Indebtedness outstanding was as follows: June 30, December 31, 1997 1996 -------- ------------ Short-term debt: $65,000 Bank Credit Facility, IBOR + 0.325% (6.0% as of June 30, 1997) . . . . . . . . $ 42,000 $ 34,000 Long-term debt: 6 5/8% Senior Notes, due January 15, 2006. Face amount less unaccrued discount of $419 and $436 (6.7% imputed rate) . . . 99,581 99,564 -------- -------- Total. . . . . . . . . . . . . . . . . . $141,581 $133,564 ======== ========
5 Note 3 - 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 June 30, 1997 ----------------------- ----------------------------- Rating of Fixed June 30, December 31, Carrying Amortized Maturity Securities(1) 1997 1996 Value Cost - ---------------------- ------- ------------ ----------- ---------- AAA. . . . . . . . . . . . . 42.8% 46.4% $1,130,905 $1,115,499 AA . . . . . . . . . . . . . 8.0 9.4 211,935 206,659 A. . . . . . . . . . . . . . 21.3 22.3 561,425 551,367 BBB. . . . . . . . . . . . . 22.2 16.4 587,542 575,519 BB . . . . . . . . . . . . . 1.2 1.4 31,454 31,610 B. . . . . . . . . . . . . . 3.9 3.7 102,849 96,553 CCC or lower . . . . . . . . - - 962 567 Not rated(2) . . . . . . . . 0.6 0.4 16,006 15,839 ----- ----- ---------- ---------- Total . . . . . . . . . . 100.0% 100.0% $2,643,078 $2,593,613 ===== ===== ========== ==========
(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 86.8% of these private placements as investment grade. $0.7 million of the remaining $1.4 million of private placements were rated as investment grade by the NAIC in 1995 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 --------------------- ----------- June 30, December 31, June 30, Scheduled Maturity 1997 1996 1997 - ------------------ ------- ----------- ----------- Due in 1 year or less.......................... 6.9% 5.7% $ 182,581 Due after 1 year through 5 years .............. 26.0 28.7 686,988 Due after 5 years through 10 years ............ 33.7 32.9 890,296 Due after 10 years through 20 years............ 19.0 18.9 502,267 Due after 20 years ............................ 14.4 13.8 380,946 ----- ------ ---------- Total ................................... 100.0% 100.0% $2,643,078 ===== ===== ==========
6 Note 4 - Shareholders' Equity Share Repurchase Program In February 1997, the Company's Board of Directors adopted a repurchase program for shares of the Company's common stock, with an initial repurchase limit of $100,000. Based on the market price of the Company's common shares at the time the Board adopted this program, $100,000 represented approximately 9% of the Company's outstanding shares. Shares of common stock may be purchased from time to time through open market and private purchases, as available. Share repurchases will be financed with cash from operations and, if needed, the Bank Credit Facility. As of June 30, 1997, the Company had repurchased 1,320,100 shares at an aggregate cost of $61,435, or $46.54 per share, which was financed primarily with cash from operations, including extraordinary dividends of $54,000 from the property and casualty subsidiaries. 7 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 June 30, 1997 - ---------------------- Premiums written. . . . . . $195,547 $ 4,971 $ 4,477 $195,053 Premiums earned . . . . . . 134,691 4,747 5,944 135,888 Benefits, claims and settlement expenses. . . . 94,145 8,917 6,061 91,289 Three months ended June 30, 1996 - ---------------------- Premiums written. . . . . . $175,308 $ 6,204 $ 7,291 $176,395 Premiums earned . . . . . . 123,008 5,899 7,346 124,455 Benefits, claims and settlement expenses. . . . 85,351 7,889 7,769 85,231 Six months ended June 30, 1997 - ---------------------- Premiums written. . . . . . $377,379 $10,961 $ 8,505 $374,923 Premiums earned . . . . . . 265,500 9,976 11,783 267,307 Benefits, claims and settlement expenses. . . . 186,113 17,208 12,884 181,789 Six months ended June 30, 1996 - ---------------------- Premiums written. . . . . . $337,956 $11,588 $13,975 $340,343 Premiums earned . . . . . . 243,564 11,811 14,577 246,330 Benefits, claims and settlement expenses. . . . 170,305 13,678 15,523 172,150 8 The Company maintains an excess and catastrophe treaty reinsurance program for its property and casualty subsidiaries. In 1997, the Company reinsures 95% of catastrophe losses above a retention of $7.5 million per occurrence up to $65 million per occurrence. The Company's catastrophe reinsurance program is augmented by a $100 million equity put. This equity put provides for 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 of losses from a catastrophe, individually or in the aggregate, which exceed $65 million. For liability coverages, including the educator professional liability policy, the Company reinsures each loss up to $20 million above a retention of $500,000. The Company reinsures each property loss up to $1.5 million above a retention of $500,000. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. . The Company's ability to develop and expand its agency force and its direct product distribution systems, as well as the Company's ability to maintain and secure product sponsorships by local, state and national education associations. . The competitive impact of new entrants such as mutual funds and banks into the tax deferred annuity products markets, and the Company's ability to profitably expand its property and casualty business in highly competitive environments. . Changes in insurance regulations, including (i) those effecting the ability of the Company's insurance subsidiaries to distribute cash to the holding company and (ii) those impacting the Company's ability to profitably write property and casualty insurance policies in one or more states. . Changes in federal income tax laws and changes resulting from federal tax audits effecting corporate tax rates or taxable income, and regulations changing the relative tax advantages of the Company's life and annuity products to customers. . The Company's ability to maintain favorable claims-paying ability ratings. . Adverse changes in policyholder mortality and morbidity rates. 10 Discontinued Operations On December 9, 1996, the Company announced its strategic decision to withdraw from the group medical insurance business over the following two years. The Company stopped writing new group medical insurance policies in January 1997 and intends to stop renewing group medical insurance policies by January 1998. In the following discussions of results of operations, group medical results are reported separately as discontinued operations for all periods. Six Months Ended June 30, 1997 Compared With Six Months Ended June 30, 1996 Insurance Premiums and Contract Charges Earned Insurance premiums and contract charges earned, which excludes annuity and life contract deposits, increased 8.5% for the six months ended June 30, 1997, compared to the same period in 1996. Insurance premiums written and contract deposits of $374.9 million for the six months ended June 30, 1997 increased 10.2%, compared to $340.3 million for the same period in 1996, driven principally by an 8.1% growth in property and casualty premiums written and a 19.1% increase in annuity deposits. Insurance premiums written and contract deposits in the Company's primary product lines, automobile (excluding involuntary), property, annuity and life, increased 10.5% to $364.7 million for the six months ended June 30, 1997, compared to $330.0 million for the same period in 1996. Involuntary automobile business includes allocations of business from state mandatory automobile insurance facilities and assigned risk business. Involuntary automobile premiums written for the six months ended June 30, 1997 decreased 10.8% compared to the same period in 1996. Automobile (excluding involuntary) and homeowners earned premiums increased 7.5% to $206.1 million for the six months ended June 30, 1997, compared to $191.7 million for the same period in 1996, primarily as a result of a 7.1% increase in automobile (excluding involuntary) and homeowners policies in force. The 816,000 automobile (excluding involuntary) and homeowners policies in force at June 30, 1997 represented an increase of 54,000 policies since June 30, 1996 and an increase of 30,000 policies since December 31, 1996. Automobile (excluding involuntary) and homeowners premiums written increased 8.6% to $208.1 million for the six months ended June 30, 1997, compared to $191.6 million for the same period in 1996. For the six months ended June 30, 1997, new direct premiums written of $23.5 million increased 14.6% compared to $20.5 million for the same period last year. Renewal direct premiums written of $188.0 million for the six months ended June 30, 1997 increased 8.9% compared to $172.7 million for the same period in 1996. For the six months ended June 30, 1997, life insurance premiums and contract charges earned were $41.3 million, compared to $39.7 million for the same period in 1996, representing an increase of 4.0%. Life insurance in force on June 30, 1997 increased 5.1% compared to June 30, 1996. The lapse rate of 8.0% for the six months ended June 30, 1997 was equal to the same period in 1996. In the first quarter of 1997, the Company began selling five new term life products developed to meet customer needs. These products started to contribute to premium growth in the second quarter of 1997 generating 11 approximately $1 million of premium during that period. Annuity contract charges earned increased 35.7% to $5.7 million for the six months ended June 30, 1997, compared to $4.2 million for the same period in 1996, due to a 45% increase in variable annuity cash value on deposit. Total annuity deposits received during the six months ended June 30, 1997 increased 19.1% to $101.8 million, compared to $85.5 million for the same period in 1996, reflecting a $9.6 million, or 15.1%, increase in scheduled deposits for retirement annuities and a $6.7 million, or 30.2%, increase in rollover deposits from other companies and single premiums. Three new variable annuity funds were added to the Horace Mann family of funds in the first quarter of 1997 in response to educators' requests for additional investment options. The addition of a small cap fund, an international fund and a socially responsible fund brings the total variable annuity fund options to seven. Net Investment Income Net investment income of $99.7 million for the six months ended June 30, 1997 was comparable to the same period in 1996. Investments (at amortized cost) decreased 0.3%, or $8.6 million, from June 30, 1996. The pretax yield on average investments was 7.4% (4.9% after tax) for both the six months ended June 30, 1997 and the same period in 1996. Realized Investment Gains and Losses Realized investment gains were $1.6 million for the six months ended June 30, 1997, compared to $2.7 million for the same period in 1996. Benefits, Claims and Settlement Expenses Total benefits, claims and settlement expenses increased 5.6% to $181.8 million for the six months ended June 30, 1997, compared to $172.1 million for the same period in 1996. Property and casualty claims and settlement expenses were $162.1 million for the six months ended June 30, 1997, compared to $152.2 million for the same period in 1996. The property and casualty loss ratio of 73.6% for the six months ended June 30, 1997 was 1.6 percentage points less than the 75.2% reported for the same period in 1996. For the first six months of 1996, losses from severe weather were higher than those incurred in the current year. Catastrophe losses after reinsurance but before federal income tax benefits for the six months ended June 30, 1997 were $4.1 million and accounted for 1.9 points on the loss ratio, compared to catastrophe losses of $10.8 million, 5.3 points on the loss ratio, for the same period in 1996. The provision for losses and loss adjustment expenses for insured events in prior years continued to reflect favorable development. Income before income taxes benefited by $26.9 million and $33.1 million for the six months ended June 30, 1997 and 1996, respectively, including $16.0 million and $17.1 million for the three months ended June 30, 1997 and 1996, respectively, as a result of a reduction in the estimated amount needed to settle prior years' claims. 12 The Company increased its catastrophe reinsurance coverage for 1997. The 1997 reinsurance program covers 95% of catastrophe losses in excess of $7.5 million up to $65 million for each catastrophe. The Company's catastrophe reinsurance program is augmented by a $100 million equity put. This equity put provides for 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 of losses from a catastrophe, individually or in the aggregate, which exceed $65 million. Life benefits were $19.7 million for the six months ended June 30, 1997, reflecting a 1.0% decrease, compared to $19.9 million for the same period in 1996. For the six months ended June 30, 1996, claims for group disability business were unusually low and returned to more normal levels in the current year. The first six months of 1997 also reflected average individual life mortality experience compared to higher mortality in the same period last year. Interest Credited to Policyholders Interest credited to policyholders was $48.9 million for the six months ended June 30, 1997, 3.4% more than the $47.3 million interest credited for the same period in 1996. Interest credited to fixed annuity contracts increased 1.3% to $38.8 million for the six months ended June 30, 1997, from $38.3 million for the same period in 1996. The increase reflects a slightly higher average annual interest rate credited of 5.7% for the six months ended June 30, 1997, compared to 5.6% for the first six months of 1996, and a growth of fixed rate annuity accumulated deposits of 0.9%. Life insurance interest credited increased $1.1 million, or 12.2%, to $10.1 million for the six months ended June 30, 1997, compared to the same period in 1996, primarily as a result of continued 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 six months ended June 30, 1997, policy acquisition and operating expenses of $71.6 million increased $3.6 million, or 5.3%, compared to $68.0 million for the first six months of 1996. The 1997 property and casualty expense ratio improved to 19.3%, five tenths of a percentage point lower than 19.8% for the same period in 1996. Amortization of Intangible Assets Amortization of intangible assets decreased by $0.3 million to $5.4 million for the six months ended June 30, 1997, compared to $5.7 million for the same period in 1996, as a result of a scheduled decrease in the non-cash amortization of the value of acquired insurance in force related to the 1989 acquisition of the Company. 13 Interest Expense The Company's interest expense of $5.2 million for the six months ended June 30, 1997 was $0.3 million, or 5.5%, less than the same period in 1996 as a result of repayments of borrowings related to the repurchase of shares of its common stock during the second quarter of 1995. The debt to capital ratio of 23.3% as of June 30, 1997 was within the Company's target operating range of 20% to 25%. Income Tax Expense The effective income tax rate was 27.6% for six months ended June 30, 1997 compared to the 28.6% effective income tax rate for the same period last year. Income from investments in tax-advantaged securities reduced the effective income tax rate 3 percentage points in 1997 and 4 percentage points in 1996 and acquisition related tax benefits reduced the effective rate 6 percentage points in 1997 and 5 percentage points in 1996. Operating Income Operating income (income from continuing operations before realized investment gains and losses and 1996 debt retirement costs) was $39.2 million for the six months ended June 30, 1997, compared to $33.6 million for the same period in 1996, an increase of 16.7%. Operating income in 1997 benefited from mild weather. Included in the Company's operating income are non-cash charges for the amortization of the value of acquired insurance in force and goodwill related to the 1989 acquisition of the Company. Excluding these non-cash charges for the amortization of intangible assets, operating income was $42.7 million for the six months ended June 30, 1997, compared to $37.3 million for the same period in 1996. Property and casualty segment operating income was $29.0 million for the six months ended June 30, 1997, compared to $24.6 million for the same period in 1996. Milder weather compared to the same period last year contributed to these results. For the first six months, after tax catastrophe losses were $2.6 million in 1997, compared to $7.0 million for 1996. The property and casualty combined loss and expense ratio for the six months ended June 30, 1997 was 92.9%, compared to the 95.0% reported for the same period in 1996. Life insurance segment operating income was $5.9 million for the six months ended June 30, 1997, compared to the $6.0 million reported for the same period in 1996. The 1997 life results reflect modest growth in business volume offset by a return to more normal levels of both group disability claims and individual life mortality experience, compared to lower-than-average disability claims and higher-than-average life mortality in the first half of 1996. Annuity segment operating income of $8.8 million for the six months ended June 30, 1997 increased 8.6%, compared to the $8.1 million reported for the same period in 1996, reflecting strong growth in variable annuity deposits and an increase in the fixed net interest margin. Annuity segment profit continues to shift from the interest margin on fixed annuity accumulations to fees on variable mutual fund deposits. Total accumulated fixed and variable annuity deposits of $2,230.6 million increased 14 $268.5 million, or 13.7%, compared to June 30, 1996. This increase resulted from a net increase in funds on deposit of 10.3% plus net increases in market value of underlying mutual funds of $75.1 million. Income from Continuing Operations Income from continuing operations, which includes realized investment gains, for the six months ended June 30, 1997 was $40.3 million, or $1.72 per share, reflecting a 16.8% increase in income and a 17.0% increase in income per share compared to the same period in 1996. The Company's share repurchase program had a minimal impact on earnings and earnings per share for the first six months of 1997; however, the impact will be recognized more fully in future quarters. After tax realized investment gains were $1.1 million for the six months ended June 30, 1997, compared to $1.8 million for the same period in 1996. Income from continuing operations for the six months ended June 30, 1996 also reflected the costs of the early redemption of $100 million of convertible notes of $0.9 million, or $0.04 per share. Net Income Net income, which includes discontinued operations in 1996, was $40.3 million, or $1.72 per share, for the six months ended June 30, 1997, compared to $32.5 million, or $1.39 per share, for the same period in 1996, an increase of 24%. The discontinued group medical business operating loss was $2.0 million for the six months ended June 30, 1996. The Company's net income for the year ended December 31, 1996 included an after tax charge of $3.9 million for anticipated losses during the two year phase-out period for the discontinued group medical insurance business. Liquidity and Financial Resources Investments The Company's investment strategy emphasizes high quality investment grade, publicly traded fixed income securities. At June 30, 1997, fixed income securities comprised 96.3% of total investments. Of the fixed income investment portfolio, 94.3% was investment grade and 99.6% was publicly traded. The average quality of the total fixed income portfolio was AA- at June 30, 1997. 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 4.3 years at June 30, 1997 and 4.4 years at December 31, 1996. 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 70% of all outstanding fixed annuity accumulated cash values are subject in most cases to substantial early withdrawal penalties. 15 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 pay dividends to shareholders, retire short-term debt and repurchase shares of the Company's common stock. Long-term liquidity requirements, beyond one year, are principally for the payment of future insurance policy claims and benefits and retirement of long-term notes. Operating Activities As a holding company, HMEC conducts its principal operations in the personal lines segment of the property and casualty and life insurance industries through its subsidiaries. HMEC's insurance subsidiaries generate cash flow from premium and investment income, generally well in excess of their immediate needs for policy obligations, operating expenses and other cash requirements. Net cash provided by operating activities was $36.7 million for the six months ended June 30, 1997 compared to $69.9 million for the same period in 1996 with the decrease due to an increase in federal income tax payments. In both years, cash provided by operating activities primarily reflected net cash generated by the insurance subsidiaries. Payment of principal and interest on debt, fees related to the catastrophe- linked equity put option, dividends to shareholders and parent company operating expenses, as well as the share repurchase program, are dependent upon the ability of the insurance subsidiaries to pay cash dividends or make other cash payments to HMEC, including tax payments pursuant to tax sharing agreements. The insurance subsidiaries are subject to various regulatory restrictions which limit the amount of annual dividends or other distributions, including loans or cash advances, available to HMEC without prior approval of the insurance regulatory authorities. Dividends which may be paid by the insurance subsidiaries to HMEC during 1997 without prior approval are approximately $89 million. During the second quarter of 1997, the Company received approval from the Illinois and California Departments of Insurance for extraordinary dividends and a total of $54 million was paid by the property and casualty subsidiaries. HMEC used cash from the extraordinary dividends primarily to repurchase shares of the Company's common stock. Although regulatory restrictions exist, dividend availability from subsidiaries has been, and is expected to be, more than adequate for parent Company 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 maturities portfolio as available for sale. During the first six months of 1997, net cash provided by investing activities was $29.7 million. This net amount reflects $579.4 million in purchases of fixed maturity investments, funded by investment sales or maturities of $609.1 million. 16 Financing Activities Financing activities include the receipt and withdrawal of funds by annuity policyholders, payment of scheduled dividends, transactions related to the Company's common stock and borrowings and repayments under the Company's debt facilities. Shareholder dividends paid for the six months ended June 30, 1997 were $6.4 million. For the six months ended June 30, 1997, receipts from annuity contracts of $101.8 million were greater than contract maturities and withdrawals of $70.1 million. Net transfers to variable annuity assets were $54.1 million during the first six months of 1997 compared to $43.6 million during the same period in 1996. Interest-sensitive life account balances increased $1.0 million during the first six months of 1997. Through June 30, 1997, the Company had repurchased 1,320,100 shares at an aggregate cost of $61.4 million, or $46.54 per share, which was financed primarily with cash from operations, including extraordinary dividends of $54.0 million from the property and casualty subsidiaries. Of these treasury shares, 1,026,900 were repurchased during the second quarter of 1997. During the six months ended June 30, 1997, the Company received $9.5 million related to the exercise of common stock options. Capital Resources Historically, the Company's insurance subsidiaries have generated capital in excess of what has been needed to support business growth. These excess amounts have been paid to HMEC through dividends. HMEC has then utilized these dividends and its access to the capital markets to retire long-term debt, repurchase shares of its common stock, increase dividends to its shareholders and fulfill 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 $608.4 million at June 30, 1997, including $99.6 million of long-term debt and $42.0 million of short-term debt. Long-term debt as a percentage of total shareholders' equity was 21.4% as of June 30, 1997, compared to 20.6% as of December 31, 1996 with the increase attributable to the repurchase of shares for treasury stock. Total debt-to- capital at June 30, 1997 was 23.3%, well within the Company's target operating range of 20% to 25%. Shareholders' equity was $466.2 million at June 30, 1997, including an unrealized gain in the Company's investment portfolio of $29.6 million after taxes and the related impact on deferred policy acquisition costs associated with interest-sensitive policies. The market value of the Company's common stock and the market value per share were $1,107.7 million and $49, respectively, at June 30, 1997. Book value per share was $20.62 at June 30, 1997, $19.31 excluding investment market value adjustments. In January 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%. Interest on the Senior Notes is payable semi-annually. The Senior Notes are redeemable in whole or in part, at any time at the 17 Company's option. The net proceeds from the sale of the Senior Notes were used to finance the redemption of the Company's convertible notes. As of June 30, 1997 and December 31, 1996, the Company had short-term debt comprised of $42.0 million and $34.0 million, respectively, outstanding under the Bank Credit Facility. The Bank Credit Facility allows unsecured borrowings of up to $65.0 million at Interbank Offering Rates plus 0.3% to 0.5% or Bank of America National Trust and Savings Association reference rates. The rate on the borrowings under the Bank Credit Facility was Interbank Offering Rate plus 0.3%, or 6.0%, as of June 30, 1997. 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, 1997 was 11.7x compared to 9.8x for the same period in 1996. Total shareholder dividends were $6.4 million for the six months ended June 30, 1997. In February 1997, the Board of Directors authorized the fifth consecutive annual increase in the Company's dividend. The regular quarterly dividend increased by 23% to $0.135 per share. Recent Accounting Changes Earnings Per Share In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 supersedes previous accounting guidance on this subject and specifies the computation, presentation and disclosure requirements for earnings per share ("EPS"). SFAS No. 128 will be implemented in the Company's December 31, 1997 financial statements; earlier application is not permitted. Upon implementation, SFAS No. 128 requires restatement of all prior-period EPS data presented. SFAS No. 128 requires dual presentation of EPS replacing primary EPS with a presentation of basic EPS and replacing fully diluted EPS with diluted EPS. The effects on the Company's EPS of implementing SFAS No. 128 are not anticipated to be material. Capital Structure Disclosures In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure" which will be implemented in the Company's 1997 financial statements. It is not anticipated that the implementation of SFAS No. 129 will require significant revision of prior disclosures because the information required by SFAS No. 129 had been covered in previous accounting guidance. Comprehensive Income In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" which will be implemented in the Company's March 31, 1998 financial statements. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income will represent the change in shareholders' equity 18 during a reporting period from transactions and other events and circumstances from non-owner sources. For the Company, it is anticipated that comprehensive income will be substantially equal to net income plus the change in net unrealized gains and losses on fixed maturities and equity securities for the period. Segment Disclosures In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" which will be implemented in the Company's March 31, 1998 financial statements. SFAS No. 131 establishes standards for the way public companies are to report information about operating segments in annual financial statements and requires those companies to report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company anticipates that implementation of this pronouncement will not have a material effect on the disclosures contained in its annual financial statements and related notes but will expand its interim financial statements and related notes to include segment information such as revenues, earnings, assets and a reconciliation of segment earnings to consolidated earnings. The Company's operations will continue to include the following segments consistent with previously reported financial information: property and casualty insurance, annuities, life insurance, and corporate and other. 19 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 June 4, 1997, 20,269,003 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.
Votes Votes For Against Abstentions ----- ------- ----------- 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 20,265,319 3,684 - Dr. Emita B. Hill 20,265,679 3,324 - Paul J. Kardos 20,265,779 3,224 - Jeffrey L. Morby 20,265,779 3,224 - Shaun F. O'Malley 20,265,779 3,224 - Ralph S. Saul 20,265,679 3,324 - William J. Schoen 20,265,779 3,224 - Ratification of the appointment of KPMG Peat Marwick LLP, independent certified public accountants, to serve as the Company's auditors for the fiscal year ending December 31, 1997. 20,007,847 2,289 258,867
Item 6: Exhibits and Reports on Form 8-K (a) The following items are filed as Exhibits. Management contracts and compensatory plans are indicated by an asterisk (*). (10) Material contracts: 10.1* Horace Mann Supplemental Employee Retirement Plan, incorporated by reference to Exhibit 10.19(a) to HMEC's Annual Report on Form 10-K for the year ended December 31, 1992, filed with the Securities and Exchange Commission on March 22, 1993. 10.1(a)* First Amendment to the Horace Mann Supplemental Employee Retirement Plan. 10.2* Horace Mann Executive Supplemental Employee Retirement Plan, 1997 Restatement. (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 1997. 20 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 13, 1997 Paul J. Kardos ----------------------- ----------------------------- Paul J. Kardos, President and Chief Executive Officer Date August 13, 1997 Larry K. Becker ----------------------- ----------------------------- Larry K. Becker, Executive Vice President and Chief Financial Officer 21 EX-10.1(A) 2 1ST AMENDMENT TO SUPP. EMPLOYEE RETIREMENT PLAN Exhibit 10.1(a) FIRST AMENDMENT TO THE HORACE MANN SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN (SERP) The Horace Mann Supplemental Employee Retirement Plan (the "Plan") is amended effective 12 February 1997 pursuant to Article IX Section 9.1. If there are any conflicts between the Plan document and/or the Summary Plan Description and/or this Amendment, the terms of this Amendment shall control. Add Section 4.5, as follows: 4.5 Vesting. This Plan contains the same vesting provisions as described in the HMPP and MPPP. EX-10.2 3 EXECUTIVE SUPP. EMPLOYEE RETIREMENT PLAN Exhibit 10.2 HORACE MANN EXECUTIVE SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN (ESERP) 1997 RESTATEMENT ARTICLE I -- GENERAL 1.1 Background and Establishment. The Horace Mann Executive Supplemental Employee Retirement Plan ("ESERP") was effective as of 01 January 1992. The function of the ESERP is to provide supplemental retirement income benefits to a finite group of employees. This finite group was identified by their estimated projected loss of benefits due to limitations on compensation as defined under Section 401(a)(17) and benefit limitations as defined under Section 415 of the Internal Revenue Code from the qualified Money Purchase Pension Plan ("MPPP"), qualified Horace Mann Pension Plan ("HMPP") and non- qualified Supplemental Employee Retirement Plan ("SERP"). (All references are to the HMPP and MPPP as the "Floor Offset" arrangement as their 1995 Restatement, as amended, unless specified otherwise.) The Floor Offset arrangement is described in its Summary Plan Description ("SPD") as contained in the Employee Benefits Binder. The ESERP plan only covers named employees. In 1994, the Plan was expanded to include certain key employees, who may not be executives of the Company, but whose employment and performance are considered to be important to meeting the goals and objectives of Horace Mann Educators Corporation ("HMEC"), the parent company of HMSC. Additionally, the structure of the Plan was changed to replicate features of the qualified "floor offset" arrangement that exists with the HMPP and the MPPP. Effective 12 February 1997, the Plan was amended and restated to include the same vesting provisions as the HMPP and MPPP. ARTICLE II -- DEFINITIONS The following words shall have the meanings below unless the context clearly indicates otherwise: 2.1 "Actuarial Equivalent" or "Equivalent" means the actuarial equivalent as defined in the HMPP. 2.2 "Company" or "HMSC" means Horace Mann Service Corporation and any successor thereto. 2.3 "Eligible Earnings" means the same earnings (compensation) as those which are eligible under the SERP, MPPP and HMPP and as described in their SPD's unless otherwise specified in the Appendix. Earnings which exceed the statutory limits as defined and controlled by the Internal Revenue Code in Section 401(a)(17), as amended, will be included as eligible earnings for purposes of the ESERP. 2.4 "Eligible Employee" means those employees who are identified by their estimated projected loss of benefits due to limitations on compensation as defined under Section 2 401(a)(17) and benefit limitations as defined under Section 415 of the Internal Revenue Code from the MPPP, HMPP and SERP, who are highly compensated key employees and who are designated in the Appendix as recorded by the Plan Administrator. 2.5 "ESERP Benefit" means the benefit payable in accordance with the Plan. 2.6 "Final Average Earnings" means the Participant's Final Average Earnings as defined in the HMPP. 2.7 "NQMPPP" means the defined contribution feature of the Plan as described in Article 4.2. 2.8 "NQMPPP Eligible Earnings" means only those Eligible Earnings in excess of the limits imposed by Internal Revenue Code ("IRC") Section 401(a)(17), as amended. 2.9 "Participant" means those highly compensated key employees listed in the Appendix. 2.10 "Plan" means the Executive Supplemental Employee Retirement Plan as amended from time to time. 2.11 "Plan Year" means each twelve-consecutive month period beginning 01 January 1992. 2.12 "Spouse" means a person who is the Participant's Spouse as defined in the HMPP. 2.13 "Vesting Service" means the sum of an Eligible Employee's periods of continuous service as defined in the MPPP. 2.14 "Years of Service" means only those periods of service as defined in the HMPP for purposes of benefit calculation. Any service beyond 30 years will not be included in the benefit calculation. ARTICLE III - ELIGIBILITY TO PARTICIPATE 3.1 Becoming a Participant. Each Eligible Employee shall initially become a Participant as indicated in Appendix A, as amended from time to time. 3.2 Reemployment. (a) Following Retirement. If a Participant retires from the Company, and subsequently is re-employed as a full time, part time or temporary employee who works more than 10 days per month, the Participant's periodic ESERP benefit will cease until he re-retires. Upon his subsequent retirement, his prior and additional service and earnings, plus any additional credit earned under the qualified plan(s) will be included in the recalculation of the Participant's ESERP benefit. 3 In the event the Participant retires and is re-employed and works less than 10 days a month, the Participant's periodic ESERP payment will continue. 3.3 Ceasing to be a Participant. A person will cease to be a Participant: (a) if he loses all of his Years of Credited Service under the HMPP or MPPP, or (b) if he dies. ARTICLE IV - ELIGIBILITY FOR AND AMOUNT OF BENEFITS 4.1 Eligibility. Benefits are payable under the ESERP only if the Participant separates from service from the Company and would be considered to be vested under the HMPP or MPPP. That eligibility would include early, normal, and postponed retirement. As defined in the HMPP: (a) For employees who separate from service and are immediately eligible for retirement benefits: (i) Normal Retirement Date is the first day of the month coincident with or next following the Participant's 65th birthday and the Participant has at least 5 years of service; (ii) Early Retirement Date is the first day of the month coincident with or following the month in which the Participant is at least 55 years and has at least 10 years of service. Benefits will be reduced according to the Early Retirement Adjustment Factor Table as contained in the HMPP; or (iii) Postponed Retirement Date is the first day of the month coincident with or next following the Participant's termination of employment with the Company after his Normal Retirement Date and the Participant will continue to accrue service under this Plan (up to 30 years) and eligible compensation. (b) For employees who separate from service, who are vested but not yet eligible for retirement benefits: (i) Normal vested benefits are payable as of the first day of the month coincident with or next following the Participant's 65th birthday and the Participant has at least 5 years of service and are calculated in the same manner as provided in the HMPP at the time of the Participant's separation from service; or (ii) Early vested benefits are payable as of the first day of the month coincident with or following the month in which the Participant is at least 55 years and has at least 10 years of service. Benefits are calculated in the same manner as provided 4 in the HMPP at the time of the Participant's separation from service and will be reduced according to the Deferred Vested Retirement Adjustment Factor Table as contained in the HMPP. 4.2 Retirement Benefit Calculation. The purpose of the ESERP is to provide minimum "floor" post retirement income benefits that are not available to the Participant under the HMPP, MPPP and SERP due to limits pertaining to IRC Sections 401(a)(17) and 415, as amended. Any benefits under the HMPP and MPPP offset the benefits available under the ESERP. If a Participant under the SERP becomes a Participant under the ESERP, then all accrued and future accrual of SERP benefits are transferred to the ESERP. The ESERP provides for benefit accruals under two plan features. (a) The first plan feature is a defined benefit calculation which is the "floor" benefit of the Plan ("Floor Benefit Feature"). If the retirement is prior to age 65 years, then the Early Retirement Reduction Factors as stated in the HMPP apply. To calculate the Floor Benefit Feature: (i) For Participants with an adjusted service date of 8/29/89 or prior and who were Participants in the HMPP or its predecessor plans: * the average of the highest 36 consecutive months of Eligible Earnings under the ESERP; *times 2%; *times years of credited service under the HMPP (up to 30 years); *minus 50% of the Primary Income Social Security Benefit as defined in the HMPP; *equals the Participant's monthly age 65 "floor" benefit. (ii) For Participants with an adjusted service date subsequent to 8/29/89 and who were or became Participants in the HMPP: * the average of the highest 36 consecutive months of Eligible Earnings under the ESERP; *times 1.6%; *times years of credited service under the HMPP (up to 30 years); *equals the Participant's monthly age 65 "floor" benefit. (b) The second plan feature is a defined contribution benefit, referred to as the "Non-Qualified MPPP" or "NQMPPP Feature". This benefit is determined by the Participant's Years of Service and NQMPPP Eligible Earnings. 5 (i) As defined in the MPPP, Employer contributions are based on a percentage of the Participant's compensation determined by the Participant's Vesting Service:
Vesting Service Completed by Amount of Employer's Participant Contribution Less than 5 years 5% 5 years but less than 15 years 6% 15 years or more 7%
(ii) For record keeping purposes, for each Participant, a notional or bookkeeping account is established. Phantom contributions to the NQMPPP Feature account are not made prior to a Participant becoming an Eligible Employee in the ESERP. In addition, contributions to the NQMPPP Feature account are not made on a retroactive basis. (iii) The NQMPPP Feature account is valued as accumulated contributions, plus any gains or losses that would have been credited to those contributions based on the rate of return credited to the qualified MPPP. (c) To determine what benefit is due under the ESERP (if any) the following calculation would be performed. The NQMPPP Feature Monthly Equivalent is calculated in the same form and manner as the Monthly Equivalent in the MPPP. *ESERP monthly Floor Benefit Feature; *minus the NQMPPP Feature Monthly Equivalent; *minus the HMPP Monthly Benefit; *minus the MPPP Monthly Equivalent; *equals the ESERP Monthly Benefit Due. If the combined payable benefit from the HMPP and the MPPP are greater than the ESERP, then no benefit is payable from the ESERP. This also applies to any other forms of benefits payable (such as, early retirement or surviving spouse options). 4.3 Accrual of Benefits. If a Participant ceases to meet the definition of an Eligible Employee, ESERP benefit accruals will cease as of that time. No further accruals will occur unless and until the Participant once again meets the definition an Eligible Employee. Notwithstanding the foregoing, if a Participant ceases to meet the definition of an Eligible Employee while remaining an employee who accrues benefits or earnings under the NQMPPP, HMPP and/or the MPPP, then the offsets for the NQMPPP Monthly Equivalent, HMPP Monthly Benefit and MPPP Monthly Equivalent as so increased shall continue to be used to decrease the ESERP monthly Floor Benefit Feature. 6 4.4 Disability Retirement. Should the Participant be placed on a long term disability leave of absence, he will continue to accrue service, with regards to the Floor Benefit Feature of this Plan (up to a maximum of 30 years). However, Eligible Earnings will be considered those which were earned as an active employee. If at the time the disability ceases, the Participant is eligible to receive a qualified retirement benefit from the HMPP, he will also be eligible to receive an ESERP benefit. 4.5 Vesting. The ESERP benefits are subject to the same vesting provisions as described in the HMPP and the MPPP. ARTICLE V - FORM AND COMMENCEMENT OF BENEFITS 5.1 Forms of Benefits Payable. The ESERP benefit is comprised of two forms of benefit. (a) The first form is a defined benefit payment, payable, provided the Participant is eligible for retirement benefits under the HMPP, as a periodic payment in the same form as is provided by the HMPP including any applicable reduction factors. The same calculation methodology and order of calculation used in the HMPP is used in the calculation of benefits in the ESERP. (i) Forms of monthly payments could reflect survivor benefits and would be based on annuity payment factors as expressed in the HMPP. (ii) An automatic lump sum distribution of the ESERP benefit will occur at retirement if the lump sum benefit equivalent is less than $3,500. The $3,500 limit may be changed in accordance with the limits established by the Service for qualified pension plans. (b) The second form is a defined contribution benefit payment as defined by the NQMPPP account balance. The NQMPPP Feature is calculated as described in Article 4.2. (i) The NQMPPP Feature is paid in one lump sum payment. A Participant, who incurs a termination of employment after vesting in the ESERP, will receive an amount equal to the accrued benefit under the NQMPPP Feature as of his date of termination. Such payment will be made within ninety (90) days following the termination of employment of the Participant. 5.2 Survivor Benefits. (a) With regards to the Floor Benefit Feature, if a Participant elects to receive a periodic payment from the qualified pension plans, the same election will apply to the ESERP in the equivalent forms of annuity options available under the HMPP. Currently, those forms include a 50%, 66 2/3%, 75% and 100% survivor option. The monthly benefit will be actuarially reduced if a Participant elects one of the survivor options. 7 (i) If a Participant dies after having a vested termination in employment but prior to commencing benefits, the surviving spouse would receive a benefit of 50% based on the Participant's lifetime ESERP benefit as calculated in Article 4.2 based on the Participant's age at the time of death. All other factors would be based on those at the time of the Participant's Normal Retirement Date from the Company. If the Participant does not have a spouse, as defined in the HMPP, upon the death of a Participant, no benefit will be due or payable. (ii) With regards to the NQMPPP Feature, pursuant to Article 5.1(b), the NQMPPP account balance would have been paid to the Participant at the time of a vested termination of employment. (b) If a Participant dies while actively employed with the Company, the Participant's spouse, as defined in the HMPP, would receive a benefit from the ESERP. The benefit, including the accrued balance of the NQMPPP Feature, would be calculated as provided in Article 4.2 and will be reduced in the same form and manner as the HMPP. The lump sum payment of the NQMPPP will be made within ninety (90) days following the death of the Participant. 5.3 Commencement of Payment of ESERP Benefits. Payment of any ESERP benefit due will begin on commencement of payment of benefits from the qualified pension plans, except as provided in Article 5.1(b). Notification of retirement to the Employee Benefits Unit for the qualified pension plans will also initiate the process of calculation and payment of the ESERP benefit. A Participant cannot defer the ESERP benefit if he has commenced receiving benefits from the qualified plans. Conversely, if the Participant defers receiving benefits from the qualified plans, he must defer receiving the ESERP benefit except as provided in Article 5.1(b). ARTICLE VI - ADMINISTRATION 6.1 Pension Committee. The same membership structure, actions, responsibility and authority shall apply to this Plan as described in the HMPP and the MPPP. The decision of the Pension Committee in matters within its jurisdiction shall be final, binding, and conclusive upon the Company and upon each Eligible Employee, Participant, spouse, and every other person or party interested or concerned. 6.2 Plan Administrator. The Plan Administrator shall have the same duties and authority pursuant to this Plan as are described in the HMPP and the MPPP. All affairs of calculation, payment and administration of the ESERP are conducted by the Plan Administrator. No benefits will be paid under the terms of this Plan without the authorization of the Plan Administrator. The Plan Administrator shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, controller, counsel or other person employed or engaged by the Company with respect to the Plan. 8 6.3 Liability. The Committee and Plan Administrator shall be free from all liability, joint and several, for their acts as members of such Committee, except to the extent that they may have committed wilful misconduct or otherwise required by federal law. ARTICLE VII - AMENDMENT AND TERMINATION 7.1 Amendment or Termination. The Company and Pension Committee intend the Plan to be permanent but reserve the right to amend or terminate the Plan when, in the sole opinion of the Pension Committee, such amendment or termination is advisable. Any such amendment or termination shall be made pursuant to a resolution of the Board of Directors of the Company and shall be effective as of the date of such resolution. No amendment or termination of the Plan shall directly or indirectly deprive any Participant or surviving spouse of all or any portion of any ESERP Benefit payment which has commenced prior to the effective date of the resolution amending or terminating the Plan. 7.2 Change of Control. In the event of a Change of Control of HMEC (the parent company of HMSC), certain protection will apply. Any Participant who is employed by HMSC when a Change of Control occurs, who has signed a Severance Agreement and who is discharged for reasons other than cause, during a three year period subsequent to the Change of Control, will receive their benefit from the ESERP in a lump sum payment equal to their accrued benefit under the ESERP, as defined in Article 4.2, at the time of severance. Should this Plan be terminated and not replaced due to a Change of Control of HMEC, all ESERP Participants will receive a lump sum payment of their accrued benefit as of the date of termination of the ESERP. All payments will be made in a reasonable period after the triggering event has occurred. A Change of Control shall be deemed to have occurred if (i) there shall be consummated (1) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation, or pursuant to which shares of the Company's common stock would be converted into cash, securities or other property, other than a merger of the Company in which no Company shareholder's ownership percentage in the surviving corporation immediately after the merger is less than such shareholder's ownership percentage in the Company immediately prior to such merger by ten percent (10%) or more, or (2) any sale, lease exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all of the assets of the Company; (ii) the shareholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company which is a part of a sale of assets, merger, or reorganization of the Company or other similar transaction; (iii) any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is or becomes, directly or indirectly, the "beneficial owner," as defined in Rule 13d-3 under the Exchange Act, of securities of the Company that represent 51% or more of the combined voting power of the Company's then outstanding securities; or (iv) a majority of the members of the Company's Board of Directors are persons who are 9 then serving on the Board of Directors without having been elected by the Board of Directors or having been nominated by the Company for election by its shareholders. 7.3 Corporate Successors. The Plan shall not be automatically terminated by a transfer or sale of assets of the Company or by the merger or consolidation of the Company into or with any other corporation or other entity, but the Plan shall be continued after such sale, merger or consolidation only if and to the extent that the transferee, purchaser or successor entity agrees to continue the Plan. In the event the Plan is not continued by the transferee, purchaser or successor entity, then the Plan shall terminate subject to the provisions of paragraphs 7.1 and 7.2. ARTICLE VIII - MISCELLANEOUS 8.1 No Contract of Employment. Nothing contained in this Plan will confer upon any Participant the right to be retained in the service of the Company nor limit the right of the Company to discharge or otherwise deal with Participants without regard to the existence of the Plan. 8.2 Funding The Plan at all times shall be entirely unfunded and no provision shall at any time be made with respect to segregating any assets of the Company for payment of any benefits hereunder. The ESERP does not have a trust or trust fund arrangement. No Participant, surviving spouse or any other person shall have any interest in any particular assets of the Company by reason of the right to receive a benefit under the Plan and any such Participant, surviving spouse or other person shall have only the rights of a general unsecured creditor of the Company with respect to any rights under the Plan. Nothing contained in the Plan shall constitute a guaranty by the Company or any other entity or person that the assets of the Company will be sufficient to pay any benefit hereunder. 8.3 Nonalienation of Benefits. No benefit payable under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge prior to actual receipt thereof by the payee; and any attempt so to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge prior to such receipt shall be void; and the Company shall not be liable in any manner for or subject to the debts, contracts, liabilities, engagements or torts of any person entitled to any benefit under the Plan. 8.4 Tax Implications. The ESERP is not a qualified pension plan, but a deferred compensation plan. It is not eligible for a tax free roll-over at the time of distribution and may also be subject to taxation on benefit accruals during a Participant's employment. The Plan Administrator will notify a Participant if any tax is owed by a Participant. A Participant should seek the advice of a tax consultant or financial advisor regarding his personal tax situation. 10 8.5 Reduction for Overpayment. The Plan Administrator shall, whenever it determines that a person has received benefit payments under this Plan in excess of the amount to which the person is entitled under the terms of the Plan, make two reasonable attempts to collect such overpayment from the person. If the person to whom such overpayment was made does not, within a reasonable time, make the requested repayment to the Plan Administrator, the overpayment shall be considered as an advance payment of benefits and the Plan Administrator will reduce all future benefits payable to that person by the actuarial equivalent value of the overpayment. 8.6 State Law. The Plan is established under and will be construed according to the laws of the State of Illinois, to the extent that such laws are not preempted by the Employee Retirement Income Security Act and valid regulations published thereunder. 8.7 Incapacity of Recipient. In the event a Participant or surviving spouse is declared incompetent and a conservator or other person legally charged with the care of his person or of his estate is appointed, any benefits under the Plan to which such Participant or surviving spouse is entitled shall be paid to such conservator or other person legally charged with the care of his person or his estate. Except as provided above in this paragraph, when the Plan Administrator in its sole discretion, determines that a Participant or surviving spouse is unable to manage his financial affairs, the Plan Administrator will make distributions to any person for the benefit of such Participant or surviving spouse. 8.8 Unclaimed Benefit. Each Participant shall keep the Plan Administrator informed of his current address and the current address of his spouse. The Plan Administrator shall not be obligated to search for the whereabouts of any person. If the location of a Participant is not made known to the Plan Administrator within three (3) years after the date on which any payment of the Participant's ESERP benefit may be made, payment may be made as though the Participant had died at the end of the three-year period. If, within one additional year after such three-year period has elapsed, or, within three years after the actual death of a Participant, the Plan Administrator is unable to locate any surviving spouse of the Participant, then the Company shall have no further obligation to pay any benefit hereunder to such Participant or surviving spouse or any other person and such benefit shall be irrevocably forfeited. 8.9 Invalidity of Certain Provisions. If any provision of this Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof and the Plan shall be construed and enforced as if such provisions, to the extent invalid or unenforceable, had not been included. 8.10 Limitations on Liability and Indemnification. Notwithstanding any of the preceding provisions of the Plan, neither the Company, Plan Administrator, nor any individual acting as an employee or agent of the Company or as a member of the Pension Committee shall be liable to any Participant, former Participant, surviving spouse or any other person for any claim, loss, liability or expense incurred in connection with the Plan. 11 Further, the Company shall indemnify and hold harmless each member of the Board of Directors, each member of the Pension Committee, the Plan Administrator, and each officer and employee of the Company to whom are delegated duties, responsibilities and authority with respect to the Plan against all claims, liabilities, fines and penalties, and all expenses reasonably incurred by or imposed upon him (including but not limited to reasonable attorney fees) which are not the result of intentional acts knowingly in violations of the Plan or the law. 8.11 Gender and Number. Except when the context indicates to the contrary when used herein, masculine terms shall be deemed to include the feminine, and singular the plural. 8.12 Headings. The headings of articles are included solely for convenience of reference, and if there is any conflict between such headings and the text of this Plan, the text shall control. Executed in two counterpart originals effective as of 12 February 1997. HORACE MANN SERVICE CORPORATION By: /s/ Kathryn E. Karr --------------------------- Plan Administrator 12 APPENDIX A (As of ______________) The following highly compensated key employees are designated to participate in the Horace Mann Executive Supplemental Employee Retirement Plan:
NAME SOCIAL SECURITY NUMBER PARTICIPATION DATE
13 EX-11 4 COMPUTATION OF PER SHARE EARNINGS Exhibit 11 Horace Mann Educators Corporation Computation of Net Income per Share For the Six and Three Months Ended June 30, 1997 and 1996 (Amounts in thousands, except per share data)
Three Months Ended Six Months Ended March 31, June 30, ----------------- ------------------- 1997 1996 1997 1996 ---- ---- ---- ---- Primary - reported: Weighted average number of common shares outstanding during the period 23,096 23,449 23,379 23,437 Net income for the period $20,896 $17,081 $40,296 $32,514 ------- ------- ------- ------- Net income per share - assuming no dilution $ 0.90 $ 0.73 $ 1.72 $ 1.39 ======= ======= ======= ======= Primary: Weighted average number of common shares outstanding during the period 23,096 23,449 23,379 23,437 Weighted average number of common equivalent shares to reflect the dilutive effect of common stock equivalent securities: Warrants 125 116 124 117 Stock options 327 301 311 310 Common stock units related to Deferred Equity Compensation Plan for Directors 15 - 15 - ------- ------- ------- ------- Total common and common equivalent shares 23,563 23,866 23,829 23,864 ------- ------- ------- ------- Net income per share $ 0.89 $ 0.72 $ 1.69 $ 1.36 ======= ======= ======= ======= Percentage of dilution compared to reported net income per share 1.1% 1.4% 1.7% 2.2% Fully diluted: Weighted average number of common shares outstanding during the period 23,096 23,449 23,379 23,437 Weighted average number of common equivalent shares to reflect the dilutive effect of common stock equivalent securities: Warrants 125 117 125 117 Stock options 341 308 337 310 Common stock units related to Deferred Equity Compensation Plan for Directors 15 - 15 - ------- ------- ------- ------- Total common and common equivalent shares adjusted to calculate fully diluted earnings per share 23,577 23,874 23,856 23,864 ------- ------- ------- ------- Net income per share - assuming full dilution $ 0.89 $ 0.72 $ 1.69 $ 1.36 ======= ======= ======= ======= Percentage of dilution compared to reported net income per share 1.1% 1.4% 1.7% 2.2%
EX-27 5 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 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 2,643,078 0 0 0 34,827 7,673 2,744,769 8,376 0 81,866 3,968,416 2,163,894 153,984 0 119,091 141,581 30 0 0 466,184 3,968,416 267,307 99,708 1,645 0 230,644 22,098 49,606 55,676 15,380 40,296 0 0 0 40,296 1.72 1.72 0 0 0 0 0 0 0 Refer to Note 3 - Investments of the Company's Consolidated Notes to Financial Statements for June 30, 1997. Refer to the Company's Consolidated Balance Sheet as of June 30, 1997.
-----END PRIVACY-ENHANCED MESSAGE-----