-----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, OucUXG8gyH7KwogCDRO8+Z99jKBPxzFD0y2fACN+pC5/CCdSSTBKfHfbPfc2QT2O shaJGExPetcoj0IEXjpi/Q== 0000950131-02-001992.txt : 20020515 0000950131-02-001992.hdr.sgml : 20020515 ACCESSION NUMBER: 0000950131-02-001992 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HORACE MANN EDUCATORS CORP /DE/ CENTRAL INDEX KEY: 0000850141 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 370911756 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10890 FILM NUMBER: 02647964 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 d10q.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 March 31, 2002 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 April 30, 2002, 40,847,969 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 MARCH 31, 2002 INDEX
Page ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Independent Auditors' Review Report................................... 1 Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001............................... 2 Consolidated Statements of Operations for the Three Months Ended March 31, 2002 and 2001......................... 3 Consolidated Statements of Changes in Shareholders' Equity for the Three Months Ended March 31, 2002 and 2001................. 4 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2001......................... 5 Notes to Consolidated Financial Statements............................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 17 Item 3. Quantitative and Qualitative Disclosures about Market Risk........... 37 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders.................. 37 Item 6. Exhibits and Reports on Form 8-K..................................... 37 SIGNATURES............................................................................... 38
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 March 31, 2002, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for the three-month periods ended March 31, 2002 and 2001. These consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Horace Mann Educators Corporation and subsidiaries as of December 31, 2001, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 7, 2002, we expressed an unqualified opinion on those consolidated financial statements. As discussed in note 5 to the consolidated financial statements, as of January 1, 2002 the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets." /s/ KPMG LLP - ---------------------- KPMG LLP Chicago, Illinois May 2, 2002 1 HORACE MANN EDUCATORS CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
March 31, December 31, 2002 2001 ---------- ------------ ASSETS Investments Fixed maturities, available for sale, at fair value (amortized cost, 2002, $2,689,455; 2001, $2,726,831) .................. $2,676,729 $2,769,867 Short-term and other investments ............................. 122,246 107,445 Short-term investments, loaned securities collateral ......... 468,152 98,369 ---------- ---------- Total investments ........................................ 3,267,127 2,975,681 Cash ............................................................ 33,321 33,939 Accrued investment income and premiums receivable ............... 98,004 112,746 Deferred policy acquisition costs ............................... 164,679 157,776 Goodwill ........................................................ 47,396 47,396 Value of acquired insurance in force ............................ 37,640 38,393 Other assets .................................................... 175,228 114,665 Variable annuity assets ......................................... 1,036,022 1,008,430 ---------- ---------- Total assets ............................................. $4,859,417 $4,489,026 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Policy liabilities Fixed annuity contract liabilities ........................... $1,295,008 $1,278,137 Interest-sensitive life contract liabilities ................. 524,882 518,455 Unpaid claims and claim expenses ............................. 313,926 314,295 Future policy benefits ....................................... 180,178 179,109 Unearned premiums ............................................ 178,334 185,569 ---------- ---------- Total policy liabilities ................................. 2,492,328 2,475,565 Other policyholder funds ........................................ 123,714 123,434 Other liabilities ............................................... 615,986 269,640 Short-term debt ................................................. 53,000 53,000 Long-term debt .................................................. 99,779 99,767 Variable annuity liabilities .................................... 1,036,022 1,008,430 ---------- ---------- Total liabilities ........................................ 4,420,829 4,029,836 ---------- ---------- Preferred stock, $0.001 par value, shares authorized 1,000,000; none issued ....................................... -- -- Common stock, $0.001 par value, shares authorized 75,000,000; shares issued, 2002, 60,155,670; 2001, 60,076,921 ............................................. 60 60 Additional paid-in capital ...................................... 342,406 341,052 Retained earnings ............................................... 472,426 461,139 Accumulated other comprehensive income (loss), net of taxes: Net unrealized gains (losses) on fixed maturities and equity securities ........................... (6,815) 26,336 Minimum pension liability adjustment ......................... (11,530) (11,438) Treasury stock, at cost, 19,341,296 shares ...................... (357,959) (357,959) ---------- ---------- Total shareholders' equity ............................... 438,588 459,190 ---------- ---------- Total liabilities and shareholders' equity ............. $4,859,417 $4,489,026 ========== ==========
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 March 31, --------------------- 2002 2001 -------- -------- Insurance premiums written and contract deposits ..... $211,748 $207,772 ======== ======== Revenues Insurance premiums and contract charges earned .... $155,553 $149,917 Net investment income ............................. 49,685 48,763 Realized investment gains ......................... 2,582 4,684 -------- -------- Total revenues .................................. 207,820 203,364 -------- -------- Benefits, losses and expenses Benefits, claims and settlement expenses .......... 110,816 107,777 Interest credited ................................. 24,149 23,809 Policy acquisition expenses amortized ............. 14,625 14,058 Operating expenses ................................ 32,276 29,494 Amortization of intangible assets ................. 1,294 1,907 Interest expense .................................. 2,067 2,524 -------- -------- Total benefits, losses and expenses ............. 185,227 179,569 -------- -------- Income before income taxes ........................... 22,593 23,795 Income tax expense ................................... 7,022 7,097 -------- -------- Net income ........................................... $ 15,571 $ 16,698 ======== ======== Net income per share Basic ............................................. $ 0.38 $ 0.41 ======== ======== Diluted ........................................... $ 0.38 $ 0.41 ======== ======== Weighted average number of shares and equivalent shares (in thousands) Basic ........................................... 40,780 40,524 Diluted ......................................... 41,231 40,747 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)
Three Months Ended March 31, --------------------- 2002 2001 --------- --------- Common stock Beginning balance ....................................... $ 60 $ 60 Options exercised, 2002, 68,465 shares; 2001, 10,000 shares ................................... -- -- Conversion of Director Stock Plan units, 2002, 10,284 shares ................................... -- -- --------- --------- Ending balance .......................................... 60 60 --------- --------- Additional paid-in capital Beginning balance ....................................... 341,052 338,243 Options exercised and conversion of Director Stock Plan units ............................. 1,354 90 Catastrophe-linked equity put option premium ............ -- (237) --------- --------- Ending balance .......................................... 342,406 338,096 --------- --------- Retained earnings Beginning balance ....................................... 461,139 452,624 Net income .............................................. 15,571 16,698 Cash dividends, 2002, $0.105; 2001, $0.105 per share .... (4,284) (4,257) --------- --------- Ending balance .......................................... 472,426 465,065 --------- --------- Accumulated other comprehensive income (loss), net of taxes: Beginning balance ....................................... 14,898 (4,975) Change in net unrealized gains (losses) on fixed maturities and equity securities .............. (33,151) 28,475 Increase in minimum pension liability adjustment ...... (92) -- --------- --------- Ending balance .......................................... (18,345) 23,500 --------- --------- Treasury stock, at cost Beginning and ending balance, 2002 and 2001, 19,341,296 shares ...................... (357,959) (357,959) --------- --------- Shareholders' equity at end of period ...................... $ 438,588 $ 468,762 ========= ========= Comprehensive income Net income .............................................. $ 15,571 $ 16,698 Other comprehensive income, net of taxes: Change in net unrealized gains (losses) on fixed maturities and equity securities ........... (33,151) 28,475 Increase in minimum pension liability adjustment ...... (92) -- --------- --------- Other comprehensive income ........................ (33,243) 28,475 --------- --------- Total ........................................... $ (17,672) $ 45,173 ========= =========
See accompanying notes to consolidated financial statements. 4 HORACE MANN EDUCATORS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Three Months Ended March 31, --------------------- 2002 2001 --------- --------- Cash flows from operating activities Premiums collected ....................................... $ 164,686 $ 161,789 Policyholder benefits paid ............................... (121,842) (123,478) Policy acquisition and other operating expenses paid ..... (55,186) (46,814) Federal income taxes paid ................................ (2,032) -- Investment income collected .............................. 52,991 49,438 Interest expense paid .................................... (3,316) (4,148) Other .................................................... (20) (287) --------- --------- Net cash provided by operating activities ............ 35,281 36,500 --------- --------- Cash flows used in investing activities Fixed maturities Purchases .............................................. (433,944) (358,085) Sales .................................................. 393,132 262,781 Maturities ............................................. 19,602 66,699 Net cash used for short-term and other investments ....... (15,342) (7,094) --------- --------- Net cash used in investing activities ................ (36,552) (35,699) --------- --------- Cash flows provided by (used in) financing activities Dividends paid to shareholders ........................... (4,284) (4,257) Principal repayments on Bank Credit Facility ............. -- -- Exercise of stock options ................................ 1,354 90 Catastrophe-linked equity put option premium ............. -- (237) Annuity contracts, variable and fixed Deposits ............................................... 63,349 58,952 Maturities and withdrawals ............................. (41,124) (53,785) Net transfer to variable annuity assets ................ (16,954) (3,484) Net decrease in life policy account balances ............. (1,688) (1,076) --------- --------- Net cash provided by (used in) financing activities .. 653 (3,797) --------- --------- Net decrease in cash ........................................ (618) (2,996) Cash at beginning of period ................................. 33,939 21,141 --------- --------- Cash at end of period ....................................... $ 33,321 $ 18,145 ========= =========
See accompanying notes to consolidated financial statements. 5 HORACE MANN EDUCATORS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002 and 2001 (Dollars in thousands, except per share data) Note 1 - Basis of Presentation The accompanying unaudited consolidated financial statements of Horace Mann Educators Corporation ("HMEC"; and together with its subsidiaries, 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 accounting principles generally accepted in the United States of America have been condensed or omitted. The Company believes that these financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company's consolidated financial position as of March 31, 2002 and December 31, 2001 and the consolidated results of operations, changes in shareholders' equity and cash flows for the three months ended March 31, 2002 and 2001. The subsidiaries of HMEC sell and underwrite tax-qualified retirement annuities and private passenger automobile, homeowners, and life insurance products, primarily to educators and other employees of public schools and their families. The Company's principal operating subsidiaries are Horace Mann Life Insurance Company, Horace Mann Insurance Company, Teachers Insurance Company, Horace Mann Property & Casualty Insurance Company and Horace Mann Lloyds. It is suggested that these financial statements be read in conjunction with the financial statements and the related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. The results of operations for the three months ended March 31, 2002 are not necessarily indicative of the results to be expected for the full year. Note 2 - Restructuring Charges Restructuring charges were incurred and separately identified in the Statements of Operations for the years ended December 31, 2001 and 2000. Massachusetts Automobile Business In October 2001, the Company recorded restructuring charges of $7,290 pretax ($4,738, or $0.12 per share, after tax) reflecting a change in the Company's presence in the Massachusetts automobile market. On October 18, 2001, Horace Mann announced that it had formed a marketing alliance with The Commerce Group, Inc. ("Commerce") for the sale of automobile insurance in the state of Massachusetts. Through this alliance, and by January 1, 2002, Horace Mann began providing its Massachusetts customers with Commerce automobile insurance policies, while continuing to write other Horace Mann products, including property and life insurance and retirement annuities. 6 Note 2 - Restructuring Charges-(Continued) The Company's Consolidated Balance Sheets at March 31, 2002 and December 31, 2001 did not reflect any accrued amounts due to the restructure of its Massachusetts automobile business. The Company expects that this transaction will have a positive impact on operating income of approximately $0.10 per share in 2003 and beyond. The improvement in 2002 earnings will be somewhat less reflecting the run-off of current policies in force. The Company plans to utilize the benefits of this transaction to invest in its marketing, customer service and technology infrastructures. The Company's Massachusetts automobile business represented premiums written and earned of approximately $7,000 and $27,000 for the three months ended March 31, 2001 and the twelve months ended December 31, 2001, respectively. In 2002, premiums written for the voluntary portion of this business have been reduced to zero, and premiums earned will be reduced significantly throughout the year reflecting run-off of the policies in force at December 31, 2001. For the full year 2001, claims and settlement expenses in Massachusetts for voluntary automobile business were $9,137 and for involuntary residual market business were $11,455. Claims and settlement expenses in 2002 will reflect run-off of the business and a decline in exposure to loss, as the policies written as the Company's risk expire. Printing Services, Group Insurance and Credit Union Marketing Operations In November 2001, the Company recorded restructuring charges of $450 pretax ($293, less than $0.01 per share, after tax) reflecting the decision to close its on site printing services operations based on a cost benefit analysis. Employee termination costs, for termination of 13 individuals by December 31, 2001, which represented severance, vacation buy-out and related payroll taxes represented $409 of the total charge. The eliminated positions encompass management, technical and clerical responsibilities. The remaining $41 was attributable primarily to the write-off of equipment related to this function. In December 2000, the Company recorded restructuring charges of $2,236 pretax ($1,453, or $0.04 per share, after tax) reflecting two changes in the Company's operations. Specifically, the Company restructured the operations of its group insurance business, thereby eliminating 39 jobs, and its credit union marketing group, eliminating 20 additional positions. The changes will improve business results and more closely align these functions with the Company's strategic direction. Employee termination costs, for termination of an estimated 50 individuals, represented severance, vacation buy-out and related payroll taxes. The eliminated positions encompass management, professional and clerical responsibilities. By December 31, 2001, 39 individuals had been terminated with two additional terminations scheduled in 2002. Termination of lease agreements represented office space used by the credit union marketing group. The remaining charge was attributable primarily to the write-off of software related to these two areas. 7 Note 2 - Restructuring Charges-(Continued) The following table provides information about the components of the charges taken in December 2001 and 2000, the balance of accrued amounts at December 31, 2001 and March 31, 2002, and payment activity during the three months ended March 31, 2002.
Original Reserve at Reserve at Pretax December 31, March 31, Charge 2001 Payments Adjustments 2002 -------- ------------ -------- ----------- ---------- Charges to earnings: Printing Services Operations Employee termination costs ...................... $ 409 $ 396 $108 $-- $288 Write-off of equipment ........ 41 -- -- -- -- ------ ------ ---- --- ---- Subtotal ................ 450 396 108 -- 288 ------ ------ ---- --- ---- Group Insurance and Credit Union Marketing Operations Employee termination costs ................... 1,827 636 139 -- 497 Termination of lease agreements .............. 285 -- -- -- -- Write-off of capitalized software ................ 106 -- -- -- -- Other ...................... 18 -- -- -- -- ------ ------ ---- --- ---- Subtotal ................ 2,236 636 139 -- 497 ------ ------ ---- --- ---- Total ................ $2,686 $1,032 $247 $-- $785 ====== ====== ==== === ====
Note 3 - Debt Indebtedness outstanding was as follows:
March 31, December 31, 2002 2001 --------- ------------ Short-term debt: $65,000 Bank Credit Facility, commitment to June 30, 2002. (IBOR + 0.75%, 2.7% as of March 31, 2002) ............................... $ 53,000 $ 53,000 Long-term debt: 6 5/8% Senior Notes, due January 15, 2006. Face amount less unaccrued discount of $221 and $233 (6.7% imputed rate) .................. 99,779 99,767 -------- -------- Total ...................................... $152,779 $152,767 ======== ========
8 Note 3 - Debt-(Continued) Bank Credit Facility The Bank Credit Facility provides for unsecured borrowings of up to $65,000. An amendment to the Bank Credit Agreement was made prior to December 31, 2001, which extended the maturity from December 31, 2001 to June 30, 2002. Interest accrues at varying spreads relative to corporate or eurodollar base rates and is payable monthly or quarterly depending on the applicable base rate (Interbank Offering Rate plus 0.75% effective January 1, 2002). The unused portion of the Bank Credit Facility is subject to a variable commitment fee which was 0.15% on an annual basis at March 31, 2002. The $53,000 balance outstanding under the Bank Credit Facility was repaid in full on May 14, 2002 utilizing a portion of the proceeds from the issuance of the Convertible Notes as described below. Subsequent Event -- Issuance of 1.425% Senior Convertible Notes ("Convertible Notes") and Repayment of Bank Credit Facility On May 14, 2002, the Company issued $315,800 face amount (up to $368,500 face amount if the initial purchasers exercise their overallotment option in full) of 1.425% senior convertible notes due in 2032 at an effective yield of 3.0%. The net proceeds from the sale of the Convertible Notes have been used to repay the Bank Credit Facility and will be used for general corporate purposes and potentially to reduce other corporate indebtedness. Interest on the Convertible Notes is payable semi-annually at a rate of 1.425% beginning November 14, 2002 until May 14, 2007. After that date, cash interest will not be paid on the Convertible Notes prior to maturity unless contingent cash interest becomes payable. Contingent cash interest becomes payable if the average market price of a Convertible Note for a five trading day measurement period preceding the applicable six-month period equals 120% or more of the sum of the Convertible Note's issue price, accrued original issue discount and accrued cash interest, if any, for such Convertible Note. The contingent cash interest payable per Convertible Note in respect of any quarterly period within any six-month period will equal the then applicable conversion rate multiplied by the greater of (i) $0.105 or (ii) any regular cash dividends paid by the Company per share on HMEC's common stock during that quarterly period. The Convertible Notes will be convertible at the option of the holders, if the conditions for conversion are satisfied, into shares of HMEC's common stock at a conversion price of $26.74 (which represents a conversion premium of 30% over the last reported bid price on the New York Stock Exchange National Market on May 8, 2002). The Convertible Notes are redeemable by HMEC in whole or in part, at any time on or after May 14, 2007, at redemption prices equal to the sum of the issue price plus accrued original issue discount and accrued cash interest, if any, on the applicable redemption date. The holders of the Convertible Notes may require HMEC to purchase all or a portion of their Convertible Notes on either May 14, 2007, 2012, 2017, 2022, or 2027 at stated prices plus accrued cash interest, if any, to the purchase date. HMEC may pay the purchase price in cash or shares of HMEC common stock or in a combination of cash and shares of HMEC common stock. The Convertible Notes were privately offered only to qualified institutional buyers under Rule 144A under the Securities Act of 1933 and outside the United States of America ("U.S.") to non-U.S. persons under Regulation S under the Securities Act of 1933, and may not be offered or sold in the U.S. absent registration or an applicable exemption from registration requirements. 9 Note 3 - Debt-(Continued) Subsequent to the issuance of the Convertible Notes and the repayment of the existing Bank Credit Facility and prior to June 30, 2002, HMEC expects to enter into a new bank credit agreement for a $25,000 three-year senior unsecured revolving credit facility with covenants similar to those under the existing Bank Credit Facility. There can be no assurance that HMEC will finalize the terms of the new bank credit agreement or that HMEC will enter into the new bank credit agreement. Note 4 - 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 fair value. Percent of Carrying Value March 31, 2002 ------------------------ ----------------------- Rating of Fixed March 31, December 31, Carrying Amortized Maturity Securities(1) 2002 2001 Value Cost - ---------------------- --------- ------------ ---------- ---------- AAA .................... 37.4% 36.7% $ 999,786 $ 985,723 AA ..................... 5.8 6.3 155,757 152,511 A ...................... 20.7 20.8 554,184 551,399 BBB .................... 31.3 31.6 836,825 855,102 BB ..................... 1.5 1.5 40,797 45,770 B ...................... 2.5 2.1 66,737 76,835 CCC or lower ........... 0.6 0.8 17,184 16,913 Not rated(2) ........... 0.2 0.2 5,459 5,202 ----- ----- ---------- ---------- Total ............... 100.0% 100.0% $2,676,729 $2,689,455 ===== ===== ========== ========== (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 $66 of publicly traded securities not currently rated by S&P, Moody's or the National Association of Insurance Commissioners (the "NAIC") and $5,393 of private placement securities not rated by either S&P or Moody's. The NAIC has rated 92.2% of these private placements as investment grade. 10 Note 4 - Investments-(Continued) The following table presents a maturity schedule of the Company's fixed maturity securities. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Percent Carrying of Total Value ------------------------ ---------- March 31, December 31, March 31, Scheduled Maturity 2002 2001 2002 - ------------------ --------- ------------ ---------- Due in 1 year or less................... 4.1% 4.0% $ 109,902 Due after 1 year through 5 years........ 21.1 23.0 565,884 Due after 5 years through 10 years...... 30.2 29.9 807,017 Due after 10 years through 20 years..... 15.3 14.8 409,212 Due after 20 years...................... 29.3 28.3 784,714 ----- ----- ---------- Total................................. 100.0% 100.0% $2,676,729 ===== ===== ========== The Company's investment portfolio includes no derivative financial instruments (futures, forwards, swaps, option contracts or other financial instruments with similar characteristics). The Company reviews the fair value of the investment portfolio on a monthly basis to determine if there are any securities that have fallen below 80% of book value. This review, in conjunction with the Company's investment managers' monthly credit reports and current market data, is the basis for determining if a security has suffered an other-than-temporary decline in value. A write-down is recorded when such decline in value is deemed to be other-than-temporary, with the realized investment loss reflected in the Statement of Operations for the period. The Company lends fixed income securities to third parties, primarily major brokerage firms. As of March 31, 2002 and December 31, 2001, fixed maturities with a fair value of $468,152 and $98,369, respectively, were on loan. The Company separately maintains a minimum of 100% of the value of the loaned securities as collateral for each loan. Securities lending collateral is classified as investments with a corresponding liability included in Other Liabilities in the Company's Consolidated Balance Sheet, in accordance with the applicable accounting guidance. Note 5 - Goodwill and Other Acquired Intangible Assets When the Company was acquired in 1989, intangible assets were recorded in the application of purchase accounting to recognize the value of acquired insurance in force and goodwill. In addition, goodwill was recorded in 1994 related to the purchase of Horace Mann Property & Casualty Insurance Company. The value of acquired insurance in force is being amortized over the following periods utilizing the indicated methods for life and annuity, respectively, as follows: 20 years, in proportion to coverage provided; 20 years, in proportion to estimated gross profits. Goodwill was amortized over 40 years on a straight-line basis through December 31, 2001. 11 Note 5 - Goodwill and Other Acquired Intangible Assets-(Continued) Effective January 1, 2002, the Company adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". The Company's value of acquired insurance in force is an intangible asset with a definite life and will continue to be amortized under the provisions of SFAS No. 142. Goodwill will remain on the balance sheet and not be amortized. SFAS No. 142 establishes a new method of testing goodwill for impairment. On an annual basis, and when there is reason to suspect that its value may have been diminished or impaired, the goodwill asset must be tested for impairment. The amount of goodwill determined to be impaired will be expensed to current operations. The Company has not determined the impact, if any, that the goodwill impairment testing prescribed by these statements will have on its consolidated financial position or results of operations. Prior to June 30, 2002, the Company will complete the allocation of goodwill by business segment and the initial impairment testing procedures. Goodwill amortization was $405 for the three months ended March 31, 2001 and $1,618 for the full year 2001. Net income and net income per share exclusive of goodwill amortization expense in 2001 were as follows: Three Months Ended March 31, ------------------ 2002 2001 ------- ------- Reported net income ............................ $15,571 $16,698 Add back: Goodwill amortization ............... -- 405 ------- ------- Adjusted net income .......................... $15,571 $17,103 ======= ======= Reported net income per share-basic ............ $ 0.38 $ 0.41 Add back: Goodwill amortization ............... -- 0.01 ------- ------- Adjusted net income per share-basic .......... $ 0.38 $ 0.42 ======= ======= Reported net income per share-diluted .......... $ 0.38 $ 0.41 Add back: Goodwill amortization ............... -- 0.01 ------- ------- Adjusted net income per share-diluted ........ $ 0.38 $ 0.42 ======= ======= For the amortization of the value of acquired insurance in force, the Company periodically reviews its estimates of future gross profits. The most significant assumptions that are involved in the estimation of future gross profits include future market performance and business surrender/lapse rates. In the event actual experience differs significantly from assumptions or assumptions are significantly revised, the Company may be required to record a material charge or credit to amortization expense for the period in which the adjustment is made. The value of acquired insurance in force for investment contracts (those issued prior to August 29, 1989) is adjusted for the impact on estimated future gross profits as if net unrealized investment gains and losses had been realized at the balance sheet date. The impact of this adjustment is included in net unrealized gains and losses within shareholders' equity. 12 Note 5 - Goodwill and Other Acquired Intangible Assets-(Continued) The balances of value of acquired insurance in force by segment at March 31, 2002 and December 31, 2001 were as follows:
March 31, 2002 December 31, 2001 --------------------------------- --------------------------------- Accumulated Net Accumulated Net Cost Amortization Balance Cost Amortization Balance -------- ------------ ------- -------- ------------ ------- Value of acquired insurance in force Life ............................ $ 48,746 $ 38,592 $10,154 $ 48,746 $38,151 $10,595 Annuity ......................... 87,553 60,100 27,453 87,553 59,247 28,306 -------- -------- ------- -------- ------- ------- Subtotal .................... $136,299 $ 98,692 37,607 $136,299 $97,398 38,901 ======== ======== ------- ======== ======= ------- Impact of unrealized gains and losses .................... 33 (508) ------- ------- Total ....................... $37,640 $38,393 ======= =======
Scheduled amortization of the December 31, 2001 balances of value of acquired insurance in force by segment over the next five years is as follows:
Year Ended December 31, ------------------------------------------ 2002 2003 2004 2005 2006 ------ ------ ------ ------ ------ Scheduled amortization of: Value of acquired insurance in force Life.................................................. $1,726 $1,625 $1,537 $1,460 $1,394 Annuity............................................... 3,779 3,785 3,917 4,037 4,140 ------ ------ ------ ------ ------ Total............................................... $5,505 $5,410 $5,454 $5,497 $5,534 ====== ====== ====== ====== ======
Note 6 - Shareholders' Equity Share Repurchase Programs The Company has not repurchased shares of its common stock under its stock repurchase program since the third quarter of 2000, consistent with management's stated intention to utilize excess capital to support the Company's strategic growth initiatives. Since early 1997, 8,165,100 shares, or 17% of the shares outstanding on December 31, 1996, have been repurchased at an aggregate cost of $203,657, equal to an average cost of $24.94 per share. Including shares repurchased in 1995, the Company has repurchased 33% of the shares outstanding on December 31, 1994. The repurchase of shares was financed through use of cash and, when necessary, the Bank Credit Facility. However, the Company has not utilized the Bank Credit Facility for share repurchases since the second quarter of 1999. As of March 31, 2002, $96,343 remained authorized for future share repurchases. 13 Note 7 - Reinsurance The Company recognizes the cost of reinsurance premiums over the contract periods for such premiums in proportion to the insurance protection provided. Amounts recoverable from reinsurers for unpaid claims and claim settlement expenses, including estimated amounts for unsettled claims, claims incurred but not reported and policy benefits, are estimated in a manner consistent with the insurance liability associated with the policy. The effect of reinsurance on premiums written; premiums earned; and benefits, claims and settlement expenses were as follows: Ceded to Assumed Gross Other from State Amount Companies Facilities Net -------- ---------- ---------- -------- Three months ended March 31, 2002 - -------------------------------- Premiums written ............... $211,173 $3,254 $3,829 $211,748 Premiums earned ................ 160,053 7,863 3,363 155,553 Benefits, claims and settlement expenses .......... 116,030 9,416 4,202 110,816 Three months ended March 31, 2001 - -------------------------------- Premiums written ............... $210,068 $6,150 $3,854 $207,772 Premiums earned ................ 152,574 6,660 4,003 149,917 Benefits, claims and settlement expenses .......... 111,274 7,790 4,293 107,777 The Company maintains an excess and catastrophe treaty reinsurance program. The Company reinsures 95% of catastrophe losses above a retention of $8,500 per occurrence up to $80,000 per occurrence. In addition, the Company's predominant insurance subsidiary for property and casualty business written in Florida reinsures 90% of hurricane losses in that state above a retention of $11,000 up to $47,400 with the Florida Hurricane Fund, based on the Fund's resources. Through December 31, 2001, these catastrophe reinsurance programs were augmented by a $100,000 equity put and reinsurance agreement. This equity put provided 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 exceeded the catastrophe reinsurance program coverage limit. Before tax benefits, the equity put provided a source of capital for up to $154,000 of catastrophe losses above the reinsurance coverage limit. For liability coverages, including the educator excess professional liability policy, the Company reinsures each loss above a retention of $500 up to $20,000. The Company also reinsures each property loss, including catastrophe losses that in the aggregate are less than the retention levels above, above a retention of $250 up to $2,500. 14 Note 7 - Reinsurance-(Continued) Effective May 7, 2002, the Company entered into a replacement equity put and reinsurance agreement with a subsidiary of Swiss Reinsurance Company. The Swiss Re Group is rated "A++ (Superior)" by A.M. Best. Under the 36-month agreement, the equity put coverage of $75,000 provides a source of capital for up to $115,000 of pretax catastrophe losses above the reinsurance coverage limit. The Company also has the option, in place of the equity put, to require a Swiss Re Group member to issue a 10% quota share reinsurance coverage of all of the Company's property and casualty book of business. Total fees related to this equity put option, which are charged directly to additional paid-in capital, increased to 145 basis points in 2002 from 95 basis points in 2001 under the prior agreement; however, in 2002 the agreement is effective only for the last eight months of the year. The agreement states certain conditions to Horace Mann's exercise of the equity put option including: (i) the Company's shareholders' equity, adjusted to exclude goodwill, can not be less than $215,000 after recording the first triggering event; (ii) the Company's total debt as a percentage of capital can not be more than 47.5% prior to recording the triggering event; and (iii) the Company's S&P financial strength rating can not be below "BBB" prior to a triggering event. The Company's S&P financial strength rating was "A+" at May 7, 2002. The maximum individual life insurance risk retained by the Company is $200 on any individual life and $125 is retained on each group life policy. Excess amounts are reinsured. 15 Note 8 - 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 March 31, ------------------------ 2002 2001 ---------- ---------- Insurance premiums and contract charges earned Property and casualty .............................. $ 128,004 $ 123,183 Annuity ............................................ 3,691 3,786 Life ............................................... 24,180 23,267 Intersegment eliminations .......................... (322) (319) ---------- ---------- Total .......................................... $ 155,553 $ 149,917 ========== ========== Net investment income Property and casualty .............................. $ 9,621 $ 9,027 Annuity ............................................ 27,328 26,659 Life ............................................... 13,028 13,360 Corporate and other ................................ 3 51 Intersegment eliminations .......................... (295) (334) ---------- ---------- Total .......................................... $ 49,685 $ 48,763 ========== ========== Net income Operating income (loss) Property and casualty ............................ $ 7,217 $ 7,864 Annuity .......................................... 4,672 4,229 Life ............................................. 3,825 3,951 Corporate and other, including interest expense... (1,821) (2,391) ---------- ---------- Total operating income ......................... 13,893 13,653 Realized investment gains, after tax ............... 1,678 3,045 ---------- ---------- Total .......................................... $ 15,571 $ 16,698 ========== ========== Amortization of intangible assets Value of acquired insurance in force Annuity .......................................... $ 853 $ 1,031 Life ............................................. 441 471 ---------- ---------- Subtotal ....................................... 1,294 1,502 Goodwill (See Note 5) .............................. -- 405 ---------- ---------- Total .......................................... $ 1,294 $ 1,907 ========== ==========
March 31, December 31, 2002 2001 ---------- ------------ Assets Property and casualty .............................. $ 734,242 $ 738,638 Annuity ............................................ 2,918,725 2,674,524 Life ............................................... 1,144,884 1,007,345 Corporate and other ................................ 102,285 105,215 Intersegment eliminations .......................... (40,719) (36,696) ---------- ---------- Total ............................................ $4,859,417 $4,489,026 ========== ==========
16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in millions, except per share data) 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 affecting 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 impact of fluctuations in the financial markets on the Company's variable annuity fee revenues, valuations of deferred policy acquisition costs and value of acquired insurance in force, and the level of guaranteed minimum death benefit reserves. . 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. 17 Critical Accounting Policies The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires the Company's management to make estimates and assumptions based on information available at the time the financial statements are prepared. These estimates and assumptions affect the reported amounts of the Company's assets, liabilities, shareholders' equity and net income. Certain accounting estimates are particularly sensitive because of their significance to the Company's financial statements and because of the possibility that subsequent events and available information may differ markedly from management's judgements at the time the financial statements were prepared. For the Company, the areas most subject to significant management judgements include: reserves for property and casualty claims and claim settlement expenses, reserves for future policy benefits, deferred policy acquisition costs, value of acquired insurance in force and valuation of investments. Additional information regarding the accounting policies for each of these areas is provided within the relevant topics in "Results of Operations," as well as in the Notes to Consolidated Financial Statements in the Company's Annual Report for 2001 on Form 10-K. The Horace Mann Value Proposition The Horace Mann Value Proposition articulates the Company's overarching strategy and business purpose: Provide lifelong financial well-being for educators and their families through personalized service, advice, and a full range of tailored insurance and financial products. In 2000, the Company's management announced steps to focus on the Company's core business and accelerate growth of the Company's revenues and profits. These initiatives are intended to: . Grow and strengthen the agency force and make the Company's agents more productive by improving the products, tools and support the Company provides to them; . Expand the Company's penetration of targeted geographic areas and new segments of the educator market; . Broaden the Company's distribution options to complement and extend the reach of the Company's agency force; . Increase cross-selling and improve retention in the existing book of business; and . Make the Company's products more responsive to customer needs and preferences and expand the Company's product lines within the personal financial services segment. During the fourth quarter of 2000, management began implementing specific plans that address the initiatives above. New compensation and evaluation systems were implemented during 2001 to improve the performance of the Company's agents and agency managers. The Company has begun targeting high-priority geographic markets with dedicated staff teams. New approaches to customer service are being developed and tested that will free agents to spend more time selling. Additional distribution options are being initiated to capitalize fully on the value of the Company's payroll deduction slots in schools across the country. And, the Company will increase its use of technology to improve the efficiency of its agency force and its administrative operations. 18 Results of Operations Insurance Premiums and Contract Charges Insurance Premiums Written and Contract Deposits
Three Months Ended Growth Over March 31, Prior Year ------------------ ---------------- 2002 2001 Percent Amount ------ ------ ------- ------ Automobile and property (voluntary)................. $118.9 $117.4 1.3% $ 1.5 Excluding Massachusetts automobile................ 118.9 111.9 6.3% 7.0 Massachusetts automobile.......................... -- 5.5 -100.0% (5.5) Annuity deposits.................................... 63.3 59.0 7.3% 4.3 Life ............................................... 27.7 28.6 -3.1% (0.9) ------ ------ ----- Subtotal - core lines...................... 209.9 205.0 2.4% 4.9 Subtotal - core lines, excluding Massachusetts automobile................. 209.9 199.5 5.2% 10.4 Involuntary and other property & casualty............................... 1.8 2.8 -35.7% (1.0) Excluding Massachusetts automobile................................... 0.4 1.2 -66.7% (0.8) Massachusetts automobile....................... 1.4 1.6 -12.5% (0.2) ------ ------ ----- Total...................................... $211.7 $207.8 1.9% $ 3.9 ====== ====== ===== Total, excluding Massachusetts automobile............................... $210.3 $200.7 4.8% $ 9.6 ====== ====== =====
Insurance Premiums and Contract Charges Earned (Excludes annuity and life contract deposits)
Three Months Ended Growth Over March 31, Prior Year ------------------ ---------------- 2002 2001 Percent Amount ------ ------ ------- ------ Automobile and property (voluntary)................. $124.5 $118.4 5.2% $ 6.1 Excluding Massachusetts automobile................ 120.3 112.8 6.6% 7.5 Massachusetts automobile.......................... 4.2 5.6 -25.0% (1.4) Annuity............................................. 3.7 3.8 -2.6% (0.1) Life ............................................... 23.9 23.0 3.9% 0.9 ------ ------ ----- Subtotal - core lines........................ 152.1 145.2 4.8% 6.9 Subtotal - core lines, excluding Massachusetts automobile................... 147.9 139.6 5.9% 8.3 Involuntary and other property & casualty............................... 3.5 4.7 -25.5% (1.2) Excluding Massachusetts automobile................................... 1.5 2.7 -44.4% (1.2) Massachusetts automobile....................... 2.0 2.0 -- -- ------ ------ ----- Total........................................ $155.6 $149.9 3.8% $ 5.7 ====== ====== ===== Total, excluding Massachusetts automobile................................. $149.4 $142.3 5.0% $ 7.1 ====== ====== =====
19 As previously disclosed, the Company restructured its presence in the Massachusetts automobile market and ceased writing automobile insurance policies in that state on December 31, 2001. Through a marketing alliance with The Commerce Group, Inc. ("Commerce"), the Company now offers Massachusetts customers Commerce automobile insurance policies while continuing to write other Horace Mann products, including retirement annuities and property and life insurance. Premiums written and contract deposits for the Company's core lines increased 5.2% compared to the prior year, excluding Massachusetts voluntary automobile premiums written in the first three months of 2001. The growth resulted from continued strong gains in the annuity segment and improved growth in the Company's automobile business. Average agent productivity for all lines of business combined increased 14.7% compared to the first quarter of 2001, offsetting a 6.8% decline in the total agent count. At March 31, 2002, the Company's exclusive agency force totaled 840. The number of experienced agents in the agent force, 520, was down 17.6% at March 31, 2002, compared to a year earlier due primarily to terminations of less-productive agents over the prior 12 months. This and the strong improvement in productivity levels of agents hired in the last 12 months have driven the overall average agent productivity increase. Average agent productivity is measured as new sales per the average number of agents for the period. In 2001, the Company modified its agent compensation and reward structure, in order to provide incentive for agent performance that is more closely aligned with the Company's objectives. The revised structure continues the historical focus on profitability but also places a greater emphasis on individual agent productivity, new premium growth, growth in educator and cross-sold business, and business retention. In addition, the Company's agency manager compensation structure was similarly modified, and the agency management team was strengthened through the promotions of several of its most experienced and capable agents. The number of new agents hired during 2001 and the first three months of 2002 was comparable to prior periods, in spite of the Company's implementation of more stringent agent selection criteria to improve agent productivity and retention in the future. The new compensation plan for agency managers became effective January 1, 2001. The new compensation plan for all agents was implemented on August 1, 2001, and there were approximately 800 agents at the time of implementation. Also in 2001, the Company implemented enhanced agent training programs, to help new agents achieve production targets more rapidly and help experienced agents sharpen and strengthen their skills, and began providing agents with additional tools and support programs, to help them make a successful transition to their new role under the Company's Value Proposition. Management believes these actions, along with other strategic initiatives, will continue to have a positive impact on agent productivity in the future. In December 2001, the North Carolina Commissioner of Insurance (the "Commissioner") ordered a 13% reduction in private passenger automobile insurance premium rates effective in April 2002. The Commissioner's Order was in response to a request from the North Carolina Rate Bureau (the "Bureau"), which represents the insurance industry, to increase private passenger automobile insurance rates by 5%. The Bureau has voted to appeal the Commissioner's Order in the state appellate court and raise rates while the case is being heard. The difference between the rates ordered by the Commissioner and the Bureau would have an adverse impact of approximately $350 million for the insurance industry. The Company's full year earned premiums 20 would be negatively impacted by approximately $2 million and $3 million in 2002 and 2003, respectively. In addition, the difference in rates between the Commissioner and the Bureau must be held in an escrow account pending the court's decision. If the court should rule in favor of the Bureau, the insurers will be entitled to the funds previously escrowed. If the court should rule in favor of the Commissioner, the escrowed funds plus interest will be refunded to the policyholders. Due to the April 2002 effective date, this issue did not impact the Company's results for the three months ended March 31, 2002. Total voluntary automobile and homeowners premium written growth was 6.3% for the quarter, excluding Massachusetts voluntary automobile written premiums of $5.5 million from the prior year. The average premium per policy increased for both automobile and homeowners insurance, compared to a year earlier, and the number of automobile policies also increased. Voluntary automobile insurance premium written, excluding Massachusetts, increased 6.9% ($6.0 million) compared to the first three months of 2001 and homeowners premium increased 4.0% ($1.0 million). The property and casualty increase in premiums written resulted from growth in average premium per policy of 3% for automobile and 11% for homeowners, compared to a year earlier, as the growing impact of rate actions continue to flow through policy renewals and new business. Compared to the first three months of 2001, average earned premiums increased 4% for voluntary automobile and 9% for homeowners, reflecting the positive impact of rate increases implemented over the prior 12 months. Over the prior 12 months and excluding a 4,000 unit decrease in Massachusetts automobile, unit growth was 0.8%, or 7,000, with all of the increase in automobile. Homeowners units were equal to 12 months earlier and 3,000 units less than at December 31, 2001. At March 31, 2002, there were 592,000 voluntary automobile and 289,000 homeowners policies in force for a total of 881,000, including 18,000 Massachusetts voluntary automobile units which will run off over the remaining months of 2002. Based on policies in force, the property and casualty 12-month retention rate for new and renewal policies was 88%, equal to the 12 months ended March 31, 2001 despite implemented rate increases over the period. The Company plans additional rate increases in the remainder of 2002 and beyond, with primary emphasis on the homeowners line, which are expected to have an adverse impact on retention of homeowners policies in force. The Company's plans to implement tiered rating systems based on customers' credit ratings for automobile and homeowners business remain on track, which management expects will have a positive impact on both loss ratios and business growth in the educator market. Tiered rating, together with price increases implemented and planned, are expected to return the Company to rate adequacy, with average premium growth keeping pace with average loss experience over time. For 2002, the Company is targeting combined ratios of approximately 96% for voluntary automobile and 108% for homeowners, as a result of the impact of rate actions coupled with other initiatives described under "Results of Operations -- Benefits, Claims and Settlement Expenses." The decline in premiums written for involuntary and other property and casualty was primarily attributable to state mandatory automobile insurance facility business. Growth in annuity contract deposits for the three months ended March 31, 2002 reflected new business and improvements in retention of existing business. In September 2000, the Company more than tripled the number of choices available to its customers by introducing 21 new investment options in its tax-deferred annuity product line. At the same time, the Company provided its agents with proprietary asset allocation software that helps agents assist educator 21 customers in selecting the best retirement investment programs for their individual needs and circumstances. The fourth quarter of 2000 was the first full quarter with the expanded investment options. Compared to the first three months of 2001, new annuity deposits increased 7.3%, reflecting a 14.2% increase in new single premium and rollover deposits and a 4.4% increase in scheduled deposits received. New deposits to variable annuities decreased 9.5% or $3.0, and new deposits to fixed annuities were 26.5%, or $7.3 million, higher than in the first three months of 2001. The Company offers a dollar cost averaging program for amounts systematically transferred from the fixed annuity option to the variable mutual fund investment options over a 12-month period. Variable annuity accumulated funds on deposit at March 31, 2002 were $1.0 billion, $101.2 million greater than a year earlier, a 10.8% increase including the impact of financial market values. Variable annuity accumulated deposit retention improved 6.7 percentage points over the 12 months to 93.0%, reflecting ongoing improvement following the Company's expansion of variable investment options and implementation of proprietary asset allocation software. Fixed annuity cash value retention for the 12 months ended March 31, 2002 was 94.1%, 4.7 percentage points better than the same period last year. Fixed annuity accumulated cash value was $1.4 billion at March 31, 2002, $64.8 million, or 4.8%, more than a year earlier. The number of annuity contracts outstanding increased 7.6%, or 10,000 contracts, compared to March 31, 2001. In 2000, the Company took actions to increase the variable annuity options available to customers, as described above, and also took steps to improve the returns of its proprietary mutual funds. For the three months ended March 31, 2002, the amount of variable annuity surrenders was 31% lower than for the same period last year. The amount of fixed annuity surrenders decreased 29% compared to the first three months of 2001. In January 2002, the Company announced that it has been selected as one of four providers of fixed and variable annuities to Chicago, Illinois, public school employees. Beginning in April 2002, the Company will partner with an independent broker/dealer, which has been providing retirement planning services to Chicago Public School employees for more than two decades, to pursue this opportunity to bolster business growth in the annuity segment. The Chicago Public Schools is the third-largest school district in the United States of America. For the three months ended March 31, 2002, annuity segment contract charges earned decreased 2.6%, or $0.1 million, compared to the same period last year. Improvements in retention of variable and fixed accumulated values, as described above, resulted in a decline in surrender fees earned. Life segment premiums and contract deposits for the first three months of 2002 were 3.1% lower than a year earlier, due primarily to a decrease in interest-sensitive life product deposits. The life insurance in force lapse ratio was 9.3% for the twelve months ended March 31, 2002, compared to 8.6% for the same period last year. The lapse ratios for the term portion and the whole life portion of the business were each comparable to the prior year, with the overall lapse ratio increasing as a result of a shift in the mix of business. 22 Net Investment Income Investment income of $49.7 million for first three months of 2002 increased 1.8%, or $0.9 million, (1.2% after tax) compared to the prior year due primarily to growth in the size of the investment portfolio. Average investments (excluding the securities lending collateral) increased 3.2% over the past 12 months. The average pretax yield on the investment portfolio was 7.0% (4.7% after tax) for the first three months of 2002, compared to a pretax yield of 7.1% (4.8% after tax) last year. Realized Investment Gains and Losses Net realized investment gains were $2.6 million and $4.7 million for the three months ended March 31, 2002 and 2001, respectively. The current quarter included impairment charges of $9.9 million related to fixed income securities issued by two telecommunications companies and a realized investment loss of $2.0 million from the Company's sale of all of its holdings in securities issued by Kmart Corporation. Offsetting these losses were gains realized from ongoing investment portfolio management activity. Management believes that there may be further investment impairments during the remainder of 2002 if current economic and financial conditions persist. The net realized gains in 2001 primarily resulted from full repayment of an impaired commercial mortgage loan and the release of a related reserve for uncollectible mortgages. The Company reviews the fair value of the investment portfolio on a monthly basis to determine if there are any securities that have fallen below 80% of book value. This review, in conjunction with the Company's investment managers' monthly credit reports and current market data, is the basis for determining if a security has suffered an other-than-temporary decline in value. A write-down is recorded when such decline in value is deemed to be other-than-temporary, with the realized investment loss reflected in the Statement of Operations for the period. Benefits, Claims and Settlement Expenses
Three Months Ended Growth Over March 31, Prior Year ------------------ --------------- 2002 2001 Percent Amount ------ ------ ------- ------ Property and casualty............................... $100.0 $ 96.2 4.0% $ 3.8 Annuity............................................. 0.1 0.2 -50.0% (0.1) Life................................................ 10.7 11.4 -6.1% (0.7) ------ ------ ----- Total............................................. $110.8 $107.8 2.8% $ 3.0 ====== ====== ===== Property and casualty statutory loss ratio: Before catastrophe losses...................... 77.9% 79.2% -1.3% After catastrophe losses....................... 78.1% 78.1% --
In the first three months of 2002, the Company's benefits, claims and settlement expenses reflected improvements in both the voluntary automobile and the homeowners loss ratios excluding catastrophe losses as a result of favorable weather, loss containment initiatives and an 23 increase in average premium per policy. In the first quarter of 2001, homeowners claims and settlement expenses reflected a high level of non-catastrophe weather-related losses. Underwriting results of the property and casualty segment are significantly influenced by estimates of the Company's ultimate liability for insured events. Reserves for property and casualty claims include provisions for payments to be made on reported claims, claims incurred but not yet reported and associated settlement expenses. The process by which these reserves are established requires reliance upon estimates based on known facts and on interpretations of circumstances, including the Company's experience with similar cases and historical trends involving claim payment patterns, claim payments, pending levels of unpaid claims and product mix, as well as other factors including court decisions, economic conditions and public attitudes. As information develops which varies from experience, provides additional data or, in some cases, augments data which previously were not considered sufficient for use in determining liabilities, adjustments may be required. The effects of these adjustments are charged or credited to income for the period in which the adjustments are made. Net favorable development of reserves for property and casualty claims occurring in prior years, excluding involuntary business, was $0.5 million for the first three months of 2002, comparable to favorable development of $0.3 million for the same period in 2001. Total reserves for property and casualty claims occurring in prior years, including involuntary business, were strengthened $0.1 million in the current period, compared to no change a year earlier. The Company's property and casualty net reserves were $270 million and $249 million at March 31, 2002 and 2001, respectively. Non-catastrophe weather-related losses in the first quarter of 2001 were notably greater than historical experience. The non-catastrophe property loss ratio by quarter and for the full years 2001, 2000 and 1999 was as follows: 2002 2001 2000 1999 ---- ---- ---- ---- Non-catastrophe property loss ratio for the: Quarter ended March 31...................... 78.5% 85.1% 79.0% 81.9% Quarter ended June 30....................... 99.4% 91.4% 72.8% Quarter ended September 30.................. 99.7% 82.8% 78.1% Quarter ended December 31................... 82.8% 80.7% 53.3% Year ended December 31...................... 91.5% 83.4% 71.0% After determining that the increase in non-catastrophe property losses experienced in the early months of 2000 was due to underlying loss trends, rather than the normal cyclicality of the property business, management began and has continued to implement pricing, underwriting and loss control initiatives. Although the Company's actions have begun to have a positive impact, with minimal effect on policy retention through the first quarter of 2002, management expects that the full impact of these changes will be realized later in 2002 and beyond. In light of experience and competitive actions in 2001, the Company is continuing to aggressively increase homeowners rates. The Company has also initiated further tightening of underwriting guidelines, expanded reunderwriting of existing policies, implemented coverage and policy form restrictions in all states 24 where permitted, and limited new homeowners business to educators in certain areas. In addition, due to the claims experience in the fourth quarter of 2001, the Company has initiated a program to reinspect a significant portion of its property book of business. The Company also is strengthening its homeowners policies' contract language to further protect the Company against water damage and mold claims. The Company has also begun the process of redesigning its claim handling procedures in order to better control loss costs. Management anticipates that these actions will enable the Company to improve the profitability of its existing book of homeowners business and attract new business that meets its profitability standards. For the first three months of 2002, incurred catastrophe losses for all lines were $0.2 million. For the same period last year, incurred catastrophe losses represented a net benefit of $1.4 million due to favorable development of reserves for 2000 catastrophe losses. The voluntary automobile loss ratio excluding catastrophe losses was 75.3% for first quarter of 2002, compared to 76.0% for the same period last year. The increase in average voluntary automobile premium per policy in the current quarter kept pace with the increase in average current accident year loss costs. The annuity benefits in the first three months of 2002 and 2001 represented mortality experience on annuity contracts on payout status for the respective periods. Life mortality experience in the current period was slightly better than a year earlier. Liabilities for future benefits on life and annuity policies are established in amounts adequate to meet the estimated future obligations on policies in force. Liabilities for future policy benefits on certain life insurance policies are computed using the net level premium method and are based on assumptions as to future investment yield, mortality and withdrawals. Mortality and withdrawal assumptions for all policies have been based on various actuarial tables which are consistent with the Company's own experience. Liabilities for future benefits on annuity contracts and certain long-duration life insurance contracts are carried at accumulated policyholder values without reduction for potential surrender or withdrawal charges. In the event actual experience varies from the estimated liabilities, adjustments are charged or credited to income for the period in which the adjustments are made. As disclosed in the Company's Annual Report on Form 10-K for 2001, early in that year management discovered some deficiencies in the tax compliance testing procedures associated with certain of the Company's life insurance policies that could jeopardize the tax status of some of those life policies. Deficiencies in the Company's computer-based monitoring of premiums, combined with the complexity of certain of the Company's life insurance products, resulted in the acceptance of too much premium for certain policies under the applicable tax test the Company was using. As a result of this discovery, the Company retained outside experts to assist with the investigation and remedy of this issue. The deficiencies in the testing procedures were identified and corrected. The Company is still in the process of quantifying the financial impact of these errors, as well as finalizing the strategy for remedying the problems caused by them. Such a problem is not uncommon in the life insurance industry and will be cured using standard Internal Revenue Service ("IRS") procedures that have been established specifically to address this type of situation. The Company recorded $2.0 million of policyholder benefits in the Corporate and Other segment in the fourth quarter of 2001, as well as $1.0 million of operating expense, which 25 represented the Company's current best estimate of the costs to the Company to resolve these problems. Management anticipates that the strategy for dealing with this issue, as well as the cost amount, will be finalized in the second quarter of 2002. As a result of the tax status issue described above, the complexity of the Company's product underlying the policies in question, and the complexity of administering that product and other life products offered by the Company, management is re-examining the life product portfolio and related administrative efficiencies. Interest Credited to Policyholders Three Months Ended Growth Over March 31, Prior Year ------------------ ----------------- 2002 2001 Percent Amount ---- ---- ------- ------ Annuity .......................... $16.9 $16.9 -- -- Life ............................. 7.2 6.9 4.3% $0.3 ----- ----- ---- Total ......................... $24.1 $23.8 1.3% $0.3 ===== ===== === ==== The fixed annuity average annual interest rate credited decreased to 4.9% for the three months ended March 31, 2002, compared to 5.2% for the same period last year. Offsetting the decline in the rate credited, the average accumulated fixed deposits increased 4.7% for the first three months of 2002, compared to the same period in 2001. Life insurance interest credited increased as a result of continued growth in the interest-sensitive life insurance reserves. Operating Expenses For the first three months of 2002, operating expenses increased $2.9 million, or 9.8%, compared to last year. The higher level of expense was due primarily to an increase in employee retirement costs including $1.3 million of transition expense. In 2001, the Company determined that it would freeze its defined benefit pension plan and move to a defined contribution structure. This change is expected to reduce the Company's pension expense by approximately $3 million per year beginning in 2004. Costs of transitioning to the new structure, based upon assumptions of future events, are estimated to be approximately $5 million and $2 million for the full years 2002 and 2003, respectively, largely from provisions that are expected to be triggered as a result of the higher retirement rate currently being experienced by the Company, coupled with more retirees choosing lump sum distributions. To the extent that actual experience differs from the Company's assumptions, adjustments may be required with the effects of these adjustments charged or credited to income for the period in which the adjustments are made. Effective January 1, 2002, the Company also implemented changes to its employee medical plans to manage that cost. The total corporate expense ratio on a statutory accounting basis was 23.3% for the three months ended March 31, 2002, 1.3 percentage points higher than the same period in 2001. The property and casualty expense ratio, the 16th lowest of the 100 largest property and casualty insurance groups for 2000 (the most recent industry ranking available), was 22.3% for the three months ended March 31, 2002, compared to 21.0% last year. The property and casualty expense ratio reflected that segment's portion of the increase in employee retirement costs. 26 Amortization of Policy Acquisition Expenses and Intangible Assets For the first three months of 2002, the combined amortization of policy acquisition expenses and intangible assets was $15.9 million, compared to the $16.0 million recorded for the same period in 2001. Amortization of intangible assets decreased to $1.3 million for the three months ended March 31, 2002, compared to $1.9 million for the same period in 2001. The decline primarily reflected the elimination of amortization of goodwill as the result of the adoption of Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." Amortization of goodwill was $0.4 million and $1.6 million for the three months ended March 31, 2001 and the year ended December 31, 2001, respectively. Policy acquisition expenses amortized for the three months ended March 31, 2002 of $14.6 million were $0.5 million more than the same period last year primarily from the property and casualty segment. Over the past 12 months, this segment has experienced accelerated growth in business and the acquisition cost amortization period matches the terms of the insurance policies (six and twelve months). Policy acquisition costs, consisting of commissions, premium taxes and other costs, which vary with and are primarily related to the production of business are capitalized and amortized on a basis consistent with the type of insurance coverage. For investment (annuity) contracts, acquisition costs, and also the value of annuity business acquired in the 1989 acquisition of the Company, are amortized over 20 years in proportion to estimated future gross profits. Capitalized acquisition costs for interest-sensitive life contracts are also amortized over 20 years in proportion to estimated future gross profits. The most significant assumptions that are involved in the estimation of future gross profits include future market performance and business surrender/lapse rates. In the event actual experience differs significantly from assumptions or assumptions are significantly revised, the Company may be required to record a material charge or credit to amortization expense for the period in which the adjustment is made. Income Tax Expense The effective income tax rate on income including realized investment gains and losses was 31.0% for the three months ended March 31, 2002, compared to 29.8% for the same period last year. Income from investments in tax-advantaged securities reduced the effective income tax rate 3.7 and 5.1 percentage points for the three months ended March 31, 2002, and 2001, respectively. Operating Income The Company defines operating income as net income before the after-tax impact of realized investment gains and losses and non-recurring items. There were no non-recurring items in either the first quarter of 2002 or 2001. 27 Compared to the first quarter of 2001, current period operating income benefitted from mild weather, the growing impact of property and casualty rate increases on earned premiums, the positive impact of the Company's restructuring of its Massachusetts automobile business, and the discontinuance of goodwill amortization with the adoption of SFAS No. 142 on January 1, 2002. Offsetting these positive items were an increase in operating expenses due primarily to transition costs related to changes in the Company's retirement plans, which are expected to have a favorable long-term impact on employee benefit costs, and an unfavorable prior year comparison of catastrophe losses due to a release of fourth quarter 2000 catastrophe reserves in the first quarter of 2001. Consistent with previous indications, at the time of this Report on Form 10-Q management anticipates that 2002 full year operating income will be within a range of $1.15 to $1.25 per share. As described throughout this discussion of Results of Operations, certain of the Company's significant accounting measurements require the use of estimates and assumptions. As additional information becomes available, adjustments may be required. Those adjustments are charged or credited to income for the period in which the adjustments are made. Operating income by segment was as follows:
Three Months Ended Growth Over March 31, Prior Year ------------------ ---------------- 2002 2001 Percent Amount ------ ------ ------- ------ Property & casualty Before catastrophe losses .................. $ 7.3 $ 7.0 4.3% $ 0.3 Catastrophe losses, after tax .............. (0.1) 0.9 (1.0) ------ ------ ----- Total including catastrophe losses ...... 7.2 7.9 -8.9% (0.7) Annuity ....................................... 4.7 4.2 11.9% 0.5 Life .......................................... 3.8 4.0 -5.0% (0.2) Corporate and other expense ................... (0.5) (0.8) 0.3 Interest expense, after tax ................... (1.3) (1.6) 0.3 ------ ------ ----- Total ................................... $ 13.9 $ 13.7 1.5% $ 0.2 ====== ====== ===== Total before catastrophe losses ......... $ 14.0 $ 12.8 9.4% $ 1.2 ====== ====== ===== Property and casualty statutory combined ratio: Before catastrophe losses ................ 100.2% 100.2% -- After catastrophe losses ................. 100.4% 99.1% 1.3%
Property and casualty segment operating income was lower than in the first three months of 2001 reflecting favorable weather in the current period offset by the increase in the Company's employee retirement costs and the unfavorable prior year comparison of catastrophe losses. Development of prior years' reserves had no net impact on earnings for the first quarters of 2002 and 2001. The primary factor which affected earnings in the first quarter of 2001 was a high level of non-catastrophe weather-related losses in the homeowners line of business. 28 For the first three months of 2002, the Company's increase in average voluntary automobile insurance premium per policy kept pace with the increase in average loss costs for the current accident year. The Company's plans to implement tiered rating systems based on customers' credit ratings for automobile and homeowners business remain on track, which management expects will have a positive impact on both loss ratios and business growth for these products in the Company's target market. The Company is continuing to approach the pricing and underwriting of its homeowners products aggressively, to accelerate margin recovery. And, due to homeowners loss experience in the fourth quarter of 2001, the Company identified additional initiatives. Actions include further tightening of underwriting guidelines, expanded reunderwriting of existing policies, coverage and policy form restrictions in all states where permitted, limited coverage of new homeowners business to educators in certain areas, reinspection of the homeowners book of business and redesign of the Company's claim handling procedures. The property and casualty combined ratio before catastrophes of 100.2% was equal to the first three months of 2001 including improvements in the loss ratios for both voluntary automobile and homeowners, offset by an increase in the expense ratio including the increase in the Company's employee retirement costs. Catastrophe losses in the first three months of 2002 were $0.1 million after tax. For the first quarter of 2001, incurred catastrophe losses represented a net benefit of $0.9 million after tax due to favorable development of reserves for 2000 catastrophe losses. Annuity segment operating income in the first three months of 2002 increased compared to the prior year due primarily to improvement in the net interest margin. Fee income related to variable annuities was comparable to the first quarter of 2001. Annuity segment operating expenses in the current period reflected this segment's portion of the Company's increase in employee retirement costs. Variable annuity accumulated funds on deposit were $1.0 billion at March 31, 2002, $101.2 million, or 10.8%, greater than 12 months earlier. Fixed annuity accumulated cash value of $1.4 billion was $64.8 million, or 4.8%, greater than March 31, 2001. Life insurance earnings decreased slightly compared to the first three months of 2001 including this segment's portion of the Company's increase in employee retirement costs. Mortality experience on ordinary life business was slightly better than expected in the current period. The reduction in the operating loss for the corporate and other segment compared to the first three months of 2001 primarily reflected the change in accounting, which was effective January 1, 2002, that eliminated goodwill amortization. For the three months ended March 31, 2001, amortization of goodwill was $0.4 million, or 1 cent per share. 29 Net Income Net Income Per Share, Diluted Three Months Ended Growth Over March 31, Prior Year ------------------ ----------------- 2002 2001 Percent Amount ---- ---- ------- ------ Operating income................. $0.34 $0.34 -- -- Realized investment gains........ 0.04 0.07 -42.9% $(0.03) ----- ----- ------ Net income.................... $0.38 $0.41 -7.3% $(0.03) ===== ===== ====== Net income, which includes net realized investment gains and losses for the first three months ended March 31, 2002 decreased by $1.1 million, or 6.6%, and net income per diluted share decreased by 7.3% compared to the same period in 2001. This change included the $0.2 million increase in operating income. After-tax realized investment gains were lower in the current period as described in "Results of Operations -- Realized Investment Gains and Losses." Return on shareholders' equity was 8% based on operating income and 5% based on net income for the 12 months ended March 31, 2002. Liquidity and Financial Resources Special Purpose Entities At March 31, 2002 and 2001, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, the Company is not exposed to any financing, liquidity, market or credit risk that could arise if the Company had engaged in such relationships. Related Party Transactions The Company does not have any contracts or other transactions with related parties that are required to be reported under the applicable securities laws and regulations. Ariel Capital Management, Inc., HMEC's largest shareholder with 21% of the common shares outstanding, is the investment adviser for two of the mutual funds offered to the Company's annuity customers. And, T. Rowe Price Associates, Inc., HMEC's second largest shareholder with 7% of the common shares outstanding, is the investment advisor for two of the mutual funds offered to the Company's annuity customers. 30 Investments The Company's investment strategy emphasizes investment grade, publicly traded fixed income securities. At March 31, 2002, fixed income securities represented 95.6% of investments excluding the securities lending collateral. Of the fixed income investment portfolio, 95.2% was investment grade and 99.8% was publicly traded. The average quality of the total fixed income portfolio was A+ at March 31, 2002. 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 4.9 years at March 31, 2002 and 5.0 years at December 31, 2001. 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 79% 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 comparable to the first three months of 2001. The Company has entered into various operating lease agreements, primarily for computer equipment, computer software and real estate (agency and claims offices across the country and portions of the home office complex). These leases have varying commitment periods with most in the 1 to 3 year range. Operating cash flow reflects payments on these leases of approximately $2 million for each of the three months ended March 31, 2002 and 2001. It is anticipated that the Company's payments under operating leases for the full year 2002 will be comparable to prior years' payments of approximately $8 million. The Company does not have any other arrangements that expose it to material liability that are not recorded in the financial statements. Payment of principal and interest on debt, fees related to the catastrophe-linked equity put option and reinsurance agreement, dividends to shareholders and parent company operating expenses, as well as the share repurchase program, are dependent upon the ability of the insurance subsidiaries to pay cash dividends or make other cash payments to HMEC, including 31 tax payments pursuant to tax sharing agreements. The insurance subsidiaries are subject to various regulatory restrictions which limit the amount of annual dividends or other distributions, including loans or cash advances, available to HMEC without prior approval of the insurance regulatory authorities. Dividends which may be paid by the insurance subsidiaries to HMEC during 2002 without prior approval are approximately $40 million, of which $5 million had been paid as of March 31, 2002. Although regulatory restrictions exist, dividend availability from subsidiaries has been, and is expected to be, 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 payment of dividends, the receipt and withdrawal of funds by annuity contractholders, repurchases of the Company's common stock, and borrowings and repayments under the Company's debt facilities. Fees related to the catastrophe-linked equity put option and reinsurance agreement, which augments its other reinsurance program, have been charged directly to additional paid-in capital. For the first three months ended March 31, 2002, receipts from annuity contracts increased 7.3%. Annuity contract maturities and withdrawals decreased $12.7 million, or 23.6%, compared to the same period last year including decreases of 30.7% and 29.3% in surrenders of variable and fixed annuities, respectively. Reflecting continued improvement in recent quarterly trends, cash value retention for variable and fixed annuities was 93.0% and 94.1%, respectively, for the 12 month period ended March 31, 2002. Net transfers to variable annuity assets increased $13.5 million compared to the same period last year reflecting the Company's expansion of its variable investment options. The Company has not repurchased shares of its common stock under its stock repurchase program since the third quarter of 2000, consistent with management's stated intention to utilize excess capital to support the Company's strategic growth initiatives. Historically, the repurchase of shares was financed through use of cash and, when necessary, the Bank Credit Facility. However, the Company has not utilized the Bank Credit Facility for share repurchases since the second quarter of 1999. As of March 31, 2002, $96.3 million remained authorized for future share repurchases. Capital Resources The Company has determined the amount of capital which is needed to adequately fund and support business growth, primarily based on risk-based capital formulas including those developed by the National Association of Insurance Commissioners ("NAIC"). Historically, the Company's insurance subsidiaries have generated capital in excess of such needed capital. These excess amounts have been paid to HMEC through dividends. HMEC has then utilized 32 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 $591.4 million at March 31, 2002, including $99.8 million of long-term debt and $53.0 million of short-term debt. Total debt represented 25.5% of capital (excluding unrealized investment gains and losses) at March 31, 2002, which was slightly higher than the Company's target operating range of 20% to 25%. Shareholders' equity was $438.6 million at March 31, 2002, including an unrealized loss in the Company's investment portfolio of $6.8 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 $918.7 million and $22.51, respectively, at March 31, 2002. Book value per share was $10.75 at March 31, 2002, $10.92 excluding investment fair value adjustments. At March 31, 2001, book value per share was $11.57, $10.97 excluding investment fair value adjustments. The decrease over the 12 months included the effects of unrealized investment gains and losses and an increase in the Company's minimum pension liability recorded at December 31, 2001. 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") (BBB+), Fitch, Inc. ("Fitch") (A-), Moody's Investors Service, Inc. ("Moody's") (Baa2), and A.M. Best Company, Inc. ("A.M. Best") (bbb+), with each indicating the outlook for their rating as "Stable", and are traded on the New York Stock Exchange (HMN 6 5/8). As of both March 31, 2002 and December 31, 2001, the Company had short-term debt of $53.0 million outstanding under the Bank Credit Facility. The amended Bank Credit Facility allows unsecured borrowings of up to $65.0 million at Interbank Offering Rates plus 0.75%, or 2.7% at March 31, 2002. In November 2001, management completed negotiation of an amendment to the existing Bank Credit Facility extending the maturity from December 31, 2001 to June 30, 2002. The $53.0 million balance outstanding under the Bank Credit Facility was repaid in full on May 14, 2002 utilizing a portion of the proceeds from the issuance of the Convertible Notes as described below. On May 14, 2002, the Company issued $315.8 million face amount (up to $368.5 million face amount if the initial purchasers exercise their overallotment option in full) of 1.425% senior convertible notes due in 2032 at an effective yield of 3.0%. The net proceeds from the sale of the Convertible Notes have been used to repay the Bank Credit Facility and will be used for general corporate purposes and potentially to reduce other corporate indebtedness. Interest on the Convertible Notes is payable semi-annually at a rate of 1.425% beginning November 14, 2002 until May 14, 2007. After that date, cash interest will not be paid on the Convertible Notes prior to maturity unless contingent cash interest becomes payable. Contingent cash interest becomes payable if the average market price of a Convertible Note for a five trading day measurement period preceding the applicable six-month period equals 120% or more of the sum of the 33 Convertible Note's issue price, accrued original issue discount and accrued cash interest, if any, for such Convertible Note. The contingent cash interest payable per Convertible Note in respect of any quarterly period within any six-month period will equal the then applicable conversion rate multiplied by the greater of (i) $0.105 or (ii) any regular cash dividends paid by the Company per share on HMEC's common stock during that quarterly period. The Convertible Notes will be convertible at the option of the holders, if the conditions for conversion are satisfied, into shares of HMEC's common stock at a conversion price of $26.74 (which represents a conversion premium of 30% over the last reported bid price on the New York Stock Exchange National Market on May 8, 2002). The Convertible Notes are redeemable by HMEC in whole or in part, at any time on or after May 14, 2007, at redemption prices equal to the sum of the issue price plus accrued original issue discount and accrued cash interest, if any, on the applicable redemption date. The holders of the Convertible Notes may require HMEC to purchase all or a portion of their Convertible Notes on either May 14, 2007, 2012, 2017, 2022, or 2027 at stated prices plus accrued cash interest, if any, to the purchase date. HMEC may pay the purchase price in cash or shares of HMEC common stock or in a combination of cash and shares of HMEC common stock. The Convertible Notes were privately offered only to qualified institutional buyers under Rule 144A under the Securities Act of 1933 and outside the United States of America ("U.S.") to non-U.S. persons under Regulation S under the Securities Act of 1933, and may not be offered or sold in the U.S. absent registration or an applicable exemption from registration requirements. The Notes have an investment grade rating from S&P (BBB+), Moody's (Baa2) and A.M. Best (bbb+). HMEC intends to register the Notes with the Securities and Exchange Commission prior to December 31, 2002. Subsequent to the issuance of the Convertible Notes and the repayment of the existing Bank Credit Facility and prior to June 30, 2002, HMEC expects to enter into a new bank credit agreement for a $25.0 million three-year senior unsecured revolving credit facility with covenants similar to those under the existing Bank Credit Facility. There can be no assurance that HMEC will finalize the terms of the new bank credit agreement or that HMEC will enter into the new bank credit agreement. The Company's ratio of earnings to fixed charges for the three months ended March 31, 2002 was 11.8x compared to 10.5x for the same period in 2001. Total shareholder dividends were $4.3 million for the three months ended March 31, 2002. In February 2002 and May 2002, the Board of Directors announced regular quarterly dividends of $0.105 per share. The Company maintains an excess and catastrophe treaty reinsurance program. The Company reinsures 95% of catastrophe losses above a retention of $8.5 million per occurrence up to $80 million per occurrence. In addition, the Company's predominant insurance subsidiary for property and casualty business written in Florida reinsures 90% of hurricane losses in that state above a retention of $11.0 million up to $47.4 million with the Florida Hurricane Fund, based on the Fund's resources. Through December 31, 2001, these catastrophe reinsurance programs were augmented by a $100 million equity put and reinsurance agreement. This equity put provided 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 exceeded the catastrophe reinsurance program coverage limit. Before tax benefits, the equity put provided a source of capital for up to $154 million of catastrophe losses above the reinsurance coverage limit. For liability coverages including the educator excess professional liability policy, the 34 Company reinsures each loss above a retention of $500 up to $20 million. The Company also reinsures each property loss, including catastrophe losses that in the aggregate are less than the retention levels above, above a retention of $250 up to $2.5 million in 2001 and 2002. Effective May 7, 2002, the Company entered into a replacement equity put and reinsurance agreement with a subsidiary of Swiss Reinsurance Company. The Swiss Re Group is rated "A++ (Superior)" by A.M. Best. Under the 36-month agreement, the equity put coverage of $75.0 million provides a source of capital for up to $115.0 million of pretax catastrophe losses above the reinsurance coverage limit. The Company also has the option, in place of the equity put, to require a Swiss Re Group member to issue a 10% quota share reinsurance coverage of all of the Company's property and casualty book of business. Total fees related to this equity put option, which are charged directly to additional paid-in capital, increased to 145 basis points in 2002 from 95 basis points in 2001 under the prior agreement; however, in 2002 the agreement is effective only for the last eight months of the year. The agreement states certain conditions to Horace Mann's exercise of the equity put option including: (i) the Company's shareholders' equity, adjusted to exclude goodwill, can not be less than $215.0 million after recording the first triggering event; (ii) the Company's total debt as a percentage of capital can not be more than 47.5% prior to recording the triggering event; and (iii) the Company's S&P financial strength rating can not be below "BBB" prior to a triggering event. The Company's S&P financial strength rating was "A+" at May 7, 2002. The cost of the Company's catastrophe reinsurance coverage program for the full year 2002 increased approximately 50%, or $2.0 million, compared to full year 2001 as a result of the effects on the reinsurance market of the September 11, 2001 terrorist attacks. However the increase was manageable and 48% of the Company's traditional coverage for catastrophe losses has rates which are fixed through 2003. The cost of the Company's entire property and casualty reinsurance program for the full year 2002 increased approximately 35%, or $2.5 million, compared to full year 2001. Insurance Financial Ratings and IMSA Certification The Company's principal insurance subsidiaries are rated by various rating agencies. Additional information regarding the rating processes and ratings definitions for each agency is included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001 in "Business -- Insurance Financial Ratings and IMSA Certification." Each of the ratings below is unchanged from December 31, 2001 with the exception of A.M. Best's rating for the Company's property and casualty subsidiaries. On May 9, 2002 following its annual review of Horace Mann's ratings, A.M. Best Company, Inc. ("A.M. Best") announced that it was affirming the "A (Excellent)" financial strength rating of the Company's principal life insurance subsidiary. A.M. Best downgraded the financial strength ratings of the Company's property and casualty subsidiaries one notch from "A+ (Superior)" to "A (Excellent)" reflecting capitalization of these subsidiaries compared to A.M. Best's standard for the Superior rating and the impact on earnings in 2000 and 2001 of prior years' reserve strengthening. A.M. Best has identified the outlook for the ratings as "Stable." Each of HMEC's principal insurance subsidiaries is rated "A+ (Strong)" for financial strength by Standard & Poor's Corporation ("S&P") with a ratings outlook of "Stable", with the exception of Horace Mann Lloyds which is not yet rated by S&P. 35 Each of HMEC's principal insurance subsidiaries is rated "AA- (Very Strong)" for financial strength by Fitch, Inc. ("Fitch") with a rating outlook of "Stable". Moody's Investors Service, Inc. ("Moody's") has assigned a financial strength rating of "A2 (Good)" to each of HMEC's principal subsidiaries, with the exception of Horace Mann Lloyds which is not yet rated by Moody's. As of 2001, Horace Mann is one of only two insurance groups that have been named to The Ward's Financial Group's ("Wards") Top 50 for both its property and casualty and life subsidiaries in each of the last eight years. Identified annually, the Top 50 represent benchmark groups of 50 life insurance companies and 50 property and casualty insurance companies that, over the prior five years, have in Ward's opinion excelled at balancing safety, consistency and performance. In July 2001, Horace Mann Life Insurance Company, the Company's principal life insurance subsidiary, earned membership in the Insurance Marketplace Standards Association ("IMSA"). HMLIC is an IMSA member for three years, after which it must demonstrate continuous improvement and repeat the self- and independent assessment process to retain its membership. As of March 31, 2002, fewer than 250 companies had earned IMSA membership. 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 three months of 2002 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 2001 Form 10-K. Recent Accounting Changes In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations", effective for fiscal years beginning after June 15, 2002. The accounting practices in this statement apply to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset. This statement will not have a material impact on the Company because it does not own a significant amount of property and equipment. 36 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. PART II: OTHER INFORMATION Item 4: Submission of Matters to a Vote of Security Holders None. Item 6: Exhibits and Reports on Form 8-K Exhibit No. Description ------- ----------- (a) The following items are filed as Exhibits. Management contracts and compensatory plans are indicated by an asterisk (*). (4) Instruments defining the rights of security holders, including indentures: 4.1 Certificate of Designations for HMEC Series A Cumulative Convertible Preferred Stock (included in Exhibit 10.4). (10) Material contracts: 10.1* Horace Mann Supplemental Employee Retirement Plan, 2002 Restatement. 10.2* Horace Mann Executive Supplemental Employee Retirement Plan, 2002 Restatement. 10.3* Horace Mann Nonqualified Supplemental Money Purchase Pension Plan. 10.4 Catastrophe Equity Securities Issuance Option and Reinsurance Option Agreement entered by and between HMEC, Swiss Re Financial Products Corporation (Option Writer) and Swiss Reinsurance America Corporation (Reinsurance Option Writer), dated May 7, 2002. (11) Statement re computation of per share earnings. (15) KPMG LLP letter regarding unaudited interim financial information. (b) No reports on Form 8-K were filed by the Company during the first quarter of 2002. 37 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HORACE MANN EDUCATORS CORPORATION (Registrant) Date May 14, 2002 /s/ Louis G. Lower II ----------------------------- ------------------------------------------- Louis G. Lower II President and Chief Executive Officer Date May 14, 2002 /s/ Peter H. Heckman ----------------------------- ------------------------------------------- Peter H. Heckman Executive Vice President and Chief Financial Officer Date May 14, 2002 /s/ Bret A. Conklin ----------------------------- ------------------------------------------- Bret A. Conklin Senior Vice President and Controller 38 EX-10.1 3 dex101.txt SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN Exhibit 10.1 HORACE MANN SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN (SERP) 2002 RESTATEMENT TABLE OF CONTENTS
Page ---- ARTICLE I. - GENERAL .................................................... 1 1.1 Establishment ................................................. 1 1.2 Purpose ....................................................... 1 1.3 Application of Plan ........................................... 1 1.4 Sponsorship ................................................... 1 ARTICLE II. - DEFINITIONS ............................................... 1 2.1 "Committee" ................................................... 1 2.2 "Company" ..................................................... 2 2.3 "Compensation" ................................................ 2 2.4 "Eligible Employee" ........................................... 2 2.5 "Employer" or "HMSC " ......................................... 2 2.6 "ERISA" ....................................................... 2 2.7 "Final Average Earnings" ...................................... 2 2.8 "HMPP" ........................................................ 2 2.9 "Hour of Service" ............................................. 2 2.10 "Internal Revenue Code" or "Code" ............................. 2 2.11 "Joint and 50% Survivor Annuity" .............................. 2 2.12 "Joint and Survivor Annuity" .................................. 2 2.13 "MPPP" ........................................................ 2 2.14 "Normal Form of Payment" ...................................... 2 2.15 "Participant" ................................................. 2 2.16 "Payment Date" ................................................ 3 2.17 "Plan" ........................................................ 3 2.18 "Plan Year" ................................................... 3 2.19 "Predecessor Employer" ........................................ 3 2.20 "Primary Social Security Benefit" ............................. 3 2.21 "QDRO" ........................................................ 3 2.22 "Spouse" ...................................................... 3 2.23 "Termination of Employment" ................................... 3 2.24 "Years of Credited Service " or "Credited Service " ........... 3 2.25 "Years of Eligible Service " or "Eligible Service " ........... 3 ARTICLE III. - PARTICIPATION ............................................ 3 3.1 Becoming a Participant ........................................ 3 3.2 Reemployment .................................................. 3 3.3 Ceasing to be a Participant ................................... 4 ARTICLE IV. - ELIGIBILITY FOR AND AMOUNT OF RETIREMENT BENEFITS ......... 4 4.1 Eligibility ................................................... 4 4.2 Vesting ....................................................... 5 4.3 Retirement Benefit Calculation ................................ 5 4.4 Commencement of Retirement Benefits ........................... 6
i ARTICLE V. - DEATH BENEFITS .............................................. 6 5.1 Entitlement to Death Benefits. ................................. 6 5.2 Claiming Death Benefits ........................................ 6 ARTICLE VI. - FORM AND COMMENCEMENT OF RETIREMENT BENEFITS ............... 7 6.1 Form and Commencement .......................................... 7 6.2 Participant Elections .......................................... 7 6.3 Hardship ....................................................... 7 6.4 Facility of Payment ............................................ 8 6.5 Effect of Return of Benefit Checks ............................. 8 6.6 Small Pensions ................................................. 8 ARTICLE VII. - PLAN FINANCING ............................................ 8 7.1 Funding ........................................................ 8 7.2 Employer Contributions ......................................... 9 7.3 Benefits Payable Only From Corporate Assets .................... 9 ARTICLE VIII. - ADMINISTRATION ........................................... 9 8.1 Pension Committee .............................................. 9 8.2 Plan Administrator ............................................. 9 8.3 Liability ...................................................... 9 8.4 Claims Procedure ............................................... 9 ARTICLE IX. - AMENDMENT AND TERMINATION .................................. 10 9.1 Amendment or Termination ....................................... 10 9.2 Change of Control .............................................. 10 9.3 Corporate Successors ........................................... 11 ARTICLE X. - MISCELLANEOUS PROVISIONS .................................... 11 10.1 Maximum Pensions ............................................... 11 10.2 Nonalienation of Benefits ...................................... 11 10.3 No Contract of Employment ...................................... 12 10.4 Termination of Employment ...................................... 12 10.5 No Duplication of Benefits ..................................... 12 10.6 Limitations on Liability and Indemnification ................... 12 10.7 Tax Implications ............................................... 12 10.8 Reduction for Overpayment ...................................... 12 10.9 No Trust Relationship .......................................... 12 10.10 Gender and Number .............................................. 13 10.11 Invalidity of Certain Provisions ............................... 13 10.12 Headings ....................................................... 13 10.13 Law Governing .................................................. 13
-ii- ARTICLE I. - GENERAL 1.1 Establishment. Effective January 1, 1992, Horace Mann Educators Corporation and Horace Mann Service Corporation (collectively referred to as the "Company") established an unfunded, deferred compensation plan on behalf of certain designated management or highly compensated employees of the Company or any subsidiary of the Company which has adopted the Horace Mann Pension Plan ("HMPP"). This document defines the provisions of such plan and shall be known as the "Horace Mann Supplemental Employee Retirement Plan" (the "Plan" or "SERP"). Effective February 12, 1997, the Plan was amended and restated to include the same vesting provisions as contained in the HMPP. The Plan was amended effective March 31, 2002, to provide that no Participant will earn or accrue benefits under the Plan after March 31, 2002. This amendment and restatement of the Plan is effective March 31, 2002. 1.2 Purpose. The Company maintains the HMPP which is intended to meet the requirements of a "qualified" retirement plan under Section 401(a) of the Internal Revenue Code of 1986, as amended ("Code"). The HMPP was amended effective January 1, 1992, to contain a new benefit formula designed to comply with the requirements for a qualified retirement plan as a result of the Tax Reform Act of 1986 and other legislative and regulatory developments. As of December 31, 1991, the HMPP's original primary offset formula was frozen. This Plan was established to replace benefits lost under the HMPP due to diminution of benefit accruals for the Eligible Employees. This Plan is intended to be an unfunded, deferred compensation plan for this select group of management or highly compensated employees, as described in Sections 201(2), 301(a)(3), and 401(a)(1) of the Employee Retirement Income Security Act of 1974 ("ERISA"). The purpose of the 2002 amendment and restatement is to effect the amendment to the Plan freezing benefit accruals effective as of March 31, 2002. 1.3 Application of Plan. The terms of this Plan are applicable only to the Eligible Employees who were in the active employ of the Company before August 29, 1989 and after January 1, 1992. 1.4 Sponsorship. Horace Mann Service Corporation maintains and sponsors the Plan. ARTICLE II. - DEFINITIONS The following terms, whenever used in the following capitalized form, shall have the meaning set forth below unless the context clearly indicates otherwise: 2.1 "Committee" means the Committee appointed pursuant to the terms of the HMPP, with the responsibility and authority described therein. -1- 2.2 "Company" means Horace Mann Educators Corporation and Horace Mann Service Corporation and any successors thereto. 2.3 "Compensation" means the Compensation recognized for a Participant under the HMPP at the same point in time. The Compensation of a Participant earned after March 31, 2002, shall not be taken into account for any purpose under the Plan. 2.4 "Eligible Employee" means those designated management or highly compensated Employees in the Appendix, but only for the period prior to their Termination of Employment. 2.5 "Employer" or "HMSC" means Horace Mann Service Corporation. 2.6 "ERISA" means the Employee Retirement Income Security Act of 1974, as from time to time amended. 2.7 "Final Average Earnings" means the Final Average Earnings recognized for a Participant under the HMPP at the same point in time. In determining a Participant's Final Average Earnings, the Compensation and service of a Participant after March 31, 2002 shall not be taken into account. 2.8 "HMPP" means the Horace Mann Pension Plan, as amended by the 2002 restatement thereof and as further amended from time to time. 2.9 "Hour of Service" means each hour which an Eligible Employee is directly or indirectly paid or entitled to payment by the Employer for the performance of duties. Hour of Service shall not include any hour after March 31, 2002. 2.10 "Internal Revenue Code" or "Code" means the Internal Revenue Code of 1986, as amended, and any subsequent Internal Revenue Code. If there is a subsequent Internal Revenue Code, any references herein to Internal Revenue Code sections shall be deemed to refer to comparable sections of any subsequent Internal Revenue Code. 2.11 "Joint and 50% Survivor Annuity" means a reduced monthly benefit payable as defined in the HMPP. 2.12 "Joint and Survivor Annuity" means a reduced Retirement Benefit payable as defined in the HMPP. 2.13 "MPPP" means the Horace Mann Money Purchase Pension Plan, as amended by the 2002 restatement thereof and as further amended from time to time. 2.14 "Normal Form of Payment" has the same meaning as defined in the HMPP. 2.15 "Participant" means an Eligible Employee or former Eligible Employee who has an Accrued Benefit under the Plan. -2- 2.16 "Payment Date" means the relevant date for determining when the retirement benefits or death benefits shall be paid and the form of payment and shall be the first day of the month next following a Participant's Termination of Employment. 2.17 "Plan" means the Plan as herein set forth, or as may be amended hereafter from time to time. 2.18 "Plan Year" means each twelve-consecutive month period beginning January 1, 1992. 2.19 "Predecessor Employer" means CIGNA Corporation and each other company for whom employment would earn "eligible service" under the Prior Plan as defined in the HMPP. 2.20 "Primary Social Security Benefit" means the estimated monthly primary insurance amount as defined in Appendix I to the HMPP. 2.21 "QDRO" means a domestic relations order which the Committee has determined to be a qualified domestic relations order within the meaning of Section 414(p) of the Code. 2.22 "Spouse" means a person who is the Participant's Spouse under the HMPP. 2.23 "Termination of Employment" occurs when a person ceases to be employed by HMSC. 2.24 "Years of Credited Service" or "Credited Service" means only those periods of service as defined in the HMPP for purposes of benefit calculation. Any service beyond 30 years will not be included in the benefit calculation. A Participant will earn no Credited Service under this Plan after March 31, 2002. 2.25 "Years of Eligible Service" or "Eligible Service" means the number of full and fractional Years of Eligible Service recognized for a Participant as defined under the HMPP. ARTICLE III. - PARTICIPATION 3.1 Becoming a Participant. Each Eligible Employee shall initially become a Participant on January 1, 1992. 3.2 Reemployment. (a) Following Retirement. If a Participant retires from the Company, and subsequently is re-employed as a full time, part time or temporary employee who works more than 10 days per month, the Participant's periodic SERP benefit will cease until he re-retires. Upon his subsequent retirement, his prior and additional service and earnings, plus any additional credit earned under the qualified plan(s), but not any additional service and earnings or any additional credit earned with respect to periods after March 31, 2002, will be included in the recalculation of the Participant's SERP benefit. -3- In the event the Participant retires and is re-employed and works less than 10 days a month, the Participant's periodic SERP payment will continue. (b) Following Termination of Employment for reason(s) other than Retirement. If an Eligible Employee's Termination of Employment is for reason(s) other than Early or Normal Retirement, then upon re-employment on or prior to March 31, 2002, any prior service will be credited as it is credited under the HMPP. However, to the extent that the Participant received a Lump Sum distribution under the SERP, as defined in the HMPP, the Participant will not receive credit under this Plan for that prior service. 3.3 Ceasing to be a Participant. A person will cease to be a Participant with respect to his Accrued Benefit earned prior to his Termination of Employment: (a) if he becomes a Participant in the Executive Supplemental Employee Retirement Plan (ESERP) then all benefits under this Plan will be forfeited; (b) if he loses all of his Years of Credited Service under the HMPP; or (c) if he dies. ARTICLE IV. - ELIGIBILITY FOR AND AMOUNT OF RETIREMENT BENEFITS 4.1 Eligibility. Benefits are payable under the SERP only if the Participant separates from service from the Company and would be considered to be vested under the HMPP. That eligibility would include early, normal, and postponed retirement. As defined in the HMPP: (a) For employees who separate from service and are immediately eligible for retirement benefits: (i) Normal Retirement Date is the first day of the month coincident with or next following the month in which the Participant is at least 65 years and has at least 5 years of service; (ii) Early Retirement Date is the first day of the month coincident with or following the month in which the Participant is at least 55 years and has at least 10 years of service. Benefits will be reduced according to the Early Retirement Adjustment Factor Table as contained in the HMPP; or (iii) Postponed Retirement Date is the first day of the month coincident with or next following the Participant's termination of employment with the Company after his Normal Retirement Date, and until March 31, 2002, the Participant will continue to accrue service under this Plan (up to 30 years) and eligible compensation. -4- (b) For employees who separate from service, who are vested but not yet eligible for retirement benefits: (i) Normal vested benefits are payable as of the first day of the month coincident with or next following the Participant's 65th birthday and the Participant has at least 5 years of service and are calculated in the same manner as provided in the HMPP at the time of the Participant's separation from service; or (ii) Early vested benefits are payable as of the first day of the month coincident with or following the month in which the Participant is at least 55 years and has at least 10 years of service. Benefits are calculated in the same manner as provided in the HMPP at the time of the Participant's separation from service and will be reduced according to the Deferred Vested Retirement Adjustment Factor Table as contained in the HMPP. 4.2 Vesting. The SERP benefits are subject to the same vesting provisions as described in the HMPP. 4.3 Retirement Benefit Calculation. The purpose of the SERP is to provide in conjunction with benefits payable from the HMPP and the MPPP, a retirement income equal to the benefit provided under the pre-January 1, 1992 HMPP as stated in the "guaranteed benefit" at age 65 years subject to the ceasing of benefit accruals hereunder on March 31, 2002. (a) A Participant who attains his Normal Retirement Date as an Eligible Employee shall have a retirement benefit equal to his Accrued Benefit, defined in the same manner as the Accrued Benefit in the HMPP. The SERP base benefit formula is: *an average of the Participant's highest 36 consecutive months of Compensation; *times 2%; *times Years of Credited Service under the HMPP (up to 30 years); *minus 50% of the Primary Social Security Benefit; *equals the Participant's lifetime only benefit at age 65 years. (b) To determine what benefit, if any, is due under the SERP, the following calculation would be performed. *SERP lifetime only base benefit; *minus the lifetime only benefit payable from the HMPP; *minus the lifetime only benefit payable from the MPPP, as defined in the HMPP and as determined as of the Valuation Date specified in the HMPP which shall be no later than March 31, 2002; *equals the lifetime only benefit payable from the SERP. If the combined payable benefits from the HMPP and the MPPP are greater than the SERP, then no benefits are payable from the SERP. This would apply to any other forms of benefits payable (such as, early retirement or surviving spouse -5- options). In addition, the SERP will not pay supplemental benefits due to IRC statutory limitations. 4.4 Commencement of Retirement Benefits. All Retirement Benefits will be paid as of the appropriate Payment Date. In the event payment of a Retirement Benefit does not commence or is not made until after a Participant's Payment Date, the Plan will pay to such Participant all amounts due and unpaid since the Payment Date in accordance with the form of payment in effect on the Payment Date. ARTICLE V. - DEATH BENEFITS 5.1 Entitlement to Death Benefits. (a) Amount and Conditions of Spouse's Death Benefit. Upon the death on or after January 1, 1992 and prior to the Payment Date of any Retirement Benefit, of a Participant who has satisfied the conditions hereinafter described, the Spouse of such Participant shall be entitled to a Death Benefit commencing on the Spouse's Payment Date and in the amount described hereinafter: (i) With respect to a Participant who is not an Eligible Employee on his date of death, and whose death occurs after he has attained his Normal Retirement Date or Early Retirement Date, the Death Benefit shall be an amount that the Participant would have been paid had the Participant commenced to receive Retirement Benefits on what would have been the Participant's Payment Date and had he died the next day. (ii) In the case of a Participant who is an Eligible Employee on the date of his death and who has accrued not less than five (5) Years of Eligible Service, the Death Benefit shall be an amount equal to fifty percent (50%) of the Participant's Accrued Benefit payable in a Single Life Annuity. (b) No Death Benefit. If a Death Benefit is not applicable in accordance with Section 5.1(a), or the Spouse dies before the Payment Date of such Death Benefit, no Death Benefit shall be paid from the Plan. 5.2 Claiming Death Benefits. All Death Benefits will be paid commencing as of the appropriate Payment Date. In the event payment of a Death Benefit does not commence or is not made until after the Payment Date, the Plan will pay to such Spouse all amounts due and unpaid since the Payment Date in accordance with the form of payment automatically in effect on the Payment Date. Notwithstanding the request or election to the contrary, the Plan Administrator shall direct an immediate distribution of a Lump Sum payment (determined pursuant to the appropriate table as defined in the HMPP) if the value of the Death Benefit payable as of the Payment Date does not exceed the applicable limit as defined in the HMPP. -6- ARTICLE VI. - FORM AND COMMENCEMENT OF RETIREMENT BENEFITS 6.1 Form and Commencement. As defined in the HMPP, benefits payable under this Plan shall be paid in the Normal Form of Payment beginning on the Participant's Payment Date. However, in the manner described in Section 6.2, any benefit due to a Participant under this Plan may be paid in the form of a Joint and Survivor Annuity or a Lump Sum payment. Each alternate form of payment shall be in the Actuarial Equivalent as defined in the HMPP of a Single Life Annuity. 6.2 Participant Elections. A Participant (or a Participant's spouse should the Participant pre decease the Participant) shall have the right to elect, by delivery of written notice to the Plan Administrator at any time prior to his Payment Date, not to have the Retirement Benefit paid in the Normal Form of Payment. Any election made by a person pursuant to this Section may be revoked by such person by delivering written notice to the Plan Administrator at any time prior to his Payment Date and, once revoked, may be made again at any time by delivering written notice to the Plan Administrator prior to his Payment Date. An election to receive payment of his Retirement Benefit in the form of a Lump Sum shall be subject to the approval of the Plan Administrator in his or her absolute discretion. The Plan Administrator shall only approve a Lump Sum form of payment when the Participant has demonstrated to the Plan Administrator's satisfaction that he is suffering or will soon be suffering a severe economic hardship due to severe and unexpected financial emergencies, as described in Section 6.3, and he has no readily available resources to meet the hardship. 6.3 Hardship. A severe economic hardship shall include: (a) unreimbursed medical expenses for the Participant, the Participant's Spouse, or the Participant's dependents; (b) unreimbursed expense for the Participant, Participant's Spouse or the Participant's dependents for long-term care, custodial care, or elder care; (c) purchase of a Participant's primary residence; (d) mortgage or rent payments to prevent the Participant's eviction from, or foreclosure on, his principal residence; (e) unreimbursed educational expense for the Participant or the Participant's dependents; (f) payment of expenses in order to prevent the Participant's bankruptcy; (g) in the cases of terminal illness of the Participant, the Spouse or the Participant's Dependents; (h) other financial emergencies of an unforeseen nature, that would impose severe hardship on the Participant as determined in a nondiscriminatory manner. -7- Hardships for purposes of the Plan would not include purchase of a secondary residence or similar types of real estate, meeting outstanding credit indebtedness, mortgage balloon payments, refinancing, and other similar types of events. In order to qualify for a Lump Sum distribution for the above hardships, the Participant must not have any other readily available resources that would meet the Participant's unforeseen, immediate financial need. This would not include the forced selling of property significantly below its true value or incurring a substantial penalty because of an early surrender of a certificate of deposit. If the Participant requests a "hardship" Lump Sum distribution, he will be required to make the request in writing and to submit documentation of the financial need and certification of the unavailability of other resources to meet the need. The review and approval of the hardship Lump Sum distribution is made by the Plan Administrator. Should the Participant's request be denied, and he feels that denial is in error, he should appeal his request within sixty (60) days of the denial to the Plan Administrator and the Chairperson of the Pension Committee. Any decision made subsequent to the appeal review process will be considered final. Subsequent to review and approval, benefits will be paid approximately thirty (30) days later by draft without interest from the Payment Date. 6.4 Facility of Payment. All benefits under the Plan shall be paid to the Participant or Spouse entitled thereto ("Payee") by a check which shall be endorsed personally by the Payee. 6.5 Effect of Return of Benefit Checks. Each person entitled to benefits under this Plan shall furnish the Plan Administrator with the address to which his benefit checks shall be mailed. If any benefit check is mailed by regular United States Mail to the last address appearing on the Plan Administrator's record is returned because the addressee is not found at that address, the mailing of benefit checks shall stop. Thereafter, if the Plan Administrator receives written notice of the proper address of the person entitled to receive such benefit checks and is furnished with evidence satisfactory to the Plan Administrator that such person is living, all amounts then due shall be forwarded to such person. 6.6 Small Pensions. Notwithstanding a Participant's election otherwise or any other provision of this Plan, if the Lump Sum value (determined pursuant to the appropriate Table contained in the HMPP) of a Participant's Retirement Benefit does not exceed the applicable limit prescribed by the HMPP, the Plan Administrator shall make full payment of such Retirement Benefit in a Lump Sum. ARTICLE VII. - PLAN FINANCING 7.1 Funding. All benefits payable under the Plan constitute general corporate obligations of the Employer. The amounts payable under the Plan shall be reflected on the accounting records of the Employer but shall not be construed to create or require the creation of a trust, custodial, or escrow account. No Participant (or Spouse of a Participant) shall have -8- any right, title, or interest whatever in or to any investment reserves, accounts, or funds that an Employer may purchase, establish, or accumulate to aid in providing benefits under this Plan. Nothing contained in this Plan, and no action taken pursuant to its provisions, shall create a trust or fiduciary relationship of any kind between an Employer and a Participant or any other person. Neither a Participant or Spouse of a Participant shall acquire any interest greater than that of an unsecured creditor. 7.2 Employer Contributions. The Employer shall make payments from its general assets to pay benefits under this Plan in such amounts and at such times as the Committee, in accordance with the Plan, shall from time to time direct. 7.3 Benefits Payable Only From Corporate Assets. All benefits provided by this Plan shall be paid solely out of the corporate assets of the Employer. ARTICLE VIII. - ADMINISTRATION 8.1 Pension Committee. The same membership structure, actions, responsibility and authority shall apply to this Plan as described in the HMPP and the MPPP. The decision of the Pension Committee in matters within its jurisdiction shall be final, binding, and conclusive upon the Company and upon each Eligible Employee, Participant, spouse, and every other person or party interested or concerned. 8.2 Plan Administrator. The Plan Administrator shall have the same duties and authority pursuant to this Plan as are described in the HMPP and the MPPP. All affairs of calculation, payment and administration of the SERP are conducted by the Plan Administrator. No benefits will be paid under the terms of this Plan without the authorization of the Plan Administrator. The Plan Administrator shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, controller, counsel or other person employed or engaged by the Company with respect to the Plan. 8.3 Liability. The Committee and Plan Administrator shall be free from all liability, joint and several, for their acts as members of such Committee, except to the extent that they may have committed willful misconduct or otherwise required by federal law. 8.4 Claims Procedure. If a Participant believes he is being denied a benefit to which he is entitled under the Plan, the Participant may file a written request for such benefit with the Committee setting forth his claim. Upon receipt of the claim, the Committee shall advise the Participant that a reply will be forthcoming within ninety (90) days and shall deliver such reply within such period, unless Committee extends the reply period for an additional ninety (90) days for reasonable cause. If the claim is denied in whole or in part, the Committee shall so advise the Participant in writing setting forth: (a) the specific reason or reasons for such denial; (b) the specific reference to pertinent provisions of the Plan on which such denial is based; (c) a description of any additional material or information necessary for the Participant to perfect his claim and an explanation why such material or such information is necessary; and (d) appropriate information as to the steps to be taken if the Participant wishes to submit the claim for review. Any request for review must be submitted in writing by the Participant -9- to the Committee in care of the Committee at its principal place of business within sixty (60) days after the receipt by the Participant of the denial of the Participant's claim. The Participant or his duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Committee. If the Participant does not request a review of the Committee's determination within such sixty (60) day period, the Participant shall be barred and estopped from challenging the Committee's determination. Within sixty (60) days after the Committee's receipt of a request for review, it will review its determination. After considering all materials presented by the Participant, the Committee will render a written opinion, written in a manner calculated to be understood by the Participant, setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of the Plan on which the decision is based. If special circumstances require that the sixty (60) day time period be extended, the Committee will so notify the Participant and will render the decision as soon as possible, but no later than one hundred twenty (120) days after receipt of the request for review. ARTICLE IX. - AMENDMENT AND TERMINATION 9.1 Amendment or Termination. The Company and Pension Committee intend the Plan to be permanent but reserve the right to amend or terminate the Plan when, in the sole opinion of the Pension Committee, such amendment or termination is advisable. Any such amendment or termination shall be made pursuant to a resolution of the Board of Directors of the Company and shall be effective as of the date of such resolution. No amendment or termination of the Plan shall directly or indirectly deprive any Participant or surviving spouse of all or any portion of any SERP Benefit payment which has commenced prior to the effective date of the resolution amending or terminating the Plan. Unless expressly provided for in this Plan, the Pension Committee may only amend, modify, change or revise the Plan by amendment if such amendment could have been adopted under the first paragraph of this Section and it does not cause a change in the level or type of expenses to be made to the Plan or otherwise materially increase the duties and obligation of the Employer with respect to the Plan. 9.2 Change of Control. In the event of a Change of Control of HMEC (the parent company of HMSC), certain protection will apply. Any Participant who is employed by HMSC when a Change of Control occurs, who has signed a severance agreement and who is discharged for reasons other than cause, during a three year period subsequent to the Change of Control, will receive their benefit from the SERP in a lump sum payment equal to their accrued benefit under the SERP, as defined in Article 4, at the time of severance. Should this Plan be terminated and not replaced due to a Change of Control of HMEC, all SERP Participants will receive a lump sum payment as defined in the HMPP of their accrued benefit as of the date of termination of the SERP. All payments will be made in a reasonable period after the triggering event has occurred. A Change of Control shall be deemed to have occurred if (i) there shall be consummated (1) any consolidation or merger of HMEC in which HMEC is not the continuing or surviving corporation, or pursuant to which shares of HMEC's common stock would be converted into cash, securities or other property, other than a merger of HMEC in which -10- no Company shareholder's ownership percentage in the surviving corporation immediately after the merger is less than such shareholder's ownership percentage in HMEC immediately prior to such merger by ten percent (10%) or more, or (2) any sale, lease exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all of the assets of HMEC; (ii) the shareholders of HMEC approve any plan or proposal for the liquidation or dissolution of HMEC which is a part of a sale of assets, merger, or reorganization of HMEC or other similar transaction; (iii) any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is or becomes, directly or indirectly, the "beneficial owner," as defined in Rule l3d-3 under the Exchange Act, of securities of HMEC that represent 51% or more of the combined voting power of HMEC's then outstanding securities; or (iv) a majority of the members of HMEC's Board of Directors are persons who are then serving on the Board of Directors without having been elected by the Board of Directors or having been nominated by HMEC for election by its shareholders. 9.3 Corporate Successors. The Plan shall not be automatically terminated by a transfer or sale of assets of the Company or by the merger or consolidation of the Company into or with any other corporation or other entity, but the Plan shall be continued after such sale, merger or consolidation only if and to the extent that the transferee, purchaser or successor entity agrees to continue the Plan. In the event the Plan is not continued by the transferee, purchaser or successor entity, then the Plan shall terminate subject to the provisions of paragraphs 9.1 and 9.2. ARTICLE X. - MISCELLANEOUS PROVISIONS 10.1 Maximum Pensions. The provisions of Section 14.11 of the HMPP (or successor provisions thereof) which impose the Code Section 415 limits on benefit accruals and all related definitions in the HMPP are incorporated herein by reference, made a part hereof, and made applicable to limit a Participant's Retirement Benefit or his Spouse's Death Benefit hereunder. 10.2 Nonalienation of Benefits. No benefit payable at any time under this Plan shall be subject to any manner to alienation, sale, transfer, assignment, pledge, attachment, or other legal processes, or encumbrance of any kind. Any attempt to alienate, sell, transfer, assign, pledge or otherwise encumber any such benefits, whether currently or thereafter payable, shall be void. No benefit, nor any fund which may be established for the payment of such benefits, shall, in any manner, be liable for or subject to the debts or liabilities of any person entitled to such benefits. If any person shall attempt to, or shall, alienate, sell, transfer, assign, pledge or otherwise encumber his benefits under this Plan, or if by reason of his bankruptcy or other event happening at any time, such benefits would devolve upon any other person or would not be enjoyed by the person entitled thereto under the Plan, then the Committee, in its discretion, may terminate the interest in any such benefits of the person entitled thereto under the Plan and hold or apply them to or for the benefit of such person entitled thereto under the Plan in such manner as the Committee may deem proper. -11- 10.3 No Contract of Employment. Nothing contained in this Plan shall be construed as a contract of employment between any Employer and any person or as creating a right of any person to be continued in the employment of any Employer. 10.4 Termination of Employment. When a person incurs a Termination of Employment his right to benefits from this Plan shall be determined only by the terms of this Plan. 10.5 No Duplication of Benefits. No benefits shall be paid to any person under more than one provision of this Plan for the same period of time. 10.6 Limitations on Liability and Indemnification. Notwithstanding any of the preceding provisions of the Plan, neither the Company, Plan Administrator, nor any individual acting as an employee or agent of the Company or as a member of the Pension Committee shall be liable to any Participant, former Participant, surviving spouse or any other person for any claim, loss, liability or expense incurred in connection with the Plan. Further, the Company shall indemnify and hold harmless each member of the Board of Directors, each member of the Pension Committee, the Plan Administrator, and each officer and employee of the Company to whom are delegated duties, responsibilities and authority with respect to the Plan against all claims, liabilities, fines and penalties, and all expenses reasonably incurred by or imposed upon him (including but not limited to reasonable attorney fees) which are not the result of intentional acts knowingly in violation of the Plan or the law. 10.7 Tax Implications. The SERP is not a qualified pension plan, but a deferred compensation plan. It is not eligible for a tax free rollover at the time of distribution and may also be subject to taxation on benefit accruals during a Participant's employment. The Company will cause taxes (including, but not limited to, employment taxes or federal or state income taxes) to be withheld from amounts paid hereunder as required by law. A Participant should seek the advice of a tax consultant or financial advisor regarding his personal tax situation. 10.8 Reduction for Overpayment. The Committee shall, whenever it determines that a person has received benefit payments under this Plan in excess of the amount to which the person is entitled under the terms of the Plan, make two reasonable attempts to collect such overpayment from the person. If the person to whom such overpayments were made does not, within a reasonable time, make the requested repayment to the Plan Administrator, the overpayment shall be considered as an advance payment of benefits and the Committee shall direct the Plan Administrator to reduce all future benefits payable to that person by the actuarial equivalent value of the overpayment. The Actuarial Equivalency is defined in the same manner as the HMPP. 10.9 No Trust Relationship. Nothing contained herein and no actions taken pursuant to the Plan shall create or be construed to create a trust of any kind or a fiduciary relationship between the Company and any Participant. The Company shall not be considered a trustee by reason of any provision of this Plan. 10.10 Gender and Number. Except when the context indicates to the contrary when used herein, masculine terms shall be deemed to include the feminine, and singular the plural. -12- 10.11 Invalidity of Certain Provisions. If any provision of this Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof and the Plan shall be construed and enforced as if such provisions, to the extent invalid or unenforceable, had not been included. 10.12 Headings. The headings of articles are included solely for convenience of reference, and if there is any conflict between such headings and the text of this Plan, the text shall control. 10.13 Law Governing. The Plan shall be construed and enforced according to the laws of the State of Illinois (other than its laws respecting choice of law). Executed effective as of March 31, 2002. HORACE MANN SERVICE CORPORATION By: /s/ Kathryn E. Karr ----------------------------------- Plan Administrator -13- EX-10.2 4 dex102.txt EXEC. SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN Exhibit 10.2 HORACE MANN EXECUTIVE SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN (ESERP) 2002 RESTATEMENT TABLE OF CONTENTS
Page ---- ARTICLE I. - GENERAL ..................................................................... 1 1.1 Background and Establishment ................................................... 1 ARTICLE II. - DEFINITIONS ................................................................ 1 2.1 "Actuarial Equivalent" or "Equivalent" ......................................... 1 2.2 "Company" or "HMSC" ............................................................ 1 2.3 "Eligible Earnings" ............................................................ 1 2.4 "Eligible Employee" ............................................................ 2 2.5 "ESERP Benefit" ................................................................ 2 2.6 "Final Average Earnings" ....................................................... 2 2.7 "Internal Revenue Code" or "Code" .............................................. 2 2.8 "NQMPPP" ....................................................................... 2 2.9 "NQMPPP Eligible Earnings" ..................................................... 2 2.10 "Participant" .................................................................. 2 2.11 "Plan" ......................................................................... 2 2.12 "Plan Year" .................................................................... 2 2.13 "Spouse" ....................................................................... 2 2.14 "Vesting Service" .............................................................. 2 2.15 "Years of Service" or "Years of Credited Service" .............................. 2 ARTICLE III. - ELIGIBILITY TO PARTICIPATE ................................................ 3 3.1 Becoming a Participant ......................................................... 3 3.2 Reemployment ................................................................... 3 3.3 Ceasing to be a Participant .................................................... 3 ARTICLE IV. - ELIGIBILITY FOR AND AMOUNT OF BENEFITS ..................................... 3 4.1 Eligibility .................................................................... 3 4.2 Retirement Benefit Calculation ................................................. 4 4.3 Accrual of Benefits ............................................................ 6 4.4 Disability Retirement .......................................................... 6 4.5 Vesting ........................................................................ 6 ARTICLE V. - FORM AND COMMENCEMENT OF BENEFITS ........................................... 6 5.1 Forms of Benefits Payable ...................................................... 6 5.2 Survivor Benefits .............................................................. 7 5.3 Commencement of Payment of SERP Benefits ....................................... 7 ARTICLE VI. - ADMINISTRATION ............................................................. 8 6.1 Pension Committee .............................................................. 8 6.2 Plan Administrator ............................................................. 8 6.3 Liability ...................................................................... 8 6.4 Claims Procedure ............................................................... 8
-i- ARTICLE VII. - AMENDMENT AND TERMINATION .................................................... 9 7.1 Amendment or Termination .......................................................... 9 7.2 Change of Control ................................................................. 9 7.3 Corporate Successors .............................................................. 9 ARTICLE VIII. - MISCELLANEOUS ............................................................ 10 8.1 No Contract of Employment ......................................................... 10 8.2 Funding ........................................................................... 10 8.3 Nonalienation of Benefits ......................................................... 10 8.4 Tax Implications .................................................................. 10 8.5 Reduction for Overpayment ......................................................... 10 8.6 State Law ......................................................................... 11 8.7 Incapacity of Recipient ........................................................... 11 8.8 Unclaimed Benefit ................................................................. 11 8.9 Invalidity of Certain Provisions .................................................. 11 8.10 Limitations on Liability and Indemnification ...................................... 11 8.11 No Trust Relationship ............................................................. 11 8.12 Gender and Number ................................................................. 12 8.13 Headings .......................................................................... 12 APPENDIX A .................................................................................. 13
ARTICLE I. - GENERAL 1.1 Background and Establishment. The Horace Mann Executive Supplemental Employee Retirement Plan (ESERP) was effective as of January 1, 1992. The function of the ESERP is to provide supplemental retirement income benefits to a finite group of employees. This finite group was identified by their estimated projected loss of benefits due to limitations on compensation as defined under Section 401(a)(17) of the Internal Revenue Code and benefit limitations as defined under Section 415 of the Internal Revenue Code from the qualified Money Purchase Pension Plan ("MPPP"), qualified Horace Mann Pension Plan ("HMPP") and non-qualified Supplemental Employee Retirement Plan ("SERP"). (All references are to the HMPP and MPPP as the "Floor Offset" arrangement under their 2002 Restatement, as amended, unless specified otherwise.) The Floor Offset arrangement is described in its Summary Plan Description (SPD) as contained in the Employee Benefits Binder. The ESERP plan only covers named employees. In 1994, the Plan was expanded to include certain key employees, who may not be executives of the Company, but whose employment and performance are considered to be important to meeting the goals and objectives of Horace Mann Educators Corporation ("HMEC"), the parent company of HMSC. Additionally, the structure of the Plan was changed to replicate features of the qualified Floor Offset arrangement that exists with the HMPP and the MPPP. Effective February 12, 1997, the Plan was amended and restated to include the same vesting provisions as the HMPP and MPPP. The Plan was amended effective March 31, 2002, to provide that no Participant will earn or accrue benefits under the Plan after March 31, 2002. The Plan is hereby amended and restated effective March 31, 2002, to effect the amendment to the Plan freezing benefit accruals effective as of March 31, 2002, and to spin off the portion of each Participant's benefit hereunder represented by the NQMPPP Feature account to the Horace Mann Nonqualified Supplemental Money Purchase Pension Plan effective as of April 1, 2002. ARTICLE II. - DEFINITIONS The following words shall have the meanings below unless the context clearly indicates otherwise: 2.1 "Actuarial Equivalent" or "Equivalent" means the actuarial equivalent as defined in the HMPP. 2.2 "Company" or "HMSC" means Horace Mann Service Corporation and any successor thereto. 2.3 "Eligible Earnings" means the same earnings (compensation) as those which are eligible under the SERP, MPPP and HMPP and as described in their SPD's unless otherwise specified in the Appendix; provided, however, earnings which exceed the statutory limits -1- as defined and controlled by the Internal Revenue Code in Section 401(a)(17), as amended, will be included as eligible earnings for purposes of the ESERP. No earnings of a Participant earned after March 31, 2002, shall be taken into account for any purpose under the Plan. 2.4 "Eligible Employee" means those employees who are identified by their estimated projected loss of benefits due to limitations on compensation as defined under Section 401(a)(17) of the Internal Revenue Code and benefit limitations as defined under Section 415 of the Internal Revenue Code from the MPPP, HMPP and SERP, who are highly compensated key employees and who are designated in the Appendix as recorded by the Plan Administrator. 2.5 "ESERP Benefit" means the benefit payable in accordance with the Plan. 2.6 "Final Average Earnings" means the Participant's Final Average Earnings as defined in the HMPP, which Final Average Earnings is to be determined without taking into account any earnings or service of the Participant earned or credited after March 31, 2002. 2.7 "Internal Revenue Code" or "Code" means the Internal Revenue Code of 1986, as amended, and any subsequent Internal Revenue Code. If there is a subsequent Internal Revenue Code, any references herein to Internal Revenue Code sections shall be deemed to refer to comparable sections of any subsequent Internal Revenue Code. 2.8 "NQMPPP" means the defined contribution feature of the Plan as described in Article 4.2. 2.9 "NQMPPP Eligible Earnings" means only those Eligible Earnings in excess of the limits imposed by Section 401(a)(17) of the Internal Revenue Code, which Eligible Earnings are to be determined without taking into account any earnings of the Participant earned after March 31, 2002. 2.10 "Participant" means those highly compensated key employees listed in the Appendix. 2.11 "Plan" means the Executive Supplemental Employee Retirement Plan as herein set forth and as amended from time to time. 2.12 "Plan Year" means each twelve-consecutive month period beginning January 1, 1992. 2.13 "Spouse" means a person who is the Participant's Spouse as defined in the HMPP. 2.14 "Vesting Service" means the sum of an Eligible Employee's periods of continuous service as defined in the MPPP. 2.15 "Years of Service" or "Years of Credited Service" means only those periods of service as defined in the HMPP for purposes of benefit calculation. Any service beyond 30 years will not be included in the benefit calculation. A Participant will earn no years of service or years of credited service under this Plan after March 31, 2002. -2- ARTICLE III. - ELIGIBILITY TO PARTICIPATE 3.1 Becoming a Participant. Each Eligible Employee shall initially become a Participant as indicated in Appendix A, as amended from time to time. 3.2 Reemployment. (a) Following Retirement. If a Participant retires from the Company, and subsequently is re-employed as a full time, part time or temporary employee who works more than 10 days per month, the Participant's periodic ESERP benefit will cease until he re-retires. Upon his subsequent retirement, his prior and additional service and earnings, plus any additional credit earned under the qualified plan(s), but not any additional service and earnings or any additional credit earned with respect to periods after March 31, 2002, will be included in the recalculation of the Participant's ESERP benefit. In the event the Participant retires and is re-employed and works less than 10 days a month, the Participant's periodic ESERP payment will continue. 3.3 Ceasing to be a Participant A person will cease to be a Participant: (a) if he loses all of his Years of Credited Service under the HMPP or MPPP, or (b) if he dies. ARTICLE IV. - ELIGIBILITY FOR AND AMOUNT OF BENEFITS 4.1 Eligibility. Benefits are payable under the ESERP only if the Participant separates from service from the Company and would be considered to be vested under the HMPP or MPPP. That eligibility would include early, normal, and postponed retirement. As defined in the HMPP: (a) For employees who separate from service and are immediately eligible for retirement benefits: (i) Normal Retirement Date is the first day of the month coincident with or next following the Participant's 65th birthday and the Participant has at least 5 years of service; (ii) Early Retirement Date is the first day of the month coincident with or following the month in which the Participant is at least 55 years and has at least 10 years of service. Benefits will be reduced according to the Early Retirement Adjustment Factor Table as contained in the HMPP; or (iii) Postponed Retirement Date is the first day of the month coincident with or next following the Participant's termination of employment with the Company after his Normal Retirement Date and until March 31, 2002 the -3- Participant will continue to accrue service under this Plan (up to 30 years) and eligible compensation. (b) For employees who separate from service, who are vested but not yet eligible for retirement benefits: (i) Normal vested benefits are payable as of the first day of the month coincident with or next following the Participant's 65th birthday and the Participant has at least 5 years of service and are calculated in the same manner as provided in the HMPP at the time of the Participant's separation from service; or (ii) Early vested benefits are payable as of the first day of the month coincident with or following the month in which the Participant is at least 55 years and has at least 10 years of service. Benefits are calculated in the same manner as provided in the HMPP at the time of the Participant's separation from service and will be reduced according to the Deferred Vested Retirement Adjustment Factor Table as contained in the HMPP. 4.2 Retirement Benefit Calculation. The purpose of the ESERP is to provide minimum "floor" post retirement income benefits that are not available to the Participant under the HMPP, MPPP and SERP due to limits pertaining to IRC Sections 401(a)(17) and 415, as amended. Any benefits under the HMPP and MPPP offset the benefits available under the ESERP. If a Participant under the SERP becomes a Participant under the ESERP, then all accrued and future accrual of SERP benefits are transferred to the ESERP. Prior to the 2002 restatement the ESERP provided for benefit accruals under two plan features. (a) The first plan feature is a defined benefit calculation which is the "floor" benefit of the Plan ("Floor Benefit Feature"). If the retirement is prior to age 65 years, then the Early Retirement Reduction Factors as stated in the HMPP apply. To calculate the Floor Benefit Feature: (i) For Participants with an adjusted service date of 8/29/89 or prior and who were Participants in the HMPP or its predecessor plans: *the average of the highest 36 consecutive months of Eligible Earnings under the ESERP; *times 2%; *times years of credited service under the HMPP (up to 30 years); *minus 50% of the Primary Social Security Benefit as defined in Appendix I to the HMPP; *equals the Participant's monthly age 65 "floor" benefit. (ii) For Participants with an adjusted service date subsequent to 8/29/89 and who were or became Participants in the HMPP: -4- *the average of the highest 36 consecutive months of Eligible Earnings under the ESERP; *times 1.6%; *times years of credited service under the HMPP (up to 30 years); *equals the Participant's monthly age 65 "floor" benefit. (b) The second plan feature was a defined contribution benefit, referred to as the "Non-Qualified MPPP" or "NQMPPP Feature". This benefit was determined by the Participant's Years of Service and NQMPPP Eligible Earnings. (i) As defined in the MPPP, Employer contributions were based on a percentage of the Participant's NQMPPP Eligible Earnings determined by the Participant's Vesting Service: Vesting Service Completed by Amount of Employer's Participant Contribution Less than 5 years 5% 5 years but less than 15 years 6% 15 years or more 7% (ii) For record keeping purposes, for each Participant, a notional or bookkeeping account was established. Phantom contributions to the NQMPPP Feature account were not made prior to a Participant becoming an Eligible Employee in the ESERP. In addition, contributions to the NQMPPP Feature account were not made on a retroactive basis. (iii) The NQMPPP Feature account was valued as accumulated contributions, plus any gains or losses that would have been credited to those contributions based on the rate of return credited to the qualified MPPP. Effective March 31, 2002, and solely for the purpose of Article 4.2(c) below, the NQMPPP Feature account will always equal the value of the frozen value of the account as of March 31, 2002. (iv) The NQMPPP Feature account benefit of any Participant who has a positive account value under this plan, shall be transferred to the Horace Mann Nonqualified Supplemental Money Purchase Pension Plan (the "HMNSMPPP") effective as of April 1, 2002 (after all adjustments thereto have been made as provided in Article 4.2(b)(iii)), and effective as of April 1, 2002, no such Participant (nor the survivor of any such Participant who is deceased) shall be entitled to any payment under this Plan of an amount representing the NQMPPP Feature (even though the Participant's NQMPPP Feature Monthly Equivalent will continue to apply hereunder for purposes of determining the Participant's ESERP Monthly Benefit hereunder as provided in Article 4.2(c) below.) -5- (c) To determine what benefit is due under the ESERP (if any) the following calculation would be performed. The NQMPPP Feature Monthly Equivalent is calculated in the same form and manner as the Monthly Equivalent in the MPPP. *ESERP monthly Floor Benefit Feature; *minus the NQMPPP Feature Monthly Equivalent determined using a valuation date of March 31, 2002; *minus the HMPP Monthly Benefit; *minus the MPPP Monthly Equivalent determined using a valuation date of March 31, 2002; *equals the ESERP Monthly Benefit Due. If the combined payable benefit from the HMPP and the MPPP are greater than the ESERP, then no benefit is payable from the ESERP. This also applies to any other forms of benefits payable (such as, early retirement or surviving spouse options). 4.3 Accrual of Benefits. If a Participant ceases to meet the definition of an Eligible Employee, ESERP benefit accruals will cease as of that time. No further accruals will occur unless and until the Participant once again meets the definition an Eligible Employee but in no event will accruals occur after March 31, 2002. Notwithstanding the foregoing, if a Participant ceases to meet the definition of an Eligible Employee while remaining an employee who accrues benefits or earnings under the NQMPPP, HMPP and/or the MPPP, then the offsets for the NQMPPP Monthly Equivalent, HMPP Monthly Benefit and MPPP Monthly Equivalent as so increased shall continue to be used to decrease the ESERP monthly Floor Benefit Feature; provided, however, no such offsets shall increase or decrease after March 31, 2002. 4.4 Disability Retirement. Should the Participant be placed on a long term disability leave of absence, he will continue to accrue service (but not after March 31, 2002) with regards to the Floor Benefit Feature of this Plan (up to a maximum of 30 years). However, Eligible Earnings will be considered those which were earned as an active employee. If at the time the disability ceases, the Participant is eligible to receive a qualified retirement benefit from the HMPP, he will also be eligible to receive an ESERP benefit. 4.5 Vesting. The ESERP benefits are subject to the same vesting provisions as described in the HMPP and the MPPP. ARTICLE V. - FORM AND COMMENCEMENT OF BENEFITS 5.1 Forms of Benefits Payable. As of the 2002 restatement, effective as of April 1, 2002, the ESERP benefit is comprised solely of the defined benefit form of payment described in Article 5.1(a) below. Accordingly, Article 5.1(b) which provided for the NQMPP distribution in a defined contribution form is reserved effective April 1, 2002 with the transfer of the liability for those benefits to the HMNSMPPP. For the same reason, Article 5.2(a)(ii) below is reserved. -6- (a) The form is a defined benefit payment, payable, provided the Participant is eligible for retirement benefits under the HMPP, as a periodic payment in the same form as is provided by the HMPP including any applicable reduction factors. The same calculation methodology and order of calculation used in the HMPP is used in the calculation of benefits in the ESERP. (i) Forms of monthly payments could reflect survivor benefits and would be based on annuity payment factors as expressed in the HMPP. (ii) An automatic lump sum distribution of the ESERP benefit will occur at retirement if the lump sum benefit equivalent is less than $5,000. The $5,000 limit may be changed in accordance with the limits established by the Service for qualified pension plans. (b) [RESERVED.] 5.2 Survivor Benefits. (a) With regards to the Floor Benefit Feature, if a Participant elects to receive a periodic payment from the qualified pension plans, the same election will apply to the ESERP in the equivalent forms of annuity options available under the HMPP. Currently, those forms include a 50%, 66 2/3%, 75% and 100% survivor option. The monthly benefit will be actuarially reduced if a Participant elects one of the survivor options. (i) If a Participant dies after having a vested termination in employment but prior to commencing benefits, the surviving spouse would receive a benefit of 50% based on the Participant's lifetime ESERP benefit as calculated in Article 4.2 based on the Participant's age at the time of death. All other factors would be based on those at the time of the Participant's Normal Retirement Date from the Company. If the Participant does not have a spouse, as defined in the HMPP, upon the death of a Participant, no benefit will be due or payable. (ii) [RESERVED.] (b) If a Participant dies while actively employed with the Company, the Participant's spouse, as defined in the HMPP, would receive a benefit from the ESERP. The benefit would be calculated as provided in Article 4.2 and will be reduced in the same form and manner as the HMPP. 5.3 Commencement of payment of SERP Benefits. Payment of any ESERP benefit due will begin on commencement of payment of benefits from the qualified pension plans, except as provided in Article 5.1(b). Notification of retirement to the Employee Benefits Unit for the qualified pension plans will also initiate the process of calculation and payment of the ESERP benefit. A Participant cannot defer the ESERP benefit if he has commenced receiving benefits from the qualified plans. Conversely, if the Participant defers receiving benefits from the qualified plans, he must defer receiving the ESERP benefit except as provided in Article 5.1(b). -7- ARTICLE VI. - ADMINISTRATION 6.1 Pension Committee. The same membership structure, actions, responsibility and authority shall apply to this Plan as described in the HMPP and the MPPP. The decision of the Pension Committee in matters within its jurisdiction shall be final, binding, and conclusive upon the Company and upon each Eligible Employee, Participant, spouse, and every other person or party interested or concerned. 6.2 Plan Administrator. The Plan Administrator shall have the same duties and authority pursuant to this Plan as are described in the HMPP and the MPPP. All affairs of calculation, payment and administration of the ESERP are conducted by the Plan Administrator. No benefits will be paid under the terms of this Plan without the authorization of the Plan Administrator. The Plan Administrator shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, controller, counsel or other person employed or engaged by the Company with respect to the Plan. 6.3 Liability. The Committee and Plan Administrator shall be free from all liability, joint and several, for their acts as members of such Committee except to the extent that they may have committed willful misconduct or otherwise required by federal law. 6.4 Claims Procedure. If a Participant believes he is being denied a benefit to which he is entitled under the Plan, the Participant may file a written request for such benefit with the Committee setting forth his claim. Upon receipt of the claim, the Committee shall advise the Participant that a reply will be forthcoming within ninety (90) days and shall deliver such reply within such period, unless Committee extends the reply period for an additional ninety (90) days for reasonable cause. If the claim is denied in whole or in part, the Committee shall so advise the Participant in writing setting forth: (a) the specific reason or reasons for such denial; (b) the specific reference to pertinent provisions of the Plan on which such denial is based; (c) a description of any additional material or information necessary for the Participant to perfect his claim and an explanation why such material or such information is necessary; and (d) appropriate information as to the steps to be taken if the Participant wishes to submit the claim for review. Any request for review must be submitted in writing by the Participant to the Committee in care of the Committee at its principal place of business within sixty (60) days after the receipt by the Participant of the denial of the Participant's claim. The Participant or his duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Committee. If the Participant does not request a review of the Committee's determination within such sixty (60) day period, the Participant shall be barred and estopped from challenging the Committee's determination. Within sixty (60) days after the Committee's receipt of a request for review, it will review its determination. After considering all materials presented by the Participant, the Committee will render a written opinion, written in a manner calculated to be understood by the Participant, setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of the Plan on which the decision is based. If special circumstances require that the sixty (60) day time period be extended, the Committee will so notify the Participant and will render the decision as soon as possible, but no later than one hundred twenty (120) days after receipt of the request for review. -8- ARTICLE VII. - AMENDMENT AND TERMINATION 7.1 Amendment or Termination. The Company and Pension Committee intend the Plan to be permanent but reserve the right to amend or terminate the Plan when, in the sole opinion of the Pension Committee, such amendment or termination is advisable. Any such amendment or termination shall be made pursuant to a resolution of the Board of Directors of the Company and shall be effective as of the date of such resolution. No amendment or termination of the Plan shall directly or indirectly deprive any Participant or surviving spouse of all or any portion of any ESERP Benefit payment which has commenced prior to the effective date of the resolution amending or terminating the Plan. 7.2 Change of Control. In the event of a Change of Control of HMEC (the parent company of HMSC), certain protection will apply. Any Participant who is employed by HMSC when a Change of Control occurs, who has signed a Severance Agreement and who is discharged for reasons other than cause, during a three year period subsequent to the Change of Control, will receive their benefit from the ESERP in a lump sum payment equal to their accrued benefit under the ESERP, as defined in Article 4.2, at the time of severance. Should this Plan be terminated and not replaced due to a Change of Control of HMEC, all ESERP Participants will receive a lump sum payment of their accrued benefit as of the date of termination of the ESERP. All payments will be made in a reasonable period after the triggering event has occurred. A Change of Control shall be deemed to have occurred if (i) there shall be consummated (1) any consolidation or merger of HMEC in which HMEC is not the continuing or surviving corporation, or pursuant to which shares of HMEC's common stock would be converted into cash, securities or other property, other than a merger of HMEC in which no Company shareholder's ownership percentage in the surviving corporation immediately after the merger is less than such shareholder's ownership percentage in HMEC immediately prior to such merger by ten percent (10%) or more, or (2) any sale, lease exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all of the assets of HMEC; (ii) the shareholders of HMEC approve any plan or proposal for the liquidation or dissolution of HMEC which is a part of a sale of assets, merger, or reorganization of HMEC or other similar transaction; (iii) any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is or becomes, directly or indirectly, the "beneficial owner," as defined in Rule 13d-3 under the Exchange Act, of securities of HMEC that represent 51% or more of the combined voting power of HMEC's then outstanding securities; or (iv) a majority of the members of HMEC's Board of Directors are persons who are then serving on the Board of Directors without having been elected by the Board of Directors or having been nominated by HMEC for election by its shareholders. 7.3 Corporate Successors. The Plan shall not be automatically terminated by a transfer or sale of assets of the Company or by the merger or consolidation of the Company into or with any other corporation or other entity, but the Plan shall be continued after such sale, merger or consolidation only if and to the extent that the transferee, purchaser or -9- successor entity agrees to continue the Plan. In the event the Plan is not continued by the transferee, purchaser or successor entity, then the Plan shall terminate subject to the provisions of paragraphs 7.1 and 7.2. ARTICLE VIII. - MISCELLANEOUS 8.1 No Contract of Employment. Nothing contained in this Plan will confer upon any Participant the right to be retained in the service of the Company nor limit the right of the Company to discharge or otherwise deal with Participants without regard to the existence of the Plan. 8.2 Funding. The Plan at all times shall be entirely unfunded and no provision shall at any time be made with respect to segregating any assets of the Company for payment of any benefits hereunder. The ESERP does not have a trust or trust fund arrangement. No Participant, surviving spouse or any other person shall have any interest in any particular assets of the Company by reason of the right to receive a benefit under the Plan and any such Participant, surviving spouse or other person shall have only the rights of a general unsecured creditor of the Company with respect to any rights under the Plan. Nothing contained in the Plan shall constitute a guaranty by the Company or any other entity or person that the assets of the Company will be sufficient to pay any benefit hereunder. 8.3 Nonalienation of Benefits. No benefit payable under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge prior to actual receipt thereof by the payee; and any attempt so to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge prior to such receipt shall be void; and the Company shall not be liable in any manner for or subject to the debts, contracts, liabilities, engagements or torts of any person entitled to any benefit under the Plan. 8.4 Tax Implications. The ESERP is not a qualified pension plan, but a deferred compensation plan. It is not eligible for a tax free rollover at the time of distribution and may also be subject to taxation on benefit accruals during a Participant's employment. The Company will cause taxes (including, but not limited to, employment taxes or federal or state income taxes) to be withheld from amounts paid hereunder as required by law. A Participant should seek the advice of a tax consultant or financial advisor regarding his personal tax situation. 8.5 Reduction for Overpayment. The Plan Administrator shall, whenever it determines that a person has received benefit payments under this Plan in excess of the amount to which the person is entitled under the terms of the Plan, make two reasonable attempts to collect such overpayment from the person. If the person to whom such overpayment was made does not, within a reasonable time, make the requested repayment to the Plan Administrator, the overpayment shall be considered as an advance payment of benefits and the Plan Administrator will reduce all future benefits payable to that person by the actuarial equivalent value of the overpayment. -10- 8.6 State Law. The Plan is established under and will be construed according to the laws of the State of Illinois, to the extent that such laws are not preempted by the Employee Retirement Income Security Act and valid regulations published thereunder. 8.7 Incapacity of Recipient. In the event a Participant or surviving spouse is declared incompetent and a conservator or other person legally charged with the care of his person or of his estate is appointed, any benefits under the Plan to which such Participant or surviving spouse is entitled shall be paid to such conservator or other person legally charged with the care of his person or his estate. Except as provided above in this paragraph, when the Plan Administrator in its sole discretion, determines that a Participant or surviving spouse is unable to manage his financial affairs, the Plan Administrator will make distributions to any person for the benefit of such Participant or surviving spouse. 8.8 Unclaimed Benefit. Each Participant shall keep the Plan Administrator informed of his current address and the current address of his spouse. The Plan Administrator shall not be obligated to search for the whereabouts of any person. If the location of a Participant is not made known to the Plan Administrator within three (3) years after the date on which any payment of the Participant's ESERP benefit may be made, payment may be made as though the Participant had died at the end of the three-year period. If, within one additional year after such three-year period has elapsed, or, within three years after the actual death of a Participant, the Plan Administrator is unable to locate any surviving spouse of the Participant, then the Company shall have no further obligation to pay any benefit hereunder to such Participant or surviving spouse or any other person and such benefit shall be irrevocably forfeited. 8.9 Invalidity of Certain Provisions. If any provision of this Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof and the Plan shall be construed and enforced as if such provisions, to the extent invalid or unenforceable, had not been included. 8.10 Limitations on Liability and Indemnification. Notwithstanding any of the preceding provisions of the Plan, neither the Company, Plan Administrator, nor any individual acting as an employee or agent of the Company or as a member of the Pension Committee shall be liable to any Participant, former Participant, surviving spouse or any other person for any claim, loss, liability or expense incurred in connection with the Plan. Further, the Company shall indemnify and hold harmless each member of the Board of Directors, each member of the Pension Committee, the Plan Administrator, and each officer and employee of the Company to whom are delegated duties, responsibilities and authority with respect to the Plan against all claims, liabilities, fines and penalties, and all expenses reasonably incurred by or imposed upon him (including but not limited to reasonable attorney fees) which are not the result of intentional acts knowingly in violations of the Plan or the law. 8.11 No Trust Relationship. Nothing contained herein and no actions taken pursuant to the Plan shall create or be construed to create a trust of any kind or a fiduciary relationship between the -11- Company and any Participant. The Company shall not be considered a trustee by reason of any provision of this Plan. 8.12 Gender and Number. Except when the context indicates to the contrary when used herein, masculine terms shall be deemed to include the feminine, and singular the plural. 8.13 Headings. The headings of articles are included solely for convenience of reference, and if there is any conflict between such headings and the text of this Plan, the text shall control. Executed effective as of March 31, 2002. HORACE MANN SERVICE CORPORATION By: /s/ Kathryn E. Karr ------------------------------------- Plan Administrator -12- EX-10.3 5 dex103.txt NONQUALIFIED SUP. MONEY PURCHASE PENSION PLAN Exhibit 10.3 HORACE MANN NONQUALIFIED SUPPLEMENTAL MONEY PURCHASE PENSION PLAN HORACE MANN NONQUALIFIED SUPPLEMENTAL MONEY PURCHASE PENSION PLAN ARTICLE I. ESTABLISHMENT AND PURPOSE OF PLAN --------------------------------- 1.1 Plan Establishment. Horace Mann Service Corporation hereby ------------------ establishes the Horace Mann Nonqualified Supplemental Money Purchase Pension Plan (the "Plan") effective April 1, 2002. 1.2 Purpose of Plan. The purpose of the Plan is to provide supplemental --------------- retirement benefits to certain executives and other key employees of Horace Mann Service Corporation who are members of a select group of management or highly compensated employees of Horace Mann Service Corporation within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA. The Plan is designed to provide certain benefits not available under the HMSC Money Purchase Pension Plan, a qualified plan under Section 401(a) of the Code, due to limitations imposed by the Code. Previously such benefits were provided as the "NQMPPP Feature" of the Horace Mann Executive Supplemental Employee Retirement Plan (the "ESERP"). The ESERP was frozen effective March 31, 2002. For those participants in the ESERP on March 31, 2002 who are also Participants in the Plan on April 1, 2002, the benefit under the ESERP represented by the value of the participant's NQMPPP Feature account (a memorandum account) as of March 31, 2002, has been transferred to the Plan as provided under the ESERP and as referenced hereunder. ARTICLE II. DEFINITIONS ----------- The following terms shall have the following meanings when used herein: 2.1 Account means a memorandum account maintained by the Committee for ------- each Participant for bookkeeping purpose only, to which is credited, if applicable, the Prior Plan Benefit as of April 1, 2002 and the annual Company Contribution, and which is adjusted annually to reflect the Investment Return. 2.2 Beneficiary means the individual, individuals, trust or estate ----------- designated by the Participant on the beneficiary designation form provided to the Participant (with only the last such beneficiary designation to be effective), but if the Participant has made no effective beneficiary designation as of the date of the Participant's death, then Beneficiary shall mean the beneficiary of the Participant's accrued benefit under the HMSC MPPP. 2.3 Code means the Internal Revenue Code of 1986 as from time to time ---- amended. 2.4 Committee means the Committee appointed by HMSC for the purpose of --------- administering the Plan. -2- 2.5 Company or HMSC means Horace Mann Service Corporation and any ------- ---- successor thereto. 2.6 Company Contribution means the amount credited to a Participant's -------------------- Account under the provisions of section 3.1 or 3.2, whichever applicable. 2.7 Compensation means compensation as defined in the HMSC MPPP except not ------------ subject to any limitation imposed under Section 401(a)(17) of the Code. 2.8 Eligible Participant means a Participant who is an employee of HMSC -------------------- and who has not been designated by HMSC as ineligible to be credited with a Company Contribution for a particular Year. 2.9 ERISA means the Employee Retirement Income Security Act of 1974 as ----- from time to time amended 2.10 Excess Compensation means the excess of Compensation over compensation ------------------- as defined in the HMSC MPPP. 2.11 HMEC means Horace Mann Educators Corporation, the parent company of ---- HMSC. 2.12 HMSC MPPP means the HMSC Money Purchase Pension Plan as currently in --------- effect and as from time to time amended. 2.13 Investment Return means the positive or negative rate of return ----------------- (taking into account earnings, gains and losses) applicable during the relevant period hereunder to those assets of the HMSC MPPP which represent contributions made to the HMSC MPPP prior to July 1, 2002 (as adjusted for earnings, gains and losses). 2.14 Participant means an employee of HMSC (a) whose Compensation exceeds ----------- the maximum amount of compensation allowable to be taken into account by a qualified plan under Section 401(a)(17) of the Code, (b) who is a member of a select group of management or highly compensated employees of HMSC, and (c) who has been designated by HMSC as a participant in the Plan. Participant also includes a former employee of HMSC for whom an account is maintained under the Plan and a current employee of HMSC who is not currently an Eligible Participant but for whom an account is maintained under the Plan. 2.15 Plan means the Horace Mann Nonqualified Supplemental Money Purchase ---- Pension Plan as set forth herein and as from time to time amended. 2.16 Plan Year or Year means the 12-month period beginning each January 1 ----------------- and ending each succeeding December 31. 2.17 Prior Plan Benefit means the benefit of a Participant under the Horace ------------------ Mann Executive Supplemental Employee Retirement Plan ("ESERP") represented by the Participant's "NQMPPP Feature account" which benefit was transferred to the Plan pursuant to the provisions of the ESERP and credited to the Participant's Account in the Plan as of April 1, 2002. -3- 2.18 Years of Vesting Service at any particular time means the same number ------------------------ of years of vesting service credited to the Participant at such time under the provisions of the HMSC MPPP. ARTICLE III. COMPANY CONTRIBUTIONS AND INVESTMENT RETURN ------------------------------------------- 3.1 Company Contributions for Eligible Participants With 5 or More Years -------------------------------------------------------------------- of Vesting Service as of April 1, 2002. As of the last day of each Plan Year the - -------------------------------------- Committee will credit to the Account of each Participant who (a) is an Eligible Participant as of such day, and (b) as of April 1, 2002 had 5 or more Years of Vesting Service, an amount equal to a percentage of the Participant's Excess Compensation for such Plan Year as determined under the following schedule: Vesting Service Completed by Amount of Employer's Participant Contribution 5 years but less than 15 years 6% 15 years or more 7% Notwithstanding the preceding provisions of this section 3.1, if a Participant terminates employment prior to the last day of the Plan Year and (a) the Participant was an Eligible Participant immediately prior to such Participant's termination of employment, and (b) the Participant had 5 or more Years of Vesting Service as of April 1, 2002, then the Committee will credit to the Account of the Participant as of the date of the Participant's termination of employment a percentage of the Participant's Excess Compensation for such Plan Year, if any, determined in accordance with the preceding schedule under this section 3.1. 3.2 Company Contributions for Eligible Participants With Less Than 5 Years ---------------------------------------------------------------------- of Vesting Service as of April 1, 2002. As of the last day of each Plan Year the - -------------------------------------- Committee will credit to the Account of each Participant who (a) is an Eligible Participant as of such day, or if a Participant terminated employment during the Plan Year then was an Eligible Participant immediately prior to such termination of employment, and (b) as of April 1, 2002 had less than 5 Years of Vesting Service, an amount equal to 5% of the Participant's Excess Compensation for such Plan Year. Notwithstanding the preceding sentence of this section 3.2, if a Participant terminates employment prior to the last day of the Plan Year and (a) the Participant was an Eligible Participant immediately prior to such Participant's termination of employment, and (b) the Participant had less than 5 Years of Vesting Service as of April 1, 2002, then the Committee will credit to the Account of the Participant as of the date of the Participant's termination of employment an amount equal to 5% of the Participant's Excess Compensation for such Plan Year, if any. 3.3 Adjustments to Accounts for Investment Return. As of the last day of --------------------------------------------- each Plan Year, or if a Participant terminates employment during the Plan Year then as of the date of -4- the Participant's termination of employment, a Participant's Account shall be adjusted to reflect the Investment Return applicable to the Participant's Account for the Plan Year as determined by the Committee. The Investment Return with respect to amounts credited to an Account as of the first day of a Plan Year and as of the last day of a Plan Year shall be credited as an annual return. The Investment Return with respect to amounts credited to a Participant's Account for only a portion of the Plan Year shall be determined based only upon such portion of the Plan Year. ARTICLE IV. DETERMINATION OF BENEFIT ------------------------ 4.1 Vesting. A Participant who is fully vested under the provisions of the ------- HMSC MPPP at any particular time shall also be fully vested at such time in such Participant's benefit under the Plan. 4.2 Amount of Benefit. The amount of the benefit of a Participant who is ----------------- fully vested hereunder shall be equal to the amount credited to the Participant's Account as of the date of the Participant's termination of employment after all credits and adjustments to the Participant's Account to be made under the provisions of Article III have been made. ARTICLE V. PAYMENT OF BENEFIT ------------------ 5.1 Time of Payment of Benefit. A fully vested Participant's benefit -------------------------- hereunder as determined under section 4.2 will be paid to the Participant no later than ninety (90) days following the Participant's termination of employment with the Company. 5.2 Method of Payment of Benefit. A Participant's benefit hereunder will be ---------------------------- paid in the form of a lump sum cash payment. 5.3 Death of Participant. In the event of a fully vested Participant's -------------------- termination of employment on account of the Participant's death, the benefit that would have been paid to the Participant hereunder had the Participant not died but terminated employment on the date of the Participant's death will be paid to the Participant's Beneficiary. In the event of the death of a fully vested Participant after the Participant's termination of employment and prior to the payment to the Participant of the Participant's benefit hereunder, the benefit that would otherwise have been paid to the Participant hereunder will be paid to the Participant's Beneficiary. 5.4 Special Rule Upon Change of Control. If the Plan is terminated and not ----------------------------------- replaced as a result of a Change of Control of Horace Mann Educators Corporation (the parent company of HMSC), or as a result of a divestiture of HMSC by Horace Mann Educators Corporation, every Participant will receive a lump sum payment of his or her benefit determined hereunder as of the date of the termination of the Plan after all credits and adjustments to the -5- Participant's Accounts to be made under the provisions of Article III, if any, have been made. All such payments will be made in a reasonable period after the triggering event has occurred. A Change of Control shall be deemed to have occurred if (a) there shall be consummated (1) any consolidation or merger of HMEC in which HMEC is not the continuing or surviving corporation, or pursuant to which shares of HMEC's common stock would be converted into cash, securities or other property, other than a merger of HMEC in which no HMEC shareholder's ownership percentage in the surviving corporation immediately after the merger is less than such shareholder's ownership percentage in HMEC immediately prior to such merger by ten percent (10%) or more, or (2) any sale, lease exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all of the assets of HMEC; (b) the shareholders of HMEC approve any plan or proposal for the liquidation or dissolution of HMEC which is a part of a sale of assets, merger, or reorganization of HMEC or other similar transaction; (c) any "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is or becomes, directly or indirectly, the "beneficial owner," as defined in Rule 13d-3 under the Exchange Act, of securities of HMEC that represent 51 % or more of the combined voting power of HMEC's then outstanding securities; or (d) a majority of the members of HMEC's Board of Directors are persons who are then serving on the Board of Directors without having been elected by the Board of Directors or having been nominated by HMEC for election by its shareholders. ARTICLE VI. ADMINISTRATION -------------- 6.1 Committee Authority. The Committee is the Plan Administrator of the ------------------- Plan. The Committee is authorized to establish rules and procedures as it deems advisable or necessary for the administration of the Plan. The Committee has the sole and absolute discretion to construe and interpret the Plan. In the administration of the Plan the Committee may, from time to time, (a) delegate its duties, (b) employ agents and delegate to them such duties as it sees fit, and (c) consult with legal counsel. 6.2 Claims Procedure. If a Participant believes he or she is being denied a ---------------- benefit to which he or she is entitled under the Plan, the Participant may file a written request for such benefit with the Committee setting forth his or her claim. Upon receipt of the claim, the Committee shall advise the Participant that a reply will be forthcoming within ninety (90) days and shall deliver such reply within such period, unless Committee extends the reply period for an additional ninety (90) days for reasonable cause. If the claim is denied in whole or in part, the Committee shall so advise the Participant in writing setting forth: (a) the specific reason or reasons for such denial; (b) the specific reference to pertinent provisions of the Plan on which such denial is based; (c) a description of any additional material or information necessary for the Participant to perfect his or her claim and an explanation why such material or such information is necessary; and (d) appropriate information as to the steps to be taken if the Participant wishes to submit the claim for review. Any request for review must be submitted in writing by the Participant to the Committee in care of the Committee at its principal place of business within sixty (60) days after the receipt by the Participant of the denial of the Participant's claim. The -6- Participant or his or her duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Committee. If the Participant does not request a review of the Committee's determination within such sixty (60) day period, the Participant shall be barred and estopped from challenging the Committee's determination. Within sixty (60) days after the Committee's receipt of a request for review, it will review its determination. After considering all materials presented by the Participant, the Committee will render a written opinion, written in a manner calculated to be understood by the Participant, setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of the Plan on which the decision is based. If special circumstances require that the sixty (60) day time period be extended, the Committee will so notify the Participant and will render the decision as soon as possible, but no later than one hundred twenty (120) days after receipt of the request for review. ARTICLE VII. MISCELLANEOUS 7.1 Amendment or Termination. The Company reserves the right to amend or terminate the Plan when, in the sole opinion of the Company, such amendment or termination is advisable. Any such amendment or termination shall be made pursuant to a resolution of the board of directors of the Company and shall be effective as of the date of such resolution. 7.2 No Contract of Employment. Nothing contained in this Plan will confer upon any Participant the right to be retained in the service of the Company nor limit the right of the Company to discharge or otherwise deal with Participants without regard to the existence of the Plan. 7.3 Unfunded. The Plan at all times shall be entirely unfunded and no provision shall at any time be made with respect to segregating any assets of the Company for payment of any benefits hereunder. The Plan does not have a trust or trust fund arrangement. No Participant or Beneficiary or any other person shall have any interest in any particular assets of the Company by reason of the right to receive a benefit under the Plan and any such Participant or Beneficiary or other person shall have only the rights of a general unsecured creditor of the Company with respect to any rights under the Plan. Nothing contained in the Plan shall constitute a guaranty by the Company or any other entity or person that the assets of the Company will be sufficient to pay any benefit hereunder. 7.4 Nonalienation of Benefits. No benefit payable under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge prior to actual receipt thereof by the payee; and any attempt so to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge prior to such receipt shall be void; and the Company shall not be liable in any manner for or subject to the debts, contracts, liabilities, engagements or torts of any person entitled to any benefit under the Plan. 7.5 Taxes. The Company will cause taxes (including, but not limited to, employment taxes or federal or state income taxes) to be withheld from amounts paid hereunder as required -7- by law. A Participant should seek the advice of a tax consultant or financial advisor regarding his or her personal tax situation. 7.6 No Trust Relationship. Nothing contained herein and no actions taken pursuant to the Plan shall create or be construed to create a trust of any kind or a fiduciary relationship between the Company and any Participant. The Company shall not be considered a trustee by reason of any provision of this Plan. 7.7 Corporate Successors. The Plan shall not be automatically terminated by a transfer or sale of assets of the Company or by the merger or consolidation of the Company into or with any other corporation or other entity, but the Plan shall be continued after such sale, merger or consolidation only if and to the extent that the transferee, purchaser or successor entity agrees to continue the Plan. In the event the Plan is not continued by the transferee, purchaser or successor entity, then the Plan shall terminate subject to the provisions of section 5.4. 7.8 Governing Law. The Plan is established under and will be construed according to the laws of the State of Illinois, to the extent that such laws are not preempted by ERISA, and regulations thereunder. 7.9 Invalidity of Certain Provisions. If any provision of this Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof and the Plan shall be construed and enforced as if such provisions, to the extent invalid or unenforceable, had not been included. 7.10 Limitations on Liability and Indemnification. Notwithstanding any of the preceding provisions of the Plan, neither the Company, Plan Administrator, nor any individual acting as an employee or agent of the Company or as a member of the Pension Committee shall be liable to any Participant, former Participant, surviving spouse or any other person for any claim, loss, liability or expense incurred in connection with the Plan. Further, the Company shall indemnify and hold harmless each member of the Committee, the Plan Administrator, and each officer and employee of the Company to whom are delegated duties, responsibilities and authority with respect to the Plan against all claims, liabilities, fines and penalties, and all expenses reasonably incurred by or imposed upon such person (including but not limited to reasonable attorney fees) which are not the result of intentional acts knowingly in violations of the Plan or the law. 7.11 Headings. The headings of articles are included solely for convenience of reference, and if there is any conflict between such headings and the text of this Plan, the text shall control. Executed effective as of April 1, 2002. HORACE MANN SERVICE CORPORATION By: /s/ Kathryn E. Karr -------------------------------- Plan Administrator -------------------------------- -8- EX-10.4 6 dex104.txt OPTION AND REINSURANCE AGREEMENT Exhibit 10.4 CATASTROPHE EQUITY SECURITIES ISSUANCE OPTION AND REINSURANCE OPTION AGREEMENT This Catastrophe Equity Securities Issuance Option and Reinsurance Option Agreement (this "Agreement") is entered into as of May 7, 2002 between Horace Mann Educators Corporation, a Delaware corporation ("HM") and the option writers listed in Exhibit A attached hereto (referred to herein as "Option Writer" and "Reinsurance Option Writer"). RECITALS WHEREAS, HM is an insurance holding company with certain subsidiaries which insure life and property/casualty risks; WHEREAS, Reinsurance Option Writer is a reinsurance company in the business of reinsuring certain property/casualty insurance risks; WHEREAS, HM, Option Writer and Reinsurance Option Writer wish to enter into an agreement under which, during a specified time period, HM will have (i) the option (the "Securities Issuance Option", as defined in Section 1.35) to require Option Writer to purchase shares of HM preferred stock (the "Preferred Shares", as defined in Section 1.26), or (ii) the right (the "Quota Share Reinsurance Right", as defined in Section 1.29) to require Reinsurance Option Writer to participate in a ten percent (10%) quota share reinsurance treaty on the terms set forth in the attached Schedule 1.29, in each case in the event that HM incurs a Qualifying Catastrophic Event (as defined in Section 1.28); and WHEREAS, HM, Option Writer and Reinsurance Option Writer desire to memorialize their agreement with respect to the Securities Issuance Option and the Quota Share Reinsurance Right on the terms and conditions set forth below; NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, HM and Option Writer agree as follows: AGREEMENT 1. Definitions. Terms used in this Agreement shall have the respective ----------- meanings ascribed to them below. 1.1 "Agreement Year" means the period beginning at 12:00 A.M. Central Time on the Effective Date and ending at 12:00 A.M. Central Time on the one year anniversary of the Effective Date, and each subsequent one (1) year period, during the Exposure Period. 1.2 "Annual Reports" has the meaning assigned thereto in Section 3.9. 1.3 "Annual Statement" means the annual statement required by statute to be prepared by an insurance company and submitted to the department of insurance in its state of domicile. 1.4 "Attachment Point" means (i) with respect to a single Event, US$75,000,000 and (ii) with respect to multiple Events, US$210,000,000; provided, however, at the beginning of each Agreement Year, starting on the one year anniversary of the Effective Date, the Attachment Point shall be increased by a dollar amount equal to the result obtained by multiplying (x) the percentage increase, if any, in excess of five percent (5%), in the number of property units insured by the HM Insurance Subsidiaries in the calendar year immediately preceding the relevant Agreement Year, compared to the calendar year second preceding the relevant Agreement Year times (y) the Attachment Point then in effect. The number of property units insured by the HM Insurance Subsidiaries in calendar year 2001 was 283,411. 1.5 "Business Day" means any day other than a Saturday, Sunday or a day on which banking institutions in New York, New York or Zurich, Switzerland are not required to be open. 1.6 "Certificate of Designations" means the Certificate of Designations for the Preferred Shares, substantially in the form attached as Schedule 1.6, to be adopted by the Board of Directors of HM and filed with the Secretary of State of Delaware in accordance with Section 151 of the Delaware General Corporation Law of 1953, as amended. 1.7 "Change of Control" means, with respect to HM, (i) the acquisition of ownership by any Person or "group" within the meaning of Sections 13(d) and 13(g) of the Exchange Act required to file a Schedule 13D under the Exchange Act (other than a Person or "group" owning greater than 20% and less than 50% of the voting power of the capital stock of HM that otherwise meets the requirements of a Person or "group" eligible to file a Schedule 13G in lieu of a Schedule 13D) of greater than 30% of the voting power of the capital stock of HM (whether by sale or other transfer of capital stock, merger, consolidation or other reorganization or means, including a reorganization under bankruptcy or insolvency laws) or (ii) the consummation of a sale, transfer or other disposition of greater than 30% of the assets of HM (determined on a combined and consolidated fair market value basis) in one or a series of related transactions to any Person that is not an affiliate of HM. 1.8 "Effective Date" means May 8, 2002. 1.9 "Event" means a "loss occurrence" as defined in the Property Catastrophe Reinsurance agreements, a copy of which definition is attached as Schedule 1.9; provided, however, that such definition shall not be materially changed or amended without the prior written consent of Option Writer, which consent shall not be unreasonably withheld. 1.10 "Exchange Act" means the Securities Exchange Act of 1934, as amended, and all rules and regulations promulgated thereunder. 1.11 "Exercise Date" means the date of purchase and sale of Preferred Shares pursuant to an exercise of the Securities Issuance Option which date shall be specified in the Notice of Exercise and shall, subject to the proviso set forth below, be the later of forty-five (45) 2 days following delivery of a Notice of Exercise or ten (10) Business Days following receipt of all necessary insurance regulatory approvals (including without limitation, any Form A approvals required for the issuance and sale of the Preferred Shares), provided that the Exercise Date shall not be later than the one hundred eightieth (180th) day after the date of delivery of the Notice of Exercise, or such later date, if any, resulting from alternative dispute resolution under Section 8, which date shall be ten (10) Business Days after the rendering of a final decision pursuant to Section 8. 1.12 "Exercise Term" means (a) with respect to a single Event, the one (1) year period commencing upon the occurrence of a Qualifying Catastrophic Event and ending at 12:00 A.M. Central Time on the first anniversary of such occurrence during which HM has the right to exercise the Option, or (b) with respect to multiple Events, the period commencing upon the occurrence of a Qualifying Catastrophic Event and ending at 12:00 A.M. Central Time on the anniversary of the Effective Date next following the end of the Agreement Year during which such Qualifying Catastrophic Event occurs during which HM has the right to exercise the Option. 1.13 "Exposure Period" means the period beginning at 12:00 A.M. Central Time on the Effective Date and ending at 12:00 A.M. Central Time on the three year anniversary of the Effective Date. 1.14 "GAAP" means United States generally accepted accounting principles, consistently applied. 1.15 "HM" means Horace Mann Educators Corporation, a Delaware corporation. 1.16 "HM Common Stock" means the common stock of HM, par value US$0.001 per share. 1.17 "HM Insurance Subsidiaries" means Horace Mann Insurance Company, an insurance company formed under the laws of Illinois; Horace Mann Property & Casualty Insurance Company f/k/a Allegiance Insurance Company, an insurance company formed under the laws of California; Teachers Insurance Company, an insurance company formed under the laws of Illinois; Horace Mann Life Insurance Company, an insurance company formed under the laws of Illinois; Allegiance Life Insurance Company, an insurance company formed under the laws of Illinois; Educators Life Insurance Company of America, an insurance company formed under the laws of Arizona; Horace Mann Lloyds, a Lloyds plan formed under the laws of Texas; and such other insurance company subsidiaries of HM as may be agreed in writing between HM and Option Writer. 1.18 "Notice of Exercise" means the written notice of HM's intent to exercise the Securities Issuance Option as described in Section 2.3. 1.19 "Notice of Objection" means Option Writer's written notice of objection to a Notice of Exercise, as described in Section 2.3. 3 1.20 "Option" means the right described in Section 2.1. 1.21 "Option Fee" means the amounts to be paid by HM to Option Writer as consideration for the Option, on the dates set forth in Section 2.1, in each case equal to 1.25% of (i) US$75,000,000, less (ii) the Original Value of all Preferred Shares purchased pursuant to exercise of the Securities Issuance Option; provided, however, that if at the time the Option Fee is due, HM's S&P Rating is below A+, the percentage used to calculate the Option Fee shall be adjusted as follows: HM S&P Rating Percentage Used to Calculate A 1.3% A- 1.45% BBB+ 1.75% BBB 2.25%. 1.22 "Original Value" means the Preferred Share Purchase Price for each Preferred Share, as proportionally adjusted for all stock splits, stock dividends, and any other subdivisions, combinations, reclassifications, or recapitalizations affecting the Preferred Shares. 1.23 "Option Writer" and "Reinsurance Option Writer" shall mean the respective entities listed on Exhibit A. 1.24 "Person" shall mean any individual, partnership, joint venture, corporation, limited liability company, association, joint stock company, trust or unincorporated organization or association, or a government or any department or agency or political subdivision thereof. 1.25 "Preferred Share Purchase Price" means US$1,000 per Preferred Share payable by Option Writer to HM as set forth in Section 2.3. 1.26 "Preferred Shares" means the Series A Cumulative Convertible Preferred Stock of HM described in the Certificate of Designations, par value US$0.001 per share. 1.27 "Property Catastrophe Reinsurance" means the property catastrophe reinsurance maintained by the HM Insurance Subsidiaries as described in Section 5.8. 1.28 "Qualifying Catastrophic Event" means (a) with respect to a single Event, any single Event taking place during an Agreement Year from which HM incurs an Ultimate Loss in an amount greater than the Attachment Point, or (b) with respect to multiple Events taking place during an Agreement Year, multiple Events from which HM incurs an Ultimate Loss in the aggregate from such Events in an amount greater than the Attachment Point. A single Event that takes place during the Exposure Period but which has not developed into a Qualifying Catastrophic Event prior to the first anniversary of such Event shall not constitute a Qualifying Catastrophic Event for purposes of this Agreement. A single Event that takes place 4 during the Exposure Period and which develops into a Qualifying Catastrophic Event prior to the first anniversary of such Event, but after expiration of the Exposure Period, shall constitute a Qualifying Catastrophic Event for purposes of this Agreement. Multiple Events that have taken place during any Agreement Year within the Exposure Period but which have not developed into a Qualifying Catastrophic Event prior to the end of six (6) months after the end of such Agreement Year shall not constitute a Qualifying Catastrophic Event for purposes of this Agreement. Multiple Events that have taken place during any Agreement Year within the Exposure Period and which develop into a Qualifying Catastrophic Event prior to the end of six (6) months after the end of such Agreement Year shall constitute a Qualifying Catastrophic Event for purposes of this Agreement. 1.29 "Quota Share Reinsurance Right" means HM's right, but not obligation, to bind Reinsurance Option Writer to participate in a ten percent (10%) quota share reinsurance treaty (the "Treaty") on the terms set forth in the attached Schedule 1.29. 1.30 "Registration Rights Agreement" means the Registration Rights Agreement between HM and Option Writer in the form attached hereto as Schedule 1.30. 1.31 "S&P Rating" means the financial strength rating (or, with respect to Option Writer, the counterparty rating), as published from time to time, by the Standard & Poor's Division of The McGraw-Hill Companies or any successor. 1.32 "SAP" means statutory accounting principles, consistently applied. 1.33 "SEC" means the United States Securities and Exchange Commission. 1.34 "Securities Act" means the Securities Act of 1933, as amended, and all rules and regulations promulgated thereunder. 1.35 "Securities Issuance Option" means HM's option to obligate Option Writer to purchase Preferred Shares with an Original Value of up to US$75,000,000, subject to the terms and conditions set forth in this Agreement. 1.36 "Transaction Agreements" means this Agreement, its schedules and exhibits, the Registration Rights Agreement, the Treaty and the Certificate of Designations. 1.37 "Ultimate Loss" means the actual direct losses (including the paid loss, all reserves for unpaid losses, and coinsurance paid by the HM Insurance Subsidiaries) incurred by the HM Insurance Subsidiaries from an Event or multiple Events during the applicable Agreement Year, without accounting for the Property Catastrophe Reinsurance in place at the time such Event or Events took place, but after accounting for all other reinsurance. A loss shall not be included in the calculation of Ultimate Loss for more than one Qualifying Catastrophic Event. 2. Securities Issuance Option and Quota Share Reinsurance Right. ------------------------------------------------------------ 5 2.1 Option Fee. To acquire the right (the "Option") to exercise (a) ---------- the Securities Issuance Option during the Exercise Term with respect to a Qualifying Catastrophic Event or (b) the Quota Share Reinsurance Right, all on the terms contained herein, HM shall pay to Option Writer an Option Fee (the "Option Fee") for each Agreement Year. The first Option Fee payment shall be delivered on the Effective Date for the year commencing on the Effective Date), and subsequent Option Fee payments shall be delivered on each anniversary of the Effective Date (or the next following Business Day) within the Exposure Period. In consideration of the payment of the Option Fee, Option Writer hereby grants to HM the right to exercise the Option on the terms set forth in this Agreement. 2.2 Exercise Rights. HM shall have the right to exercise the --------------- Securities Issuance Option subject to the following limitations: a. The first exercise of the Securities Issuance Option must be made with respect to a number of Preferred Shares having a minimum aggregate Original Value of US$25,000,000, and may only be made in integral multiples of US$1,000,000 above such minimum amount; provided, however, HM shall be entitled to exercise the Securities Issuance Option in an amount in excess of US$37,500,000 only if gross losses resulting from a single Event are greater than US$105,000,000. b. The second or any subsequent exercise of the Securities Issuance Option must be made with respect to a number of Preferred Shares having a minimum aggregate Original Value of US$5,000,000, and may only be made in integral multiples of US$1,000,000 above such minimum amount. c. In no event shall the Preferred Shares issued pursuant to all exercises of the Securities Issuance Option have an aggregate Original Value in excess of US$75,000,000. d. In no event shall HM exercise the Securities Issuance Option more than one time (i) per Qualifying Catastrophic Event resulting from any single Event, (ii) per Qualifying Catastrophic Event resulting from multiple Events occurring during any one (1) Agreement Year or (iii) with respect to any one Agreement Year (regardless of the number of Qualifying Catastrophic Events occurring during such Agreement Year). 2.3 Method of Exercise. In the event that HM desires to exercise the ------------------ Securities Issuance Option with respect to a Qualifying Catastrophic Event, HM shall provide written notice to Option Writer during the Exercise Term of its intent to exercise the Securities Issuance Option (a "Notice of Exercise"), together with such information as may be necessary to evidence the satisfaction by HM of, or the ability of HM to satisfy prior to delivery of Preferred Shares, the conditions to exercise set forth in Article 5. The Notice of Exercise shall specify the number of Preferred Shares to be issued pursuant to the exercise of the Securities Issuance Option, the aggregate Preferred Share Purchase Price payable for such Preferred Shares based on Original Value and the proposed Exercise Date and, with respect to the applicable Qualifying Catastrophic Event, the amount of the Ultimate Loss relating to such Qualifying Catastrophic Event, including the amount of (i) paid losses, (ii) losses reported but not yet paid and (iii) losses 6 incurred but not yet then reported, including assumptions underlying the calculation of item (iii). Option Writer shall have until the end of the forty-five (45) day period following delivery of the Notice of Exercise in accordance with Section 10.2 to investigate whether the conditions to exercise of the Securities Issuance Option have been satisfied and shall, by the end of such 45 day period, either issue a Notice of Objection (hereinafter defined) or state its intent not to issue a Notice of Objection based on its investigation theretofore conducted; provided, however, that if the Exercise Date is extended for more than an additional forty-five (45) days (beyond the initial forty-five (45) day notice period) for any reason, Option Writer shall have a period of ten (10) business days to update its investigation, which ten (10) business day period shall commence on the date that is the later of (a) the date that HM certifies to Option Writer that all conditions to exercise of the Securities Issuance Option set forth in Article 5 hereof shall have been satisfied or (b) the 45th day immediately preceding the actual Exercise Date. In connection with such investigation, HM shall provide Option Writer, or its designated agent, reasonable access to its loss records relating to the Qualifying Catastrophic Event in question (including, without limitation, policy files, claim files and loss and loss reserve files or information), during normal business hours, in order to allow Option Writer to undertake such investigation. In the event that Option Writer determines that the conditions to exercise of the Securities Issuance Option set forth in Article 5 have been satisfied, or such is determined pursuant to Article 8, Option Writer shall deliver, on the Exercise Date (or the next following Business Day if the Exercise Date is not a Business Day), by wire transfer of immediately available funds, in U.S. dollars, the aggregate Preferred Share Purchase Price specified in the Notice of Exercise, against the delivery by HM of the corresponding number of Preferred Shares. In the event that Option Writer determines that the conditions for exercise of the Securities Issuance Option have not been met, Option Writer shall deliver a written notice of objection to exercise of the Securities Issuance Option (the "Notice of Objection") to HM within such forty-five (45) day period or the ten (10) business day update period described above, as applicable. Such Notice of Objection shall specify in reasonable detail the reason(s) for Option Writer's objection to the exercise of the Securities Issuance Option. If, within twenty (20) days following delivery of the Notice of Objection to HM, HM and Option Writer cannot reach an agreement regarding the exercise of the Securities Issuance Option, their dispute shall be submitted to dispute resolution in accordance with Article 8 below. If Option Writer has not delivered a Notice of Objection to HM or a Notice of Objection has been resolved in HM's favor, Option Writer and HM shall cooperate and shall use their commercially reasonable efforts to cause the conditions listed in Section 5.5 which involve obligations of Option Writer or HM, as applicable, to be satisfied as soon as reasonably practicable, including without limitation making any Form A filings required under applicable state insurance laws, rules and regulations. 2.4 Quota Share Exercise. If HM has satisfied all conditions to -------------------- exercise of the Securities Issuance Option other than those contained in Sections 5.9 and 5.12, HM may elect, as an alternative to such exercise, on one occasion and prior to the issuance of any Preferred Shares pursuant to Section 2.3, to exercise the Quota Share Reinsurance Right. In such a case, HM shall provide written notice to Reinsurance Option Writer during the Exercise Term of its intent to exercise the Quota Share Reinsurance Right, which shall contain the same information as a Notice of Exercise other than information regarding Preferred Shares. Following delivery of that notice in accordance with Section 10.2, the procedures for Reinsurance Option Writer to object to that notice and for resolution of that objection shall be consistent with those set forth above in 7 Section 2.3. If Reinsurance Option Writer has not objected to such an exercise or such an objection has been resolved in HM's favor, Reinsurance Option Writer and HM shall cooperate and shall use their commercially reasonable efforts to cause the conditions listed in Section 5.5 which involve obligations of Reinsurance Option Writer or HM, as applicable, to be satisfied as soon as reasonably practicable. Any election by HM to exercise the Quota Share Reinsurance Right shall terminate the obligation of Reinsurance Option Writer to purchase Preferred Shares pursuant to this Agreement. 3. Representations and Warranties of HM. HM, on its behalf and on behalf of ------------------------------------ each of the HM Insurance Subsidiaries, represents and warrants to Option Writer and Reinsurance Option Writer (which representations and warranties shall be deemed to be repeated by HM on each Exercise Date and which representations and warranties shall be deemed to include any certification made by any officer of HM pursuant to the terms of this Agreement) as follows: 3.1 Existence and Qualifications of HM. Each of HM and the HM ---------------------------------- Insurance Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and each of HM and the HM Insurance Subsidiaries has the full corporate power and authority to conduct its business as currently being conducted and to execute and deliver the Transaction Agreements to which it is a party, and to perform its obligations under, and to consummate the transactions contemplated by, the Transaction Agreements to which it is a party, including, without limitation, the delivery of the Preferred Shares pursuant to the exercise of the Securities Issuance Option. 3.2 No Violation or Conflict. The execution and delivery of the ------------------------ Transaction Agreements to which it is a party by HM, and the performance of HM under such Transaction Agreements, will not be in violation or conflict with any applicable law, any provision of HM's or HM's Insurance Subsidiaries' organizational documents or any order or judgment of any court or other government agency applicable to HM or any of its assets or subsidiary or affiliated companies, to the extent that any such order or judgment would have a material adverse effect on the rights and privileges of Option Writer under this Agreement, or any contractual restriction binding upon or affecting HM or any of its assets or subsidiary or affiliated companies. HM and the HM Subsidiaries, as applicable, have complied, in all material respects, with all representations, warranties, covenants and agreements contained in any Transaction Agreements. 3.3 Consents. All governmental and other consents that are required to -------- have been obtained by HM with respect to the execution and delivery of this Agreement have been obtained and are in full force and effect and all conditions of any such consents have been complied with. 3.4 Binding Obligations. The execution of the Transaction Agreements ------------------- to which it is a party has been duly authorized by all necessary corporate action of HM, and such Transaction Agreements (a) have been duly executed and delivered by HM, (b) constitute legal, valid and binding obligations of HM and (c) are enforceable against HM in accordance with their terms (subject to applicable bankruptcy, reorganization, insolvency, moratorium or similar laws 8 affecting creditors' rights generally and subject, as to enforceability, to equitable principles of general application). 3.5 Absence of Litigation. There is not pending or, to its knowledge, --------------------- threatened against HM or any of its subsidiaries or affiliates, any action, suit or proceeding before any court, tribunal, governmental body, agency or official or any arbitrator or mediator that would reasonably be expected to materially and adversely affect the legality, validity and enforceability of the Transaction Agreements against HM or materially adversely affect the financial condition of HM or any of the HM Insurance Subsidiaries. 3.6 Preferred Shares. HM has, or will have as of the applicable ---------------- Exercise Date, 75,000 authorized Preferred Shares, and such Preferred Shares, when issued pursuant to the exercise of the Securities Issuance Option, shall, upon delivery of payment therefor, be validly issued, fully paid and non-assessable. Upon issuance pursuant to this Agreement, the Preferred Shares shall be free and clear of any lien, encumbrance or other restriction (other than as set forth in the Transaction Agreements), and upon delivery of and payment for the Preferred Shares as provided in this Agreement, Option Writer will acquire good title to the Preferred Shares purchased under this Agreement, free and clear of any lien, encumbrance or other restriction (other than as set forth in the Transaction Agreements). 3.7 HM Common Stock. The shares of HM Common Stock into which the --------------- Preferred Shares may be converted, as set forth in the Certificate of Designations, shall, upon issuance pursuant to such conversion, be validly issued, fully paid and non-assessable. Such shares of HM Common Stock shall be free and clear of any lien, encumbrance or other restriction (other than as set forth in the Transaction Agreements), and upon conversion as provided in the Certificate of Designations, Option Writer will acquire good title to the requisite number of shares of HM Common Stock, free and clear of any lien, encumbrance or other restriction (other than as set forth in the Transaction Agreements). Such shares of HM Common Stock shall be subject to the Registration Rights Agreement. 3.8 Options or Other Rights. Except for this Agreement, there is no ----------------------- outstanding right, subscription, warrant, call, unsatisfied preemptive right, option or other agreement of any kind to purchase or otherwise to receive from HM any authorized but unissued, unauthorized or treasury shares of the Preferred Shares. 3.9 Financial Statements. Option Writer has had access to true and -------------------- complete copies of (a) the Annual Statements of the HM Insurance Subsidiaries containing audited balance sheets as of December 31, 2000 and 2001 and statements of earnings for the years ended December 31, 2000 and 2001, and (b) the Annual Report on Form 10-K and Annual Report to Shareholders of HM for the year ended December 31, 2001 (collectively, the "Annual Reports"). The Annual Statements have been prepared in accordance with SAP and the Annual Reports have been prepared in accordance with GAAP, and both the Annual Statements and the Annual Reports present fairly in all material respects the financial position of HM and/or the HM Insurance Subsidiaries, and the results of their respective operations, as of the dates indicated and for the periods then ended. 9 3.10 Licenses and Permits. HM and the HM Insurance Subsidiaries have -------------------- all requisite licenses, permits and authority (collectively, "Licenses") that are necessary for the conduct of their respective insurance and other businesses, if any, such Licenses are in full force and effect and no proceeding is pending or threatened to suspend, revoke or limit any License which is material to the operations of any such insurance company. 3.11 Regulatory Filings. All previous regulatory filings by HM with ------------------ the SEC and applicable insurance regulatory authorities, at the time of filing, (a) in the case of filings with the SEC, did not contain any material misstatements or omissions, and (b) in the case of filings with applicable insurance regulatory authorities, were appropriately responsive to, and in compliance with, the insurance regulatory requirements in all material respects. All previous regulatory filings by the HM Insurance Subsidiaries with applicable insurance regulatory authorities were, at the time of filing, appropriately responsive to, and in compliance with, the insurance regulatory requirements in all material respects. 3.12 No Insolvency or Bankruptcy. Neither HM nor any HM Insurance --------------------------- Subsidiary (a) is the subject of any voluntary or involuntary petition under any bankruptcy, insolvency or similar law affecting creditors generally, (b) is the subject of any liquidation, transformation or rehabilitation proceeding or (c) has had a receiver or similar person or entity appointed for any of its property. 3.13 1934 Act Compliance. HM's most recent Annual Report filed on Form -------------------- 10-K and its Quarterly Reports filed on Form 10-Q and any Current Reports filed on Form 8-K filed after the date of such Form 10-K, at the time they were filed with the SEC and as of the Effective Date, complied and comply in all material respects with the requirements of the Exchange Act and the rules and regulations of the SEC under the Exchange Act and, at the Effective Date, do not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 4. Representations and Warranties of Option Writer. Each of Option Writer ----------------------------------------------- and Reinsurance Option Writer represents and warrants to HM (which representations and warranties shall be deemed repeated by Option Writer and/or Reinsurance Option Writer, to the extent applicable, on each Exercise Date) as follows (with each reference to Option Writer being construed as a reference to which of Option Writer or Reinsurance Option Writer is making the representations below, except for Section 4.6 which shall be limited to Option Writer): 4.1 Existence and Qualifications of Option Writer. Option Writer is a --------------------------------------------- corporation duly organized, validly existing and in good standing under the laws of the state of domicile noted on Exhibit A, and Option Writer has the full corporate power and authority to conduct its business as currently being conducted and to execute and deliver the Transaction Agreements to which it is a party, and to perform its obligations under, and consummate the transactions contemplated by the Transaction Agreements to which it is a party, including, without limitation, the purchase of the Preferred Shares pursuant to the exercise of the Securities Issuance Option. 10 4.2 No Violation or Conflict. The execution and delivery of the ------------------------ Transaction Agreements to which it is a party by Option Writer, and the performance of Option Writer under such Transaction Agreements, do not violate or conflict with any applicable law, any provision of Option Writer's organizational documents or any order or judgment of any court or other government agency applicable to Option Writer or any of its assets or subsidiary or affiliated companies to the extent that any such order or judgment would have a material adverse effect on the rights and privileges of HM under this Agreement, or any contractual restriction binding upon or affecting Option Writer or any of its assets or subsidiary or affiliated companies. Option Writer has complied, in all material respects, with all representations, warranties, covenants and agreements contained in any Transaction Agreements to the extent that such compliance will not have a material adverse effect on the rights and privileges of HM under this Agreement. 4.3 Consents. All governmental and other consents that are required to -------- have been obtained by Option Writer with respect to the execution and delivery of this Agreement have been obtained and are in full force and effect and all conditions of any such consents have been complied with. 4.4 Binding Obligations. The execution of the Transaction Agreements ------------------- to which it is a party has been duly authorized by all necessary corporate action of Option Writer, and such Transaction Agreements (a) have been duly executed and delivered by Option Writer, (b) constitute legal, valid and binding obligations of Option Writer and (c) are enforceable against Option Writer in accordance with their terms (subject to applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting creditors' rights generally and subject, as to enforceability, to equitable principles of general application). 4.5 Absence of Litigation. There is not pending or to its knowledge, --------------------- threatened against Option Writer or any of its subsidiaries or affiliates, any action, suit or proceeding before any court, tribunal, governmental body, agency or official or any arbitrator or mediator that would reasonably be expected to materially and adversely affect the legality, validity and enforceability of the Transaction Agreements against Option Writer. 4.6 Investment Representation. Option Writer understands that the ------------------------- issuance of Preferred Shares under this Agreement and the issuance of HM Common Stock upon conversion of Preferred Shares have not been and will not (except as contemplated pursuant to the Registration Rights Agreement) be registered under the Securities Act and such Preferred Shares and HM Common Stock will be issued in reliance upon the exemption afforded by Section 4(2) of the Securities Act for transactions by an issuer not involving any public offering. Option Writer represents that (a) it is acquiring the Preferred Shares and such HM Common Stock solely for its own account, for investment purposes only, and not with a view to distribution, fractionalization or resale thereof, (b) it will not sell or otherwise dispose of the Preferred Shares and such HM Common Stock except in compliance with the registration requirements or exemption provisions of applicable securities laws including the Securities Act, (c) it has not relied on HM for any explanation of the application of the various state and federal securities laws with regard to the acquisition of the Preferred Shares and such HM Common Stock, (d) assuming the accuracy of HM's representations and warranties set forth in Article 3 11 hereof, it has access to adequate information regarding the business and finances of HM, and has received, read and understood the contents of the Annual Statements and the Annual Reports and Notice of Meeting and Proxy Statements for HM and the HM Insurance Subsidiaries as of and for each of the years ended December 31, 1999, 2000 and 2001, (e) it has such knowledge and experience in business and financial matters that it has been able to fully understand and completely evaluate the risks and merits of holding the Preferred Shares and such HM Common Stock as provided in this Agreement and (f) it is able to bear the economic risk and limitation in liquidity of an investment in the Preferred Shares and such HM Common Stock. 5. Conditions to Exercise of Option. With respect to each exercise of the -------------------------------- Option, the right of HM to effect such exercise shall be subject to the satisfaction by HM at, or waiver by Option Writer at or prior to, the Exercise Date, of the following conditions: 5.1 Occurrence of Event. A Qualifying Catastrophic Event shall have ------------------- occurred with respect to the HM Insurance Subsidiaries collectively. 5.2 HM Net Worth. With respect to the first exercise of the Option, ------------ after accounting for the Qualifying Catastrophic Event, but prior to payment for any Preferred Shares to be purchased upon such first exercise of the Option, the consolidated stockholders' equity of HM and its consolidated subsidiaries, as determined in accordance with GAAP (the "HM Net Worth") shall not be less than US$215,000,000, excluding goodwill. With respect to any subsequent exercise of the Option, after accounting for the Qualifying Catastrophic Event but prior to accounting for any payment for Preferred Shares previously issued pursuant to an exercise of the Securities Issuance Option, the HM Net Worth shall not be less than US$215,000,000, excluding goodwill. 5.3 Financial Leverage. Prior to accounting for the Qualifying ------------------ Catastrophic Event, the total amount of HM long-term debt and short-term debt divided by the total amount of HM long-term debt and shareholders equity (excluding any payment received for the Preferred Shares), determined in accordance with GAAP, shall not be more than 47.5%. 5.4 Rating. Prior to the Qualifying Catastrophic Event, the S&P Rating ------ of HM shall not have fallen below BBB. 5.5 Compliance with Laws and Consents. With respect to the exercise of --------------------------------- only the Securities Issuance Option, HM shall have complied with all laws and regulations applicable to the authorization and issuance of the Preferred Shares, and subject to the following sentence, the conversion of the Preferred Shares into HM Common Stock, including the adoption by the Board of Directors of HM of the Certificate of Designations, and the filing of such Certificate of Designations with the Secretary of State of Delaware. HM and Option Writer shall have obtained all consents and approvals (whether shareholder, regulatory, contractual or otherwise) necessary for the authorization and issuance of the Preferred Shares, the conversion of the Preferred Shares into HM Common Stock, and the authorization and issuance of such HM Common Stock, including without limitation the filing and approval of any Form A application with the applicable insurance departments (but excluding any filings required under the Hart- 12 Scott-Rodino Antitrust Improvements Act of 1976, as amended); provided that, if any insurance regulator shall for any reason decline to approve the conversion of the Preferred Shares and/or the issuance of HM Common Stock pursuant to such conversion, but shall approve the authorization and issuance of the Preferred Shares then such approval of the conversion of the Preferred Shares and/or the issuance of HM Common Stock pursuant to such conversion, as applicable, shall not be a condition to exercise of the Securities Issuance Option, provided further, however, that HM has reasonably cooperated with Option Writer to obtain such approvals. 5.6 Review of Financial Statements by Auditor. HM's regular outside ----------------------------------------- auditor or accounting firm shall have reviewed HM's consolidated balance sheet and statement of earnings for the most recent quarter ending prior to the date of the applicable Notice of Exercise, and shall have issued its review report on such quarterly financial statements, and HM shall provide an adjusted consolidated balance sheet for HM for the period up to the Exercise Date, and HM shall represent and warrant, as of the Exercise Date, that such adjusted consolidated balance sheet presents fairly in all material respects the financial position of HM as of the date indicated. In addition, HM shall supply Option Writer with such information as Option Writer may reasonably request to permit Option Writer to determine satisfaction by HM of the conditions to exercise set forth in Sections 5.1, 5.2, 5.3, 5.4, 5.6, 5.8, 5.9 and 5.13 of this Agreement. 5.7 No Insolvency or Bankruptcy. None of HM or the HM Insurance --------------------------- Subsidiaries shall (a) be the subject of any voluntary or involuntary petition under any bankruptcy, insolvency or similar law affecting creditors generally, (b) be the subject of any liquidation, transformation or rehabilitation proceeding, (c) be under the supervision of any governmental regulatory body or (d) have had a receiver or similar person or entity appointed for any of its property. 5.8 Maintenance of Current HM Reinsurance Program. HM shall have in --------------------------------------------- effect a property catastrophe reinsurance program, of reasonably consistent quality with its reinsurance program in effect on the Effective Date, with a total retention and coinsurance of no more than $30,000,000 below the then applicable Attachment Point for a single Event. 5.9 HM Common Stock Ownership Threshold. With respect to the exercise ----------------------------------- of only the Securities Issuance Option, the purchase of Preferred Shares pursuant to an exercise of the Securities Issuance Option shall not (when taking into account all shares of HM Common Stock in which Option Writer then holds direct, indirect or beneficial ownership) result in Option Writer having direct, indirect or beneficial ownership of more than fifty percent (50%) of the issued and outstanding shares of HM Common Stock, assuming that such Preferred Shares, together with any other Preferred Shares already then held directly, indirectly or beneficially by Option Writer, were converted into shares of HM Common Stock on the Exercise Date. 5.10 Accuracy of Representations, Warranties and Covenants. Each of ----------------------------------------------------- the representations and warranties of HM made in Article 3 of this Agreement shall be true in all material respects on and as of the Exercise Date and with the same effect as though such representations and warranties had been made on and as of such date except as otherwise 13 contemplated or permitted by this Agreement, and HM shall not be in breach of any of the covenants of HM made in Article 6 of this Agreement; and Option Writer shall have received a certificate to that effect, in the form attached as Schedule 5.10, dated the Exercise Date and executed on behalf of HM by a duly authorized officer. 5.11 Payment of Fees. All Option Fee payments then due shall have been --------------- paid in full. 5.12 Legal Opinion. Option Writer shall have received, from counsel ------------- for HM, an opinion of counsel dated as of the Exercise Date which is substantially in the form attached as Schedule 5.12. 5.13 Consents. All governmental and other consents, including those of -------- HM's shareholders, that are required to have been obtained by HM with respect to the execution, delivery and performance of the Transaction Agreements or the issuance of the Preferred Shares shall have been obtained by HM and shall be in full force and effect and all conditions of any such consents shall have been complied with. 6. Covenants and Agreements. Option Writer and HM make the following ------------------------ covenants and agreements: 6.1 Redemption Rights. The Preferred Shares shall be subject to the ----------------- provisions of the Certificate of Designations. 6.2 Registration Rights. Holders of Registrable Securities (as defined ------------------- in the Registration Rights Agreement) shall have registration rights in accordance with the terms of the Registration Rights Agreement, which Registration Rights Agreement shall be executed by HM and Option Writer concurrently with this Agreement. 6.3 Resale Rights. ------------- a. Option Writer shall be able to sell or transfer Preferred Shares to its affiliates and affiliated investment funds; provided, however, that any such sale or transfer shall not subject HM to any material cost or expense, and provided further, that if such affiliate is foreign, there would be no material adverse effect on HM due to the fact that such affiliate is a foreign entity. Other than as so provided, the Preferred Shares will be freely transferable subject only to restrictions imposed by Federal and state securities laws. b. Prior to the registration of the Preferred Shares, pursuant to the Registration Rights Agreement or otherwise, the certificates evidencing the Preferred Shares shall bear a legend which evidences restrictions upon transferability of the Preferred Shares. The legend shall read as follows: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, 14 AS AMENDED, OR UNDER ANY STATE OR FOREIGN SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION FROM REGISTRATION THEREUNDER OR A WRITTEN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO HORACE MANN EDUCATORS CORPORATION TO THE EFFECT THAT NO SUCH REGISTRATION IS REQUIRED. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER SET FORTH IN A CATASTROPHE EQUITY SECURITIES ISSUANCE OPTION AND REINSURANCE OPTION AGREEMENT BETWEEN HORACE MANN EDUCATORS CORPORATION AND THE OPTION WRITER NAMED THEREIN DATED AS OF MAY 7, 2002, AS AMENDED AND MODIFIED FROM TIME TO TIME. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT HORACE MANN EDUCATORS CORPORATION'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE. The first sentence of the legend (and the eighth and eleventh words of the second sentence) shall be removed from any certificate representing Preferred Shares (i) sold under an effective registration statement under the Securities Act or (ii) as to which, in an opinion of counsel reasonably satisfactory to HM (which opinion shall be paid for solely by the holder of such Preferred Shares), such registration is not necessary or required, and that the transfer will not otherwise violate the Securities Act, the Exchange Act or applicable state or foreign securities laws; and any stop transfer instructions previously given to HM's transfer agent shall be revoked as to such Preferred Shares upon the occurrence of (i) or (ii) above. c. The shares of HM Common Stock into which the Preferred Shares may be convertible shall not be subject to any restrictions on sale or transfer by Option Writer pursuant to this Agreement. d. Prior to the registration of any shares of HM Common Stock into which the Preferred Shares are converted, pursuant to the Registration Rights Agreement or otherwise, the certificates representing such shares of HM Common Stock shall bear a legend which evidences restrictions upon transferability of such shares of HM Common Stock. Such legend shall read as follows: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE OR FOREIGN SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION FROM REGISTRATION THEREUNDER OR A WRITTEN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO HORACE MANN EDUCATORS 15 CORPORATION IS OBTAINED TO THE EFFECT THAT NO SUCH REGISTRATION IS REQUIRED. The legend shall be removed from any certificate representing either (i) shares of HM Common Stock sold under an effective registration statement under the Securities Act or (ii) shares of HM Common Stock as to which, in an opinion of counsel reasonably satisfactory to HM (which opinion shall be paid for solely by the holder of such shares of HM Common Stock), such registration is not necessary or required, and that the transfer will not otherwise violate the Securities Act, the Exchange Act or applicable state or foreign securities laws; and stop transfer instructions previously given to HM's transfer agent shall be revoked as to such shares of HM Common Stock upon the occurrence of (i) or (ii) above. 6.4 Preferred Share Preference. The liquidation preference of the -------------------------- Preferred Shares shall be at least equal to the highest liquidation preference of any other class of preferred shares of HM issued and outstanding at the time of liquidation. During the term of this Agreement and during the period when any Preferred Shares remain issued and outstanding, HM shall not issue any debt securities convertible into equity securities of HM or any preferred or other capital stock, in any such case which ranks equal or senior to the Preferred Shares with respect to dividend or distribution rights or rights to distributions on liquidation, without the prior written approval, which approval shall not be unreasonably withheld, of (i) Option Writer if no Preferred Shares are then outstanding, or (ii) the holders of more than sixty-six and two-thirds percent (66 2/3%) of the outstanding Preferred Shares if Preferred Shares are then outstanding. 6.5 Restrictions on HM and Option Writer. During the period when any ------------------------------------ Preferred Shares remain issued and outstanding, without the prior written consent of the holders of more than sixty-six and two-thirds percent (66 2/3%) of such Preferred Shares, which consent shall not be unreasonably withheld, (a) HM and the HM Insurance Subsidiaries shall not (i) pay dividends on, make redemptions of, or make other distributions with respect to, any capital stock of HM other than the Preferred Shares except that subsidiaries of HM may pay dividends to HM and HM may pay dividends on the HM Common Stock at any time if all dividends theretofore accrued on the Preferred Shares shall be paid in full in cash to the holders of Preferred Shares before the declaration or payment of any such dividends on the HM Common Stock, (ii) enter into related party transactions at other than arm's length or (iii) except in the ordinary course of business, make any loan or advance to, or investment in, any person or entity, and (b) HM shall not dispose of its interest in any material subsidiary (i.e., any subsidiary which contains more than ten percent (10%) of the consolidated assets or produces more than ten percent (10%) of the consolidated annual revenue of HM); provided, however, that the restrictions set forth in clauses (a)(iii) and (b) above shall only apply in the event that HM has not then paid all dividends then accrued and payable with respect to such Preferred Shares. 6.6 Option Writer Filings. Notwithstanding anything in this Agreement --------------------- to the contrary, Option Writer shall be responsible for making any filing required of it under Section 13(d) or Section 16 of the Exchange Act, but the making of such filings shall not be a condition to the exercise of the Securities Issuance Option. 16 6.7 Regulatory Filings for Conversion. HM, Option Writer and their --------------------------------- respective affiliates shall make all regulatory filings, including without limitation all filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which are necessary or desirable to permit Option Writer to convert any Preferred Shares into shares of HM Common Stock in accordance with its terms as promptly as possible following any request by Option Writer. Option Writer and HM shall cooperate and use commercially reasonable efforts to obtain any insurance regulatory approvals for such conversion not theretofore obtained, including without limitation any Form A filings required under applicable insurance laws, rules and regulations. 6.8 Change of Control. In the event of a Change of Control, at the ----------------- option of Option Writer, to be exercised within thirty (30) Business Days after the earlier of notice from HM to Option Writer of a pending, or an occurrence of a, Change of Control, (i) this Agreement shall be terminated as of the earlier of the date of such Change of Control or the end of the Agreement Year in which notice of such Change of Control is received by Option Writer and (ii) HM shall be obligated either to redeem any issued and outstanding Preferred Shares or convert such Preferred Shares into Common Shares, in each case on the terms and conditions set forth in the Certificate of Designations, provided, however, that in the event of the cancellation of this Agreement, a portion of the annual Option Fee shall be returned to HM in an amount equal to the amount of the annual Option Fee paid for the year in which the Change of Control occurs, multiplied by a fraction, the numerator of which is the number of days between the date of the Change of Control and the end of the Agreement Year and the denominator of which is 365, and provided further, however, that this Agreement shall be reinstated in the event the redemption price for the Preferred Shares must be refunded or returned by Option Writer due to any preferential transfer or fraudulent conveyance claim. 6.9 Option Writer Credit Support. Each of Option Writer and ---------------------------- Reinsurance Option Writer shall, promptly upon request by HM, in the event that the S&P Rating of Option Writer or Reinsurance Option Writer, as applicable, falls below AA- during any period during which HM has the ability to exercise the Option, purchase at Option Writer's or Reinsurance Option Writer's, as applicable, sole expense an irrevocable standby letter of credit drawable in New York, from a financial institution reasonably acceptable to HM, which letter of credit secures the performance of Option Writer or Reinsurance Option Writer, as applicable, under this Agreement and effectively raises the payment ability of Option Writer or Reinsurance Option, as applicable, under this Agreement to an S&P Rating of AAA. Such letter of credit shall remain in effect until the earlier of (a) five (5) days following the end of the period during which HM has the ability to exercise the Option, and (b) the date that the S&P Rating of Option Writer or Reinsurance Option Writer, as applicable, shall be at least AA-. Such letter of credit shall initially be in a principal amount equal to the Original Value of the Preferred Shares subject to the Securities Issuance Option which are not then issued and outstanding, and such principal amount shall subsequently be adjusted from time to time based on adjustments to the total Original Value of the Preferred Shares subject to the Securities Issuance Option, whether due to exercises of the Securities Issuance Option, redemption of Preferred Shares which are reincluded in the Preferred Shares subject to the Securities Issuance Option, or otherwise. 17 6.10 Option Writer Common Stock Ownership. Option Writer shall not ------------------------------------ acquire or own HM Common Stock (other than through the acquisition of Preferred Shares by exercise of the Securities Issuance Option and the subsequent conversion of such Preferred Shares into HM Common Stock) if such acquisition or ownership could result in the inability to satisfy the condition contained in Section 5.9. 6.11 Maintenance of Reinsurance. During the Exposure Period and -------------------------- Exercise Term, if any, and during any period in which any Preferred Shares remain outstanding, HM shall maintain the reinsurance program described in Section 5.8. 6.12 Plans and Reports. HM shall promptly deliver, or cause to be ----------------- delivered, to Option Writer copies of (a) HM's most recent two (2) year future business plan, which plan will generally be available on or about March 1 of each calendar year, (b) HM's most recent Annual Report on Form 10-K and Annual Report to Shareholders, and (c) the most recent Annual Statements for the HM Insurance Subsidiaries. The failure of HM to deliver any such items shall not be deemed a breach of this Agreement unless such item is actually available, has been requested in writing by Option Writer and has not been delivered by HM within thirty (30) days after HM's receipt of such request. Option Writer shall keep all documents or information delivered to Option Writer pursuant to this Section 6.12 (except for the Form 10-K and Annual Report and statements described in clauses (b) and (c) above) in strictest confidence and shall use them solely in connection with the Transaction Agreements, except as otherwise required by law. 6.13 Stock Dividends or Distributions. In the event that Option -------------------------------- Writer, whether as a holder of Common Stock or as a holder of Preferred Shares, receives (or is entitled to receive upon conversion of such Preferred Shares, as the case may be) a distribution (by stock dividend or otherwise) of any securities, the sale of which is registered, not required to be registered or exempt from such registration under the Securities Act in the hands of public holders of the HM Common Stock, but the sale of which is not registered, and is required to be registered or exempt from registration under the Securities Act in the hands of Option Writer, HM shall at its option, within a reasonable time period following a request by Option Writer, either (a) notify Option Writer that it will be permitted to include such securities as "Registrable Securities" as defined in the Registration Rights Agreement, or (b) repurchase such securities from Option Writer at market value as determined in the public market. In the event that there is no public market for such securities, HM and Option Writer shall appoint a mutually agreeable third-party appraiser to establish the value of such securities, provided that if the parties fail to agree on such third-party appraiser, the value will be determined pursuant to Article 8. 6.14 Press Releases and Confidentiality. Neither HM nor Option Writer ---------------------------------- shall issue any press release or other announcements to the public relating to the execution of the Transaction Agreements or the transactions contemplated thereunder without the prior written consent of the other party. Each of Option Writer and HM shall hold confidential all financial and other information supplied by the other party in respect of the Transaction Agreements or the transactions contemplated therein; provided that such confidentiality obligation shall apply only to non-public information, and information which was not available to the other party on a non-confidential basis from a third party. Notwithstanding any provision of this Section to the 18 contrary, either Option Writer or HM may make any disclosure required to be made by it under applicable law (including federal securities law) if it determines in good faith that it is necessary to do so, and gives prior notice to the other party and discusses such disclosure with such other party. In addition, either Option Writer or HM may make any disclosure to which the other party gives its prior written consent. 6.15 Default Notice. HM shall promptly give notice to Option Writer of -------------- any breach of the representations and warranties contained in Article 3 of this Agreement of which HM is aware. 7. Termination. This Agreement and the transactions contemplated by this ----------- Agreement shall be terminated (a) by HM at any time prior to the end of the Exposure Period, (b) in accordance with Section 6.8, (c) at the option of Option Writer and Reinsurance Option Writer, upon the receipt of a notice in accordance with Section 6.15 of a breach that would, if not cured, have a material adverse effect on the rights and privileges of Option Writer or Reinsurance Option Writer under this Agreement and such breach has not been cured by HM within thirty (30) days of such notice or (d) if none of (a) through (c) occur, upon the latest to occur of (i) the expiration of the Exposure Period, (ii) the expiration of the Exercise Term for the latest Qualifying Catastrophic Event (including an Event that develops into a Qualifying Catastrophic Event outside the Exposure Period), (iii) the Exercise Date for which a Notice of Exercise was properly delivered during the Exercise Term, as such date may be extended pursuant to the submission of any matter to alternative dispute resolution under Article 8 or (iv) the first day on which no Preferred Shares issued pursuant to this Agreement (including without limitation Preferred Shares issued on the Exercise Date specified in (iii) above) remain issued and outstanding; provided, however, that Articles 8 and 9 shall survive such termination and remain in full force and effect. 8. Alternative Dispute Resolution. ------------------------------ (a) In the event of a dispute regarding the satisfaction of any of the conditions set forth in Sections 5.1, 5.2, 5.3, 5.4 and 5.6 of this Agreement, such dispute shall be referred to a mutually acceptable public accounting firm except for any such accounting firm which serves as a then current accountant or outside auditor for either HM or Option Writer (the "Accountant"). Either party may submit a dispute to the Accountant by making a written submission to the Accountant and the other party, which written submission shall include the submitting party's documentation of such dispute and the submitting party's position on the issue(s). The other party shall then have ten (10) Business Days to submit to the Accountant and the first party its documentation of the dispute and its position on the issue(s); provided, however, that if such other party fails to make a timely and complete submission to the Accountant, such other party shall be deemed to have conceded the dispute. Upon receipt of submissions from both parties with respect to a given dispute, the Accountant shall then have ten (10) Business Days in which to resolve the dispute by selecting one party's position or the other's. The decision of the Accountant in the event of alternative dispute resolution under this 19 Article 8 shall be final and binding upon the parties, and each party shall bear its own costs plus one-half (1/2) of the costs of the Accountant. (b) In the event of a dispute regarding the satisfaction of any of the conditions set forth in Article 5 of this Agreement other than in Sections 5.1, 5.2, 5.3, 5.4 and 5.6, such dispute shall be referred to a panel of three arbitrators. The place of arbitration shall be New York, New York. Notice requesting arbitration must be in writing in accordance with Section 10.2 of this Agreement. (c) One arbitrator shall be chosen by each party within twenty (20) Business Days of delivery of a written notice of request for arbitration by a party. The two arbitrators shall, before instituting the hearing, choose a third arbitrator who shall preside at the hearing. If either party fails to appoint its arbitrator within twenty (20) Business Days of the notice of request for arbitration, the other party, after ten (10) Business Days notice of its intention to do so, may appoint the second arbitrator. If the two arbitrators are unable to agree upon the third arbitrator within fifteen (15) Business Days of their appointment, the two arbitrators shall request the American Arbitration Association to appoint the third arbitrator with the qualifications identified herein. (d) All arbitrators shall be impartial, and unless the parties otherwise agree, all arbitrators shall be attorneys with at least fifteen (15) years of corporate law experience. (e) The procedure to be followed in the arbitration hereunder shall be as prescribed herein and in such directives as shall be issued by the arbitrators. (f) Either party may submit a dispute to the arbitration panel by making a written submission to the panel and the other party, which written submission shall include the submitting party's documentation of such dispute, and the submitting party's position on the issue(s). The other party shall then have ten (10) Business Days to submit to the panel and the other party its documentation of the dispute and its position on the issue(s); provided, however, that if such party fails to make a timely and complete submission to the panel, such other party shall be deemed to have conceded the dispute. (g) Upon receipt of submissions from both parties with respect to a given dispute, the panel shall then have ten (10) Business Days in which to resolve the dispute by determining whether the condition has been satisfied. The decision of any two arbitrators when rendered in writing shall be final and binding. The arbitration award shall be based on and accompanied by a written opinion containing findings of fact and conclusions of law. Each party shall bear its own expenses and the expense of its own arbitrator and shall jointly and equally bear with the other party the cost of the third arbitrator. 9. Broker's Fees. ------------- 9.1 HM Indemnification for Broker's Fees. HM agrees to indemnify, ------------------------------------ defend and hold harmless Option Writer and its affiliates from any and all claims, costs and expenses 20 (including reasonable attorney's fees and disbursements) in respect of the assertions of any broker, finder, agent or other person seeking compensation with respect to the transactions contemplated herein on the basis of alleged representation of HM or alleged arrangements undertaken by HM or for other expenses incurred in connection with such transactions. 9.2 Option Writer Indemnification for Broker's Fees. Option Writer ----------------------------------------------- agrees to indemnify, defend and hold harmless HM and its affiliates from any and all claims, costs and expenses (including reasonable attorney's fees and disbursements) in respect of the assertions of any broker, finder, agent or other person seeking compensation with respect to the transactions contemplated herein on the basis of alleged representation of Option Writer or alleged arrangements undertaken by Option Writer or for other expenses incurred in connection with such transactions. 9.3 Acknowledgement. HM acknowledges and agrees that Option Writer has --------------- not provided HM with any financial, accounting, tax or other advice with respect to the transactions contemplated herein. 10. Miscellaneous. ------------- 10.1 Amendments. The provisions of this Agreement may not be waived, ---------- altered, amended or repealed, in whole or in part, except by the written consent of both parties to this agreement. 10.2 Notices. Any notice or other communication required or permitted ------- under this Agreement shall be in writing and shall be deemed to have been given (a) on the date of delivery if delivered personally or sent by facsimile transmission (which transmission shall be confirmed by telephone), (b) on the next Business Day if sent by overnight delivery service or (c) fifteen (15) days after mailing if sent by certified, registered or express mail, postage prepaid, if properly addressed or directed to such party at the appropriate address or facsimile number set forth below, or such address or facsimile number as such party may designate by written notice to the other parties: (i) if to HM to: Horace Mann Educators Corporation Mail No. G 016 One Horace Mann Plaza Springfield, Illinois 62715-0001 Attention: George Zock Fax No.: (217) 788-5798 with a copy to: Gibson, Dunn & Crutcher LLP 200 Park Avenue 21 New York, NY 10166-0193 Attention: Conor Reilly Fax No.: (212) 351-5247 and a copy to: Aon Securities Corporation 200 E. Randolph Street Chicago, Illinois 60601 Attention: Bryon Ehrhart Fax No.: (312) 381-0162 (ii) if to Option Writer or Reinsurance Option Writer to the "Contact Information" set forth in Exhibit A, with a copy to: Sidley Austin Brown & Wood LLP 875 Third Avenue New York, NY 10022 Attention: Robert J. Donatucci Fax No.: (212) 906-2130 10.3 Entire Agreement. This Agreement (including the Exhibits and the ---------------- Schedules) contains the entire agreement between the parties, and supersedes all prior agreements, written or oral, with respect to the Option. 10.4 Governing Law. This Agreement shall be governed by and construed ------------- in accordance with the laws of the State of New York (without regard to any choice of law or conflict of law rules that would cause the application of any laws or rules of any jurisdiction other than the State of New York). 10.5 Successors and Assigns. This Agreement shall be binding upon and ---------------------- inure to the benefit of the parties and their respective successors and assigns, and any references to a specific party in this Agreement shall include such party's permitted successors or assigns. Neither party shall have the right to assign or otherwise transfer its rights or obligations under this Agreement without the prior written consent of the other party, provided, however, that any holder of Preferred Shares, or Common Stock into which such Preferred Shares are convertible, shall be a third-party beneficiary under this Agreement having all the rights of Option Writer, subject to the obligations of, and limitations on, Option Writer contained in this Agreement, and provided, further, that Option Writer may assign this Agreement to any affiliate of Option Writer provided that such affiliate agrees to and complies with the terms and conditions applicable to Option Writer under this Agreement, including without limitation the terms set forth in Section 6.9. 22 10.6 Severability. Each term, covenant, condition or provision of this ------------ Agreement shall be viewed as separate and distinct, and in the event that any such term, covenant, condition or provision shall be deemed by a court of competent jurisdiction to be invalid, the remaining provisions shall continue in full force and effect. 10.7 Necessary Acts. Each party to this Agreement shall perform any -------------- further acts and execute and deliver any additional agreements, assignments, documents or instruments that may be reasonably necessary or desirable to carry out the provisions or effectuate the purposes of this Agreement. 23 10.8 Legal Expenses. If any legal action or any arbitration or other -------------- proceeding is brought to enforce the provisions of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party or parties, whether or not such party or parties have instituted the action, shall be entitled to recover all attorneys' fees and other costs incurred in such action or proceeding, in addition to any other relief to which it or they may be entitled. Notwithstanding the forgoing, in the event of alternative dispute resolution under Section 8, each party shall bear its own costs as set forth in Section 8. 10.9 Counterparts. This Agreement may be executed in separate ------------ counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. 10.10 Headings. The headings in this Agreement are for reference only, -------- and shall not affect the interpretation of this Agreement. IN WITNESS WHEREOF, the parties to this Agreement have caused it to be duly executed as of the date first written above. Horace Mann Educators Corporation By: /s/ George J. Zock ---------------------------- Title: Executive Vice President Swiss Re Financial Products Corporation (Option Writer) By: /s/ Danyal Ozizmir ---------------------------- Title: Senior Managing Director Swiss Reinsurance America Corporation (Reinsurance Option Writer) By: /s/ Alan B. Binder ---------------------------- Title: Director, Non-Traditional Underwriting 24 EXHIBIT A --------- Option Writer - ------------- Swiss Re Financial Products Corporation, a Delaware corporation The contact information is: Swiss Re Financial Products Corporation 55 East 52nd Street New York, New York 10055 Attention: General Counsel Telephone No.: 212-317-5400 Fax No.: 212-317-5450 With a copy to: Swiss Re Financial Products Corporation 55 East 52nd Street New York, New York 10055 Attention: Treasurer Telephone No.: 212-317-5400 Fax No.: 212-317-5450 Reinsurance Option Writer - ------------------------- Swiss Reinsurance America Corporation, a New York corporation The contact information is: Swiss Reinsurance America Corporation c/o Swiss Re Financial Products Corporation 55 East 52nd Street New York, New York 10055 Attention: General Counsel Telephone No.: 212-317-5400 Fax No.: 212-317-5450 With a copy to: Swiss Reinsurance America Corporation c/o Swiss Re Financial Products Corporation 55 East 52nd Street New York, New York 10055 Attention: Treasurer Telephone No.: 212-317-5400 Fax No.: 212-317-5450 SCHEDULE 1.6 HORACE MANN EDUCATORS CORPORATION CERTIFICATE OF DESIGNATIONS Pursuant to Section 151 of the General Corporation Law of the State of Delaware SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK ================================================================================ RESOLVED, that, pursuant to the authority vested in the Board of Directors of Horace Mann Educators Corporation (the "Corporation") in accordance with the provisions of its Certificate of Incorporation, a series of Preferred Stock of the Corporation be, and hereby is, created and that the designation and amount thereof and the voting powers, preferences and relative, participating, optional or other special rights of the shares of such series, and the qualifications, limitations or restrictions thereon, are as follows: Section 1. Designation. The series of Preferred Stock established hereby shall - ---------- ----------- be designated the "Series A Cumulative Convertible Preferred Stock" (the "Series A Preferred Shares") and the authorized number of Series A Preferred Shares shall be 75,000 shares. Section 2. Dividends. ---------- (a) Holders of outstanding Series A Preferred Shares shall be entitled to receive, if, when and as declared by the Board of Directors out of funds legally available therefore, cash dividend payments in the amount of the Dividend Yield on each Series A Preferred Share, payable quarterly for each of the quarters ending March, June, September and December of each year, payable in arrears on the first Business Day of each succeeding April, July, October and January, respectively (each such date being hereinafter referred to as a "Preferred Dividend Payment Date". The first dividend shall be payable on the ------------------------------- Preferred Dividend Payment Date corresponding to the quarter in which the Issuance Date falls. Each such dividend will be payable to holders of record as they appear on the stock books of the Corporation on such record dates, not less than 10 nor more than 50 days preceding the related Preferred Dividend Payment Date, as shall be fixed by the Board of Directors. Dividends on each Series A Preferred Share shall accrue on a daily basis and compound quarterly commencing on the Issuance Date for such share and continuing to, but not including, the Redemption Date, or Conversion Date for such share (or other date on which such Series A Preferred Share is no longer outstanding) and accrued dividends for each quarterly dividend period shall accumulate as Unpaid Dividend Yield, to the extent not paid, on the Preferred Dividend Payment Date for the quarter in which they accrued. Dividend payments under this paragraph (a) shall accrue whether or not the Corporation shall have earnings, whether or not there shall be funds legally available for the payment of such dividends and whether or not such dividends are declared. (b) So long as any Series A Preferred Shares shall remain outstanding, no dividend (other than a dividend payable in shares of Common Stock or rights to obtain Common Stock or any class of capital stock of the Corporation which is junior to the Series A Preferred Shares as to dividends and upon liquidation) shall be declared, nor shall the Corporation make any other distribution or payment or set aside anything of value for distribution or payment on, or redeem, repurchase or otherwise acquire any shares of, the Common Stock of the Corporation or any other class of stock or series thereof ranking junior to the Series A Preferred Shares in the payment of dividends or upon liquidation (other than a redemption or purchase of shares of Common Stock of the Corporation made for purposes of an employee incentive or benefit plan of the Corporation or any of its subsidiaries) unless the full amount of Unpaid Dividend Yield, if any, accumulated on all outstanding Series A Preferred Shares through all past Preferred Dividend Payment Dates shall have been paid and not refunded. No dividend shall be declared on any share or shares on any class of stock of the Corporation or series thereof ranking on a parity with the Series A Preferred Shares in respect of payment of dividends or upon liquidation for any prior dividend payment period of said parity stock unless there shall have been declared on all shares then outstanding of the Series A Preferred Shares like proportional dividends determined ratably in proportion to the respective Unpaid Dividend Yield accumulated to date for all previous quarterly dividend periods on all outstanding Series A Preferred Shares and the dividends accumulated on all outstanding shares of said parity stock. Section 3. Cash Redemption by the Corporation. - ---------- ----------------------------------- (a) Redemption at Option of Corporation. At any time and from time to ------------------------------------ time on or after issuance of the Series A Preferred Shares, the Corporation may, at its option, with proper notice as set forth in paragraph (b) of this Section 3, redeem any or all of the outstanding Series A Preferred Shares, as of a Proposed Redemption Date specified in the notice to holders, for cash in an amount equal to the Redemption Price per share. (b) Notice of Redemption. In order to properly effect the redemption -------------------- of Series A Preferred Shares, the Corporation shall provide notice, to holders of record of the Series A Preferred Shares to be redeemed, not less than (i) thirty (30) days prior to the Proposed Redemption Date if the Proposed Redemption Date is three (3) years, eight (8) months and fifteen (15) days or less from the Issuance Date of such Series A Preferred Shares, and (ii) forty-five (45) days prior to the Proposed Redemption Date if the Proposed Redemption Date is more than three (3) years, eight (8) months and fifteen (15) days after the Issuance Date of such Series A Preferred Shares. Such notice may be provided by mail, first class postage prepaid, to the holders of record of the Series A Preferred Shares at their respective addresses as the same shall appear on the books of the Corporation or any transfer agent for the Series A Preferred Shares, or by facsimile or telecopy, as set forth in paragraph (a) of Section 9 herein. Each such notice shall state, as appropriate: (1) the Proposed 2 Redemption Date; (2) the total number of Series A Preferred Shares to be redeemed and, if fewer than all Series A Preferred Shares are to be redeemed, the number of such shares held by such holder to be redeemed; (3) the Redemption Price; (4) the place or places where certificates for such shares are to be surrendered for redemption; and (5) that dividends on the Series A Preferred Shares to be redeemed will cease to accrue on the Proposed Redemption Date. Each holder of Series A Preferred Shares called for redemption shall surrender the certificates evidencing such shares to the Corporation at the place designated in such notice and shall thereupon be entitled to receive the cash payable upon such redemption. In case less than all of the shares represented by any such surrendered certificate are redeemed, a new certificate shall be issued promptly at the expense of the Corporation representing the balance of the shares. If proper notice of redemption shall have been duly provided to holders of the Series A Preferred Shares in accordance with this paragraph (b), and payment therefor has been made or duly provided for, then, notwithstanding that the certificates evidencing any of such shares so called for redemption shall not have been surrendered, as of the close of business on the Redemption Date the shares represented thereby shall be deemed no longer outstanding, dividends with respect to such Series A Preferred Shares shall cease to accrue and all rights of the holder with respect to such Series A Preferred Shares shall forthwith cease and terminate, except for the right of the holders to receive the cash payable upon such redemption, without interest, upon surrender of the certificates therefor. (c) Revocation of Notice to Redeem. The Corporation's election to ------------------------------ redeem the Series A Preferred Shares pursuant to paragraph (a) of this Section 3 shall be fully or partially revocable, and any notice to holders of Series A Preferred Shares provided in accordance with paragraph (b) of this Section 3 shall be subject to revocation or amendment by the Corporation. In order to properly effect the revocation or amendment of such notice, the Corporation shall provide notice of its revocation or amendment, not less than five Business Days prior to the Proposed Redemption Date, to holders of record of the Series A Preferred Shares. Such notice may be provided in any of the manners permissible for providing notice of redemption under paragraph (b) of this Section 3. Such notice of revocation or amendment shall clearly state that: (1) on the Proposed Redemption Date, the Corporation will not redeem any of the Series A Preferred Shares, or if notice of partial revocation, the amended number of Series A Preferred Shares held by such holder to be redeemed, and the balance of Series A Preferred Shares held by such holder not being redeemed; and (2) dividends on the Series A Preferred Shares not being redeemed will continue to accrue on and after the Proposed Redemption Date without interruption. (d) Ratable Redemption. If fewer than all outstanding Series A ------------------ Preferred Shares are to be redeemed on any Redemption Date, the shares to be redeemed (which shall be a whole number) shall be selected by the Corporation from outstanding Series A Preferred Shares not previously called for redemption by lot or pro rata (to the extent possible without redeeming fractional shares) or by any other method determined by the Corporation in its sole discretion to be equitable. 3 (e) Redemption at the Option of the Holders Upon a Change of Control. ---------------------------------------------------------------- Within 30 Business Days after the earlier of notice from the Corporation of a pending, or an occurrence of a, Change of Control, a holder of Series A Preferred Shares may, at its option, with proper notice to the Corporation as set forth in paragraph (f) of this Section 3, require the Corporation to redeem any or all of such holder's outstanding Series A Preferred Shares, as of the date specified in such notice (a "Special Redemption Date") for cash, in an ----------------------- amount equal to the Redemption Price per share. (f) Notice of Optional Redemption. Any holder desiring to exercise the ----------------------------- right to require the Corporation to redeem such holder's Series A Preferred Shares shall provide notice to the Corporation not less than 30 days prior to the proposed Special Redemption Date. Such notice may be provided by mail, first class postage prepaid, to the Corporation, at its principal executive offices, or by facsimile or telegram, as set forth in paragraph (a) of Section 9 herein. Each such notice shall state (1) the proposed Special Redemption Date and (2) the total number of Series A Preferred Shares to be redeemed. (g) Cancellation of Shares. All Series A Preferred Shares redeemed by ---------------------- the Corporation as provided in this Section 3 (or otherwise acquired by the Corporation) shall be retired and thereupon restored to the status of authorized but unissued Series A Preferred Shares. Section 4. Conversion by Holders into Common Stock. - ---------- --------------------------------------- (a) Right of Conversion. Except as provided in paragraph (b) of this ------------------- Section 4, no holder of Series A Preferred Shares may convert such shares into shares of Common Stock at any time prior to the close of business of the fourth anniversary of the Issuance Date of such Series A Preferred Shares. At any time and from time to time after such anniversary date, on the terms and subject to the conditions set forth in this Section 4, any holder of Series A Preferred Shares shall be entitled, at the option of such holder, to cause any or all of such shares to be converted into shares of Common Stock of the Corporation at an initial per share rate equal to the result obtained by dividing (i) the Original Value of such Series A Preferred Share, plus Unpaid Dividend Yield accumulated for all previous dividend periods up to and including the dividend period ending on the Conversion Date, by (ii) the Market Price at Conversion, as such rate may be subsequently adjusted hereunder (the "Conversion Rate"), as of the Proposed --------------- Conversion Date specified in such holder's notice to the Corporation delivered pursuant to paragraph (d) of this Section 4. The minimum number of Series A Preferred Shares for which conversion may be elected shall be 1,000, or such lesser number which constitutes all of the outstanding Series A Preferred Shares held by such holder. Notwithstanding anything to the contrary in this paragraph (a), the holder of Series A Preferred Shares may provide notice of its intention to convert any or all of such shares prior to the fourth anniversary of the Issuance Date of such Series A Preferred Shares, so long as the Proposed Conversion Date specified in such notice is a date after the date of such fourth anniversary. 4 (b) Special or Change of Control Conversion Events. Notwithstanding ---------------------------------------------- anything to the contrary in paragraph (a) of this Section 4, at any time after the occurrence of a Special Conversion Event or a Change of Control Conversion Event, any holder of Series A Preferred Shares shall be entitled, at the option of such holder, to cause any or all of such shares to be converted into shares of Common Stock of the Corporation at the Special Conversion Rate as of the Proposed Conversion Date specified in such holder's notice to the Corporation delivered pursuant to paragraph (d) of this Section 4. Such notice shall be effective only to the extent that the condition resulting in a Special Conversion Event has not been cured prior to the delivery of such notice. (c) Priority of Corporation's Right of Redemption. Notwithstanding --------------------------------------------- paragraphs (a) and (b) of this Section 4, no Series A Preferred Shares shall be converted on or after the close of business on any Redemption Date for which notice has been properly delivered in accordance with Section 3 hereof. The Corporation's right to redeem any or all shares of Series A Preferred Stock on or prior to any Proposed Conversion Date shall supersede any holder's right of conversion under this Section 4, whether or not such holder's notice of conversion was properly delivered prior to the Corporation's notice to redeem, so long as the Corporation's notice to redeem was properly delivered in accordance with Section 3 hereof at least (i) thirty (30) days prior to the Proposed Conversion Date if such notice to redeem is delivered three (3) years, eight (8) months and fifteen (15) days or less from the applicable Issuance Date, or (ii) forty-five (45) days prior to the Proposed Conversion Date if such notice to redeem is delivered more than (3) years, eight (8) months and nine fifteen (15) days from the applicable Issuance Date. (d) Notice of Conversion. In order to properly effect the conversion -------------------- of Series A Preferred Shares, the holder of such shares shall provide notice to the Corporation not less than one hundred five (105) days prior to the Proposed Conversion Date. Such notice must be provided by first class, registered mail, postage prepaid, to the Corporation at its principal executive offices, at the address or number set forth in paragraph (a) of Section 9 herein. Each such notice shall state, as appropriate: (1) the Proposed Conversion Date; (2) the number of Series A Preferred Shares (which must be a whole number of shares) to be converted; (3) the name or names in which such holder wishes the certificate or certificates for Common Stock and for any Series A Preferred Shares not to be so converted to be issued and the address to which such holder wishes delivery to be made of the new certificates to be issued upon conversion; and (4) an acknowledgment that the shares to be converted remain subject to the Corporation's right of redemption in accordance with Section 3. Notwithstanding the preceding paragraph, for any conversion pursuant to paragraph (b) of Section 4, the holder of Series A Preferred Shares may properly convert such shares into shares of Common Stock upon providing notice to the Corporation, not less than five (5) Business Days prior to the Proposed Conversion Date, in the manner set forth in the preceding paragraph. Such notice shall contain the information described above for conversion 5 pursuant to paragraph (d) of this Section 4, as well as a statement setting forth the facts and circumstances under which the holder believes a Special Conversion Event has occurred. (e) Revocation of Notice to Convert. The right of any holder of Series ------------------------------- A Preferred Shares electing to convert the Series A Preferred Shares pursuant to paragraphs (a) or (b) of this Section 4 shall be fully or partially revocable, and any notice to the Corporation provided in accordance with paragraph (d) of this Section 4 shall be subject to revocation or amendment by the holder of the shares to which such notice relates. In order to properly effect the revocation or amendment of such notice, the holder shall provide notice to the Corporation of its revocation or amendment not less than three (3) Business Days prior to the Proposed Conversion Date. Such notice shall be provided in the same manner specified as permissible for providing notice of conversion under paragraph (d) of this Section 4, and shall clearly state that the holder of such Series A Preferred Shares will not convert any of such shares, or if notice of partial revocation, the amended number of Series A Preferred Shares held by such holder that are to be converted. (f) Surrender of Series A Preferred Shares. Any holder of Series A -------------------------------------- Preferred Shares desiring to convert any such shares into shares of Common Stock shall surrender the certificate or certificates representing the Series A Preferred Shares being converted, duly assigned or endorsed for transfer to the Corporation (or accompanied by duly executed stock powers relating thereto), at the principal executive office of the Corporation or the offices of the transfer agent for the Series A Preferred Shares or such office or offices in the continental United States of an agent for conversion as may from time to time be designated by notice to the holders of the Series A Preferred Shares by the Corporation or the transfer agent for the Series A Preferred Shares, accompanied by a copy of the written notice of conversion previously provided to the Corporation in accordance with paragraph (d) of this Section 4. (g) Delivery of Common Stock. Upon the effectiveness of a conversion ------------------------ of Series A Preferred Shares on the Conversion Date for such shares, the Corporation, subject to the provisions of paragraph (j) of this Section 4 regarding fractional shares and paragraph (l) of this Section 4 regarding payment of taxes, shall issue and send by first-class mail, postage prepaid, to the holder thereof, or to such holder's designee, at the address designated by such holder a certificate or certificates for the number of whole shares of Common Stock to which such holder shall be entitled upon conversion. In case there shall have been surrendered a certificate or certificates representing Series A Preferred Shares only part of which are to be converted, the Corporation, subject to the provisions of paragraph (l) of this Section 4 regarding payment of taxes, shall issue and deliver to such holder or such holder's designee a new certificate or certificates for the number of Series A Preferred Shares which shall not have been converted. (h) Effectiveness of Conversion. Any conversion of Series A Preferred --------------------------- Shares into shares of Common Stock made at the option of the holder thereof shall be effective immediately following the close of business on the Conversion Date. At and after the effective time on the Conversion Date, the person or persons entitled to receive the Common Stock 6 issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock. (i) Conversion Price Adjustments. The Conversion Rate of any Series A ---------------------------- Preferred Shares shall be subject to the following adjustments: (A) If any capital reorganization or reclassification of the capital stock of the Corporation, or any consolidation or merger of the Corporation with another corporation, or the sale of all or substantially all of its assets to another corporation, or any other transaction, shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger, sale or other transactions, lawful and adequate provisions (in form authorized and approved by the Board of Directors of the Corporation) shall be made whereby each holder of any Series A Preferred Shares shall thereafter have the right to receive, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock of the Corporation immediately theretofore receivable upon the conversion of such Series A Preferred Shares, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of Common Stock immediately theretofore so receivable had such reorganization, reclassification, consolidation, merger, sale or other transactions, not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of such holder to the end that the provisions hereof (including, without limitation, provisions for adjustments of the Conversion Rate) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise of such conversion rights. If applicable, the Corporation shall reserve as provided by paragraph (k) of this Section 4 such shares of common stock, other capital stock or other securities of the Corporation as may be issuable upon conversion of Series A Preferred Shares as provided by this Section 4 and shall comply with the other requirements of paragraph (k) of this Section 4 in respect of such shares or other securities so as to permit their issuance to holders of Series A Preferred Shares upon conversion thereof. The Corporation shall not effect any such consolidation or merger, or any sale of all or substantially all of its assets or properties, unless (i) prior to the consummation thereof the successor corporation (if other than the Corporation) resulting from such consolidation or merger or the corporation purchasing such assets shall assume, by written instrument (in form authorized and approved by the Board of Directors), executed and mailed or delivered to each holder of shares of Series A Preferred Stock at the last address of such holder appearing on the books of the Corporation, the obligation to deliver to such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to receive or (ii) the Series A Preferred Stock shall have been redeemed by the Corporation pursuant to paragraph (a) or (e) of Section 3 hereof. (B) In any case in which (i) this Section 4 shall require that an adjustment as a result of any event become effective after the opening of business on a 7 specified business day following a record date, and (ii) the date fixed for conversion pursuant to paragraph (d) of this Section 4 occurs after such record date but before the occurrence of the event on such date, then the Corporation may elect to defer until after the occurrence of such event (1) issuing to the holder of any Series A Preferred Shares surrendered for conversion certificates representing the shares or securities issuable upon such conversion, and (2) paying to such holder any amount in cash in lieu of a fractional share of Common Stock in accordance with paragraph (j) of this Section 4, provided, however, that such deferral is not for an unreasonable period of time. (j) Fractional Shares. No fractional shares of Common Stock shall be ----------------- issued upon conversion of any Series A Preferred Shares but, in lieu of any fraction of a share of Common Stock which would otherwise be issuable in respect of the aggregate number of Series A Preferred Shares surrendered for conversion at one time by the same holder, the Corporation shall pay an amount in cash equal to the same fraction of the Conversion Price (based on the Market Price at Conversion). (k) Reservation of Shares. The Corporation shall at all times reserve --------------------- and keep available out of the authorized but unissued shares of Common Stock the maximum number of shares of Common Stock into which all Series A Preferred Shares from time to time outstanding are convertible, but shares of Common Stock held in the treasury of the Corporation may in its discretion be delivered upon any conversion of Series A Preferred Shares. (l) Taxes. The Corporation shall pay any and all stock transfer and ----- documentary stamp taxes that may be payable in respect of any issuance or delivery of shares of Common Stock or any other securities issued upon conversion of the Series A Preferred Shares pursuant hereto. The Corporation shall not, however, be required to pay any such tax which may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock or other securities in a name other than that in which the Series A Preferred Shares with respect to which such shares are issued were registered, or any payment to any person other than the registered holder thereof, and shall not be required to make any such issuance or delivery unless and until the person otherwise entitled to such issuance or payment has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid or is not payable. (m) Cancellation of Shares. All Series A Preferred Shares converted ---------------------- into shares of Common Stock, other capital stock or other securities of the Corporation as provided in this Section 4 (or otherwise acquired by the Corporation) shall be retired and thereupon restored to the status of authorized but unissued shares of preferred stock, par value $0.001 per share, undesignated as to series. Section 5. Liquidation Rights. - ---------- ------------------- (a) In the event of any Liquidation, after payment or provision for payment has been made of the debts and other liabilities of the Corporation, the holders of Series A 8 Preferred Shares shall be entitled to receive, out of the net assets of the Corporation, for each share its Original Value plus an amount equal to the sum of Unpaid Dividend Yield (whether or not declared) accrued and unpaid thereon for all previous periods and the current period, whether or not accumulated, and no more. After such amount is paid in full, no further distributions or payments shall be made in respect of Series A Preferred Shares, such Series A Preferred Shares shall no longer be deemed to be outstanding or be entitled to any other powers, preferences, rights or privileges, including voting rights, and such Series A Preferred Shares shall be surrendered for cancellation to the Corporation. (b) The full amount payable to the holders of Series A Preferred Shares shall be paid before any distribution shall be made to the holders of any class of common stock of the Corporation or any other class of stock or series thereof ranking junior to the Series A Preferred Shares with respect to the distribution of assets upon a Liquidation. No payment on account of any Liquidation shall be made to the holders of any class or series of stock ranking on a parity with the Series A Preferred Shares in respect of the distribution of assets upon Liquidation unless there shall likewise be paid at the same time to the holders of the Series A Preferred Shares like proportionate amounts determined ratably in proportion to the full amounts to which the holders of all outstanding Series A Preferred Shares and the holders of all outstanding shares of such parity stock are respectively entitled with respect to such distribution. (c) If the assets distributed to the holders of Series A Preferred Shares upon any Liquidation shall be insufficient to permit the payment to such holders of the full amount to which they are entitled in such circumstances, then such assets or the proceeds thereof shall be distributed among such holders ratably in proportion to the sums which would be payable to such holders if all sums were paid in full. (d) Once any payment required upon any Liquidation is made to any holder of Series A Preferred Shares, there shall not be any conversion rights in respect of such shares pursuant to Section 4 hereof unless the full amount of all such distributions and payment made in respect of such shares being converted is remitted to the Corporation prior to or concurrently with the conversion of such shares. (e) Neither the merger nor consolidation of the Corporation into or with any other corporation, nor the merger or consolidation of any other corporation into or with the Corporation, nor a sale, transfer or lease of all or any part of the assets of the Corporation, shall be deemed to be a Liquidation for purposes of this Section 5. (f) Written notice of any Liquidation, stating the payment date or dates when and the place or places where the amounts distributable in such circumstances shall be payable, shall be given by first class mail, postage prepaid, not less than thirty (30) days prior to any payment date stated therein, to the holders of record of the Series A Preferred Shares at their respective addresses as the same shall appear on the books of the Corporation or any transfer agent for the Series A Preferred Shares. 9 Section 6. Voting Rights. - ---------- -------------- (a) Except as otherwise provided by paragraph (b) of this Section 6 or required by law, the holders of Series A Preferred Shares shall not be entitled to vote on any matter on which the holders of any voting securities of the Corporation shall be entitled to vote. (b) So long as any Series A Preferred Shares remain outstanding, the Corporation shall not without first obtaining the approval (by vote or written consent, as provided by applicable law) of the holders of more than sixty-six and two-thirds percent (66 2/3%) of the then outstanding Series A Preferred Shares, voting together as a single class: (A) alter or change the rights, preferences or privileges of the Series A Preferred Shares so as to affect adversely such Series A Preferred Shares; (B) sell, convey or otherwise dispose of or encumber all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a corporation owned by or under common ownership with the Corporation), provided, however, that the holders of Series A Preferred Shares shall have no voting rights under this subparagraph (B) of paragraph (b) of this Section 6 with respect to an event or occurrence which constitutes a Special Redemption Event; (C) increase the authorized number of Series A Preferred Shares; or (D) create any new class or series of stock, or any other securities convertible into equity securities of the Corporation having rights or preferences over, or on a parity with, the Series A Preferred Shares. (c) For purposes of any vote of the holders of Series A Preferred Shares pursuant to the foregoing provisions of this Section 6, each Series A Preferred Share shall have one (1) vote per share. Section 7. Sinking Fund. No sinking fund or other mechanism for the segregation - ---------- ------------ of funds shall be established for the purpose of redemption or repurchase of the Series A Preferred Shares or payment of dividends thereon. Section 8. Certain Definitions. For purposes of this Certificate of - --------- ------------------- Designations, the following terms shall have the meanings as set forth below. "Average Market Price" means, with respect to a share of Common Stock --------------------- on any date of determination, the lesser of (a) the average of the daily Closing Prices for the thirty (30) consecutive Trading Days ending on the date of determination or (b) the average of the daily Closing Prices for the fifteen (15) consecutive Trading Days ending on the date of determination; provided, however, that in averaging the daily Closing Prices for such Trading 10 Days, all adjustments shall be made as are necessary to reflect any subdivision, reclassification, recapitalization or combination of, or dividend paid or distribution made on, shares of Common Stock during such period of Trading Days. "Business Day" means any day other than a Saturday, Sunday or a day on ------------ which banking institutions in New York, New York, London, England or Zurich, Switzerland are not required to be open. "Change of Control" means, with respect to the Corporation, (i) the ----------------- acquisition of ownership (by any Person or "group" within the meaning of Sections 13(d) and 13(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) required to file a Schedule 13D under the Exchange Act (other ------------ than a Person or "group" owning greater than 20% and less than 50% of the voting power of the capital stock of the Corporation that otherwise meets the requirements of a Person or "group" eligible to file a Schedule 13G in lieu of a Schedule 13D) of greater than 30% of the voting power of the capital stock of the Corporation (whether by sale or other transfer of capital stock, merger, consolidation or other reorganization or means, including a reorganization under bankruptcy or insolvency laws) or (ii) the consummation of a sale, transfer or other disposition of greater than 30% of the assets of the Corporation (determined on a combined and consolidated fair market value basis) in one or a series of related transactions to any Person that is not an affiliate of the Corporation. "Change of Control Conversion Event" means the occurrence of a Change ---------------------------------- of Control without the written consent of the holders of more than 66 2/3% of the Series A Preferred Shares then outstanding. "Closing Price" on any Trading Day shall mean the closing sales price ------------- regular way on such day for one share of Common Stock or, in case no such sale takes place on such day, the average of the reported closing bid and asked prices regular way, in each case on the New York Stock Exchange, or, if the Common Stock is not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or, if not listed or admitted to trading on any national securities exchange, the average of the closing bid and asked prices of the Common Stock on the over-the-counter market on the day in question as reported by the National Quotation Bureau Incorporated, or a similarly generally accepted reporting service, or if not so available in such manner as furnished by any New York Stock Exchange member-firm selected from time to time by the Board of Directors of the Corporation for that purpose. "Common Stock" means common stock of the Corporation, par value $0.001 ------------- per share. "Conversion Date" shall be the same day as the Proposed Conversion --------------- Date, provided that (i) the holder of Series A Preferred Shares has not delivered a notice of revocation in accordance with paragraph (e) of Section 4 and (ii) the Corporation has not properly delivered a notice of redemption pursuant to paragraph (b) of Section 3 naming any date on or prior to the Proposed Conversion Date as the Proposed Redemption Date, and such 11 notice to redeem has not been revoked prior to such date in accordance with paragraph (b) of Section 3. Notwithstanding the foregoing, in the event that the holders of more than sixty-six and two-thirds percent (66 2/3%) of the outstanding Series A Preferred Shares hold registration rights with respect to Common Stock into which such Series A Preferred Shares can be converted, and such holders have delivered to the Corporation, concurrently with any notice of conversion under paragraph (d) of Section 4, a notice requesting registration of such Common Stock upon conversion in an underwritten securities offering, then the Conversion Date shall be delayed so that it occurs (i) on or after the effective date of such registration and (ii) immediately prior to the purchase of such Common Stock by the underwriter(s) undertaking such offering. "Corporation" has the meaning set forth in the first paragraph hereof. ----------- "Dividend Yield" means, with respect to each Series A Preferred Share -------------- for each quarter, or such lesser period as may arise in connection with the issuance, redemption or conversion of such share, or with any Liquidation, the amount accruing on such share during the quarter, or such lesser period, at an annual rate equal to the Preferred Dividend Yield Rate, applied to the sum of (A) such share's Original Value, plus (B) Unpaid Dividend Yield thereon for all prior periods. Dividend Yield for any period shorter than a full quarterly dividend period shall be computed on the basis of the actual number of days elapsed over a 360 day year. Dividend Yield shall begin accruing on each Series A Preferred Share on the Issuance Date of such share and shall accrue to, but not including, the Redemption Date, Special Redemption Date or Conversion Date for such share (or other date on which such Series A Preferred Share is no longer outstanding). "GAAP" means United States generally accepted accounting principles, ---- consistently applied. "Issuance Date" means, for each Series A Preferred Share, the date on ------------- which such share was originally issued by the Corporation. "LIBOR" means an interest rate per annum equal to (a) the rate of ------ interest for deposits in U.S. Dollars having a term of three months appearing on Telerate Page 3750 (as defined in the 2000 ISDA Definitions as published by the International Swaps and Derivatives Association, Inc., as modified and amended from time to time (the "Definitions") ("Page 3750") at approximately 11:00 a.m. ----------- --------- London time, on the day that is two Business Days prior to the applicable Issuance Date or Preferred Dividend Payment Date, (b) in the event such rate is not available from Page 3750, the rate of interest for deposits in U.S. Dollars having a term of three months appearing on the Reuters Screen ISDA Page (as defined in the Definitions) (the "ISDA Page") at approximately 11:00 a.m. London ---- ---- time on the day that is two Business Days prior to the applicable Issuance Date or Preferred Dividend Payment Date, (c) in the event such rate is not available from the ISDA Page, the rate per annum for deposits in U.S. Dollars having a term of three months equal to the USD-LIBOR-Reference Banks rate (as defined in the Definitions) at approximately 11:00 a.m. London time on the day that is two Business Days prior to the applicable Issuance Date or Preferred Dividend Payment Date or (d) in the event 12 such rate is not available from the USD-LIBOR-Reference Banks, if determined for a Preferred Dividend Payment Date, the rate per annum for deposits in U.S. Dollars having a term of three months equal to LIBOR in effect for the previous Issuance Date or Preferred Dividend Payment Date, as the case may be, or, if determined for the Issuance Date, the most recent such rate available from the USD-LIBOR Reference Banks. For purposes of calculating the Preferred Dividend Yield Rate for any particular Series A Preferred Shares, LIBOR shall be such rate as reported on the applicable Issuance Date; provided, such rate shall be adjusted up or down, effective on the first day of each subsequent calendar quarter (i.e., January 1, April 1, July 1 and October 1), to reflect the current published rate on the last Trading Day of the prior calendar quarter, until such time that no Series A Preferred Shares remain outstanding. "Liquidation" means any dissolution, liquidation or winding up of the ----------- affairs of the Corporation, whether voluntary or involuntary. "Market Price at Conversion" means the Average Market Price of one -------------------------- share of Common Stock determined as of the Proposed Conversion Date. "Original Issuance Date" means the first date on which any Series A ---------------------- Preferred Shares were originally issued by the Corporation. "Original Value" of each Series A Preferred Share shall be equal to --------------- $1,000, as proportionally adjusted for all stock splits, stock dividends, and any other subdivisions, combinations, reclassifications or recapitalization affecting the Series A Preferred Shares. "Person" means any individual, partnership, joint venture, ------- corporation, limited liability company, association, joint stock company, trust or unincorporated organization or association, or a government or any department or agency or political subdivision thereof. "Preferred Dividend Payment Date" has the meaning set forth in ---------------------------------- paragraph (a) of Section 2. "Preferred Dividend Tax Adjustment Factor" has the meaning set forth ---------------------------------------- in paragraph (c) of Section 2. "Preferred Dividend Yield Rate" means (A) the sum of (i) LIBOR, ----------------------------- expressed as an annual percentage, and (ii) an additional percentage amount based on the S&P Rating of the Series A Preferred Shares (adjusted annually) as set forth in the table below: S&P Rating Additional Percentage Amount - ---------- ---------------------------- AA 0.50% AA- 0.75% A+ 1.00% A 1.25% A- 1.50% 13 BBB+ 2.00% BBB 2.50% BBB- 3.00% BB+ 4.00% BB 5.50% BB- 6.50% Less than BB- or unrated 8.50% Upon the occurrence of a Special Conversion Event, the Preferred Dividend Yield Rate shall be adjusted effective as of the Preferred Dividend Payment Date next succeeding the date of such Special Conversion Event based on the S&P Rating as adjusted pursuant to such Special Conversion Event. With respect to any Series A Preferred Shares that have been issued and outstanding for four (4) years or more, the additional percentage amounts listed in the right hand column of the above table shall be modified on each anniversary of the Issuance Date for such Series A Preferred Shares, beginning on the fourth (4th) anniversary of such Issuance Date, by adding to such percentage amount an amount equal to: 12.5 basis points times the number of such anniversaries of the Issuance Date that have passed after the third (3rd) anniversary (i.e., the fourth (4th) anniversary shall be counted as the first (1st) anniversary that has so passed, the fifth (5th) anniversary shall be counted as the second (2nd) anniversary that has so passed, etc.) for all rating classes from AA through A-; and 50 basis points times the number of such anniversaries of the Issuance Date that have passed after the third (3rd) anniversary (i.e., the fourth (4th) anniversary shall be counted as the first (1st) anniversary that has so passed, the fifth (5th) anniversary shall be counted as the second (2nd) anniversary that has so passed, etc.) for rating classes BBB+ or lower. "Proposed Conversion Date" shall mean the date on which a holder of ------------------------ Series A Preferred Shares proposes to convert any or all of the Series A Preferred Shares, as set forth in its notice to the Corporation properly delivered in accordance with paragraph (d) of Section 4. "Proposed Redemption Date" shall mean the date on which the ------------------------ Corporation proposes to redeem any or all of the Series A Preferred Shares, as set forth in its notice to holders of Series A Preferred Shares properly delivered in accordance with paragraph (b) of Section 3. "Redemption Date" shall be the same day as the Proposed Redemption --------------- Date, provided that (i) the Corporation has not withdrawn its intention to redeem the Series A Preferred Shares pursuant to paragraph (c) of Section 3; and (ii) proper provision for the payment of the Redemption Price to holders of Series A Preferred Shares being redeemed has been made in accordance with paragraph (b) of Section 3 by the close of business on the Proposed Redemption Date. 14 "Redemption Price" for each Series A Preferred Share shall be equal to ---------------- the sum of (A) the Original Value, plus (B) Unpaid Dividend Yield to and including the Redemption Date on such share. "S&P Rating" means the Preferred Stock Rating of the Series A ---------- Preferred Shares as in effect from time to time by the Standard & Poor's Division of The McGraw-Hill Companies or any successor. The Corporation shall use its reasonable best efforts to obtain an S&P Rating with respect to the Series A Preferred Shares as soon as practicable after the applicable Issuance Date or Special Conversion Event, if any. "Series A Preferred Shares" has the meaning set forth in Section 1. ------------------------- "Special Conversion Event" means the occurrence of the following ------------------------ event: the consolidated stockholders' equity of the Corporation and its consolidated subsidiaries, as determined in accordance with GAAP, is less than US$215,000,000, excluding goodwill and prior to giving effect to the invested capital relating to any issued and outstanding Series A Preferred Shares, and such condition remains uncured for over sixty (60) days. "Special Conversion Rate" means, with respect to the conversion of ----------------------- Series A Preferred Stock to shares of Common Stock in the event of a Special Conversion Event or a Change of Control Conversion Event, the conversion of each Series A Preferred Share into the number of Common Stock shares resulting from dividing (i) the Original Value of such Series A Preferred Share, plus Unpaid Dividend Yield accumulated to date for all previous dividend periods up to and including the dividend period ending on the Conversion Date, by (ii) the Market Price at Conversion. "Special Redemption Date" has the meaning set forth in Section 3(e). ----------------------- "Trading Day" shall mean a date on which the New York Stock Exchange ----------- (or if different, the principal national securities exchange on which the Common Stock is listed or admitted to trading) is open for the transaction of business. "Unpaid Dividend Yield" of any Series A Preferred Share means, for any --------------------- particular quarterly period (or lesser period, as may arise in connection with the issuance, redemption or conversion of such shares, or with any Liquidation), an amount equal to the excess, if any, of (A) the aggregate Dividend Yield accrued on such share in such period, over (B) the aggregate amount of cash dividends or distributions paid by the Corporation in satisfaction of Dividend Yield on such shares for such period. Section 9. Miscellaneous. ------------- (a) Any notice or other communication required or permitted hereunder shall be in writing and shall be deemed to have been given (a) on the date of delivery if delivered personally or sent by facsimile transmission (which transmission shall be confirmed by telephone), (b) on the next Business Day if sent by overnight delivery service or (c) fifteen (15) 15 days after mailing if sent by certified, registered or express mail, postage prepaid, if properly addressed or directed to such party at the appropriate address or facsimile number set forth below, or such address or facsimile number as such party may designate by written notice to the other parties: (i) if to the Corporation to: Horace Mann Educators Corporation Mail No. G 016 One Horace Mann Plaza Springfield, Illinois 62715-0001 Attention: George Zock Executive Vice President with a copy to: Gibson, Dunn & Crutcher LLP 200 Park Avenue New York, NY 10166-0193 Attention: Conor Reilly (ii) if to a holder of the Series A Preferred Shares: to such holder at the address for such holder as listed in the stock record books of the Corporation (which may include the records of any transfer agent for the Series A Preferred Shares if appropriate). (b) In the event a holder of Series A Preferred Shares shall not by written notice designate the name to whom payment upon redemption of Series A Preferred Shares should be made or the address to which the certificate or certificates representing such shares, or such payment, should be sent, the Corporation shall be entitled to register such shares, and make such payment, in the name of the holder of such Series A Preferred Shares as shown on the records of the Corporation and to send the certificate or certificates representing such shares, or such payment, to the address of such holder shown on the records of the Corporation. (c) All payments in the form of dividends and distributions and distributions upon any Liquidation or otherwise made upon the Series A Preferred Shares and any other shares of stock ranking on a parity with the Series A Preferred Shares with respect to such dividend or distribution shall be made pro rata, so that amounts paid per share on the Series A Preferred Shares and such other shares of stock shall in all cases bear to each other the same ratio that the required dividends, distributions or payments, as the case may be, payable per share on the Series A Preferred Shares and such other shares of stock bear to each other. (d) The Corporation may appoint, and from time to time discharge and change, a transfer agent for the Series A Preferred Shares. 16 SCHEDULE 1.9 DEFINITION OF LOSS OCCURRENCE ----------------------------- "Loss occurrence" will mean the sum of all individual losses directly occasioned by any one disaster, accident, or loss or series of disasters, accidents, or losses arising out of one event, which occurs within the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. The duration and extent of any one "loss occurrence" will be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event except that the term "loss occurrence" will be further defined as follows: A. As regards windstorm, hail, tornado, hurricane, and cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same event. The event need not be limited to one state or province or states or provinces contiguous thereto. B. As regards riot, riot attending a strike, civil commotion, vandalism, and malicious mischief, all individual losses sustained by the Company occurring during any period of 72 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 72 consecutive hours may be extended in respect of individual losses that occur beyond such 72 consecutive hours during the continued occupation of an insured's premises by strikers, provided such occupation commenced during the aforesaid period. C. As regards earthquake (the epicenter of which need not necessarily be within the territorial confines referred to in the opening paragraph of this Article) and fire following directly occasioned by the earthquake, only those individual fire losses that commence during the period of 168 consecutive hours may be included in the Company's "loss occurrence." D. As regards "freeze," only individual losses directly occasioned by collapse, breakage of glass, and water damage (caused by bursting of frozen pipes and tanks) may be included in the Company's "loss occurrence." For all "loss occurrences" other than those referred to in B. above, the Company may choose the date and time when any such period of consecutive hours commences provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident, or loss and provided that only one such period of 168 consecutive hours will apply with respect to one event, except for those "loss occurrences" referred to in A. above where only one such period of 72 consecutive hours will apply with respect to one event. As respects those "loss occurrences" referred to in B. above, if the disaster, accident, or loss occasioned by the event is of greater duration than 72 consecutive hours, then the Company may divide that disaster, accident, or loss into two or more "loss occurrences" provided no two periods overlap and no individual loss is included in more than one such period and provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident, or loss. No individual losses occasioned by an event that would be covered by 72 hours provisions may be included in any "loss occurrence" claimed under the 168 hours provisions. Losses directly or indirectly occasioned by: (i) loss of, alteration of, or damage to (ii) a reduction in the functionality, availability or operation of a computer system, hardware, programme, software, data, information repository, microchip, integrated circuit or similar device in computer equipment or non-computer equipment, whether the property of the policyholder of the Company or not, do not in and of themselves constitute an event unless arising out of one or more of the following perils: fire, lightning, explosion, aircraft or vehicle impact, falling objects, windstorm, hail, tornado, cyclone, hurricane, earthquake, volcano, tsunami, flood, freeze or weight of snow. 2 SCHEDULE 1.29 BINDER OF REINSURANCE MULTILINE QUOTA SHARE REINSURANCE AGREEMENT (hereinafter referred to as the "Agreement") Between HORACE MANN INSURANCE COMPANIES Springfield, Illinois (hereinafter referred to as the "Company") and SWISS REINSURANCE AMERICA CORPORATION Armonk, New York (hereinafter referred to as the "Reinsurer") BUSINESS COVERED: The Company obligates itself to cede to the Reinsurer and - ---------------- the Reinsurer obligates itself to accept from the Company a 10% Quota Share participation of the Company's Ultimate Net Liability for the Policies in force as of the Inception Date, and new and renewal Policies becoming effective on or after said date as respects losses occurring on or after the Inception Date. Under this Agreement, the indemnity for reinsured loss applies to Homeowners, Personal Automobile Liability and Personal Automobile Physical Damage except as excluded under this Agreement. INCEPTION DATE - -------------- AND TERMINATION - --------------- DATE: This Agreement shall become effective with respect to in - ---- force, new and renewal business effective on or after the Inception Date and shall remain in force for 12 months from the Inception Date, such date to be the Termination Date. As of the Termination Date of this Agreement, all reinsurance hereunder shall be automatically cancelled as of the Termination Date and the Reinsurer shall be released of all liability as respects losses occurring subsequent to the Termination Date. The Reinsurer shall return to the Company the unearned premiums on the hereunder at the Termination Date, less the commission allowed thereon. The Inception Date shall be determined based on the terms and conditions of the CLOCS agreement with SRFP. TERRITORY: United States of America, its territories and possessions, - ---------- and Canada, except as respects Inland Marine business covered hereunder where the territorial limits shall be those of the policies concerned. LIMIT AND - --------- RETENTION: This Quota Share Agreement is subject to a maximum cession - --------- limit of $750,000 Ultimate Net Liability each Occurrence (10% share of the Company's Ultimate Net Liability of $7,500,000 each occurrence). If the Company's Accident Year Loss Ratio for the period exceeds 77.0%, the Company will retain as a loss corridor deductible, loss and Loss Adjustment Expense for which the Reinsurer would otherwise be liable for the difference between the actual Accident Year Loss Ratio and 77.0%, calculated per the following paragraph. The Loss Ratio percentage points comprising the loss corridor deductible shall be 13.0 Loss Ratio percentage points adjusted by the difference in the cumulative trend percent less cumulative rate change percent from January 1, 2002 until the Inception Date, subject to a minimum loss corridor deductible of 13.0 Loss Ratio percentage points. The Reinsurer will then be liable for its 10% share of the next 15.0 Loss Ratio percentage points in excess of the number of loss corridor deductible Loss Ratio percentage points, and shall have no liability excess of such amount of Accident Year Loss Ratio percentage points. DEFINITION OF - ------------- ULTIMATE - -------- NET LIABILITY: The term "Ultimate Net Liability" shall mean the of the - -------------- remaining portion of the Company's gross liability including 90% ECO and 90% XPL (within the Agreement limits) as defined herein, from each Occurrence reinsured under this Agreement after deducting recoveries from all other reinsurance (excluding the aggregate cover), if any, whether specific or general and whether collectible or not. REINSURANCE - ----------- PREMIUM: The Company shall cede to the Reinsurer 10% of the Company's - -------- unearned premiums on its Ultimate Net Liability in force as of the Inception Date on the business covered hereunder. The Company shall cede to the Reinsurer 10% of the Company's Net Premiums Written applicable to new and renewal Policies becoming effective on or after the Inception Date, with respect to its Ultimate Net Liability on the business covered hereunder. The term "Net Premiums Written" shall mean gross and additional premiums less return premiums, less premiums ceded on all other reinsurance. CEDING COMMISSION: The Reinsurer shall allow to the Company a ceding commission - ----------------- allowance of 20.0% of the Net Premiums Written, ceded hereunder. ACCIDENT YEAR - ------------- LOSS RATIO: In calculating the Accident Year Loss Ratio, direct earned - ---------- premium less all ceded reinsurance earned premium will be used to determine Net Earned Premium. Net Incurred Loss will be equal to the total of all Ultimate Net Liability. Accident Year Loss Ratio will equal Net Incurred Loss divided by Net Earned Premium. The term "incurred losses" means all losses and Loss Adjustment Expenses paid less recoveries, including salvage and subrogation, plus Losses and Loss Adjustment Expenses outstanding (including IBNR) as respects losses which occurred during the term. REPORTS AND - ----------- REMITTANCES: Within 5 days after receiving a signed binder of reinsurance - ----------- the Company shall pay to the Reinsurer the Reinsurer's pro rata share of the Company's unearned premium reserve segregated by Line of Business on the business in force as of the Inception Date. Within 30 days after the close of each quarter the Company shall forward a quarterly account summarizing the following transactions under this Agreement during the quarter: Net Premiums written ceded segregated by Line of business; Commissions; Loss and LAE paid less recoveries, segregated by Line of Business, by year of loss; Unearned Premium Reserves segregated by Line of Business at the end of the quarter and calculated on a monthly pro rata basis; Estimated loss and LAE reserves outstanding at the end of the quarter segregated by Line of Business, by year of loss. The balance due either party shall be paid within 45 days after the close of each quarter for the transactions during such quarter. EXCLUSIONS: See Attached. - ---------- OTHER CLAUSES: . 90% ECO and 90% XPL Covered up to limits. - ------------- . Definition of Occurrence - No Reinstatement (attached) . Catastrophe Reinsurance . Currency . Definition of Risk . Dispute Resolution . Errors or omissions . Insolvency . Losses, Loss Adjustment Expenses and Salvages . Offset . Special Termination . Taxes . Others to be Agreed Upon signature by a duly authorized representative of the Reinsurer, this Binder of Reinsurance shall be effective until superseded by an Agreement of Reinsurance signed by duly authorized representatives of the Reinsurer and the Company. SRA Participation Accepted Hereon: 100% of 10% Authorized Signature: ------------------------- Date: ------------------------- Horace Mann Authorized Signature: ------------------------- Date: ------------------------- EXCLUSIONS THIS AGREEMENT DOES NOT COVER: A. THE FOLLOWING GENERAL CATEGORIES 1. All Lines of Business not specifically listed in Business Covered. 2. Policies issued with a deductible of $100,000 or more; provided this exclusion shall not apply to Policies which customarily provide a percentage deductible on the perils of earthquake or windstorm. 3. Reinsurance assumed, except pro rata local agency reinsurance on specific risks. 4. Ex-gratia Payments. 5. Loss or damage occasioned by war, invasion, revolution, bombardment, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, martial law, or confiscation by order of any government or public authority, but not excluding loss or damage which would be covered under a standard form of Policy containing a standard war exclusion clause. 6. Insolvency Funds as per the attached Insolvency Funds Exclusion Clause, which is made part of this Agreement. 7. Pool, Syndicate and Association business as per the attached Pools, Associations and Syndicates Exclusion Clause, which is made part of this Agreement. 8. Risks where the Total Insured Value, per risk, exceeds the figure specified as per, the attached Total Insured Value Exclusion Clause, which is made part of this Agreement. B. THE FOLLOWING CLASSES OF BUSINESS AND TYPES OF RISKS 1. Mortgage Impairment. 2. Growing and/or standing crops. 3. Mortality and Health covering birds, animals or fish. 4. All onshore and offshore gas and oil drilling rigs. 5. Petrochemical operations engaged in the production, refining or upgrading of petroleum or petroleum derivatives or natural gas. 6. Satellites. 7. All railroad business. 8. As respects Inland Marine business: a. Registered Mail and Armored Car Policies. b. Jeweler's Block Policies. c. Furrier's Customers Policies. d. Rolling Stock. e. Parcel Post when written to cover banks and financial institutions. f. Commercial Negative Film Insurance. g. Garment Contractors Policies. h. Mining Equipment while underground. i. Radio and Television Broadcasting Towers. j. Motor Truck Cargo Insurance written for common carriers operating beyond a radius of 200 miles. C. THE FOLLOWING PERILS 1. Flood and/or Earthquake when written as such. 2. Difference in Conditions, however styled. 3. Pollution and Seepage as per the attached Pollution and Seepage Exclusion Clause, which is made part of this Agreement. 4. Nuclear Incident Exclusion Clauses which are attached and made part of this Agreement: a. Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance - U.S.A. b. Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance - Canada. c. Nuclear Incident Exclusion Clause - Reinsurance - No. 4. D. In the event the Company is inadvertently bound on any risk which is excluded under this Agreement and identified below, the reinsurance provided under this Agreement shall apply to such risk until discovery by the Company within its Home Office of the existence of such risk and for 30 days thereafter, and shall then cease unless within the 30 day period, the Company has received from the Reinsurer written notice of its approval of such risk. SUPPLEMENT TO THE ATTACHMENTS DEFINITION OF IDENTIFICATION TERMS USED WITHIN THE ATTACHMENTS -------------------------------------------------------------- A. Wherever the term "Company" or "Reinsured" or "Reassured" or whatever other term is used to designate the reinsured company or companies within the various attachments to the reinsurance agreement, the term shall be understood to mean Company or Reinsured or Reassured or whatever other term is used in the attached reinsurance agreement to designate the reinsured company or companies. B. Wherever the term "Agreement" or "Contract" or "Policy" or whatever other term is used to designate the attached reinsurance agreement within the various attachments to the reinsurance agreement, the term shall be understood to mean Agreement or Contract or Policy or whatever other term is used to designate the attached reinsurance agreement. C. Wherever the term "Reinsurer" or "Reinsurers" or "Underwriters" or whatever other term is used to designate the reinsurer or reinsurers in the various attachments to the reinsurance agreement, the term shall be understood to mean Reinsurer or Reinsurers or Underwriters or whatever other term is used to designate the reinsuring company or companies. - -------------------------------------------------------------------------------- INSOLVENCY FUNDS EXCLUSION CLAUSE --------------------------------- This Agreement excludes all liability of the Company arising by contract, operation of law, or otherwise from its participation or membership, whether voluntary or involuntary, in any insolvency fund or from reimbursement of any person for any such liability. "Insolvency fund" includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed, which provides for any assessment of or payment or assumption by any person of part or all of any claim, debt, charge, fee, or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part. POOLS, ASSOCIATIONS AND SYNDICATES EXCLUSION CLAUSE --------------------------------------------------- SECTION A Excluding: (a) All Business derived directly or indirectly from any Pool, Association or Syndicate which maintains its own reinsurance facilities. (b) Any Pool or Scheme (whether voluntary or mandatory) formed after March 1, 1968, for the purpose of insuring Property whether on a country-wide basis or in respect of designated areas. This Exclusion shall not apply to so-called Automobile Insurance Plans or other Pools formed to provide coverage for Automobile Physical Damage. SECTION B It is agreed that business, written by the Company for the same perils, which is known at the time to be insured by or in excess of underlying amounts placed in the following Pools, Associations or Syndicates, whether by way of insurance or reinsurance is excluded hereunder: Industrial Risk Insurers (successor to Factory Insurance Association and Oil Insurance Association); Associated Factory Mutuals; Improved Risk Mutuals. Any Pool, Association or Syndicate formed for the purpose of writing Oil, Gas or Petro-Chemical Plants and/or Oil or Gas Drilling Rigs. United States Aircraft Insurance Group, Canadian Aircraft Insurance Group, Associated Aviation Underwriters, American Aviation Underwriters. SECTION B does not apply: (a) Where the Total Insured value over all interests of the risk in question is less than $250,000,000. (b) To interests traditionally underwritten as Inland Marine or Stock and/or Contents written on a Blanket basis. (c) To Contingent Business Interruption, except when the Company is aware that the key location is known at the time to be insured in any Pool, Association or Syndicate named above. (d) To risks as follows: Offices, Hotels, Apartments, Hospitals, Educational Establishments, Public Utilities (other than Railroad Schedules) and Builders Risks on the classes of risks specified in this subsection (d) only. TOTAL INSURED VALUE EXCLUSION CLAUSE ------------------------------------ It is the mutual intention of the parties to exclude risks, other than Offices, Hotels, Apartments, Hospitals, Educational Establishments, Public Utilities (except Railroad schedules) and Builders Risk on the above classes where, at the time of the cession, the Total Insured Value over all interests exceeds $250,000,000. However, the Company shall be protected hereunder, subject to the other terms and conditions of this Agreement, if subsequently to cession being made the Company becomes acquainted with the true facts of the case and discovers that the mutual intention has been inadvertently breached, the Company shall at the first opportunity, and certainly by next anniversary of the original policy, exclude the risk in question. It is agreed that this mutual intention does not apply to Contingent Business Interruption or to interest traditionally underwritten as Inland Marine or to Stock and/or Contents written on a blanket basis except where the Company is aware that the Total Insured Value of $250,000,000 is already exceeded for buildings, machinery, equipment and direct use and occupancy at the key location. It is understood and agreed that this Clause shall not apply hereunder where the Company writes 100% of the risk. Notwithstanding anything contained herein to the contrary, it is the mutual intention of the parties in respect of bridges and tunnels to exclude such risks where the Total Insured Value over all interests exceeds $250,000,000. POLLUTION AND SEEPAGE EXCLUSION CLAUSE -------------------------------------- This Reinsurance does not apply to: 1. Pollution, seepage, contamination or environmental impairment insurances (hereinafter collectively referred to as "pollution"), however styled; 2. Loss or damage caused directly or indirectly by pollution, unless said loss or damage follows as a result of a loss caused directly by a peril covered hereunder; 3. Expenses resulting from any governmental direction or request that material present in or part of or utilized on an insured's property be removed or modified, except as provided in 5. below; 4. Expenses incurred in testing for and/or monitoring pollutants; 5. Expenses incurred in removing debris, unless (A) the debris results from a loss caused directly by a peril covered hereunder, and (B) the debris to be removed is itself covered hereunder, and (C) the debris is on the insured's premises, subject, however, to a limit of $5,000 plus 25% of (i) the property damage loss, any risk, any one location, any one original insured, and (ii) any deductible applicable to the loss; 6. Expenses incurred to extract pollutants from land or water at the insured's premises unless (A) the release, discharge, or dispersal of pollutants results from a loss caused directly by a peril covered hereunder, and (B) such expenses shall not exceed $10,000; 7. Loss of income due to any increased period of time required to resume operations resulting from enforcement of any law regulating the prevention, control, repair, clean-up or restoration of environment damage; 8. Claims under 5. and/or 6. above, unless notice therefore is given to the Company within 180 days after the date of the loss occurrence to which such claims relate. "Pollutants" means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed. Where no pollution exclusion has been accepted or approved by an insurance regulatory authority for use in a policy that is subject to this Agreement or where a pollution exclusion that has been used in a policy is overturned, either in whole or in part, by a court having jurisdiction, there shall be no recovery for pollution under this Agreement unless said pollution loss or damage follows as a result of a loss caused directly by a peril covered hereunder. 1 Nothing herein shall be deemed to extend the coverage afforded by this reinsurance to property or perils specifically excluded or not covered under the terms and conditions of the original policy involved. 2 NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - U.S.A. - -------------------------------------------------------------------------- N.M.A. 1119 1. This Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. 2. Without in any way restricting the operation of paragraph 1. of this Clause, this Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: I. Nuclear reactor power plants including all auxiliary property on the site, or II. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and critical facilities as such, or III. Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material," and for reprocessing, salvaging, chemically separating, storing or disposing of spent nuclear fuel or waste materials, or IV. Installations other than those listed in paragraph 2. III. above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operation of paragraphs 1. and 2. of this Clause, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith, except that this paragraph 3. shall not operate: (a) where the Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or (b) where the said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However, on and after 1st January, 1960, this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof. 4. Without in any way restricting the operation of paragraphs 1., 2. and 3. of this Clause, this Reinsurance does not cover any loss or liability by radioactive contamination 1 accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. It is understood and agreed this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard. 6. The term "special nuclear material" shall have the meaning given to it by the Atomic Energy Act of 1954 or by any law amendatory thereof. 7. Reassured to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation., plant or site. NOTE: - Without in any way restricting the operation of paragraph 1. hereof, it is understood and agreed that (a) all policies issued by the Reassured on or before 31st December, 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December, 1960 whichever first occurs whereupon all the provisions of this Clause shall apply, (b) with respect to any risk located in Canada policies issued by the Reassured on or before 31st December, 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December, 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. N.M.A. 1119 2 NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - CANADA - -------------------------------------------------------------------------- N.M.A. 1980 1. This Agreement does not cover any loss or liability accruing to the Company directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. 2. Without in any way restricting the operation of paragraph 1. of this clause, this Agreement does not cover any loss or liability accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: a. Nuclear reactor power plants including all auxiliary property on the site, or b. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and critical facilities as such, or c. Installations for fabricating complete fuel elements or for processing substantial quantities of prescribed substances, and for reprocessing, salvaging, chemically separating, storing or disposing of spent nuclear fuel or waste materials, or d. Installations other than those listed in c. above using in substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operation of paragraphs 1. and 2. of this clause, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith, except that this paragraph 3. shall not operate: a. where the Company does not have knowledge of such nuclear reactor power plant or nuclear installation, or b. where the said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. 4. Without in any way restricting the operation of paragraphs 1., 2. and 3. of this clause, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. This clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Company to be the primary hazard. 1 6. The term "prescribed substances" shall have the meaning given to it by the Atomic Energy Control Act R.S.C. 1974 or by any law amendatory thereof. 7. Company to be sole judge of what constitutes: a. substantial quantities, and b. the extent of installation, plant or site. 8. Without in any way restricting the operation of paragraphs 1., 2., 3. and 4. of this clause, this Agreement does not cover any loss or liability accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, caused by any nuclear incident as defined in The Nuclear Liability Act, nuclear explosion or contamination by radioactive material. NOTE: Without in any way restricting the operation of paragraphs 1., 2., 3. and 4. of this clause, paragraph 8. of this clause shall apply to all original contracts of the Company whether new, renewal or replacement which become effective on or after December 31, 1984. N.M.A. 1980 2 NUCLEAR INCIDENT EXCLUSION CLAUSE - REINSURANCE - NO. 4 ------------------------------------------------------- 1. The Reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. 2. Without in any way restricting the operations of Nuclear Incident Exclusion Clauses, - Liability, - Physical Damage, - Boiler and machinery and paragraph 1. of this Clause, it is understood and agreed that for all purposes of the reinsurance assumed by the Reinsurer from the Reinsured, all original insurance policies or contracts of the Reinsured (new, renewal and replacement) shall be deemed to include the applicable existing Nuclear Clause and/or Nuclear Exclusion Clause(s) in effect at the time and any subsequent revisions thereto as agreed upon and approved by the Insurance Industry and/or a qualified Advisory or Rating Bureau. SCHEDULE 5.10 OFFICER'S CERTIFICATE --------------------- This certifies that (1) the representations and warranties of Horace Mann Educators Corporation, a Delaware corporation (the "Company", as further defined below) contained in Article 3 of the Agreement (as defined below), were true and accurate in all material respects on the date of the Agreement, and are true and accurate in all material respects as of the date of this Certificate, (2) the Company has, as of the date of this Certificate, satisfied all conditions set forth in Article 5 of the Agreement, (3) the Company is not, as of the date of this Certificate, in breach of any of the covenants and agreements required to be complied with by the Company as set forth in Article 6 of the Agreement, and (4) the representation and warranty of the Company described in Section 5.8 of the Agreement is true and accurate in all material respects as of the date of this Certificate. This Certificate is being delivered pursuant to Section 5.10 of the Agreement. For the purposes of this Certificate, the term (a) "Agreement" means that certain Catastrophe Equity Securities Issuance Option and Reinsurance Option Agreement dated as of May 7, 2002 between the Company and , a corporation, including its - ------------------------- ------------------------ exhibits and schedules, and (b) the "Company" includes the HM Insurance Subsidiaries (as defined in the Agreement), on behalf of which the Company has the requisite power and authority to make the applicable representations and warranties in Article 3 of the Agreement and pursuant to this Certificate. Dated: ----------------- Horace Mann Educators Corporation, a Delaware corporation By: ------------------------------- Name: Title: SCHEDULE 5.12 [Form of Opinion of Gibson, Dunn & Crutcher, LLP] Swiss Re Financial Products Corporation 55 East 52nd Street New York, NY 10055 Re: Catastrophe Equity Securities Issuance Option and Reinsurance Option Agreement dated as of May 7, 2002 (the "Agreement") between Option Writer and Horace Mann Educators Corporation, a Delaware corporation (the "Company"). Ladies and Gentlemen: We have acted as special counsel to the Company in connection with the Agreement. Capitalized terms used in this opinion and not otherwise defined shall have the meanings assigned to them in the Agreement. In rendering this opinion, we have examined originals or copies certified or otherwise identified to our satisfaction as being true copies of the documents and instruments relevant to our opinion. We have, with your permission, assumed, without independent investigation or inquiry with respect to any matter, that: the signatures on all documents examined by us are genuine, all individuals executing such documents had all requisite legal capacity (except in the case of documents signed on behalf of the Company) and competency and were duly authorized (except in the case of documents signed on behalf of the Company), the documents submitted to us as originals are authentic and the documents submitted to us as certified or reproduction copies conform to the originals. With respect to questions of fact material to the opinions expressed below, we have, with your consent, relied upon certificates of public officials and officers of the Company, in each case without having independently verified the accuracy or completeness thereof. Based on the foregoing and in reliance thereon, and subject to the assumptions, exceptions, qualifications and limitations set forth herein, we are of the opinion that: 1. Each of HM and the HM Insurance Subsidiaries incorporated in California and Texas is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has the full corporate power and authority to conduct its business as currently being conducted and to execute and deliver the Transaction Agreements to which it is a party, and to perform its obligations under, and to consummate the transactions contemplated by, the Transaction Agreements to which it is a party, including, without limitation, the delivery of the Preferred Shares pursuant to the exercise of the Securities Issuance Option. 2. The execution and delivery of the Transaction Agreements to which it is a party by the Company, and the performance of the Company under such Transaction Agreements, is not in violation of any applicable law, any provision of the Company or HM's Insurance Subsidiaries' organizational documents or, to our knowledge, any order or judgment of any court or other government agency applicable to the Company or any of its assets or subsidiary or affiliated companies, to the extent that any such order or judgment would have a material adverse effect on the rights and privileges of Option Writer under the Agreement, or to our knowledge any contractual restriction binding upon or affecting the Company of any of its assets or subsidiary or affiliated companies. To our knowledge, the Company and the HM Insurance Subsidiaries, as applicable, have complied, in all material respects, with all representations, warranties, covenants and agreements contained in any Transaction Agreements. 3. All governmental and other consents (including without limitation approvals under the Federal securities laws) that are required to have been obtained by the Company with respect to the execution and delivery of the Agreement have been obtained and are in full force and effect and all conditions of any such consents have been complied with. 4. The execution of the Transaction Agreements to which it is a party have been duly authorized by all necessary corporate action of the Company, and such Transaction Agreements (a) have been duly executed and delivered by the Company, (b) constitute legal, valid and binding obligations of the Company and (c) are enforceable against the Company in accordance with their terms. 5. To our knowledge, there is not pending or threatened against the Company or any of its subsidiaries or affiliates any action, suit or proceeding before any court, tribunal, governmental body, agency or official or any arbitrator or mediator that would reasonably be expected to materially and adversely affect the legality, validity and enforceability of the Transaction Agreements against the Company or materially adversely affect the financial condition of the Company or any of the HM Insurance Subsidiaries. 6. The Company has authorized Preferred Shares, and such ----------- Preferred Shares, when issued pursuant to the exercise of the Securities Issuance Option, shall, upon delivery of payment therefor, be validly issued, fully paid and non-assessable. Upon issuance pursuant to the Agreement, the Preferred Shares shall be free and clear of any lien, encumbrance or other restriction (other than as set forth in the Transaction Agreements), and upon delivery of and payment for the Preferred Shares as provided in the Agreement, Option Writer will acquire good title to the Preferred Shares purchased under this Agreement, free and clear of any lien, encumbrance or other restriction (other than as set forth in the Transaction Agreements). 7. The shares of HM Common Stock into which the Preferred Shares may be converted, as set forth in the Certificate of Designations, shall, upon issuance pursuant to such conversion, be validly issued, fully paid and non-assessable. Such shares of HM Common Stock shall be free and clear of any lien, encumbrance or other restriction (other than as set forth in the Transaction Agreements), and upon conversion as provided in the Certificate of Designations, Option Writer will acquire good title to the requisite number of shares of HM Common Stock, 2 free and clear of any lien, encumbrance or other restriction (other than as set forth in the Transaction Agreements). Such shares of HM Common Stock shall be subject to the Registration Rights Agreement. 8. To our knowledge, except for the Agreement, there is no outstanding right, subscription, warrant, call, unsatisfied preemptive right, option or other agreement of any kind to purchase or otherwise to receive from the Company any authorized but unissued, unauthorized or treasury shares of the Preferred Shares. 9. To our knowledge, the Company and the HM Insurance Subsidiaries incorporated in California and Texas have all requisite licenses, permits and authority (collectively, "Licenses") that are necessary for the conduct of their respective insurance and other businesses, if any, such Licenses are in full force and effect and no proceeding is pending or threatened to suspend, revoke or limit any License which is material to the operations of any such insurance company. 10. To our knowledge, neither the Company nor any HM Insurance Subsidiary (a) is the subject of any voluntary or involuntary petition under any bankruptcy, insolvency or similar law affecting creditors generally, (b) is the subject of any liquidation, transformation or rehabilitation proceeding or (c) has had a receiver or similar person or entity appointed for any of its property. Each of the opinions set forth above is subject to the following exceptions, qualifications, limitations and assumptions: (a) Our opinions are subject to the effect of bankruptcy, insolvency, reorganization, moratorium, arrangement or other similar state or federal laws affecting enforcement of debtors' and creditors' rights generally, including, without limitation, the effect of statutory or other laws regarding fraudulent conveyances or transfers, preferential transfers and of laws affecting distributions by corporations to stockholders. (b) Our opinions are subject to the application of general principles of equity, whether considered in a case or proceeding at law or in equity, including, without limitation, concepts of materiality, reasonableness, commercial reasonableness, good faith and fair dealing. Without limitation, we express no opinion as to the availability of specific performance, injunctive relief or other equitable relief as a remedy for noncompliance with any of the terms of the Transaction Agreements. (c) We express no opinion as to the legality, validity, binding effect or enforceability (whether according to its terms or otherwise) of any provisions of any Transaction Agreement to the effect that rights or remedies are not exclusive, that every right or remedy is cumulative and may be exercised in addition to any other right or remedy, that the election of some particular remedy does not preclude recourse to one or more other remedies or that failure to exercise or delay in exercising rights or remedies will not operate as a waiver of any such right or remedy. 3 (d) We express no opinion as to the legality, validity, binding effect or enforceability of any waiver (whether or not stated as such) under the Transaction Agreements, or any consent thereunder relating to any presently existing, unknown or future rights or the rights of any party thereto existing or duties owing to it, as a matter of law. We express no opinion as to the effectiveness of any waiver or consent contained in the Transaction Agreements that is broadly or vaguely stated or does not describe the right or duty purportedly waived or to which such consent relates with reasonable specificity. Without limitation, we express no opinion as to any provision of any Transaction Agreement waiving the right to object to venue in any court or waiving the right to jury trial. This opinion is limited to the effect of the present laws of the States of New York, California and Texas and the United States of America and, to the limited extent set forth below, the General Corporation Law of the State of Delaware. Although we are not admitted to practice in the State of Delaware, we are generally familiar with the General Corporation Law of the State of Delaware as presently in effect and have made such inquiries as we consider necessary to render our opinions expressed in Paragraphs 1 through 7 hereof. In rendering this opinion, we assume no obligation to revise or supplement this opinion in the event of future changes in the present laws, or the interpretation thereof, or the present facts relevant to the transaction contemplated by the Agreement. This opinion is rendered to Option Writer in connection with the Agreement and may not be relied upon by any person other than Option Writer or by Option Writer in any other context. This opinion may not be quoted without the prior written consent of this Firm or furnished to any other person or entity without the prior written consent of this Firm, provided that Option -------- Writer may provide copies of this opinion to regulatory authorities should they so request or in connection with their normal examinations or to the independent auditors and attorneys of Option Writer. Very truly yours, 4 [Form of Opinion of General Counsel of HMEC] Swiss Re Financial Products Corporation 55 East 52nd Street New York, NY 10055 Re: Catastrophe Equity Securities Issuance Option and Reinsurance Option Agreement dated as of May 7, 2002 (the "Agreement") between Option Writer and Horace Mann Educators Corporation, a Delaware corporation (the "Company"). Ladies and Gentlemen: I am the General Counsel of the Company and am familiar with the Agreement. Capitalized terms used in this opinion and not otherwise defined shall have the meanings assigned to them in the Agreement. In rendering this opinion, I have examined originals or copies certified or otherwise identified to my satisfaction as being true copies of the documents and instruments relevant to my opinion. I have, with your permission, assumed, without independent investigation or inquiry with respect to any matter, that: the signatures on all documents examined by me are genuine, all individuals executing such documents had all requisite legal capacity (except in the case of documents signed on behalf of the Company) and competency and were duly authorized (except in the case of documents signed on behalf of the Company), the documents submitted to me as originals are authentic and the documents submitted to me as certified or reproduction copies conform to the originals. Based on the foregoing and in reliance thereon, and subject to the assumptions, exceptions, qualifications and limitations set forth herein, I am of the opinion that: 1. Each of the HM Insurance Subsidiaries incorporated in Illinois and Arizona is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has the full corporate power and authority to conduct its business as currently being conducted and to execute and deliver the Transaction Agreements to which it is a party, and to perform its obligations under, and to consummate the transactions contemplated by, the Transaction Agreements to which it is a party. 2. The execution and delivery of the Transaction Agreements to which it is a party by the Company, and the performance of the Company under such Transaction Agreements, is not in violation of any applicable law, any provision of the Company or HM's Insurance Subsidiaries' organizational documents or any order or judgment of any court or other government agency applicable to the Company or any of its assets or subsidiary or affiliated companies, to the extent that any such order or judgment would have a material adverse effect on the rights and privileges of Option Writer under the Agreement, or any contractual restriction binding upon or affecting the Company of any of its assets or subsidiary or affiliated companies. 5 The Company and the HM Insurance Subsidiaries, as applicable, have complied, in all material respects, with all representations, warranties, covenants and agreements contained in any Transaction Agreements. 3. All governmental and other consents that are required to have been obtained by the Company with respect to the execution and delivery of the Agreement have been obtained and are in full force and effect and all conditions of any such consents have been complied with. 4. There is not pending or threatened against the Company or any of its subsidiaries or affiliates any action, suit or proceeding before any court, tribunal, governmental body, agency or official or any arbitrator or mediator that would reasonably be expected to materially and adversely affect the legality, validity and enforceability of the Transaction Agreements against the Company or materially adversely affect the financial condition of the Company or any of the HM Insurance Subsidiaries. 5. Except for the Agreement, there is no outstanding right, subscription, warrant, call, unsatisfied preemptive right, option or other agreement of any kind to purchase or otherwise to receive from the Company any authorized but unissued, unauthorized or treasury shares of the Preferred Shares. 6. The Company and the HM Insurance Subsidiaries have all requisite licenses, permits and authority (collectively, "Licenses") that are necessary for the conduct of their respective insurance and other businesses, if any, such Licenses are in full force and effect and no proceeding is pending or threatened to suspend, revoke or limit any License which is material to the operations of any such insurance company. 7. Neither the Company nor any HM Insurance Subsidiary (a) is the subject of any voluntary or involuntary petition under any bankruptcy, insolvency or similar law affecting creditors generally, (b) is the subject of any liquidation, transformation or rehabilitation proceeding or (c) has had a receiver or similar person or entity appointed for any of its property. 8. All regulatory filings made by the Company and the HM Insurance Subsidiaries with the SEC and with applicable insurance regulatory authorities for the past five years, at the time of filing, (a) in the case of filings with the SEC, were all filings required by law and did not contain any material misstatements or omissions and (b) in the case of filings with applicable insurance regulatory authorities, were appropriately responsive to, and in compliance with, the applicable insurance regulatory requirements in all material respects. This opinion is limited to the effect of the present laws of the States of Illinois and Arizona, and as to Arizona law, I have relied entirely on a back-up opinion to me from Arizona counsel to the Company. In rendering this opinion, I assume no obligation to revise or supplement this opinion in the event of future changes in the present laws, or the interpretation thereof, or the present facts relevant to the transaction contemplated by the Agreement. This opinion is rendered to Option Writer in connection with the Agreement and may not be relied upon by any person other than Option Writer or by Option Writer in any other 6 context. This opinion may not be quoted without my prior written consent or furnished to any other person or entity without my prior written consent, provided that Option Writer may provide copies of this opinion to regulatory - -------- authorities should they so request or in connection with their normal examinations or to the independent auditors and attorneys of Option Writer. Very truly yours, 7 SCHEDULE 6.2 REGISTRATION RIGHTS AGREEMENT ----------------------------- This REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of May 7, 2002, between Horace Mann Educators Corporation, a Delaware corporation (the "Company") and Swiss Re Financial Products Corporation, a Delaware corporation ("Option Writer"). 1. Background. Pursuant to a Catastrophe Equity Securities Issuance Option ---------- and Reinsurance Option Agreement, dated as of the date hereof, between the Company and Option Writer (the "Option Agreement"), Option Writer may acquire shares of the Company's Series A Cumulative Convertible Preferred Stock, par value US$0.001 per share (the "Preferred Stock"). The number of shares of Preferred Stock to be acquired by Option Writer, if any, will be determined in accordance with applicable provisions of the Option Agreement. The shares of Preferred Stock outstanding from time to time are referred to in this Agreement as the "Preferred Shares." The Preferred Stock will, when issued, be convertible, subject to certain conditions, into shares of the Company's common stock, par value $0.001 per share ("Common Stock"), all as set forth in the Certificate of Designations for the Preferred Stock (the "Certificate of Designations"). Pursuant to the Option Agreement, the Company has agreed to enter into this Agreement granting to the holders of the Preferred Shares the right to register the Registrable Securities (hereinafter defined) upon the terms and subject to the conditions set forth in this Agreement. 2. Definitions. As used in this Agreement, the following terms have the ----------- following respective meanings: "Additional Securities" has the meaning ascribed thereto in Section 3.1(b). "Affiliate" of a Person means any other Person that is controlled by, controls, or is under common control with such Person. "Business Day" means any day other than a Saturday, Sunday or a day on which banking institutions in New York, New York or Zurich, Switzerland are not required to be open. "Certificate of Designations" is defined in Section 1. "Commission" means the Securities and Exchange Commission or any other Federal agency at the time administering the Securities Act or the Exchange Act. "Common Stock" is defined in Section 1. "Company" means Horace Mann Educators Corporation, a Delaware corporation. "Conversion Shares" means the shares of Common Stock issued or issuable upon conversion of the Preferred Stock. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time. "Initiating Holder" is defined in Section 3.1(a). "Minimum Period" is defined in Section 3.3(b). "Option Agreement" is defined in Section 1. "Option Writer" means Swiss Re Financial Products Corporation, a Delaware corporation. "Other Securities" is defined in Section 3.2(b) "Person" means a corporation, association, partnership, limited liability company, organization, business, individual, governmental or political agency or other entity. "Preferred Shares" is defined in Section 1. "Preferred Stock" is defined in Section 1. "Registrable Securities" means (i) any Conversion Shares, (ii) any Preferred Shares which a holder is unable to convert into Conversion Shares due to a lack of approval, from the appropriate state insurance commissioner, of any applicable insurance regulatory filing necessary for such conversion, and (iii) any other securities which may be included as Registrable Securities as set forth in Section 6.13 of the Option Agreement. As to any particular Registrable Securities, once issued such securities shall cease to be Registrable Securities when (a) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities have been disposed of in accordance with such registration statement (b) they shall have been sold as permitted by Rule 144 under the Securities Act, (c) they shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been properly delivered by the Company and subsequent public distribution of them shall not, in the reasonable opinion of counsel to the Company, require registration of them under the Securities Act, or (d) they shall have ceased to be outstanding. "Registration Expenses" means all expenses incident to the Company's performance of or compliance with Section 3, including, without limitation, all registration, filing and NASD fees, all fees and expenses of complying with securities or blue sky laws (including related counsel fees), all word processing, duplicating and printing expenses, messenger and delivery expenses, the fees and expenses incurred in connection with the listing of the securities to be registered on each securities exchange or national marked system on which such securities are to be listed, the fees and disbursements of counsel for the Company and of its independent public 2 accountants, including the expenses of "cold comfort" letter required by or incident to such performance and compliance, fees of transfer agents any fees and disbursements of underwriters customarily paid by issuers or sellers of securities (excluding any underwriting discounts or commissions with respect to the Registrable Securities), but excluding any fees or expenses of counsel to any holders. Notwithstanding the foregoing, in the event the Company shall determine, in accordance with Section 3.2, not to register any securities with respect to which it had given written notice of its intention to so register to holders of Registrable Securities, all of the costs of the type (and subject to any limitation to the extent) set forth in this definition and incurred by Requesting Holders in connection with such registration on or prior to the date the Company notifies the Requesting Holders of such determination shall be deemed Registration Expenses. "Registration Rights Holder" is defined in Section 3.1(b). "Requesting Holder" is defined in Section 3.2(a). "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time. "Selling Expenses" means all underwriting discounts and selling commissions applicable to the sale of Registrable Securities and all fees and expenses of counsel to Selling Holders. "Selling Holder" is defined in Section 3.1(a)(ii). "Significant Subsidiary" is defined under Rule 1-02(w) of Regulation S-X promulgated under the Securities Act and the Exchange Act. "Trading Day" means a date on which the New York Stock Exchange (or, if different, the principal national securities exchange on which the Common Stock is listed or admitted to trading) is open for the transaction of business. "Value" is defined in Section 3.1(a). 3. Registration Under the Securities Act. ------------------------------------- 3.1 Registration on Request. ----------------------- (a) Request. Subject to Section 3.9, upon the written request of ------- one or more holders (the "Initiating Holders") of Registrable Securities, representing not less than US$25,000,000 of the Registrable Securities (or such lesser amount of Registrable Securities as set forth in Section 3.1(g)(ii) below) based on the market value of such Registrable Securities at the time of the request (with Preferred Shares valued on an as converted basis) (the "Value"), that the Company effect the registration under the Securities Act of all or part of such Initiating Holders' Registrable Securities, the Company shall promptly give written notice of such 3 requested registration to all registered holders of Registrable Securities, and the Company will use its commercially reasonable efforts to effect, as early as practicable, the registration under the Securities Act of (i) the Registrable Securities which the Company has been so requested to register by such Initiating Holders, and (ii) all other Registrable Securities which the Company has been requested to register by holders of Registrable Securities (such holders together with the Initiating Holders are referred to in this Agreement as the "Selling Holders") by written notice to the Company, within thirty (30) days after the receipt of such written notice by the Company, all to the extent requisite to permit the disposition of the Registrable Securities to be registered in such manner, subject to Section 3.1(d) below. (b) Registration of Other Securities. Whenever the Company shall -------------------------------- effect a registration pursuant to this Section 3.1 in connection with an offering and sale of Registrable Securities by one or more Selling Holders of Registrable Securities, subject to the following sentence and Section 3.1(f) below, (i) any Person other than a Selling Holder who holds registration rights with respect to securities of the Company (each, a "Registration Rights Holder"), shall have the right to include, to the extent provided in the relevant agreement between the Company and the Registration Rights Holder, in the registration made pursuant to this Section 3.1 the securities held by the Registration Rights Holders to which such registration rights relate, and (ii) the Company shall have the right to include in the registration made pursuant to this Section 3.1 securities to be issued by the Company (the securities for which Registration Rights Holders and the Company can so require registration are referred to in this Agreement as "Additional Securities"). No Additional Securities, however, shall be included among the securities covered by the registration made pursuant to this Section 3.1 if, in case of an underwritten offering, the managing underwriter of such offering shall have advised the Company and any Registration Rights Holder seeking to have Additional Securities covered by such registration in writing that the inclusion of such Additional Securities would adversely affect such offering, in which case the number of Additional Securities included in such registration shall be limited to the number that will not, in the judgment of the managing underwriter, adversely affect the offering (such limited number to be allocated promptly (so as not to interfere with the timing of the offering) between the Company and the affected Registration Rights Holders as the Company shall determine). (c) Registration Statement Form. Registrations under this Section --------------------------- 3.1 shall be on an appropriate registration form of the Commission, as reasonably determined by the Company. (d) Effective Registration Statement. A registration requested -------------------------------- pursuant to this Section 3.1 shall not be deemed to have been effected (i) unless a registration statement with respect thereto has become effective and remained effective in compliance with the provisions of the Securities Act until the Minimum Period has been completed, (ii) if, after it has become 4 effective, such registration is interfered with by any stop order, injunction or other order or requirement of the Commission or other governmental agency or court for any reason not attributable to the Selling Holders and has not subsequently become effective or (iii) if the conditions to closing specified in the underwriting agreement, if any, entered into in connection with such registration are not satisfied or waived, other than by reason of a failure on the part of Selling Holders. (e) Selection of Underwriters. All registrations pursuant to this ------------------------- Section 3.1 shall involve underwritten securities offerings. The underwriter or underwriters of each underwritten offering of the Registrable Securities so to be registered shall be selected by the Company. (f) Priority in Requested Registration. If the managing ---------------------------------- underwriter of any underwritten offering shall advise the Company in writing (with a copy to each Selling Holder of Registrable Securities requesting registration) that, in its opinion, the number or type of securities requested to be included in such registration (including any Additional Securities requested to be included pursuant to Section 3.1(b)) is a number or type which would adversely affect such offering (including, but not limited to, the price offered), then the Company shall include in such registration, to the extent of the number which the Company is so advised can be sold in such offering, Registrable Securities requested to be included in such registration, pro rata among the Selling Holders requesting such registration on the basis of the percentage of the Registrable Securities of such Selling Holders requested so to be registered. In connection with any such registration to which this Section 3.1(f) is applicable, no securities other than Registrable Securities shall be covered by such registration unless all Registrable Securities requested to be included in such registration are so included. If all of the Registrable Securities requested by the Initiating Holder to be included in such registration cannot be included as provided in the first sentence of this Section 3.1 (f), the Company shall so notify the Initiating Holder and the Initiating Holder shall have the right to withdraw the request for registration by giving written notice to the Company within 20 days after receipt of notice thereof by the Company and, in the event of such withdrawal, such request shall not be counted for purposes of the requests for registration to which holders are entitled pursuant to Section 3.1 hereof (thereby allowing such holders to make a demand for registration pursuant to Section 3.1 at another time). (g) Limitations on Registration on Request. Notwithstanding -------------------------------------- anything in this Section 3.1 to the contrary, in no event will the Company be required to (i) effect more than five registrations pursuant to this Section 3.1, (subject to the last sentence of Section 3.1(f) and 3.6(b)), it being understood that Initiating Holders are entitled to one registration for each issuance of Registrable Securities and up to two additional conditional registrations as set forth below in this Section 3.1(g), (ii) effect a registration in which the aggregate amount of Registrable Securities has a Value less than US$25,000,000, unless the Value of Registrable Securities outstanding is less than US$25,000,000 in which case the Company shall be obligated to effect one and only one registration of no less than US$5,000,000 in Value of Registrable Securities pursuant to this Section 3.1, subject to the other provisions hereof, unless less than US$5,000,000 in Value of Registrable Securities remain outstanding due to a prior partial 5 redemption of Registrable Securities by the Company, in which case such $5,000,000 minimum shall not apply, or (iii) file a registration statement pursuant to this Section 3.1 within the twelve-month period occurring immediately subsequent to the effectiveness (within the meaning of Section 3.1(d)) of a registration statement filed pursuant to this Section 3.1 or pursuant to Section 3.2. The conditions to any second and third registrations under this Section 3.1 are as follows: (A) Selling Holders shall be entitled to a second registration if, at the time immediately preceding a sale in the first registration, such Selling Holders either (i) hold Preferred Shares which on an as converted basis would cause them, without giving effect to any other holdings of Common Stock acquired other than upon conversion of Preferred Shares, to hold an ownership interest in the Company of greater than 33 1/3% based on market capitalization or (ii) stand to receive, in a sale of Registrable Securities pursuant to such registration, gross proceeds of less than 95% of the Option Writer's cost basis in such Registrable Securities (which cost basis shall include the amount paid by Option Writer for the relevant Preferred Shares, plus accrued but unpaid dividends thereon). Notwithstanding the foregoing, in the first registration (unless clause (A)(ii) above applies, in which case the holders can withdraw from such first registration), the Selling Holders shall be obligated to sell Registrable Securities with an aggregate value of at least 1/3 of the aggregate value of the outstanding Preferred Shares (valued on an as converted basis) and Common Stock issued upon conversion of Preferred Shares. (B) Selling Holders shall be entitled to a third registration if, at the time immediately preceding a sale in the second registration, such Selling Holders either (i) hold Preferred Shares which on an as converted basis would cause them, without giving effect to any other holdings of Common Stock acquired other than upon conversion of Preferred Shares, to hold an ownership interest in the Company of greater than 33 1/3% based on market capitalization or (ii) stand to receive, in a sale of Registrable Securities pursuant to such registration, gross proceeds of less than 90% of the Option Writer's cost basis in such Registrable Securities (which cost basis shall include the amount paid by Option Writer for the relevant Preferred Shares, plus accrued but unpaid dividends thereon). Notwithstanding the foregoing, in the second registration (unless clause (B)(ii) above applies, in which case the Selling Holders can withdraw from such second registration), the Selling Holders shall be obligated to sell Registrable Securities with an aggregate value of at least 1/3 of the aggregate value of the outstanding Preferred Shares (valued on an as converted basis) and Common Stock issued upon conversion of Preferred Shares. (C) In any third registration, the Selling Holders shall be obligated to (i) sell all of the Common Stock that they then hold, (ii) convert all of the Preferred Shares that they then hold into Common Stock and sell such Common Stock (unless such Preferred Shares cannot be converted as set forth in the definition of Registrable Securities above, in which case clause (C)(iii) below applies), (iii) sell all of the Preferred Shares that they then hold which cannot be converted and must therefore be registered in accordance with the definition of Registrable Securities above and (iv) sell all other securities that they then hold pursuant to Section 6.13 of the Option Agreement. 6 3.2 Incidental Registration. ----------------------- (a) Right to Include Registrable Securities. Subject to Section --------------------------------------- 3.9, if the Company at any time proposes to register any of its securities under the Securities Act by registration on any form other than Forms S-4 or S-8 (or any successor forms), whether or not for sale for its own account, it shall, each such time give prompt written notice to all registered holders of Registrable Securities of its intention to do so and of such holders' rights under this Section 3.2. Upon the written request of any such holder (a "Requesting Holder") made as promptly as practicable and in any event within seven (7) Business Days after the receipt of any such notice (five (5) Business Days if the Company states in such written notice or gives telephonic notice to all registered holders of Registrable Securities, with written confirmation to follow promptly thereafter, stating that (i) such registration will be on Form S-3 and (ii) such shorter period of time is required because of a planned filing date), which request shall specify the Registrable Securities intended to be disposed of by such Requesting Holder, the Company shall, subject to Section 3.9, use its commercially reasonable efforts to effect the registration under the Securities Act of all Registrable Securities which the Company has been so requested to register by the Requesting Holders thereof, provided, however, that --------- ------- if, at any time after giving written notice of its intention to register any securities and prior to the effective date of registration statement filed in connection with such registration, the Company shall determine for any reason not to register or to delay registration of such securities the Company may, at its election, give written notice of such determination to each Requesting Holder of Registrable Securities and (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from any obligation of the Company to pay the Registration Expenses in connection therewith), without prejudice, however, to the rights of any holder or holders of Registrable Securities entitled to do so to request that such registration be effected as a registration under Section 3.1, and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities, for the same period as the delay in registering such securities. Other than as provided in Section 3.1, no registration effected under this Section 3.2 shall relieve the Company of its obligation to effect any registration upon request under Section 3.1. Any Requesting Holder of Registrable Securities may elect, in writing not less than five (5) Business Days prior to the effective date of such registration statement, not to register such Registrable Securities in connection with such registration. (b) Priority in Incidental Registrations. If the managing ------------------------------------ underwriter of any underwritten offering shall advise the Company in writing (with a copy to each Requesting Holder) that, in its opinion, the number or type of Registrable Securities requested to be included in such registration would adversely affect such offering, then the Company shall, subject to any relevant agreements between the Company and Registration Rights Holders, include in such registration, to the extent of the number and type which the Company is so advised can be sold in (or during the time of) such offering, first, all securities proposed by the Company to be sold for its own account, second, such Registrable Securities and other securities of the Company with 7 respect to which the holders thereof have the right to require the Company to register such securities in connection with any registration of securities to be offered by the Company ("Other Securities") requested to be included in such registration, such Registrable Securities and Other Securities to be included in such registration pro rata on the basis of the estimated gross proceeds from the sale thereof, and third, any other securities of the Company requested to be included in such registration. Requesting Holders who become subject to a reduction pursuant to this Section 3.2(b) in the amount of Registrable Securities to be included in a registration statement may elect not to sell such Registrable Securities in connection with such registration statement. There shall be no limit on the number or registrations that may be requested pursuant to this Section 3.2. (c) Limitations on Incidental Registrations. Notwithstanding --------------------------------------- anything in this Section 3.2 to the contrary, in no event will the Company be required to (i) grant a request to include Registrable Securities in any "shelf' registration filed pursuant to Rule 415 under the Securities Act, or any successor rule, relating to the offering of debt securities by the Company, or (ii) grant a request to include Registrable Securities in any registration unless the amount of all Registrable Securities which the Company has been so requested to register by the Requesting Holders thereof (without giving effect to the application of the foregoing subsection (b)) is at least US$25,000,000 (or such lesser amount as described in Section 3.l(g)(ii)). 3.3 Registration Procedures. If and whenever the Company is required ----------------------- to use its commercially reasonable efforts to effect the registration of any Registrable Securities under the Securities Act as provided in Sections 3.1 and 3.2, the Company shall as expeditiously as possible: (a) prepare and file with the Commission the requisite registration statement (within ninety (90) days after receipt of a request for registration from the requisite Initiating Holders under Section 3.1(a) above) to effect such registration and then use its commercially reasonable efforts to cause such registration statement to become and remain effective for the Minimum Period, provided, however, that before filing with the Commission a registration --------- ------- statement or prospectus or any amendments or supplements thereto, the Company shall furnish to one counsel selected by the holders of a majority of the Registrable Securities requesting to be registered copies of all such documents proposed to be filed and provided further, however, that the Company may ----------------- discontinue any registration of its securities which are not Registrable Securities (and, under the circumstances specified in Section 3.2(a), its securities which are Registrable Securities) at any time prior to the effective date of the applicable registration statement relating thereto; (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement for such period as shall be required for the disposition of all such Registrable Securities, provided that such period shall not exceed ninety (90) days (such 8 period being referred to in this Agreement as the "Minimum Period"); (c) furnish to each seller of Registrable Securities covered by such registration statement such number of conformed copies of such registration statement and the prospectus included in such registration statement (including each preliminary prospectus and any summary prospectus) and of each such amendment and supplement thereto (in each case including all exhibits and documents incorporated by reference therein), such number of copies of the prospectus contained in such registration statement and any other prospectus filed under Rule 424 under the Securities Act, in conformity with the requirements of the Securities Act, and such other documents, as such seller may reasonably request; (d) use its commercially reasonable efforts (i) to register or qualify all Registrable Securities and other securities covered by such registration statement under such other securities or blue sky laws of such States when an exemption is not available and as the sellers of Registrable Securities covered by such registration statement shall reasonably request in writing, (ii) to keep such registration or qualification in effect for the Minimum Period and (iii) to take any other action which may be reasonably necessary or advisable to enable such sellers to consummate the disposition in such jurisdictions of the securities to be sold by such sellers, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction in which it would not, but for the requirements of this Section 3.3(d), be obligated to be so qualified or to consent to general service of process in any such jurisdiction; (e) use its commercially reasonable efforts to cause all Registrable Securities covered by such registration statement to be registered with or approved by such other Federal or state governmental agencies or authorities as may be necessary to enable the seller or sellers of such Registrable Securities to consummate the disposition of such Registrable Securities; (f) in the case of an underwritten or "best efforts" offering, furnish at the effective date of such registration statement to each Selling Holder a photocopy, and such Person's underwriters, if any, a signed counterpart, of: (i) an opinion of counsel for the Company, dated the effective date of such registration statement and, if applicable, the date of the closing under the underwriting agreement, and (ii) a "comfort" letter signed by the independent public accountants who have certified the Company's financial statements included or incorporated by reference in such registration statement, covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of the accountants' comfort letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' comfort letters delivered to the underwriters in 9 underwritten public offerings of securities; (g) cause representatives of the Company to participate in any "road show" or "road shows" reasonably requested by any underwriter of an underwritten or "best efforts" offering of any Registrable Securities; (h) notify each seller of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, in the light of the circumstances under which they were made, and at the request of any such seller promptly prepare and furnish (subject to the proviso below) to it a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; provided, however, that the prompt delivery of such a supplement -------- ------- to or amendment of such prospectus may be delayed by the Company pursuant to Section 3.6 below. (i) use its commercially reasonable efforts to list the Registrable Securities covered by such registration statement with any national securities exchange on which securities of the same class as those requested to be included in such registration statement are then listed (or, if such securities are not listed on a national securities exchange but are quoted on The Nasdaq Stock Market, to include such shares for quotation therein); (j) provide a transfer agent and registrar for all Registrable Securities to be registered under this Agreement, and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration; (k) enter into such agreements (including an underwriting agreement as provided below, if applicable) and take all such other actions reasonably requested in order to expedite and facilitate the disposition of the Registrable Securities to be registered; (1) otherwise use its commercially reasonable efforts to comply with all applicable rules and regulations of the Commission, including without limitation Section 11(a) of the Securities Act, and promptly furnish to each Selling Holder of Registrable Securities a copy of any amendment or supplement to the applicable registration statement or prospectus; (m) notify each seller of Registrable Securities and the managing underwriter or agent, and confirm the notice in writing (a) when the registration statement, or any post-effective amendment to the registration statement, shall have become effective, or any supplement to the prospectus or any amendment to the prospectus shall have been filed, (b) of 10 the receipt of any comments from the Commission, (c) of any request of the Commission to amend the registration statement or amend or supplement the prospectus or for additional information and (d) of the issuance by the Commission of any stop order suspending the effectiveness of the registration statement or of any order preventing or suspending the use of any preliminary prospectus or of the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or of the institution or threatening of any proceedings for any such purposes; (n) use its commercially reasonable efforts to obtain the withdrawal of any order suspending the effectiveness of the registration statement at the earliest possible time; (o) cooperate with the sellers of Registrable Securities and the managing underwriter or agent, if any, to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legends) representing Registrable Securities to be sold, and enable such Registrable Securities to be in such denominations and registered in such names as such sellers or the managing underwriter or agent, if any, may reasonably request; (p) cause its subsidiaries and Affiliates to take all action necessary or advisable to effect the registration of the Registrable Securities contemplated hereby, including preparing the filing any required financial information; and (q) use its commercially reasonable efforts to take all other steps necessary or advisable to effect the registration of the Registrable Securities contemplated hereby. The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish the Company such information regarding such seller and the distribution of such securities as the Company may from time to time reasonably request in writing in order to comply with Federal and applicable state securities laws. Each seller of Registrable Securities agrees, by requesting registration thereof, that upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3.3(h), such holder shall immediately discontinue such holder's disposition of Registrable Securities pursuant to the registration statement relating to such Registrable Securities until such holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3.3(h) and, if so directed by the Company, shall deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such holder's possession of the prospectus relating to such Registrable Securities current at the time of receipt of such notice. 3.4 Underwritten Offerings. ---------------------- (a) Requested Underwritten Offerings. If requested by the -------------------------------- underwriters for any underwritten offering by holders of Registrable Securities pursuant to registrations requested under Section 3.1, the Company shall use commercially reasonable efforts to enter into an 11 underwriting agreement with such underwriters for such offering, such agreement to be reasonably satisfactory in substance and form to the Company, each such holder and the underwriters and to contain such representations and warranties by the Company and such other terms as are generally prevailing in agreements of that type, including, without limitation, indemnities and the furnishing of an opinion of counsel and "cold comfort" letters from the Company's independent certified public accountants. The holders of the Registrable Securities proposed to be distributed by such underwriters shall cooperate with the Company in the negotiation of, and shall be parties to, the underwriting agreement between the Company and such underwriters. (b) Incidental Underwritten Offerings. If the Company proposes to --------------------------------- register any of its securities under the Securities Act as contemplated by Section 3.2 and such securities are to be distributed by or through one or more underwriters, the Company shall, subject to Section 3.9, if requested by any Requesting Holder of Registrable Securities, use its commercially reasonable efforts to arrange for such underwriters to include all the Registrable Securities to be offered and sold by such Requesting Holder among the securities of the Company to be distributed by such underwriters. The holders of Registrable Securities to be distributed by such underwriters shall be parties to the underwriting agreement between the Company and such underwriters. Notwithstanding the foregoing provisions of this Section 3.4(b), the Company need not include any Registrable Securities of any such Requesting Holder in an underwritten offering of the Company's securities under the circumstances contemplated by Section 3.2(b) above. 3.5 Preparation: Reasonable Investigation. In connection with the ------------------------------------- preparation and filing of each registration statement under the Securities Act pursuant to this Agreement, the Company shall give the holders of Registrable Securities registered under such registration statement, their underwriters, if any, and their respective counsel the opportunity to participate in the preparation of such registration statement, and, to the extent practicable, each amendment or supplement to such registration statement, and give each of them such access to its books and records, pertinent corporate documents and properties (to the extent customarily given to the underwriters of the Company's securities), such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary to conduct a reasonable investigation within the meaning of the Securities Act. 3.6 Limitations, Conditions and Qualifications to Obligations under --------------------------------------------------------------- Registration Covenants. The obligations of the Company to use its commercially - ---------------------- reasonable efforts to cause the Registrable Securities to be registered under the Securities Act are subject to each of the following limitations, conditions and qualifications: (a) The Company shall not be obligated to file any registration statement pursuant to Section 3.1 at any time if the Company would be required to include financial statements audited as of any date other than the end of its fiscal year. 12 (b) The Company shall be entitled to postpone for a reasonable period of time (but not exceeding 120 days) the filing, supplementing or amending or any registration statement otherwise required to be prepared and filed by it pursuant to Section 3.1 if the Company determines, in its reasonable judgment, that such registration and offering would interfere with, or require public disclosure of, any financing, acquisition, disposition, corporate reorganization or other transaction involving the Company or any of its Significant Subsidiaries, and promptly gives the holders of Registrable Securities requesting registration pursuant to Section 3.1 written notice of such determination and an approximation of the anticipated delay; provided, -------- however, that after any exercise of its right to postpone the filing of a - ------- registration statement under this Section 3.6(b), the Company shall not, within 120 days of the expiration of any such postponement, exercise again its right of postponement under this Section 3.6(b). The Company shall notify the Selling Holders of the expiration of the period of delay. If the Company shall so postpone the filing of a registration statement, such holders of Registrable Securities requesting registration pursuant to Section 3.1 shall have the right to withdraw the request for registration by giving written notice to the Company within 15 days after receipt of the notice from the Company of the end of such delay and, in the event of such withdrawal, such request for registration to which holders of Registrable Securities are entitled pursuant to Section 3.1 shall not be considered a request for registration pursuant to Section 3.1 (thereby allowing such holders to make a demand for registration pursuant to Section 3.1 at another time). 3.7 Indemnification and Contribution. --------------------------------- (a) In the event of a registration of any Registrable Securities under the Securities Act pursuant to Section 3, the Company shall, and hereby does, indemnify and hold harmless, to the full extent permitted by law, each seller of Registrable Securities covered by such registration statement and each other Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such seller or any such underwriter within the meaning of the Securities Act, and their respective directors, officers, partners, members and agents, against any losses, claims, damages, liabilities and expenses whatsoever, as incurred, joint or several, to which such seller or underwriter or any such director, officer, partner, member, agent or controlling person may become subject under the Securities Act or otherwise including, without limitation, the reasonable fees and expenses paid in reasonable settlement of any litigation, or any investigation or proceeding by any government agency or body, commenced or threatened, or of any claim whatsoever, incurred in investigating, preparing or defending against any litigation or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of legal counsel (including those incurred in connection with any claim for indemnity hereunder), insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Registrable Securities were registered under the Securities Act pursuant to Section 3, any preliminary prospectus, summary prospectus or final prospectus contained therein, or any amendment or supplement thereof, arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein in 13 light of the circumstances in which they were made not misleading or arise out of any violation or alleged violation by the Company of any Federal, state or common law rule or regulation applicable to the Company and relating to action required of or inaction by the Company in connection with such registration statement, and shall pay or reimburse each such seller or underwriter and each such director, officer, partner, member and controlling Person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, --------- ------- that the Company shall not be liable in any such case if and to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with information furnished by any such seller or underwriter and each such director, officer, partner, member and controlling Person as the case may be, in writing specifically for use in such registration statement, prospectus, amendment or supplement, and provided further that the Company shall not be ---------------- liable to any Person who participates as an underwriter in the offering or sale of Registrable Securities or any other Person, if any, who controls such underwriter within the meaning of the Securities Act, in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of such Person's failure to send or give a copy of the final prospectus, as the same may be then supplemented or amended, to the Person asserting an untrue statement or alleged untrue statement or omission or alleged omission at or prior to the written confirmation of the sale of Registrable Securities to such Person if such statement or omission was corrected in such final prospectus. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such seller or any such director, officer, partner, member, agent or controlling person and shall survive the transfer of such securities by such seller. (b) In the event of a registration of any Registrable Securities under the Securities Act pursuant to Section 3, each seller of Registrable Securities under such registration, severally and not jointly, shall, and hereby does, indemnify and hold harmless the Company, each person, if any, who controls the Company within the meaning of the Securities Act, each officer of the Company who signs the registration statement, each director of the Company, each underwriter and each person who controls any underwriter within the meaning of the Securities Act, against all losses, claims damages or liabilities, joint or several, to which the Company or such officer, director, underwriter or controlling person may become subject under the Securities Act or otherwise, but only insofar as such losses, claims, damages or liabilities (or actions in respect thereof), arise out of or are based upon an untrue statement or alleged untrue statement or omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, made in reliance upon and in conformity with information pertaining to such seller of Registrable Securities furnished in writing to the Company by such seller of Registrable Securities specifically for use in such registration statement under which such Registrable Securities were registered under the Securities Act pursuant to Section 3, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, and shall pay or reimburse the Company and 14 each such officer, director, underwriter and controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or actions; provided, however, -------- ------- that (i) the liability of each seller of Registrable Securities under this Section 3.7 shall be limited to the proportion of any such loss, claim, damage, liability or expense which is equal to the proportion that the public offering price of the Registrable Securities sold by such seller of Registrable Securities under such registration statement bears to the total public offering price of all securities sold under such registration statement, but not in any event to exceed the net proceeds received by such seller of Registrable Securities for the sale of Registrable Securities covered by such registration statement, and (ii) no seller of Registrable Securities shall be liable for amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of such seller of Registrable Securities, such consent not to be unreasonably withheld or delayed. Such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling person and shall survive the transfer of such securities by such seller. (c) Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in Section 3.7(a) or (b), such indemnified party shall, if a claim is to be made against the indemnifying party, notify the indemnifying party in writing of such claim, but the failure to so notify the indemnifying party shall not relieve the indemnifying party from any liability which it may have to such indemnified party other than under this Section 3.7 and shall only relieve it from any liability which it may have to such indemnified party under this Section 3.7 if and to the extent the indemnifying party is actually prejudiced by such failure. In case any such action shall be brought against any indemnified party and the indemnified party shall notify the indemnifying party of the commencement of that action, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense of that action with counsel reasonably satisfactory to such indemnified party and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense of that action, the indemnifying party shall not be liable to such indemnified party under this Section 3.7 for legal and other professional expenses subsequently incurred by such indemnified party in connection with the defense of that action other than reasonable costs of investigation and of liaison with counsel so selected; provided, however, that --------- ------- if the defendants in any such action include both the indemnified party and the indemnifying party, and the indemnified party shall have reasonably concluded that there may be legal defenses or rights available to the indemnified party (which have not been waived) which are in actual or potential conflict with those available to the indemnifying party, the indemnified party shall have the right to select one law firm to act as separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the reasonable fees and expenses of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred. Upon the election by the indemnifying party to assume the defense of, or otherwise contest, such litigation, proceeding or other action, the indemnifying party shall not be liable for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense of such litigation, proceeding or action unless (x) the indemnified party shall have employed such 15 counsel in connection with the assumption of legal defense or assertion of rights in accordance with the provision of the preceding sentence or (y) the indemnifying party fails to take reasonable steps necessary to diligently defend such claim within twenty (20) days after receiving notice from the indemnified party stating that the indemnified party believes the indemnifying party has failed to take such steps, in which case the indemnified party may assume its own defense and the indemnifying party shall be liable for reimbursement of all legal and other expenses of the indemnified party as incurred by the indemnified party. The parties shall cooperate in any such defense and give each other full access to all information relevant to such defense. The indemnifying party shall not be obligated to indemnify any party for any settlement entered into without the indemnifying party's prior written consent, which consent shall not be unreasonably withheld or delayed. No indemnifying party, in the defense of any such claim or litigation against an indemnified party, shall consent to entry of any judgment or enter into any settlement which does not include an unconditional release by the claimant or plaintiff of such indemnified party from all liability in respect of such claim or litigation, unless such indemnified party shall otherwise consent in writing. (d) If the indemnification provided for in this Section 3.7 shall for any reason be held by a court to be unavailable to an indemnified party under Section 3.7(a) or (b) hereof in respect of any loss, claim, damage or liability, or any action in respect thereof, then, in lieu of the amount paid or payable under Section 3.7(a) or (b), the indemnified party and the indemnifying party under Section 3.7(a) or (b) shall contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating the same, including those incurred in connection with any claim for indemnity hereunder), (i) in such proportion as is appropriate to reflect the relative fault of the Company and the prospective sellers of Registrable Securities covered by the registration statement which resulted in such loss, claim, damage or liability, or action or proceeding in respect thereof, with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action or proceeding in respect thereof, as well as any other relevant equitable considerations or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such portion as shall be appropriate to reflect the relative benefits received by the Company and such prospective sellers from the offering of the securities covered by such registration statement; provided, however, that for purposes of --------- ------- this clause (ii), the relative benefits received by the prospective sellers shall be deemed not to exceed the amount of proceeds received by such prospective sellers. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. Such prospective sellers' obligations to contribute as provided in this Section 3.7(d) are several in proportion to the relative value of their respective Registrable Securities covered by such registration statement and not joint. In addition, no Person shall be obligated to contribute hereunder any amounts in payment for any settlement of any action or claim effected without such Person's consent, which consent shall not be unreasonably withheld. (e) Indemnification and contribution similar to that specified in the preceding subdivisions of this Section 3.7 (with appropriate modifications) shall be given by the Company and each seller of Registrable Securities with respect to any required registration or other 16 qualification of securities under any federal or state law or regulation of any governmental authority other than the Securities Act. (f) The indemnification and contribution required by this Section 3.7 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. 3.8 Removal of Legends on Certificates. Following the registration of ---------------------------------- any Registrable Securities under the Securities Act and sales pursuant to such registration, the Company shall (a) furnish to each holder of Registrable Securities so registered and sold unlegended certificates representing ownership of the registered Registrable Securities, in such denominations as shall be requested, and (b) instruct the transfer agent to release any stop transfer orders with respect to such registered Registrable Securities. 3.9 Conditions and Limitations on Registrations of Registrable ---------------------------------------------------------- Securities. - ---------- (a) The Company shall not be required to effect any registration of Registrable Securities pursuant to Section 3.2 if (i) it shall deliver to the holder or holders requesting such registration an opinion of reputable counsel to the effect that the Registrable Securities requested to be registered may be sold by such holder without restriction or limitation and without registration under the Securities Act, and (ii) the Company provides or has provided to the holders of such Registrable Securities certificates therefor which do not contain restrictive legends, as contemplated in Section 3.8. (b) The Company shall not be required to effect any registration of Registrable Securities pursuant to this Agreement, if (i) the holder can resell such Registrable Securities without restriction or limitation and without registration under the Securities Act, and (ii) the Company provides or has provided to the holders of such Registrable Securities certificates therefor which do not contain restrictive legends, as contemplated in Section 3.8. 3.10 Expenses. All Registration Expenses, but not Selling Expenses, -------- shall be borne by the Company. 3.11 Rule 144 and 144A Reporting. With a view to making available the --------------------------- benefits of certain rules and regulations of the Commission which may at times permit the sale of the Registrable Securities to the public or other Persons without registration, the Company, so long as it is required to file information with the Commission pursuant to the requirements of the Exchange Act (or any successor provision), shall: (a) make and keep public information available, as contemplated by Rule 144 under the Securities Act; (b) file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and 17 (c) furnish to each holder of Registrable Securities promptly upon request (i) a written statement by the Company as to its compliance with the reporting requirements of such Rule 144 of the Securities Act and the Exchange Act, (ii) copies of all SEC filings made by the Company within the previous one (1) year period and any press releases issued by the Company since the date of the last such filing and (iii) only in the event that Company securities cease to be listed on a national securities exchange, copies of all Rule 144A information with respect to the Company. 3.12 Market Stand-Off Agreement. If requested by the Company, each -------------------------- holder of Registrable Securities included in a registration statement hereunder shall not sell or otherwise transfer or dispose of any Conversion Shares or Preferred Shares or other securities of the Company held by it (other than those included in the registration) during the period specified by the managing underwriter or underwriters of the underwritten offer being made pursuant to such registration statement (which period shall not exceed seven days prior to and 180 days following the effective date of such registration statement), except as part of such registration, if and to the extent reasonably requested by such managing underwriter or underwriters, provided that all officers and directors of the Company, enter into similar agreements. The obligations described in this Section 3.12 shall not apply to a registration relating solely to employee benefit plans on S-8 or similar forms which may be promulgated in the future, or a registration relating solely to a Commission Rule 145 transaction on Form S-14 or Form S-IS or similar forms which may be promulgated in the future. The Company may impose stop-transfer instructions with respect to securities subject to the restrictions in this Section 3.12 until the end of such 180 day period. 4. Voting Percentages. In determining whether a required percentage or ------------------ amount of Registrable Securities has been met under this Agreement, the amount required shall be calculated on the basis of the aggregate value of outstanding Registrable Securities. For purposes of this Agreement, the value of each Conversion Share shall be the average closing market price per share of the Common Stock on the thirty (30) most recent Trading Days prior to the valuation date. 5. Amendments and Waivers. This Agreement may be amended with the consent ---------------------- of the Company and holders of at least sixty-six and two-thirds percent (66 2/3%) of the Registrable Securities and the Company may take any action prohibited by this Agreement, or omit to perform any act required to be performed by it under this Agreement, only if the Company shall have obtained the written consent to such amendment, action or omission to act, of the holder or holders of at least sixty-six and two-thirds percent (66 2/3%) of the Registrable Securities. Each holder of any Registrable Securities at the time or subsequently outstanding shall be bound by any consent authorized by this Section 5, whether or not such Registrable Securities shall have been marked to indicate such consent, but such consent shall be effective only in the specific instance and for the specific purpose for which given. 18 6. Nominees for Beneficial Owners. In the event that any Registrable ------------------------------ Securities are held by a nominee or trustee for a beneficial owner, the beneficial owner may, at its election in writing delivered to the Company, be treated as the holder of such Registrable Securities for purposes of any request or other action by any holder or holders of Registrable Securities pursuant to this Agreement or any determination of any number or percentage of Registrable Securities held by any holder or holders of Registrable Securities contemplated by this Agreement. If the beneficial owner of any Registrable Securities so elects, the Company may require assurances reasonably satisfactory to it of such owner's beneficial ownership of such Registrable Securities. 7. Notices. All notices or other communications required or permitted ------- hereunder shall be given only in writing and only by personal delivery, registered or certified mail, return receipt requested, or overnight courier service, and shall be deemed given on the fifteenth day following the date when deposited in the mail, on the day following the date of delivery to a courier service (postage or charges prepaid) or when personally delivered, and addressed to the particular party to whom the notice is to be sent as follows: 7.1 if to Option Writer, addressed in the manner set forth in the Option Agreement, or at such other address as Option Writer shall have furnished to the Company in writing; 7.2 if to any other holder of Registrable Securities, at the address that such holder shall have furnished to the Company in writing, or, until any such other holder so furnishes to the Company an address, then to and at the address of the last holder of such Registrable Securities who has furnished an address to the Company; or 7.3 if to the Company, addressed to it in the manner set forth in the Option Agreement or at such other address as the Company shall have furnished to each holder of Registrable Securities at the time outstanding. 8. Transfer of Registration Rights. Any holder of Registrable Securities ------------------------------- may exercise the rights described in this Agreement subject to the terms and conditions of this Agreement. 9. Successors and Assigns; Amendments; Entire Agreement. This Agreement ---------------------------------------------------- shall be binding upon and inure to the benefit of and be enforceable by transferees of the Registrable Securities (and, with respect to the holders of Registrable Securities, subject to the provisions respecting the minimum percentage of Registrable Securities required in order to be entitled to certain rights, or take certain actions, contained herein) and the parties to this Agreement and their respective successors and assigns. The parties to this Agreement may amend this Agreement as provided in Section 5 without the consent of any other Person. This Agreement contains the entire agreement between the parties, and supersedes all prior agreements, written or oral, with respect to the matters addressed herein. 10. Descriptive Headings. The descriptive headings of the several sections -------------------- and paragraphs of this Agreement are inserted for reference only and shall not limit or otherwise 19 affect the meaning of the respective sections or paragraphs to which they apply. 11. Governing Law. This Agreement shall be construed and enforced in ------------- accordance with, and the rights of the parties shall be governed by, the laws of the State of New York (without regard to any choice of law or conflict of law rules that would cause the application of any laws or rules of any jurisdiction other than the State of New York). 12. Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original, but all of which together shall constitute one and the same document. 13. Certain Agreements and Grants. ----------------------------- 13.1 The Company is not now a party to or otherwise bound by, any agreement or contract (whether written or oral) with respect to any of its securities which is inconsistent in any adverse respect with the registration rights granted by the Company pursuant to this Agreement. 13.2 The Company shall not at any time during the effectiveness of this Agreement grant to any other person(s) any rights with respect to the registration of any securities of the Company which have priority or are inconsistent in any adverse respect with the registration rights granted by the Company pursuant to this Agreement. 14. Severability. In the event that any one or more of the provisions ------------ contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the holders of Registrable Securities shall be enforceable to the fullest extent permitted by law. 20 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their respective duly authorized officers as of the date first written above. Horace Mann Educators Corporation By ------------------------------------- Name: Title: Swiss Re Financial Products Corporation By ------------------------------------- Name: Title: 21 EX-11 7 dex11.txt COMPUTATION OF NET INCOME PER SHARE Exhibit 11 Horace Mann Educators Corporation Computation of Net Income per Share For the Three Months Ended March 31, 2002 and 2001 (Amounts in thousands, except per share data)
Three Months Ended March 31, ------------------ 2002 2001 -------- ------ Basic - assumes no dilution: Net income for the period $15,571 $16,698 ------- ------- Weighted average number of common shares outstanding during the period 40,780 40,524 ------- ------- Net income per share - basic $ 0.38 $ 0.41 ======= ======= Diluted - assumes full dilution: Net income for the period $15,571 $16,698 ------- ------- Weighted average number of common shares outstanding during the period 40,780 40,524 Weighted average number of common equivalent shares to reflect the dilutive effect of common stock equivalent securities: Stock options 307 102 Common stock units related to Deferred Equity Compensation Plan for Directors 114 107 Common stock units related to Deferred Compensation Plan for Employees 30 14 ------- ------- Total common and common equivalent shares adjusted to calculate diluted earnings per share 41,231 40,747 ------- ------- Net income per share - diluted $ 0.38 $ 0.41 ======= ======= Percentage of dilution compared to basic net income per share 0.0% 0.0%
EX-15 8 dex15.txt LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION Exhibit 15 Horace Mann Educators Corporation Springfield, Illinois Re: Registration Statement on Forms S-8 With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated May 2, 2002, related to our review of interim financial information. Pursuant to Rule 436 under the Securities Act of 1933 (the "Act"), such report is not considered part of a registration statement prepared or certified by an accountant, or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Act. /s/ KPMG LLP KPMG LLP Chicago, Illinois May 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----