-----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, AzOHvLvX8YK/w2ZZ2GWKnBlpIkDiwO4PiZeZ5Rg8AA+sr0viKukViLBSDHwRJajZ CfpnW2PC4kRzn7a7s1Mo7g== /in/edgar/work/20000811/0000950131-00-004819/0000950131-00-004819.txt : 20000921 0000950131-00-004819.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950131-00-004819 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HORACE MANN EDUCATORS CORP /DE/ CENTRAL INDEX KEY: 0000850141 STANDARD INDUSTRIAL CLASSIFICATION: [6331 ] IRS NUMBER: 370911756 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10890 FILM NUMBER: 692939 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 0001.txt 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, 2000 OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-10890 HORACE MANN EDUCATORS CORPORATION (Exact name of registrant as specified in its charter) Delaware 37-0911756 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1 Horace Mann Plaza, Springfield, Illinois 62715-0001 (Address of principal executive offices) (Zip Code) Registrant's Telephone Number, Including Area Code: 217-789-2500 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ ----- As of July 31, 2000, 40,515,757 shares of Common Stock, par value $0.001 per share, were outstanding, net of 19,341,296 shares of treasury stock. ================================================================================ HORACE MANN EDUCATORS CORPORATION FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000 INDEX
Page ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Independent Auditors' Review Report.................................... 1 Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999.................................. 2 Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2000 and 1999.................... 3 Consolidated Statements of Changes in Shareholders' Equity for the Six Months Ended June 30, 2000 and 1999...................... 4 Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2000 and 1999.................... 5 Notes to Consolidated Financial Statements............................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 12 Item 3. Quantitative and Qualitative Disclosures about Market Risk.......... 24 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders................. 25 Item 6. Exhibits and Reports on Form 8-K.................................... 26 SIGNATURES............................................................................ 28
INDEPENDENT AUDITORS' REVIEW REPORT The Board of Directors and Shareholders Horace Mann Educators Corporation: We have reviewed the consolidated balance sheet of Horace Mann Educators Corporation and subsidiaries as of June 30, 2000 and the related consolidated statements of operations and cash flows for the three-month and six-month periods ended June 30, 2000 and 1999. These consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Horace Mann Educators Corporation and subsidiaries as of December 31, 1999, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated January 25, 2000, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1999, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ KPMG LLP KPMG LLP Chicago, Illinois July 31, 2000 1 HORACE MANN EDUCATORS CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
June 30, December 31, 2000 1999 ----------- ----------- ASSETS Investments Fixed maturities, available for sale, at market (amortized cost, 2000, $2,584,099; 1999, $2,575,403)........................... $ 2,507,064 $ 2,507,280 Short-term and other investments....................................... 89,015 122,929 Short-term investments, loaned securities collateral................... 112,710 - ----------- ----------- Total investments................................................ 2,708,789 2,630,209 Cash ...................................................................... 30,628 22,848 Accrued investment income and premiums receivable.......................... 86,562 92,755 Value of acquired insurance in force and goodwill.......................... 96,566 102,068 Deferred policy acquisition costs.......................................... 134,987 130,192 Other assets............................................................... 163,444 144,061 Variable annuity assets.................................................... 1,059,674 1,131,713 ----------- ----------- Total assets..................................................... $ 4,280,650 $ 4,253,846 =========== =========== LIABILITIES, REDEEMABLE SECURITIES AND SHAREHOLDERS' EQUITY Policy liabilities Fixed annuity contract liabilities..................................... $ 1,217,181 $ 1,238,379 Interest-sensitive life contract liabilities........................... 461,962 443,309 Unpaid claims and claim expenses....................................... 301,043 309,604 Future policy benefits................................................. 178,909 179,157 Unearned premiums...................................................... 167,025 170,845 ----------- ----------- Total policy liabilities ........................................ 2,326,120 2,341,294 Other policyholder funds................................................... 123,257 126,530 Other liabilities.......................................................... 227,681 110,698 Short-term debt............................................................ 49,000 49,000 Long-term debt............................................................. 99,699 99,677 Variable annuity liabilities............................................... 1,054,458 1,126,505 ----------- ----------- Total liabilities................................................ 3,880,215 3,853,704 ----------- ----------- Preferred stock............................................................ - - Common stock............................................................... 60 59 Additional paid-in capital................................................. 338,181 333,892 Retained earnings ......................................................... 462,739 449,023 Accumulated other comprehensive income (loss) (net unrealized gains (losses) on fixed maturities and equity securities)...................................... (47,167) (40,016) Treasury stock, at cost.................................................... (353,378) (342,816) ----------- ----------- Total shareholders' equity....................................... 400,435 400,142 ----------- ----------- Total liabilities, redeemable securities, and shareholders' equity...................... $ 4,280,650 $ 4,253,846 =========== ===========
See accompanying notes to consolidated financial statements. 2 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, --------------------------- ---------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Insurance premiums written and contract deposits....................................... $204,466 $207,644 $398,978 $405,709 ======== ======== ======== ======== Revenues Insurance premiums and contract charges earned.................................. $150,590 $148,535 $297,929 $294,779 Net investment income....................................... 47,601 46,983 95,109 93,907 Realized investment gains (losses).......................... 204 (5,336) (2,341) (8,473) -------- -------- -------- -------- Total revenues........................................... 198,395 190,182 390,697 380,213 -------- -------- -------- -------- Benefits, losses and expenses Benefits, claims and settlement expenses.................... 113,864 110,667 217,075 211,927 Interest credited........................................... 22,755 22,882 45,510 46,015 Policy acquisition expenses amortized....................... 13,577 13,023 27,318 23,752 Operating expenses.......................................... 29,222 24,494 58,427 50,230 Amortization of intangible assets........................... 2,399 1,706 4,800 3,413 Interest expense............................................ 2,521 2,423 5,032 4,877 Litigation settlement....................................... 100 - 100 - -------- -------- -------- -------- Total benefits, losses and expenses...................... 184,438 175,195 358,262 340,214 -------- -------- -------- -------- Income before income taxes...................................... 13,957 14,987 32,435 39,999 Income tax expense.............................................. 4,275 4,565 10,027 12,526 -------- -------- -------- -------- Net income...................................................... $ 9,682 $ 10,422 $ 22,408 $ 27,473 -------- -------- -------- -------- Net income per share Basic ...................................................... $ 0.24 $ 0.25 $ 0.55 $ 0.66 ======== ======== ======== ========= Diluted..................................................... $ 0.23 $ 0.25 $ 0.54 $ 0.65 ======== ======== ======== ========= Weighted average number of shares and equivalent shares (in thousands) Basic.................................................... 40,913 41,131 41,034 41,467 Diluted.................................................. 41,085 41,663 41,218 41,996
See accompanying notes to consolidated financial statements. 3 HORACE MANN EDUCATORS CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Dollars in thousands, except per share data)
Six Months Ended June 30, ------------------------------------- 2000 1999 ---- ---- Common stock Beginning balance...................................................... $ 59 $ 59 Options exercised, 2000, 515,000 shares; 1999, 6,550 shares.................................................. 1 - ---------- ----------- Ending balance......................................................... 60 59 ---------- ----------- Additional paid-in capital Beginning balance...................................................... 333,892 336,686 Options exercised...................................................... 4,764 123 Catastrophe-linked equity put option premium........................... (475) (475) ---------- ----------- Ending balance......................................................... 338,181 336,334 ---------- ----------- Retained earnings Beginning balance...................................................... 449,023 420,274 Net income............................................................. 22,408 27,473 Cash dividends, 2000, $0.21 per share; 1999, $0.185 per share.............................................. (8,692) (7,652) ---------- ----------- Ending balance......................................................... 462,739 440,095 ---------- ----------- Accumulated other comprehensive income (loss) (net unrealized gains (losses) on fixed maturities and equity securities) Beginning balance................................................... (40,016) 57,327 Increase (decrease) for the period.................................. (7,151) (57,490) ---------- ----------- Ending balance...................................................... (47,167) (163) ---------- ----------- Treasury stock, at cost Beginning balance, 2000, 18,258,896 shares; 1999, 17,183,596 shares............................................. (342,816) (317,723) Purchase of 720,000 shares in 2000; 1,075,300 shares in 1999 (See note 4)............................... (10,562) (25,021) ---------- ----------- Ending balance, 2000, 18,978,896 shares; 1999, 18,258,896 shares............................................. (353,378) (342,744) ---------- ----------- Shareholders' equity at end of period...................................... $ 400,435 $ 433,581 ========== =========== Comprehensive income (loss) Net income............................................................. $ 22,408 $ 27,473 Other comprehensive income (loss)...................................... (7,151) (57,490) ---------- ----------- Total ............................................................. $ 15,257 $ (30,017) ========== ===========
See accompanying notes to consolidated financial statements. 4 HORACE MANN EDUCATORS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Three Months Ended Six Months Ended June 30, June 30, ---------------------------- -------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Cash flows from operating activities Premiums collected......................................... $ 154,401 $ 145,926 $ 311,316 $ 303,103 Policyholder benefits paid................................. (120,122) (111,141) (238,011) (224,634) Policy acquisition and other operating expenses paid....... (48,482) (44,455) (91,696) (89,064) Federal income taxes paid.................................. (14,501) (10,800) (16,101) (12,300) Investment income collected................................ 45,798 44,148 97,301 93,041 Interest expense paid...................................... (827) (718) (4,950) (4,785) Other ..................................................... (1,535) 1,079 (2,684) 382 --------- --------- --------- --------- Net cash provided by operating activities.............. 14,732 24,039 55,175 65,743 --------- --------- --------- --------- Cash flows used in investing activities Fixed maturities Purchases................................................ (194,778) (226,504) (295,944) (458,972) Sales .................................................. 86,739 139,896 147,078 285,390 Maturities............................................... 73,123 76,213 134,009 147,739 Net cash received from (used for) short-term and other investments.............................................. 66,212 12,970 34,084 19,327 --------- --------- --------- --------- Net cash provided by (used in) investing activities.... 31,296 2,575 19,227 (6,516) --------- --------- --------- --------- Cash flows used in financing activities Purchase of treasury stock................................. (4,597) (10,725) (10,562) (25,021) Dividends paid to shareholders............................. (4,328) (3,796) (8,692) (7,652) Principal repayments on Bank Credit Facility............... - (2,000) - (1,000) Exercise of stock options.................................. - 26 4,765 123 Catastrophe-linked equity put option premium............... (238) (238) (475) (475) Annuity contracts, variable and fixed Deposits................................................. 51,261 55,920 99,477 107,180 Maturities and withdrawals............................... (81,324) (65,389) (165,989) (116,944) Net transfer from (to) variable annuity assets........... 6,158 2,308 17,129 (9,135) Net increase (decrease) in life policy account balances.... (1,290) 319 (2,275) 610 Net cash used in financing activities.................. --------- --------- --------- --------- (34,358) (23,575) (66,622) (52,314) --------- --------- --------- --------- Net increase in cash......................................... 11,670 3,039 7,780 6,913 Cash at beginning of period.................................. 18,958 15,918 22,848 12,044 --------- --------- --------- --------- Cash at end of period........................................ $ 30,628 $ 18,957 $ 30,628 $ 18,957 ========= ========= ========= =========
See accompanying notes to consolidated financial statements. 5 HORACE MANN EDUCATORS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 and 1999 (Dollars in thousands) Note 1 - Basis of Presentation The accompanying unaudited consolidated financial statements of Horace Mann Educators Corporation (the "Company") have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The Company believes that these financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company's consolidated financial position as of June 30, 2000 and December 31, 1999 and the consolidated results of operations, changes in shareholders' equity and cash flows for the three and six months ended June 30, 2000 and 1999. It is suggested that these financial statements be read in conjunction with the financial statements and the related notes included in the Company's December 31, 1999 Form 10-K. The results of operations for the three and six months ended June 30, 2000 are not necessarily indicative of the results to be expected for the full year. Note 2 - Debt Indebtedness outstanding was as follows:
June 30, December 31, 2000 1999 -------- ----------- Short-term debt: $65,000 Bank Credit Facility, commitment to December 31, 2001. (IBOR + 0.325%, 7.1% as of June 30, 2000)................... $ 49,000 $ 49,000 Long-term debt: 6 5/8% Senior Notes, due January 15, 2006. Face amount less unaccrued discount of $301 and $323 (6.7% imputed rate)........ 99,699 99,677 -------- -------- Total.................................... $148,699 $148,677 ======== ========
6 Note 3 - Investments The following table presents the composition and value of the Company's fixed maturity securities portfolio by rating category. The Company has classified the entire fixed maturity securities portfolio as available for sale, which is carried at market value.
Percent of Carrying Value June 30, 2000 --------------------------- --------------------------- Rating of Fixed June 30, December 31, Carrying Amortized Maturity Securities(1) 2000 1999 Value Cost ---------------------- -------- ------------- ---------- ---------- AAA.............................. 47.3% 46.3% $1,185,824 $1,205,660 AA............................... 6.8 7.7 170,055 171,767 A................................ 19.7 20.2 494,039 507,527 BBB.............................. 19.2 18.8 481,129 509,842 BB............................... 3.1 2.0 78,167 84,421 B................................ 3.5 4.7 88,466 94,567 CCC or lower..................... 0.1 - 2,488 2,785 Not rated(2)..................... 0.3 0.3 6,896 7,530 ----- ----- ---------- ---------- Total........................ 100.0% 100.0% $2,507,064 $2,584,099 ===== ===== ========== ==========
(1) Ratings are as assigned primarily by Standard & Poor's Corporation ("S&P") when available, with remaining ratings as assigned on an equivalent basis by Moody's Investors Service, Inc. ("Moody's"). Ratings for publicly traded securities are determined when the securities are acquired and are updated monthly to reflect any changes in ratings. (2) This category includes $0.9 million of publicly traded securities not currently rated by S&P or Moody's and $6.0 million of private placement securities not rated by either S&P or Moody's. The National Association of Insurance Commissioners (the "NAIC") has rated 98.0% of these private placements as investment grade. The following table presents a maturity schedule of the Company's fixed maturity securities. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Percent Carrying of Total Value ---------------------------- ---------- June 30, December 31, June 30, Scheduled Maturity 2000 1999 2000 ------------------ ---------- ------------ ---------- Due in 1 year or less............................. 8.2% 7.0% $ 205,342 Due after 1 year through 5 years.................. 29.9 31.0 750,514 Due after 5 years through 10 years................ 31.1 31.5 779,716 Due after 10 years through 20 years............... 15.9 15.9 397,195 Due after 20 years................................ 14.9 14.6 374,297 ----- ----- ---------- Total.......................................... 100.0% 100.0% $2,507,064 ===== ===== ==========
7 Note 3 - Investments-(Continued) The Company loans fixed income securities to third parties, primarily major brokerage firms. As of June 30, 2000, fixed maturities with a fair value of $112,710 were on loan. There were no securities on loan at December 31, 1999. The Company separately maintains a minimum of 100% of the value of the loaned securities as collateral for each loan. Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," requires the securities lending collateral to be classified as investments. The corresponding liability is included in Other Liabilities in the Company's consolidated balance sheet. Note 4 - Shareholders' Equity Share Repurchase Programs During the first six months of 2000, the Company repurchased 720,000 shares of its common stock, or 2% of the outstanding shares on December 31, 1999, at an aggregate cost of $10,562, or an average cost of $14.67 per share, under its stock repurchase program. Since early 1997, 7,802,700 shares, or 17% of the shares outstanding on December 31, 1996, have been repurchased at an aggregate cost of $199,075, equal to an average cost of $25.51 per share. Including shares repurchased in 1995, the Company has repurchased 33% of the shares outstanding on December 31, 1994. The repurchase of shares was financed through use of cash and, when necessary, the Bank Credit Facility. As of June 30, 2000, $100,925 remained authorized for future share repurchases. Note 5 - Income Taxes As previously reported, the Company has been contesting proposed additional federal income taxes relating to a settlement agreement with the Internal Revenue Service ("IRS") for prior years' taxes. Based on developments in that process during 1999, it appeared that the Company could be forced to litigate the issue with the IRS in order to reach a resolution of the issue acceptable to the Company. Therefore, in the third quarter of 1999, the Company recorded an additional federal income tax provision of $20 million representing the maximum exposure of the Company to the IRS with regard to the issue for all of the past tax years in question. While the ultimate resolution of the issue, through settlement or litigation, may result in the Company paying less than the maximum exposure, given the vagaries of litigation and of reaching an acceptable agreement with the IRS, management believed it prudent to book the maximum exposure in 1999. None of the $20 million reserve was paid as of June 30, 2000. This reserve was a charge to net income in 1999. 8 Note 6 - Reinsurance The Company recognizes the cost of reinsurance premiums over the contract periods for such premiums in proportion to the insurance protection provided. Amounts recoverable from reinsurers for unpaid claims and claim settlement expenses, including estimated amounts for unsettled claims, claims incurred but not reported and policy benefits, are estimated in a manner consistent with the insurance liability associated with the policy. The effect of reinsurance on premiums written; premiums earned; and benefits, claims and settlement expenses were as follows:
Ceded to Assumed Gross Other from State Amount Companies Facilities Net -------- --------- ---------- --- Three months ended June 30, 2000 ------------------ Premiums written.................................. $206,203 $8,666 $6,929 $204,466 Premiums earned................................... 151,503 6,679 5,766 150,590 Benefits, claims and settlement expenses............................ 116,090 9,707 7,481 113,864 Three months ended June 30, 1999 ------------------ Premiums written.................................. $209,563 $6,248 $4,329 $207,644 Premiums earned................................... 150,270 6,412 4,677 148,535 Benefits, claims and settlement expenses............................ 115,599 9,216 4,284 110,667 Six months ended June 30, 2000 ---------------- Premiums written.................................. $402,193 $16,586 $13,371 $398,978 Premiums earned................................... 300,246 12,441 10,124 297,929 Benefits, claims and settlement expenses............................ 221,428 16,381 12,028 217,075 Six months ended June 30, 1999 ---------------- Premiums written.................................. $408,945 $12,293 $9,057 $405,709 Premiums earned................................... 297,915 12,490 9,354 294,779 Benefits, claims and settlement expenses............................ 222,050 19,013 8,890 211,927
9 Note 6 - Reinsurance-(Continued) The Company maintains an excess and catastrophe treaty reinsurance program. The Company reinsures 95% of catastrophe losses above a retention of $7.5 million per occurrence up to $80 million per occurrence in 2000. These programs are augmented by a $100 million equity put and reinsurance agreement. This equity put provides an option to sell shares of the Company's convertible preferred stock with a floating rate dividend at a pre-negotiated price in the event losses from property catastrophes exceed the catastrophe reinsurance program coverage limit. The equity put provides a source of capital for up to $154 million of catastrophe losses, before tax benefits, above the reinsurance coverage limit. The fee for the equity put is charged directly to additional paid-in capital. For liability coverages, including the educator excess professional liability policy, the Company reinsures each loss above a retention of $0.5 million up to $20 million. The Company also reinsures each property loss above a retention of $0.5 million up to $2.5 million, including catastrophe losses that in the aggregate are less than the retention levels above. The maximum individual life insurance risk retained by the Company is $0.2 million on any individual life and $0.1 million on each group life policy. Excess amounts are reinsured. 10 Note 7 - Segment Information The Company conducts and manages its business through four segments. The three operating segments representing the major lines of insurance business are: property and casualty insurance, principally personal lines automobile and homeowners insurance; individual tax-qualified annuity products; and life insurance. The fourth segment, Corporate and Other, includes primarily debt service and realized investment gains and losses. Summarized financial information for these segments is as follows:
Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------ 2000 1999 2000 1999 ---- ---- ---- ---- Insurance premiums and contract charges earned Property and casualty.................... $123,209 $122,127 $243,637 $243,113 Annuity.................................. 4,361 4,286 8,719 8,260 Life..................................... 23,336 22,122 46,185 43,406 Intersegment eliminations................ (316) - (612) - -------- -------- -------- -------- Total.............................. $150,590 $148,535 $297,929 $294,779 ======== ======== ======== ======== Net investment income Property and casualty........................ $ 8,867 $ 9,199 $ 17,787 $ 18,391 Annuity...................................... 26,081 26,381 52,258 52,865 Life......................................... 12,637 11,669 25,010 23,174 Corporate and other.......................... 315 62 654 95 Intersegment eliminations.................... (299) (328) (600) (618) -------- -------- -------- -------- Total.............................. $ 47,601 $ 46,983 $ 95,109 $ 93,907 ======== ======== ======== ======== Net income Operating income Property and casualty.................... $ 2,909 5,918 $ 11,966 $ 16,393 Annuity.................................. 5,643 6,788 11,030 12,659 Life..................................... 3,750 3,657 6,727 8,484 Corporate and other, including interest expense.............................. (2,687) (2,473) (5,728) (4,556) -------- -------- -------- -------- Total operating income............. 9,615 13,890 23,995 32,980 Realized investment gains (losses), after tax.................................. 132 (3,468) (1,522) (5,507) Litigation settlement, after tax............. (65) - (65) - -------- -------- -------- -------- Total.............................. $ 9,682 $ 10,422 $ 22,408 $ 27,473 ======== ======== ======== ======== Amortization of intangible assets Value of acquired insurance in force Property and casualty.................... $ - $ 258 $ - $ 516 Annuity.................................. 1,488 501 2,977 1,002 Life..................................... 507 543 1,014 1,086 -------- -------- -------- -------- Subtotal.............................. 1,995 1,302 3,991 2,604 Goodwill..................................... 404 404 809 809 -------- -------- -------- -------- Total.............................. $ 2,399 $ 1,706 $ 4,800 $ 3,413 ======== ======== ======== ======== June 30, December 31, Assets 2000 1999 ---------- ------------ Property and casualty........................................... $ 687,176 $ 681,432 Annuity......................................................... 2,587,458 2,611,766 Life............................................................ 894,667 840,594 Corporate and other............................................. 150,794 153,493 Intersegment eliminations....................................... (39,445) (33,439) ---------- ----------- Total.................................................... $4,280,650 $ 4,253,846 ========== ===========
11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in millions) Forward-looking Information Statements made in the following discussion that state the Company's or management's intentions, hopes, beliefs, expectations or predictions of the future are forward-looking statements. It is important to note that the Company's actual results could differ materially from those projected in such forward-looking statements due to, among other risks and uncertainties inherent in the Company's business, the following important factors: . Changes in the composition of the Company's assets and liabilities through acquisitions or divestitures. . Prevailing interest rate levels, including the impact of interest rates on (i) unrealized gains and losses on the Company's investment portfolio and the related after-tax effect on the Company's shareholders' equity and total capital and (ii) the book yield of the Company's investment portfolio. . The impact of fluctuations in the capital markets on the Company's ability to refinance outstanding indebtedness or repurchase shares of the Company's outstanding common stock. . The frequency and severity of catastrophes such as hurricanes, earthquakes and storms, and the ability of the Company to maintain a favorable catastrophe reinsurance program. . Future property and casualty loss experience and its impact on estimated claims and claim adjustment expenses for losses occurring in prior years. . The Company's ability to develop and expand its agency force and its direct product distribution systems, as well as the Company's ability to maintain and secure product sponsorships by local, state and national education associations. . The competitive impact of new entrants such as mutual funds and banks into the tax deferred annuity products markets, and the Company's ability to profitably expand its property and casualty business in highly competitive environments. . Changes in insurance regulations, including (i) those effecting the ability of the Company's insurance subsidiaries to distribute cash to the holding company and (ii) those impacting the Company's ability to profitably write property and casualty insurance policies in one or more states. . Changes in federal income tax laws and changes resulting from federal tax audits affecting corporate tax rates or taxable income, and regulations changing the relative tax advantages of the Company's life and annuity products to customers. . The Company's ability to maintain favorable claims-paying ability ratings. . Adverse changes in policyholder mortality and morbidity rates. . The resolution of legal proceedings and related matters. 12 Six Months Ended June 30, 2000 Compared With Six Months Ended June 30, 1999 Insurance Premiums and Contract Charges In April 2000, the Company's management announced steps that are being taken to reenergize the Company's core business and accelerate growth of the Company's business and profits. These initiatives are intended to expand the Company's product lines within the personal lines insurance segment and make the Company's product development efforts more responsive to customer needs and preferences; grow and strengthen the agent force and make the Company's agents more productive by improving the products, tools and support the Company provides to them; broaden the Company's distribution options to complement and extend the reach of the Company's agent force; increase cross-selling and improve retention in the existing book of business; and expand the Company's penetration of targeted geographic areas and new segments of the educator market. Insurance Premiums Written and Contract Deposits
Six Months Ended Growth Over June 30, Prior Year ---------------- ----------------- 2000 1999 Percent Amount ------ ------ ------- ------ Automobile and property (voluntary) Before North Carolina settlement............... $234.6 $231.9 1.2% $ 2.7 North Carolina settlement...................... (1.7) - (1.7) ------ ------ ----- Total...................................... 232.9 231.9 0.4% 1.0 Annuity deposits.................................. 99.5 107.2 -7.2% (7.7) Life.............................................. 59.7 58.0 2.9% 1.7 ------ ------ ----- Subtotal - core lines before North Carolina settlement............... 393.8 397.1 -0.8% (3.3) Subtotal - core lines...................... 392.1 397.1 -1.3% (5.0) Involuntary and other property & casualty............................ 6.9 8.6 -19.8% (1.7) ------ ------ ----- Total...................................... $399.0 $405.7 -1.7% $(6.7) ====== ====== =====
13 Insurance Premiums and Contract Charges Earned (Excludes annuity and life contract deposits)
Six Months Ended Growth Over June 30, Prior Year ----------------------- --------------------- 2000 1999 Percent Amount ---- ---- ------- ------ Automobile and property (voluntary) Before North Carolina settlement............... $234.4 $230.6 1.6% $ 3.8 North Carolina settlement...................... (1.7) - (1.7) ------ ------ ----- Total...................................... 232.7 230.6 0.9% 2.1 Annuity........................................... 8.7 8.3 4.8% 0.4 Life.............................................. 45.6 43.4 5.1% 2.2 ------ ------ ----- Subtotal - core lines before North Carolina settlement............... 288.7 282.3 2.3% 6.4 Subtotal - core lines...................... 287.0 282.3 1.7% 4.7 Involuntary and other property & casualty......... 10.9 12.5 -12.8% (1.6) ------ ------ ----- Total...................................... $297.9 $294.8 1.1% $ 3.1 ====== ====== =====
The property and casualty and life segments both experienced premium growth for the first six months of 2000 excluding the North Carolina settlement described below. Nonetheless, total insurance premiums written and contract deposits decreased 1.7% for the six months because of a decline in new annuity deposits. For the first six months of 2000, single premium and rollover annuity deposits declined significantly, ($5.5 million, or 20.8%), compared to the same period in 1999. The number of experienced agents in Horace Mann's exclusive agent force, 672, was down 1.0% at June 30, 2000, compared to a year ago. The number of new agents also declined, as newer agents were more adversely affected by the current highly competitive insurance environment. This was a significant factor in the 6.1% decline in the agent total, which stood at 1,005 at June 30, 2000. Modifications have been made to agent recruiting and the new agents' finance programs that management believes will have a positive impact on agent growth in the future. In March 2000, following lengthy negotiations, the North Carolina Rate Bureau and that state's Commissioner of Insurance agreed to settle the outstanding 1994, 1996 and 1999 private passenger automobile insurance rate filing cases resulting in an adverse impact of approximately $250 million for the insurance industry. Horace Mann's portion of the adverse settlement was $2.5 million pretax, comprised of $1.7 million premium refunds and $0.8 million interest charges. North Carolina is the Company's largest property and casualty state representing approximately 7 percent of total premiums. Total voluntary automobile and homeowners premium written growth was 1.2% for the first six months of 2000, excluding the effect of the North Carolina settlement. The average premium per policy increased for both automobile and homeowners, as did the number of homeowners policies in force. The number of automobile policies in force was slightly lower than year-earlier levels. Excluding the effect of the North Carolina settlement, automobile insurance premium decreased slightly ($1.3 million, or 0.7%) compared to the first six months of last year, and homeowners premium increased 7.9% ($4.0 million). Nearly all of the property and casualty increase in premiums resulted from growth in average premium per policy. The Company's 14 average annual premium per policy for automobile and homeowners increased less than 1% and approximately 2.5%, respectively, compared to a year earlier. Over the prior 12 months, unit growth was 1.0%, bringing policies in force at June 30, 2000 to 879,000. Compared to December 31, 1999, total property and casualty policies in force increased 7,000 with 6,000 policies of the increase attributable to homeowners insurance. While automobile policies in force ended the quarter 4,000 policies below the June 30, 1999 level, the increase in average premium per automobile policy kept pace with loss cost experience. Based on policies in force, the property and casualty 12-month retention rate for new and renewal policies was 88%, a slight decrease compared to the 12 months ended June 30, 1999. The change in property and casualty retention was primarily caused by greater price competition for automobile insurance which offset improvement in the retention of homeowners policies. New annuity deposits decreased 7.2%, compared to the first six months of 1999. The decline was primarily attributable to a 20.8% decrease in new single premium and rollover deposits, compared to the first six months of 1999. The change in new annuity deposits also included a 2.7% decrease in scheduled deposits received. New deposits to variable mutual fund annuities decreased 6.9% and new deposits to fixed annuities were 7.7% lower than last year. Variable annuity accumulated funds on deposit at June 30, 2000 were $1.1 billion, $139.4 million less than a year ago, an 11.6% decrease. Variable annuity accumulated deposit retention decreased 5.2 percentage points over the 12 months to 85.5%. Fixed annuity cash value retention for the 12 months ended June 30, 2000 was 89.5%, 3.5 percentage points lower than the same period last year. Over the last 12 months, the number of annuity contracts outstanding increased 1.6%, or 2,000 contracts. In May 2000, the Company introduced two additional variable annuity fund options. In September 2000, an additional 22 variable annuity fund options will be made available to the Company's customers, tripling the number of variable annuity fund options available and providing increased diversity of investment choices. At the same time, the Company's sales force will begin utilizing customized software to support the financial planning process. At June 30, 2000, approximately 80% of accumulated variable annuity funds on deposit were in the Company's Equity and Balanced mutual funds, and investment returns for these two funds have been less than their comparable Lipper average returns in recent periods. Life premium growth was 2.9% for the first six months of 2000, compared to the same period in 1999. The life insurance in force lapse ratio was 8.8% for the twelve months ended June 30, 2000, compared to 8.0% for the same period last year. Net Investment Income Investment income of $95.1 million for the first six months of 2000 increased 1.3%, or $1.2 million, (1.4% after tax) compared to the same period last year due to growth in the average investment portfolio. Average investments (excluding the securities lending collateral) increased 1.3%, compared to the first six months of 1999. The average pretax yield on the investment portfolio was 7.1% (4.8% after tax) for the first six months of 2000, equal to the same period last year. All of the investment income decrease in the annuity segment was offset by a reduction in interest credited to fixed annuity deposits. Excluding the cumulative impact of the use of cash in the share repurchase program since its initiation in 1997 from both periods, net investment income would have increased to $102.9 million for the first half of 2000, compared to $100.5 million in the first six months of 1999, an increase of 2.4%, or $2.4 million. 15 Realized Investment Gains and Losses Net realized investment losses were $2.3 million for the six months ended June 30, 2000, compared to net realized investment losses of $8.5 million for the first six months of 1999. For both periods, nearly all of the net realized gains and losses occurred in the fixed income portfolios. Benefits, Claims and Settlement Expenses
Six Months Ended Growth Over June 30, Prior Year --------------------- --------------------- 2000 1999 Percent Amount ---- ---- ------- ------ Property and casualty............................. $194.2 $191.0 1.7% $3.2 Life.............................................. 22.9 20.9 9.6% 2.0 ------ ------ ---- Total.......................................... $217.1 $211.9 2.5% $5.2 ====== ====== ==== Property and casualty statutory loss ratio: Before catastrophe losses and North Carolina settlement............... 75.4% 73.5% 1.9% Before catastrophe losses.................. 75.9% 73.5% 2.4% After catastrophe losses and North Carolina settlement............... 79.7% 78.6% 1.1%
In the second quarter of 2000, the Company had a higher level of non-catastrophe property losses including: losses on lower value homes; non-catastrophe weather-related property claims; and greater-than-expected fire losses. The non-catastrophe property loss ratio was 91.4% in the second quarter of 2000, compared with 72.8% in the same period last year and 79.0% in the first quarter of 2000. The Company is addressing the factors that caused the increase in non-catastrophe property losses through aggressive pricing, underwriting and loss control initiatives. Management expects these actions to begin having an impact in the latter half of 2000, however, the full impact of these changes will not be realized until well into 2001. Management anticipates that these actions will enable the Company to improve the profitability of its existing book of homeowners business and attract new business that meets its profitability standards. The increase in non-catastrophe property losses more than offset the Company's decline in catastrophe losses. Catastrophe losses were $9.2 million in the first six months of 2000 and $12.2 million in the first half of 1999, a decrease of 24.6%. For the first six months of 2000, the increase in the Company's average voluntary automobile insurance premium per policy kept pace with loss cost experience which produced a loss ratio of 71.7% excluding catastrophe losses and the effect of the North Carolina settlement. This favorable result reflected a number of operational changes, principally savings realized to date from new claims evaluation software that was fully installed by June 1999. Property and casualty results for the first six months of 2000 included continuation of favorable development of prior years reserves, with reserve releases somewhat less than prior year. Favorable development of property and casualty claims occurring in prior years, excluding involuntary business, was $2.7 million in the first six months of 2000, compared to $5.2 million for the same period in 1999. Favorable development of total property and casualty claims occurring 16 in prior years was $2.3 million in the first six months of 2000, compared to $4.5 million for the same period in 1999. Life mortality was slightly lower in the first six months of 2000 than in the same period in 1999. The largest single item included in the increase in life segment benefits resulted from positive experience last year on a small closed block of individual accident and health policies. Interest Credited to Policyholders
Six Months Ended Growth Over June 30, Prior Year ---------------- ---------------- 2000 1999 Percent Amount ---- ---- ------- ------ Annuity...................... $32.6 $34.0 -4.1% $(1.4) Life......................... 12.9 12.0 7.5% 0.9 ----- ----- ----- Total..................... $45.5 $46.0 -1.1% $(0.5) ===== ===== =====
Interest credited to fixed annuity contracts decreased as the fixed annuity average annual interest rate credited decreased 0.1 percentage points to 5.0% in the first six months of 2000, compared to the same period in 1999. In addition, the average accumulated deposits for the six months ended June 30, 2000 decreased 1% compared to the same period in 1999. Life insurance interest credited increased as a result of continued growth in the interest-sensitive life insurance reserves. Operating Expenses For the first six months of 2000, operating expenses increased $8.3 million, or 16.5%, compared to last year. Current year expenses include a non-recurring charge of $0.8 million for interest on the North Carolina settlement. Current period expenses also include $1.9 million, or approximately $0.03 per share after tax benefits, attributable to the chief executive officer transition, and there will be an additional pension-related charge of approximately $0.01 per share in the second half of 2000. The total corporate expense ratio on a statutory accounting basis excluding the impact of the North Carolina settlement was 23.0% for the six months ended June 30, 2000, 2.0 percentage points higher than the same period in 1999. The property and casualty expense ratio, the 12th lowest of the 100 largest property and casualty insurance groups for 1998 (the most recent industry ranking available), was 20.3% for the six months ended June 30, 2000 excluding the impact of the North Carolina settlement, compared to 19.4% last year. The increase in these expense ratios primarily reflects the modest level of premium growth, which was lower than the anticipated growth level, while statutory expenses for the Company increased 8.5%. Amortization of Policy Acquisition Expenses and Intangible Assets For the first six months of 2000, the combined amortization of policy acquisition expenses and intangible assets of $32.1 million increased by $4.9 million, or 18.0%, compared to the same period in 1999. Amortization of intangible assets increased by $1.4 million to $4.8 million for the six months ended June 30, 2000, compared to $3.4 million for the same period in 1999, reflecting the higher 17 level of amortization of the value of annuity business acquired in the 1989 acquisition of the Company ("Annuity VIF"). Amortization of Annuity VIF for full year 1999 and 1998 was significantly reduced due to favorable experience in prior periods. The $2.0 million current period increase in Annuity VIF amortization is about equally attributed to the scheduled increase in amortization, the effect of recent experience and trends identified at December 31, 1999, and the effect of higher than expected annuity surrenders in the first six months of 2000. Assuming annuity surrenders return to expected levels, Annuity VIF amortization for full year 2000 and 2001 is expected to be $5.9 million (versus $4.6 million as scheduled at December 31, 1999) and $4.4 million, respectively. Annuity VIF amortization was ($4.2) million, $2.0 million and $5.6 million for the twelve months ended December 31, 1999, 1998 and 1997, respectively. The negative Annuity VIF amortization in 1999 included a $6.2 million reduction due to recent experience and trends identified at December 31, 1999 partially offset by a $3.4 million increase in the amortization of annuity policy acquisition costs deferred after the 1989 acquisition of the Company. The amortization of the value of property and casualty business acquired in the 1989 acquisition of the Company was completed in the third quarter of 1999; amortization was $0.5 million for the first six months of 1999. Policy acquisition expenses amortized for the six months ended June 30, 1999 of $23.8 million were $3.5 million lower than the current period including a $1.9 million reduction recorded in 1999 to reflect favorable life mortality estimates which resulted in higher anticipated future gross profits. Income Tax Expense The effective income tax rate was 30.9% for the six months ended June 30, 2000, compared to 31.3% for the same period last year. Income from investments in tax-advantaged securities reduced the effective income tax rate 6.2 and 4.3 percentage points for the six months ended June 30, 2000 and 1999, respectively. As previously reported, the Company has been contesting proposed additional federal income taxes relating to a settlement agreement with the Internal Revenue Service ("IRS") for prior years' taxes. Based on developments in that process during 1999, it appeared that the Company could be forced to litigate the issue with the IRS in order to reach a resolution of the issue acceptable to the Company. Therefore, in the third quarter of 1999, the Company recorded an additional federal income tax provision of $20 million representing the maximum exposure of the Company to the IRS with regard to the issue for all of the past tax years in question. While the ultimate resolution of the issue, through settlement or litigation, may result in the Company paying less than the maximum exposure, given the vagaries of litigation and of reaching an acceptable agreement with the IRS, management believed it prudent to book the maximum exposure in 1999. None of the $20 million reserve has been paid as of August 11, 2000. This reserve was a charge to net income in 1999 but was excluded from the determination of reported operating income. Operating Income For the first six months of 2000, operating income (net income before the after-tax impact of realized investment gains and losses and non-recurring charges) decreased 27.3%, or $9.0 million, and operating income per share on a diluted basis of $0.58 decreased 26.6%, or $0.21 per share. 18 Operating income for the first six months of 2000 was affected adversely by two items. In the second quarter of 2000, there was a higher level of non- catastrophe property losses including: losses on lower value homes; non- catastrophe weather-related property claims; and greater-than-expected fire losses. And, the Company's portion of the adverse automobile insurance rate settlement in North Carolina, as described above, of $1.7 million after tax, or approximately $0.04 per share, was recorded in the first quarter of 2000. In addition, comparisons to operating income for the first six months of 1999 were adversely impacted by non-recurring items in the first quarter of 1999, primarily in the life segment, totaling approximately $0.04 per share. Operating income by segment was as follows:
Six Months Ended Growth Over June 30, Prior Year ---------------------- ------------------------ 2000 1999 Percent Amount ---- ---- ------- ------ Property & casualty Before catastrophe losses and North Carolina settlement..................... $19.6 $24.3 -19.3% $(4.7) Catastrophe losses, after tax..................... (6.0) (7.9) -24.1% 1.9 North Carolina settlement (including interest), after tax.......................... (1.7) - (1.7) ----- ----- ----- Total including catastrophe losses and North Carolina settlement.............................. 11.9 16.4 -27.4% (4.5) Annuity ........................................... 11.0 12.7 -13.4% (1.7) Life................................................. 6.8 8.5 -20.0% (1.7) Corporate and other expense.......................... (2.4) (1.4) (1.0) Interest expense, after tax.......................... (3.3) (3.2) (0.1) ----- ----- ----- Total...................................... $24.0 $33.0 -27.3% $(9.0) ===== ===== ===== Total before catastrophe losses and North Carolina settlement.............................. $31.7 $40.9 -22.5% $(9.2) ===== ===== ===== Property and casualty statutory combined ratio: Before catastrophe losses and North Carolina settlement..................... 95.7% 92.9% 2.8% Before catastrophe losses......................... 96.4% 92.9% 3.5% After catastrophe losses and North Carolina settlement..................... 100.2% 98.0% 2.2%
Property and casualty segment operating income was lower than in the first six months of 1999 primarily due to a higher level of non-catastrophe property losses and an adverse industry settlement of outstanding automobile insurance rate filing cases for 1994, 1996 and 1999 in North Carolina. The Company's portion of this settlement, including interest, was $1.7 million after tax. Property and casualty segment earnings for the first six months of 2000 also were affected negatively by lower than expected business volume in the automobile line partially offset by a $1.9 million decrease in after tax catastrophe losses. During the first six months of 2000, the Company's increase in average voluntary automobile insurance premium kept pace with loss cost experience. 19 The property and casualty combined ratio before catastrophes and the North Carolina settlement of 95.7% was 2.8 percentage points higher than the first six months of 1999, primarily reflecting the higher level of non-catastrophe property losses. Favorable development of property and casualty claims occurring in prior years (excluding involuntary business), was $1.8 million after tax in the first six months of 2000, compared to $3.4 million after tax for the same period in 1999. Favorable development of total property and casualty claims occurring in prior years was $1.5 million after tax in the first six months of 2000, compared to $2.9 million after tax for the same period in 1999. Annuity segment operating income was below the year-earlier total. Increases in both annuity interest rate spreads and contract fees in the first six months of 2000 were offset by higher expenses, primarily the increased amortization of the value of annuity business acquired in the 1989 acquisition of the Company which included the effect of higher than expected annuity surrenders during the first half of 2000. For the six months, the net interest margin increased 3.7% and fees and contract charges earned increased 4.8%. Variable annuity accumulated deposits were $1.1 billion at June 30, 2000, $139.4 million, or 11.6%, less than 12 months earlier. Fixed annuity accumulated cash value of $1.3 billion was $27.8 million, or 2.0%, less than June 30, 2000. Life insurance earnings for the first six months of 1999 reflected lower expenses resulting from a decrease in the amortization of deferred policy acquisition costs to reflect favorable mortality estimates and positive experience on a small closed block of accident and health business. Excluding those items, first quarter 2000 life operating income was comparable to a year ago. Mortality costs for the first six months of 2000 were slightly lower than the same period last year. The cumulative effect of the Company's share repurchase program, since initiation in 1997, reduced operating income by $5.1 million for the six months ended June 30, 2000, reflecting utilization of capital and the corresponding reduction of net investment income, and reduced earnings per share by $0.02 for the period including the reduction in the number of shares outstanding. The negative effect on earnings per share is due to the lower level of earnings in 2000. Net Income Net Income Per Share, Diluted
Six Months Ended Growth Over June 30, Prior Year ---------------- ---------------- 2000 1999 Percent Amount ---- ---- ------- ------- Operating income.......................... $ 0.58 $ 0.79 -26.6% $(0.21) Realized investment gains (losses)........ (0.04) (0.14) 0.10 Litigation settlement..................... - - ------ ------ ------ Net income............................. $ 0.54 $ 0.65 -16.9% $(0.11) ====== ====== ======
Net income, which includes realized investment gains and losses and non-recurring charges, for the first six months of 2000 decreased by 18.5% and net income per diluted share decreased by 16.9% compared to the same period in 1999, reflecting the $9.0 million decline in operating income. Net income also reflected $1.5 million of after tax realized investment losses 20 for the first six months of 2000, compared to $5.5 million of after tax realized investment losses in the same period last year. During the second quarter of 2000, all remaining suits that had been filed in Alabama related to life insurance policies were settled at a cost of $0.1 million after tax and after receipt of insurance proceeds. Return on shareholders' equity based on operating income for the last 12 months was 15%. Based on net income, return on equity was 10% for the last 12 months. Liquidity and Financial Resources Investments The Company's investment strategy emphasizes investment grade, publicly traded fixed income securities. At June 30, 2000, fixed income securities represented 96.6% of investments excluding the securities lending collateral. Of the fixed income investment portfolio, 93.0% was investment grade and 99.8% was publicly traded. The average quality of the total fixed income portfolio was AA- at June 30, 2000. The duration of the investment portfolio is managed to provide cash flow to satisfy policyholder liabilities as they become due. The average option adjusted duration of total investments was 4.1 years at both June 30, 2000 and December 31, 1999. The Company has included in its annuity products substantial surrender penalties to reduce the likelihood of unexpected increases in policy or contract surrenders. All annuities issued since 1982 and approximately 75% of all outstanding fixed annuity accumulated cash values are subject in most cases to substantial early withdrawal penalties. Cash Flow The short-term liquidity requirements of the Company, within a 12-month operating cycle, are for the timely payment of claims and benefits to policyholders, operating expenses, interest payments and federal income taxes. Cash flow in excess of these amounts has been used to fund business growth, retire short-term debt, pay dividends to shareholders and repurchase shares of the Company's common stock. Long-term liquidity requirements, beyond one year, are principally for the payment of future insurance policy claims and benefits and retirement of long-term notes. Operating Activities As a holding company, HMEC conducts its principal operations in the personal lines segment of the property and casualty and life insurance industries through its subsidiaries. HMEC's insurance subsidiaries generate cash flow from premium and investment income, generally well in excess of their immediate needs for policy obligations, operating expenses and other cash requirements. Cash provided by operating activities primarily reflects net cash generated by the insurance subsidiaries. Net cash provided by operating activities was approximately $10 million less than the first six months of 1999. Payment of principal and interest on debt, fees related to the catastrophe-linked equity put option, dividends to shareholders and parent company operating expenses, as well as the share repurchase program, are dependent upon the ability of the insurance subsidiaries to pay cash dividends or make other cash payments to HMEC, including tax payments pursuant to tax sharing 21 agreements. The insurance subsidiaries are subject to various regulatory restrictions which limit the amount of annual dividends or other distributions, including loans or cash advances, available to HMEC without prior approval of the insurance regulatory authorities. Dividends which may be paid by the insurance subsidiaries to HMEC during 2000 without prior approval are approximately $75 million. Although regulatory restrictions exist, dividend availability from subsidiaries has been, and is expected to be, more than adequate for HMEC's capital needs. Investing Activities HMEC's insurance subsidiaries maintain significant investments in fixed maturity securities to meet future contractual obligations to policyholders. In conjunction with its management of liquidity and other asset/liability management objectives, the Company, from time to time, will sell fixed maturity securities prior to maturity and reinvest the proceeds in other investments with different interest rates, maturities or credit characteristics. Accordingly, the Company has classified the entire fixed maturity securities portfolio as available for sale. Financing Activities Financing activities include primarily repurchases of the Company's common stock, payment of dividends, the receipt and withdrawal of funds by annuity policyholders and borrowings and repayments under the Company's debt facilities. Fees related to the catastrophe-linked equity put which augments its reinsurance program have been charged directly to additional paid-in capital. For the first six months of 2000, receipts from annuity contracts decreased 7.2% primarily reflecting the reduced level of single premium and rollover deposits received. Annuity contract maturities and withdrawals increased $49.1 million, or 42.0%, compared to the same period last year due about equally to higher withdrawals from both the variable and fixed annuity options. Variable annuity deposit retention decreased 5.2 percentage points over the 12 months to 85.5%. Net transfers to variable annuity assets decreased $26.3 million compared to the same period last year reflecting a greater allocation of funds by customers to fixed annuities rather than variable annuities and the decrease in total annuity contract receipts. Retention of fixed annuity accumulated cash value was 89.5% for the 12 months ended June 30, 2000, 3.5 percentage points lower than the same period last year. Following the February 23, 2000 removal of the suspension of the Company's share repurchase program through June 30, 2000, the Company repurchased 720,000 shares of its common stock, or 2% of the shares outstanding on December 31, 1999, at an aggregate cost of $10.6 million, or an average cost of $14.67 per share, under its stock repurchase program. Repurchases in 2000 compare to 1,075,300 shares repurchased in the first six months of 1999 at an aggregate cost of $25.0 million. The repurchase of shares was financed through use of cash and, when necessary, the Bank Credit Facility. As of June 30, 2000, $100.9 million remained authorized for future share repurchases. Capital Resources The Company has determined the amount of capital which is needed to adequately fund and support business growth, primarily based on risk-based capital formulas including those developed by the National Association of Insurance Commissioners. Historically, the Company's insurance subsidiaries have generated capital in excess of such needed capital. These excess 22 amounts have been paid to HMEC through dividends. HMEC has then utilized these dividends and its access to the capital markets to service and retire long-term debt, increase and pay dividends to its shareholders, fund growth initiatives, repurchase shares of its common stock and for other corporate purposes. Management anticipates that the Company's sources of capital will continue to generate capital in excess of the needs for business growth, debt interest payments and shareholder dividends. The total capital of the Company was $549.1 million at June 30, 2000, including $99.7 million of long-term debt and $49.0 million of short-term debt. Total debt represented 24.9% of capital (excluding unrealized investment losses) at June 30, 2000 at the upper end of the Company's target operating range of 20% to 25%. Shareholders' equity was $400.4 million at June 30, 2000, including an unrealized loss in the Company's investment portfolio of $47.2 million after taxes and the related impact on deferred policy acquisition costs and the value of acquired insurance in force associated with annuity and interest-sensitive life policies. The market value of the Company's common stock and the market value per share were $612.4 million and $15, respectively, at June 30, 2000. Book value per share was $9.81 at June 30, 2000, $10.97 excluding investment market value adjustments. At June 30, 1999, book value per share was $10.57, both including and excluding investment market value adjustments. The decrease over the 12 months was entirely due to unrealized investment gains and losses, the third quarter 1999 non-recurring charge for prior years' taxes and share repurchases. Excluding these items, book value per share increased 9% over the 12-month period. In January 1996, the Company issued $100.0 million face amount of 6 5/8% Senior Notes ("Senior Notes") at a discount of 0.5% which will mature on January 15, 2006. Interest on the Senior Notes is payable semi-annually. The Senior Notes are redeemable in whole or in part, at any time at the Company's option. The Senior Notes have an investment grade rating from Standard & Poor's Corporation ("S&P") (A-), Fitch, Inc. (formerly Duff & Phelps Credit Rating Co.) (A), and Moody's Investors Service, Inc. ("Moody's") (Baa1) and are traded on the New York Stock Exchange (HMN 6 5/8). As of both June 30, 2000 and December 31, 1999, the Company had short-term debt of $49.0 million outstanding under the Bank Credit Facility. The Bank Credit Facility allows unsecured borrowings of up to $65.0 million at Interbank Offering Rates plus 0.3% to 0.5% or Bank of America National Trust and Savings Association reference rates. The rate on the borrowings under the Bank Credit Facility was Interbank Offering Rate plus 0.3%, or 7.1%, as of June 30, 2000. The commitment for the Bank Credit Facility terminates on December 31, 2001. The Company's ratio of earnings to fixed charges for the six months ended June 30, 2000 was 7.5x compared to 9.2x for the same period in 1999. The decline was primarily attributable to the increase in non-catastrophe property losses and the North Carolina settlement recorded in the current period as well as the non-recurring favorable items included in operating income for the first six months of 1999. Total shareholder dividends were $8.7 million for the six months ended June 30, 2000. In November 1999, the Board of Directors authorized the eighth increase to the Company's quarterly dividend in the eight years since the Company's initial public offering in November 1991. The regular quarterly dividend increased by 13.5% to $0.105 per share. 23 The Company reinsures 95% of catastrophe losses above a retention of $7.5 million per occurrence up to $80 million per occurrence. These catastrophe reinsurance programs are augmented by a $100 million equity put and reinsurance agreement. This equity put provides an option to sell shares of the Company's convertible preferred stock with a floating rate dividend at a pre-negotiated price in the event losses from catastrophes, individually or in the aggregate during a calendar year, exceed the catastrophe reinsurance program coverage limit. The equity put provides a source of capital for up to $154 million of catastrophe losses, before tax benefits, above the reinsurance coverage limit. Market Risk Market risk is the risk that the Company will incur losses due to adverse changes in market rates. The Company's primary market risk exposure is the risk that the Company will incur economic losses due to adverse changes in interest rates. This risk arises as the Company's profitability is affected by the spreads between interest yields on investments and rates credited on insurance liabilities. The Company manages its market risk by coordinating the projected cash outflows of assets with the projected cash outflows of liabilities. For all its assets and liabilities, the Company seeks to maintain reasonable durations, consistent with the maximization of income without sacrificing investment quality and providing for liquidity and diversification. The risks associated with mutual fund investments supporting variable annuity products are assumed by those contractholders, and not by the Company. There have been no material changes during the first six months of 2000 in the market risks the Company is exposed to and the management of those risks, which are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1999 Form 10-K. Item 3: Quantitative and Qualitative Disclosures About Market Risk The information required by Item 305 of Regulation S-K is contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in this Form 10-Q. 24 PART II: OTHER INFORMATION Item 4: Submission of Matters to a Vote of Security Holders At the Company's Annual Meeting of Shareholders held on May 25, 2000, 34,169,811 shares of Common Stock were represented and entitled to vote. The results of the matters submitted to a vote of security holders are shown in the table below.
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 32,947,570 1,222,241 - Dr. Emita B. Hill 33,127,620 1,042,191 - Donald E. Kiernan 33,127,620 1,042,191 - Louis G. Lower II 33,090,025 1,079,786 - Jeffrey L. Morby 32,947,570 1,222,241 - Shaun F. O'Malley 33,127,620 1,042,191 - Charles A. Parker 32,947,570 1,222,241 - Ralph S. Saul 32,947,190 1,222,621 - William J. Schoen 33,127,620 1,042,191 - Approval of an amendment to the Company's Certificate of Incorporation provision which requires the retirement of any Director who is 72 or more years of age following the completion of his or her then current term in office. The amendment permits Ralph S. Saul, who has served as a member of the Board of Directors, to be eligible for re-election to the Board of Directors at the Annual Meeting of Shareholders held on May 25, 2000 for one additional year of service on the Board. 31,184,933 2,744,646 240,232 Approval of an amendment to the Company's 1991 Stock Incentive Plan which makes 2,000,000 additional shares of the Company's common stock available under the Plan. 28,701,989 5,009,672 458,150 Ratification of the appointment of KPMG LLP, independent certified public accountants, to serve as the Company's auditors for the fiscal year ending December 31, 2000. 33,902,308 15,180 252,323
25 Item 6: Exhibits and Reports on Form 8-K Exhibit No. Description ------- ----------- (a) The following items are filed as Exhibits. (3) Articles of incorporation and bylaws: 3.1 Restated Certificate of Incorporation of HMEC, filed with the Delaware Secretary of State on October 6, 1989, incorporated by reference to Exhibit 3.1 to HMEC's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, filed with the Securities and Exchange Commission (the "SEC") on November 14, 1996. 3.1(a) Certificate of Amendment to Restated Certificate of Incorporation of HMEC, filed with the Delaware Secretary of State on October 18, 1991, incorporated by reference to Exhibit 3.2 to HMEC's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, filed with the SEC on November 14, 1996. 3.1(b) Certificate of Amendment to Restated Certificate of Incorporation of HMEC, filed with the Delaware Secretary of State on August 23, 1995, incorporated by reference to Exhibit 3.3 to HMEC's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, filed with the SEC on November 14, 1996. 3.1(c) Certificate of Amendment to Restated Certificate of Incorporation of HMEC, filed with the Delaware Secretary of State on September 23, 1996, incorporated by reference to Exhibit 3.4 to HMEC's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, filed with the SEC on November 14, 1996. 3.1(d) Certificate of Amendment to Restated Certificate of Incorporation of HMEC, filed with the Delaware Secretary of State on June 5, 1998, incorporated by reference to Exhibit 3.1 to HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, filed with the SEC on August 13, 1998. 3.1(e) Certificate of Amendment to Restated Certificate of Incorporation of HMEC, filed with the Delaware Secretary of State on June 22, 2000. (10) Material contracts. Management contracts and compensatory plans are indicated by an asterisk (*). 10.1* Amended and Restated Horace Mann Educators Corporation 1991 Stock Incentive Plan, incorporated by reference to Exhibit 10.5 to HMEC's Annual Report on Form 10-K for the year ended December 31, 1999, filed with the SEC on March 30, 2000. 26 Exhibit No. Description ------- ----------- 10.1(a)* Amendment to Amended and Restated Horace Mann Educators Corporation 1991 Stock Incentive Plan. 10.1(b)* Specimen Employee Stock Option Agreement under the Horace Mann Educators Corporation 1991 Stock Incentive Plan, incorporated by reference to Exhibit 10.5(a) to HMEC's Annual Report on Form 10-K for the year ended December 31, 1999, filed with the SEC on March 30, 2000. 10.1(c)* Specimen Director Stock Option Agreement under the Horace Mann Educators Corporation 1991 Stock Incentive Plan, incorporated by reference to Exhibit 10.5(b) to HMEC's Annual Report on Form 10-K for the year ended December 31, 1999, filed with the SEC on March 30, 2000. 10.2* Severance Agreements between HMEC and certain officers of HMEC, incorporated by reference to Exhibit 10.9 to HMEC's Annual Report on Form 10- K for the year ended December 31, 1993, filed with the SEC on March 31, 1994. 10.2(a)* Revised Schedule to Severance Agreements between HMEC and certain officers of HMEC. 10.3* Specimen Continuation of Employment Agreement between HMEC and certain officers, incorporated by reference to Exhibit 10.21(a) to HMEC's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, filed with the SEC on November 14, 1994. 10.3(a)* Schedule of Continuation of Employment Agreements between HMEC and certain officers. 10.4* Separation Agreement entered by and between HMEC and Larry K. Becker as of June 20, 2000. 10.5* Letter of Employment entered by and between HMEC and Thomas K. Manion effective July 6, 2000. (11) Statement re computation of per share earnings. (27) Financial Data Schedule. (b) No reports on Form 8-K were filed by the Company during the second quarter of 2000. 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HORACE MANN EDUCATORS CORPORATION (Registrant) Date August 11, 2000 /s/ Louis G. Lower II ------------------------- -------------------------------------- Louis G. Lower II President and Chief Executive Officer Date August 11, 2000 /s/ Peter H. Heckman ------------------------ -------------------------------------- Peter H. Heckman Executive Vice President and Chief Financial Officer Date August 11, 2000 /s/ Thomas K. Manion ----------------------- -------------------------------------- Thomas K. Manion Senior Vice President and Controller 28 EX-3.1(E) 2 0002.txt CERTIFICATE OF AMENDMENT DATED JUNE 22, 2000 Exhibit 3.1(e) CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF HORACE MANN EDUCATORS CORPORATION HORACE MANN EDUCATORS CORPORATION (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify: First, that at a meeting of the Board of Directors of the Corporation held on 23 February 2000, a resolution was adopted setting forth the proposed Amendment to the Certificate of Incorporation of said Corporation, declaring said Amendment to be advisable and calling for submission for consideration of the Amendment to the Stockholders of said Corporation. The resolution setting forth the proposed Amendment is as follows: RESOLVED the agenda for the Annual Meeting of the Stockholders shall include the approval of an amendment to the Company,s Certificate of Incorporation provision which would permit Ralph Saul to be eligible for re-election to the Board of Directors at the Annual Meeting for one additional year of service on the Board. Second, that the proposed amendment to the Certificate of Incorporation was submitted for consideration to the Stockholders at their Annual Meeting held on 25 May 2000 and the Stockholders did approve said amendment by amending ARTICLE FOURTEENTH. "FOURTEENTH. Any Director who is 72 or more years of age shall retire following completion of his or her then current term in office; however, Ralph S. Saul is eligible for re-election to the Board of Directors for one additional year of service on the Board." Third, that the aforesaid Amendment was duly adopted in accordance with the applicable provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said HORACE MANN EDUCATORS CORPORATION has caused this Certificate of Amendment of the Certificate of Incorporation to be signed by Louis G. Lower II, its President and Chief Executive Officer, and attested by Ann M. Caparros, its Corporate Secretary, this 19 day of June 2000. HORACE MANN EDUCATORS CORPORATION By: /s/ Louis G. Lower II ---------------------------------------------- Louis G. Lower II, President and Chief Executive Officer ATTEST: By: /s/ Ann M. Caparros ----------------------------------- Ann M. Caparros, Corporate Secretary EX-10.1(A) 3 0003.txt AMENDMENT TO AMENDED 1991 STOCK INCENTIVE PLAN EXHIBIT 10.1(a) EXHIBIT A HORACE MANN EDUCATORS CORPORATION 1991 STOCK INCENTIVE PLAN AMENDED AND RESTATED EFFECTIVE DECEMBER 31, 1999 AMENDMENT 1 Effective May 25, 2000, the Horace Mann Educators Corporation 1991 Stock Incentive Plan Amended and Restated Effective December 31, 1999 ("Plan") is amended in accordance with the terms and conditions of the Plan as follows. Amend and restate the first paragraph of Section 3 to read in its entirety: Initially, the total number of shares of Common Stock reserved and available for distribution pursuant to Awards under the Plan was 2,000,000. Pursuant to the 2-for-1 split of Common Stock effective December 15, 1997, an additional 2,000,000 shares of Common Stock were reserved and available for distribution pursuant to Awards under the Plan. An additional 2,000,000 shares are hereby reserved and available for distribution pursuant to Awards under the Plan. Such shares may consist, in whole or in part, of authorized and unissued shares or treasury shares. EX-10.2(A) 4 0004.txt REVISED SCHEDULE TO SEVERANCE AGREEMENT Exhibit 10.2(a) SCHEDULE TO SEVERANCE AGREEMENT Horace Mann Educators Corporation entered into severance agreements on the date shown with the following persons. These agreements are identical to the one included herein as Exhibit 10.9. George Zock - December 27, 1991 H. Albert Inkel - December 27, 1991 Ann Caparros - March 07, 1994 Peter H. Heckman - April 10, 2000 Horace Mann Educators Corporation entered into severance agreements on the date shown with the following persons. These agreements are substantially identical to the one included herein as Exhibit 10.9 except that they provide (1) a one- time cash payment equal to 2 times the highest annual compensation received by the employee in the five preceding years (as compared to 2.9 times) and (2) the specified period during which such employee's insurance benefits would continue is 2 years (as compared to 2.9 years): A. Thomas Arisman - December 27, 1991 Ron Byers - March 16, 2000 Valerie Chrisman - December 27, 1991 J. Michael Henderson - September 02, 1997 William Hinkle - July 19, 1999 Robert Lee - July 19, 1999 Thomas Manion - July 6, 2000 Michael Orr - July 19, 1999 Francis Purcell - December 27, 1991 Michael Vignola - March 16, 1998 Walter Stooksbury - December 27, 1991 Horace Mann Educators Corporation entered into a severance agreement with Louis G. Lower II as set forth in the Lower Employment Agreement contained in Exhibit 10.12 to Horace Mann Educators Corporation's Annual Report on Form 10-K for the year ended December 31, 1999. EX-10.3(A) 5 0005.txt SCHEDULE OF CONTINUATION OF EMPLOYMENT AGREEMENT Exhibit 10.3(a) Management Bonus Agreements between HMEC and certain officers. - ---------------------------------------------------- George J. Zock $262,508 - ---------------------------------------------------- Ann M. Caparros $185,000 - ---------------------------------------------------- H. Albert Inkel $176,953 - ---------------------------------------------------- EX-10.4 6 0006.txt SEPARATION AGREEMENT DATED JUNE 20, 2000 Exhibit 10.4 Execution Copy SEPARATION AGREEMENT -------------------- This Separation Agreement (this "Agreement") is made and entered into this 20th day of June, 2000, by and among Horace Mann Educators Corporation, a Delaware corporation ("HMEC"), Horace Mann Service Corporation, an Illinois corporation ("HMSC"), and Larry K. Becker, an Illinois resident ("Employee"). HMEC and HMSC are collectively referred to herein as the "Company." 1. Novation and Replacement of Prior Agreement. Employee and the Company ------------------------------------------- hereby agree that the Separation Agreement entered into among them dated March 21, 2000 is, upon the execution of this Agreement, null and void and of no effect. That prior agreement shall be replaced in its entirety by this Agreement and none of the provisions of the prior agreement shall take, or be deemed to have come into, effect. 2. Employment as Temporary Employee and Subsequent Resignation. Employee ----------------------------------------------------------- and the Company hereby agree that the last day of Employee's employment with the Company as a regular, full-time employee shall be June 22, 2000. Employee and the Company also agree that for the period of June 23, 2000 through June 22, 2002, HMSC shall employ Employee, and Employee shall accept employment with HMSC, as a temporary employee with the title of Financial Advisor. To the extent not already done, Employee hereby resigns as an officer and director of the Company and all affiliated companies effective June 22, 2000 and the Company hereby accepts such resignation. Employee hereby resigns as an employee of the Company effective June 22, 2002 and the Company hereby accepts such resignation. Notwithstanding any public statements by Employee or the Company regarding the termination of Employee's employment with the Company, Employee understands and acknowledges that effective June 22, 2000 and June 22, 2002 he is not "retiring" from employment with the Company as that term is used in any of the Company's benefit, pension or compensation plans. Employee shall be paid his current salary and benefits through June 22, 2000, thereafter shall be compensated as a temporary employee upon such terms and conditions as may mutually be agreed between the Company and the Employee (which may include under the Company's Short Term Incentive Program and/or Long Term Incentive Program for 2000, bonuses based on the Employee's eligible compensation through June 22 but will not include any bonus based on achievement of the Company's recent strategic initiatives) and, assuming that he remains a temporary employee of the Company through June 22, 2002, shall be treated under all employee plans of the Company (including, without limitation, stock option plans) as a temporary employee who has resigned from the Company on June 22, 2002, provided however, that all options to purchase Common Stock of HMEC granted to Employee prior to June 22, 2000 ("Stock Options") which have not vested prior to June 22, 2001 will vest on that date. Notwithstanding anything else contained herein, Employee agrees that his Bonus Agreement with the Company dated as of September 12, 1994 and his Severance Agreement with the Company dated as of December 27, 1991 shall both terminate on June 22, 2000 and shall be of no further force and effect thereafter. Employee's agreement to the provisions of this Agreement provided for below is made in consideration of the Company's agreement to retain Employee as a temporary employee and the acceleration of option vesting as provided for above. Employee's change of employee status to become a temporary employee and his subsequent resignation shall not affect his rights to indemnification by the Company by reason of his being an officer, director or employee of the Company or any of its subsidiaries or affiliates, pursuant to the Company's corporate documents and otherwise. 3. Releases and Covenant Not to Sue. -------------------------------- (a) Employee, for himself, his agents, legal representatives, assigns, heirs, distributees, devisees, legatees, administrators, personal representatives and executors (the "Releasing Parties"), hereby releases and forever discharges the Company, its present and past subsidiaries and affiliates, successors and assigns, and their respective present and past officers, directors, employees and agents (the "Released Parties"), from any and all claims, demands, actions, liabilities and other claims for relief and remuneration whatsoever, whether known or unknown, arising or which could have arisen up to and including June 22, 2000, including without limitation those arising out of or relating to Employee's employment, change of employment status and resignation from employment effective June 22, 2002 and any claims arising under Title VII of the Civil Rights Act of 1964 (as amended by the Civil Rights Act of 1991), the Equal Pay Act, the Fair Labor Standards Act, the Older Workers Benefits Protection Act, the Age Discrimination in Employment Act, the Illinois Human Rights Act, the Illinois Wage Payment and Collection Act, the Employee Retirement Income Security Act ("ERISA") or any other federal, state or local statute, law, ordinance, regulation, code or executive order, any tort or contract claims, and any of the claims, matters and issues which could have been asserted by Employee against the Company in any legal, administrative or other proceeding, provided that the Releasing Parties do not release potential claims ------------- (i) for failure of the Company to comply with this Agreement, (ii) arising under ERISA or otherwise with regard to any benefits to which Employee is entitled in accordance with the Company's benefit programs by virtue of his employment with the Company or (iii) arising from any fraud or criminal activity committed by the Company. (b) Employee further agrees not to assert any claim, charge or other legal proceeding against the Released Parties, in any forum, based on any events, whether known or unknown, which are the subject of the release contained in section (a) above. If Employee brings any such proceeding, Employee shall immediately forfeit any right to continued compensation or other consideration from the Company pursuant to this Agreement. (c) The Released Parties hereby release and forever discharge Employee and the other Releasing Parties from any and all claims, demands, actions, liabilities and other claims for relief and remuneration whatsoever, whether known or unknown, arising out of or relating to Employee's employment, change of employment status or resignation from employment effective June 22, 2002 or the performance of his duties on behalf of the Company through June 22, 2000. The Released Parties hereby covenant not to file any charge, action, complaint or claim whatsoever against Employee which are based upon the claims released by them hereunder. However, notwithstanding anything contained in this Agreement, including this section, the Released Parties reserve the right to file a claim or lawsuit to enforce this Agreement and the right to bring any action against Employee arising from any fraud or criminal activity committed by him while employed by the Company. 4. Restrictive Covenants. --------------------- (a) Employee agrees that, through June 22, 2002, Employee will not knowingly, directly or indirectly, solicit any person who, at any time during the one year period ending on June 22, 2000 was employed or retained by the Company, to terminate such person's employment or retention by the Company for the purpose of becoming employed or retained by Employee or any other person to perform the same or similar services that such person performed for the Company or the Company's successors or assigns. (b) Employee agrees that he will not, at any time, disclose to any person, or otherwise use or exploit, any of the proprietary or confidential information or knowledge, including without limitation trade secrets, research proposals, reports, methods, techniques, computer programming or budgets or other financial information, regarding the Company, its business, properties or affairs obtained by him at any time except as required by law or legal process. On June 22, 2002, Employee will promptly deliver to the Company all documents and materials of any nature pertaining to the Company which contain any such information and will not take with him any documents or materials or copies thereof containing any such information. (c) Employee covenants, agrees and recognizes that because the breach or threatened breach of the covenants and agreements set forth in this Section 4, or any of them, will result in immediate and irreparable injury to the Company, the Company shall be entitled to an injunction restraining Employee from any violation of this Section 4 to the fullest extent allowed by law. Employee further covenants, agrees and recognizes that in the event of a violation of any of the covenants and agreements set forth in this Section 4, the Company shall be entitled to receive all such amounts to which the Company would be entitled as damages under law or at equity. Nothing herein shall be construed as prohibiting the Company from pursuing any other legal or equitable remedies that may be available to it for such breach, including the recovery of damages from Employee. (d) Employee expressly acknowledges and agrees that (i) the covenants and agreements set forth in this Section 4 are reasonable and are necessary to protect the legitimate business and competitive interests of the Company and (ii) each of the covenants and agreements set forth in this Section 4 is separately and independently given, and each such covenant and agreement is intended to be enforceable separately and independently of the other such covenants and agreements, including without limitation enforcement by injunction; in the event that any provision of this Agreement shall be held invalid or unenforceable by a court of competent jurisdiction, such invalidity or unenforceability shall attach only to the particular aspect of such provision found invalid or unenforceable as applied and shall not render invalid or unenforceable any other provisions of this Agreement which shall be construed as if the provision or other basis on which this Agreement has been challenged had been more narrowly drafted so as not to be invalid or unenforceable. 5. Voluntary Agreement. Employee acknowledges and states that he has read ------------------- this Agreement, that he has had opportunity to, and has been advised, orally and in writing hereby, to consult with legal counsel prior to executing this Agreement, that he understands the legal effect and binding nature of this Agreement and that he is acting voluntarily and with full knowledge of his actions in executing this Agreement. 6. Governing Law. This Agreement shall be governed by and construed and ------------- enforced in accordance with the laws of the State of Illinois, without giving effect to its conflict or choice of law provisions. 7. Miscellaneous. No provision of this Agreement may be modified, waived ------------- or discharged unless such waiver, modification or discharge is agreed to in writing signed by the parties hereto. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provisions of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by any party which are not set forth expressly in this Agreement. Headings in this Agreement are for convenience only and shall not be used to interpret or construe its provisions. This Agreement may be executed in counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. This Agreement constitutes the entire agreement among the parties hereto regarding the subject matter hereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. HORACE MANN EDUCATORS CORPORATION By /s/ Louis G. Lower II ------------------------------- Name: Louis G. Lower II Title: President and CEO, Member of the HMEC Board of Directors HORACE MANN SERVICE CORPORATION By /s/ Louis G. Lower II ------------------------ Name: Louis G. Lower II Title: President and CEO EMPLOYEE /s/ Larry K. Becker -------------------------- LARRY K. BECKER EX-10.5 7 0007.txt LETTER OF EMPLOYMENT JULY 6, 2000 Exhibit 10.5 June 29, 2000 Thomas K. Manion 7212 Sandy Creek Road Wausau, WI 54401 Dear Tom: We are pleased to offer you employment as Senior Vice President and Controller effective Thursday, July 6, 2000, with an initial monthly salary of $14,167.00. Your initial responsibilities will include managing the Controllers, Internal Audit, Tax, Special Investigations, and Purchasing and Business Process Redesign (BPR) departments. You will be eligible to participate in the officers' bonus program which consists of three elements: 1. An annual bonus based on meeting specific corporate and divisional --------------- measures. Your position provides for a target bonus opportunity of 30% of your annual salary but could increase or decrease based on the corporate and divisional results (0 to 2 times target percentage). You are guaranteed a pro-rata portion of this year's target bonus which is payable in 2001. 2. Long term incentive bonus opportunity based on specific corporate ------------------------- measures over a rolling four (4) year period of time. Your position provides for a target bonus payment opportunity of 25% of your annual salary but could increase or decrease based on corporate results (0 to 2 times target percentage). You are guaranteed a pro-rata portion of this year's target bonus which is payable in 2001. As part of the long term incentive, there are stock ownership guideline requirements which must be met. The long term plan is a vehicle to help you achieve the targeted percent. I have attached a brief summary of the guidelines for your review. 3. Annual Stock Option grants based on corporate, divisional and ------------------- individual performance results. In addition, under the HMEC Incentive Stock Plan (the Plan), 20,000 options of HMEC stock will be granted to you on August 1, 2000. These options vest in four equal portions; the first 5,000 shares on August 1, 2000 and the remaining three (3) pieces vest on the first, second and third year anniversaries of the grant date. The option price, for all shares, will be equal to the fair market value as of August 1, 2000. A change of control severance agreement is also included with our offer. I have attached a sample agreement for your review. As we discussed, full relocation benefits will be provided (attached) as well as the complete Employee Benefit Program. Thomas K. Manion Page 2 June 29, 2000 In order to substantiate your identity and employment eligibility in accordance with federal law, I would like for you to bring documentation with you on your first day. Samples of acceptable identification and authorization are enclosed. As this is a federal law, failure to comply with this regulation would be cause for us to reconsider our offer of employment. On July 6, please stop by the Employment Office on the first floor at 8:00 a.m. and we will coordinate your employment orientation. We are excited about you joining Horace Mann and truly look forward to working with you. Sincerely, Jann M. Braun Assistant Vice President, Employee Relations Enclosures cc: (w/o attachments) Paul Kardos Louis Lower Peter Heckman Valerie Chrisman Paul Hanson To confirm your acceptance of this offer, please sign this letter and return it to me. The enclosed copy is for your records. _________________________ ______________________ (Signature) (Date) EX-11 8 0008.txt STATEMENT RE COMPUTATION OF PER SHARE EARNINGS Exhibit 11 Horace Mann Educators Corporation Computation of Net Income per Share For the Three and Six Months Ended June 30, 2000 and 1999 (Amounts in thousands, except per share data)
Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------- 2000 1999 2000 1999 -------- ------- ------- ------- Basic - assumes no dilution: Net income (loss) for the period $ 9,682 $10,422 $22,408 $27,473 -------- ------- ------- ------- Weighted average number of common shares outstanding during the period 40,913 41,131 41,034 41,467 -------- ------- ------- ------- Net income (loss) per share - basic $ 0.24 $ 0.25 $ 0.55 $ 0.66 ======== ======= ======= ======= Diluted - assumes full dilution: Net income (loss) for the period $ 9,682 $10,422 $22,408 $27,473 -------- ------- ------- ------- Weighted average number of common shares outstanding during the period 40,913 41,131 41,034 41,467 Weighted average number of common equivalent shares to reflect the dilutive effect of common stock equivalent securities: Stock options 67 365 79 362 Common stock units related to Deferred Equity Compensation Plan for Directors 97 65 97 65 Common stock units related to Deferred Compensation Plan for Employees 8 6 8 6 Warrants - 96 - 96 -------- ------- ------- ------- Total common and common equivalent shares adjusted to calculate diluted earnings per share 41,085 41,663 41,218 41,996 -------- ------- ------- ------- Net income (loss) per share - diluted $ 0.23 $ 0.25 $ 0.54 $ 0.65 ======== ======= ======= ======= Percentage of dilution compared to basic net income (loss) per share 4.2% 0.0% 1.8% 1.5%
EX-27 9 0009.txt 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-31-2000 JAN-01-2000 JUN-30-2000 2,507,064 0 0 0 17,359 143 2,708,789 30,628 0 134,987 4,280,650 2,159,095 167,025 0 123,257 148,699 0 0 60 400,375 4,280,650 297,929 95,109 (2,341) 0 217,075 27,318 58,427 32,435 10,027 22,408 0 0 0 22,408 0.55 0.54 0 0 0 0 0 0 0 REFER TO NOTE 3 - INVESTMENTS OF THE COMPANY'S CONSOLIDATED NOTES TO FINANCIAL STATEMENTS FOR JUNE 30, 2000. REFER TO THE COMPANY'S CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2000.
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