-----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, PQt5hmEDp1BpbT8vFIyNS2s+IfcBcd1zQzAQNtB03TLPZm4DFatDsJbzfXQ1Yo/w Sw/LfxO2L24OMrScMsnsVA== 0000950131-98-003367.txt : 19980518 0000950131-98-003367.hdr.sgml : 19980518 ACCESSION NUMBER: 0000950131-98-003367 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HORACE MANN EDUCATORS CORP /DE/ CENTRAL INDEX KEY: 0000850141 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 370911756 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10890 FILM NUMBER: 98622646 BUSINESS ADDRESS: STREET 1: 1 HORACE MANN PLZ CITY: SPRINGFIELD STATE: IL ZIP: 62715-0001 BUSINESS PHONE: 2177892500 MAIL ADDRESS: STREET 1: 1 HORACE MANN PLZ CITY: SPRINGFIELD STATE: IL ZIP: 62715-0001 FORMER COMPANY: FORMER CONFORMED NAME: HORACE MANN EDUCATORS CORP DATE OF NAME CHANGE: 19920108 10-Q 1 FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [x]QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 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, 1998, 44,009,644 shares of Common Stock, par value $0.001 per share, were outstanding, net of 15,233,396 shares of treasury stock. ================================================================================ HORACE MANN EDUCATORS CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998 INDEX
Page ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997....................... 1 Consolidated Statements of Operations for the Three Months Ended March 31, 1998 and 1997................. 2 Consolidated Statements of Changes in Shareholders' Equity for the Three Months Ended March 31, 1998 and 1997.. 3 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997................. 4 Notes to Consolidated Financial Statements................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 11 PART II - OTHER INFORMATION................................................. 20 Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K SIGNATURES.................................................................. 21
HORACE MANN EDUCATORS CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
March 31, December 31, 1998 1997 ---------- ----------- ASSETS Investments Fixed maturities, available for sale, at market (amortized cost, 1998, $2,582,162; 1997, $2,535,538)................. $2,674,555 $2,638,794 Short-term and other investments............................ 200,017 130,252 ---------- ---------- Total investments........................................ 2,874,572 2,769,046 Cash.......................................................... 10,187 353 Accrued investment income and premiums receivable............. 93,631 103,951 Value of acquired insurance in force and goodwill............. 106,140 107,976 Deferred policy acquisition costs............................. 90,545 85,883 Other assets.................................................. 96,475 104,943 Variable annuity assets....................................... 1,086,827 959,760 ---------- ---------- Total assets............................................. $4,358,377 $4,131,912 ========== ==========
LIABILITIES, REDEEMABLE SECURITIES AND SHAREHOLDERS' EQUITY
Policy liabilities Fixed annuity contract liabilities.......................... $1,238,440 $1,245,459 Interest-sensitive life contract liabilities................ 373,439 364,205 Unpaid claims and claim expenses............................ 317,862 322,335 Future policy benefits...................................... 179,832 179,562 Unearned premiums........................................... 166,353 166,996 ---------- ---------- Total policy liabilities................................. 2,275,926 2,278,557 Other policyholder funds...................................... 123,586 122,107 Other liabilities............................................. 225,690 126,847 Short-term debt............................................... 42,000 42,000 Long-term debt................................................ 99,609 99,599 Variable annuity liabilities.................................. 1,082,907 956,253 ---------- ---------- Total liabilities........................................ 3,849,718 3,625,363 ---------- ---------- Warrants, subject to redemption............................... 577 577 ---------- ---------- Preferred stock............................................... - - Common stock.................................................. 59 59 Additional paid-in capital.................................... 340,503 340,564 Retained earnings............................................. 368,197 349,274 Accumulated other comprehensive income (Net unrealized gains on fixed maturities and equity securities).. 55,614 62,167 Treasury stock, at cost....................................... (256,291) (246,092) ---------- ---------- Total shareholders' equity............................... 508,082 505,972 ---------- ---------- Total liabilities, redeemable securities, and shareholders' equity................... $4,358,377 $4,131,912 ========== ==========
See accompanying notes to consolidated financial statements. 1 HORACE MANN EDUCATORS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data)
Three Months Ended March 31, ------------------ 1998 1997 -------- -------- Insurance premiums written and contract deposits......... $196,954 $179,870 ======== ======== Revenues Insurance premiums and contract charges earned.......... $141,207 $131,419 Net investment income................................... 48,520 49,787 Realized investment gains............................... 6,371 857 -------- -------- Total revenues...................................... 196,098 182,063 -------- -------- Benefits, losses and expenses Benefits, claims and settlement expenses................ 97,430 90,500 Interest credited....................................... 24,129 24,384 Policy acquisition expenses amortized................... 11,446 10,840 Operating expenses...................................... 27,225 24,509 Amortization of intangible assets....................... 1,836 2,706 Interest expense........................................ 2,360 2,454 -------- -------- Total benefits, losses and expenses................. 164,426 155,393 -------- -------- Income before income taxes............................... 31,672 26,670 Income tax expense....................................... 9,213 7,270 -------- -------- Net income............................................... $ 22,459 $ 19,400 ======== ======== Net income per share Basic................................................... $ 0.51 $ 0.41 ======== ======== Diluted................................................. $ 0.50 $ 0.40 ======== ======== Weighted average number of shares and equivalent shares Basic................................................... 44,176 47,330 Diluted................................................. 44,961 48,045
See accompanying notes to consolidated financial statements. 2 HORACE MANN EDUCATORS CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Dollars in thousands, except per share data)
Three Months Ended March 31, --------------------- 1998 1997 ---- ---- Common stock Beginning balance.......................................... $ 59 $ 58 Options exercised, 1998, 77,532 shares; 1997, 371,944 shares...................................... - - --------- --------- Ending balance............................................. 59 58 --------- --------- Additional paid-in capital Beginning balance.......................................... 340,564 330,234 Options exercised.......................................... 1,414 5,714 Catastrophe-linked equity put option premium............... (1,475) - --------- --------- Ending balance............................................. 340,503 335,948 --------- --------- Retained earnings Beginning balance.......................................... 349,274 278,669 Net income................................................. 22,459 19,400 Cash dividends, 1998, $0.08 per share; 1997, $0.0675 per share................................... (3,536) (3,208) --------- --------- Ending balance............................................. 368,197 294,861 --------- --------- Accumulated other comprehensive income (Net unrealized gains (losses) on fixed maturities and equity securities) Beginning balance......................................... 62,167 29,736 Increase (decrease) for the period........................ (6,553) (25,799) --------- --------- Ending balance............................................ 55,614 3,937 --------- --------- Treasury stock, at cost Beginning balance, 1998, 14,896,796 shares; 1997, 11,176,196 shares................................... (246,092) (154,302) Purchase of 297,000 shares in 1998; 586,400 shares in 1997 (See note 5)....................... (10,199) (13,348) --------- --------- Ending balance, 1998, 15,193,796 shares; 1997,11,762,596 shares.................................... (256,291) (167,650) --------- --------- Shareholders' equity at end of period....................... $ 508,082 $ 467,154 ========= ========= Comprehensive income Net income................................................. $ 22,459 $ 19,400 Other comprehensive income................................. (6,553) (25,799) --------- --------- Total..................................................... $ 15,906 $ (6,399) ========= =========
See accompanying notes to consolidated financial statements. 3 HORACE MANN EDUCATORS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Three Months Ended March 31, ---------------------- 1998 1997 ---- ---- Cash flows from operating activities Premiums collected........................................ $ 156,335 $ 148,861 Policyholder benefits paid................................ (114,314) (112,546) Policy acquisition and other operating expenses paid...... (40,515) (40,036) Federal income taxes paid................................. (800) (30,306) Investment income collected............................... 53,754 51,419 Interest expense paid..................................... (3,319) (3,951) Other..................................................... 1,541 2,310 --------- --------- Net cash provided by operating activities.............. 52,682 15,751 --------- --------- Cash flows from investing activities Fixed maturities Purchases................................................ (330,130) (265,366) Sales.................................................... 198,927 217,068 Maturities............................................... 105,117 62,001 Net cash received from (used for) short-term and other investments.......................... 15,109 (11,932) --------- --------- Net cash provided by (used in) investing activities.... (10,977) 1,771 --------- --------- Cash flows from financing activities Purchase of treasury stock................................ (10,199) (13,348) Dividends paid to shareholders............................ (3,536) (3,208) Principal borrowing (payments) on Bank Credit Facility.... - - Exercise of stock options................................. 1,414 5,714 Catastrophe-linked equity put option premium.............. (1,475) (1,250) Annuity contracts, variable and fixed Deposits................................................. 54,343 46,793 Maturities and withdrawals............................... (45,109) (34,210) Net transfer to variable annuity assets.................. (27,207) (26,285) Net increase (decrease) in interest-sensitive life account balances.................................... (102) 418 --------- --------- Net cash used in financing activities.................. (31,871) (25,376) --------- --------- Net increase (decrease) in cash............................ 9,834 (7,854) Cash at beginning of period................................ 353 13,704 --------- --------- Cash at end of period...................................... $ 10,187 $ 5,850 ========= =========
See accompanying notes to consolidated financial statements. 4 HORACE MANN EDUCATORS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 and 1997 (Dollars in thousands) Note 1 - Basis of Presentation The accompanying unaudited consolidated financial statements of Horace Mann Educators Corporation (the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The Company believes that these financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company's consolidated financial position as of March 31, 1998 and December 31, 1997 and the consolidated results of operations, changes in shareholders' equity and cash flows for the three months ended March 31, 1998 and 1997. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto contained in the December 31, 1997 Form 10-K filed by the Company. The results of operations for the three months ended March 31, 1998 are not necessarily indicative of the results to be expected for the full year. The Company has reclassified the presentation of certain prior period information to conform with the 1998 presentation. Note 2 - Debt Indebtedness outstanding was as follows:
March 31, December 31, 1998 1997 --------- ------------ Short-term debt: $65,000 Bank Credit Facility, IBOR + 0.325% (6.0% as of March 31, 1998)................... $ 42,000 $ 42,000 Long-term debt: 6-5/8% Senior Notes, due January 15, 2006. Face amount less unaccrued discount of $391 and $401 (6.7% imputed rate).......... 99,609 99,599 -------- -------- Total....................................... $141,609 $141,599 ======== ========
5 Note 3 - Investments The following sets forth the composition and value of the Company's fixed maturity securities portfolio by rating category. The Company has classified the entire fixed maturity securities portfolio as available for sale, which is carried at market value.
Percent of Carrying Value March 31, 1998 ------------------------- ---------------------------- Rating of Fixed March 31, December 31, Carrying Amortized Maturity Securities(1) 1998 1997 Value Cost ---------------------- --------- ------------ ---------- ---------- AAA.................... 44.4% 42.7% $1,186,810 $1,154,966 AA..................... 7.1 7.1 191,332 182,761 A...................... 18.8 20.3 502,835 481,431 BBB.................... 23.1 23.3 617,745 595,006 BB..................... 1.5 1.6 39,285 37,667 B...................... 4.0 4.0 107,661 101,149 CCC or lower........... 0.1 0.1 2,476 4,654 Not rated(2)........... 1.0 0.9 26,411 24,528 ----- ----- ---------- ---------- Total................ 100.0% 100.0% $2,674,555 $2,582,162 ===== ===== ========== ==========
(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 $17.8 million of publicly traded securities not currently rated by S&P, Moody's or the NAIC and $8.6 million of private placement securities not rated by either S&P or Moody's. The National Association of Insurance Commissioners (the "NAIC") has rated 89.0% of these private placements as investment grade. $0.8 million of the remaining $0.9 million of private placements were rated as investment grade by the NAIC in 1995 and are under review for the assignment of a current rating. The following table presents a maturity schedule of the Company's fixed maturity securities. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Percent Carrying of Total Value ------------------------- ---------- March 31, December 31, March 31, Scheduled Maturity 1998 1997 1998 - ------------------ --------- ------------ ---------- Due in 1 year or less................ 4.9% 5.6% $ 131,782 Due after 1 year through 5 years..... 27.2 24.2 728,656 Due after 5 years through 10 years... 33.4 34.8 892,565 Due after 10 years through 20 years.. 18.7 19.6 500,288 Due after 20 years................... 15.8 15.8 421,264 ----- ----- ---------- Total................................ 100.0% 100.0% $2,674,555 ===== ===== ==========
6 Note 4 - Shareholders' Equity Share Repurchase Programs During 1997, the Company repurchased 3,720,600 shares, 8% of the Company's outstanding shares at December 31, 1996, at an aggregate cost of $91,790 under a $100,000 stock repurchase program announced in February 1997. In January 1998, the Company's Board of Directors authorized an additional repurchase of shares of the Company's common stock up to $100,000. Based on the market price of the Company's common shares at the time, $100,000 represented approximately 8% of the Company's then outstanding shares. Shares of common stock may be purchased from time to time through open market and private purchases, as available. The repurchase of shares is financed through use of cash and, if needed, the Bank Credit Facility. During the three months ended March 31, 1998, the Company repurchased 297,000 shares at an aggregate cost of $10,199 which was financed with cash from operations. Note 5 - Value of Annuity Business Acquired The value of annuity business acquired was recorded in the application of purchase accounting at the time that the Company was acquired in 1989 and is being amortized over 20 years, in proportion to projected future gross profits. Reflecting the significant recent market appreciation, the retention of the business and their impact on projected future gross profits, scheduled annual amortization of the December 31, 1997 balance has been revised as follows: 1998, $3,119; 1999, $3,132; 2000, $3,176; 2001, $3,220; and 2002, $3,207. Note 6 - Comprehensive Income Effective January 1, 1998, the Company adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income. Comprehensive income represents the change in shareholders' equity during a reporting period from transactions and other events and circumstances from non-shareholder sources. For the Company, comprehensive income is equal to net income plus the change in net unrealized gains and losses on fixed maturities and equity securities for the period as shown in the Statement of Changes in Shareholders' Equity in prior periods. The adoption of SFAS No. 130 resulted in revised and additional disclosures but had no effect on the financial position, results of operations, or liquidity of the Company. Comprehensive income was $15,906 and ($6,399) for the three months ended March 31, 1998 and 1997, respectively, with the change between years due primarily to the change in the market value of fixed maturity securities. 7 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, 1998 - ------------------ Premiums written................. $197,870 $5,262 $4,346 $196,954 Premiums earned.................. 142,495 5,245 3,957 141,207 Benefits, claims and settlement expenses............ 101,384 7,502 3,548 97,430 Three months ended March 31, 1997 - ------------------ Premiums written................. $181,832 $5,990 $4,028 $179,870 Premiums earned.................. 130,809 5,229 5,839 131,419 Benefits, claims and settlement expenses............ 91,968 8,291 6,823 90,500
The Company maintains an excess and catastrophe treaty reinsurance program for its property and casualty subsidiaries. The Company reinsures 95% of catastrophe losses above a retention of $7.5 million per occurrence up to $80 million per occurrence. This program is augmented by a $100 million equity put that provides an option to sell shares of the Company's convertible preferred stock with a floating rate dividend at a pre-negotiated price in the event losses from catastrophes, individually or in the aggregate during a calendar year, exceed the catastrophe reinsurance program coverage limit. Before tax benefits, the equity put provides a source of capital for up to $154 million of catastrophe losses above the reinsurance coverage limit. The fee for the equity put has been charged directly to additional paid-in capital. For liability coverages, including the educator professional liability policy, the Company reinsures each loss above a retention of $0.5 million up to $20 million. The Company also reinsures each property loss above a retention of $0.5 million up to $1.5 million. 8 Note 8 - Segment Information Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 specifies the presentation and disclosure of operating segment information reported in the annual and interim reports issued to shareholders and requires that reported segment information be consistent with what the Company's management uses to make operating decisions and assess performance. The adoption of SFAS No. 131 had no effect on the financial position, results of operations, or liquidity of the Company. Adoption of SFAS No. 131 resulted in no changes in the way the Company has reported its segment results with the exception of realized investment gains and losses which are managed in the aggregate and accordingly have been reclassified to the Corporate and Other segment. Segment information for prior periods has been restated to conform to this presentation. The Company's operations include the following operating segments: property and casualty, annuity and life insurance. The property and casualty insurance segment includes primarily personal lines automobile and homeowners products. The annuity segment includes primarily fixed and variable tax- qualified annuity products. The life insurance segment includes primarily interest-sensitive life and traditional life products. 9 Note 8 - Segment Information-(Continued) Summarized financial information for these segments is as follows:
Three Months Ended March 31, ----------------------- 1998 1997 ---------- ---------- Revenues Property and casualty.................... $ 125,965 $ 119,646 Annuity.................................. 30,921 30,835 Life..................................... 32,711 30,798 Corporate and other, including realized investment gains.... 6,775 1,061 Intersegment eliminations................ (274) (277) ---------- ---------- Total.............................. $ 196,098 $ 182,063 ========== ========== Net income Operating income Property and casualty.................. $ 12,539 $ 13,723 Annuity................................ 5,299 4,254 Life................................... 2,646 2,950 Corporate and other, including interest expense........... (2,166) (2,084) ---------- ---------- Total operating income............. 18,318 18,843 Realized investment gains, after tax..... 4,141 557 ---------- ---------- Total.............................. $ 22,459 $ 19,400 ========== ========== March 31, December 31, 1998 1997 ---------- ------------ Assets Property and casualty.................... $ 748,193 $ 742,487 Annuity.................................. 2,694,291 2,531,309 Life..................................... 826,233 777,488 Corporate and other...................... 124,423 125,624 Intersegment eliminations................ (34,763) (44,996) ---------- ---------- Total.............................. $4,358,377 $4,131,912 ========== ==========
Revenues include insurance premiums and contract charges earned, net investment income and realized investment gains and losses. Operating income is equal to net income before realized investment gains, after tax. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-looking Information Statements made in the following discussion that state the Company's or management's intentions, hopes, beliefs, expectations or predictions of the future are forward-looking statements. It is important to note that the Company's actual results could differ materially from those projected in such forward-looking statements due to, among other risks and uncertainties inherent in the Company's business, the following important factors: . Changes in the composition of the Company's assets and liabilities through acquisitions or divestitures. . Prevailing interest rate levels, including the impact of interest rates on (i) unrealized gains and losses on the Company's investment portfolio and the related after-tax effect on the Company's shareholders' equity and total capital and (ii) the book yield of the Company's investment portfolio. . The impact of fluctuations in the capital markets on the Company's ability to refinance outstanding indebtedness or repurchase shares of the Company's outstanding common stock. . The frequency and severity of catastrophes such as hurricanes, earthquakes and storms, and the ability of the Company to maintain a favorable catastrophe reinsurance program. . Future property and casualty loss experience and its impact on estimated claims and claim adjustment expenses for losses occurring in prior years. . The Company's ability to develop and expand its agency force and its direct product distribution systems, as well as the Company's ability to maintain and secure product sponsorships by local, state and national education associations. . The competitive impact of new entrants such as mutual funds and banks into the tax deferred annuity products markets, and the Company's ability to profitably expand its property and casualty business in highly competitive environments. . Changes in insurance regulations, including (i) those effecting the ability of the Company's insurance subsidiaries to distribute cash to the holding company and (ii) those impacting the Company's ability to profitably write property and casualty insurance policies in one or more states. . Changes in federal income tax laws and changes resulting from federal tax audits effecting corporate tax rates or taxable income, and regulations changing the relative tax advantages of the Company's life and annuity products to customers. . The Company's ability to maintain favorable claims-paying ability ratings. . Adverse changes in policyholder mortality and morbidity rates. 11 Three Months Ended March 31, 1998 Compared With Three Months Ended March 31, 1997 Insurance Premiums and Contract Charges Earned Insurance premiums and contract charges earned, which excludes annuity and life contract deposits, increased 7.5% for the three months ended March 31, 1998, compared to the same period in 1997. Insurance premiums written and contract deposits of $197.0 million for the three months ended March 31, 1998 increased 9.5%, compared to $179.9 million for the same period in 1997, driven principally by a 16.0% increase in annuity deposits and an 8.2% growth in property and casualty premiums written. Insurance premiums written and contract deposits in the Company's primary product lines, automobile (excluding involuntary), property, annuity and life, increased 9.9% to $192.6 million for the three months ended March 31, 1998, compared to $175.3 million for the same period in 1997. Involuntary automobile business includes allocations of business from state mandatory automobile insurance facilities and assigned risk business. Involuntary automobile premiums written for the three months ended March 31, 1998 decreased 5.3% compared to the same period in 1997. Automobile (excluding involuntary) and homeowners earned premiums increased 7.9% to $110.0 million for the three months ended March 31, 1998, compared to $101.9 million for the same period in 1997, primarily as a result of a 5.5% increase in automobile (excluding involuntary) and homeowners policies in force. The 846,000 automobile (excluding involuntary) and homeowners policies in force at March 31, 1998 represented an increase of 44,000 policies since March 31, 1997 and an increase of 9,000 policies since December 31, 1997. Automobile (excluding involuntary) and homeowners premiums written increased 8.7% to $111.0 million for the three months ended March 31, 1998, compared to $102.1 million for the same period in 1997. The average premium per policy in the first three months of 1998 increased approximately 3% compared to a year earlier and contributed a similar increase to the first quarter growth in premiums written. For the three months ended March 31, 1998, new direct premiums written of $11.6 million were comparable to $11.8 million for the same period last year. Renewal direct premiums written of $100.8 million for the three months ended March 31, 1998 increased 9.8% compared to $91.8 million for the same period in 1997. Annuity contract charges earned increased 38.5% to $3.6 million for the three months ended March 31, 1998, compared to $2.6 million for the same period in 1997, due to a 52% increase in variable annuity cash value on deposit at the end of the quarter compared to a year earlier. Total annuity deposits received during the three months ended March 31, 1998 increased 16.0% to $54.3 million, compared to $46.8 million for the same period in 1997, reflecting a $3.3 million, or 9.5%, increase in scheduled deposits for retirement annuities and a $4.2 million, or 35.0%, increase in rollover deposits from other companies and single premiums. In response to changes in the tax law, the Company introduced new IRA annuities during the first quarter of 1998. Annuity deposits received for these new IRA retirement options represented approximately 1.5 percentage points of the 16.0% growth in annuity deposits received. For the three months ended March 31, 1998, life insurance premiums and contract charges earned were $21.6 million, compared to $20.4 million for the same period in 1997, representing an increase of 5.9%. Life insurance in force on March 31, 1998 increased 6.6% compared to March 31, 1997. The 12 lapse rate for ordinary life insurance in force of 7.0% for the three months ended March 31, 1998 improved 1.0 percentage point compared to 8.0% reported for the same period in 1997. Net Investment Income Net investment income of $48.5 million for the three months ended March 31, 1998 decreased 2.6% compared to $49.8 million for the same period in 1997. The decrease in net investment income was due primarily to the utilization of capital for the share repurchase program and customers' preference for variable versus fixed annuity contracts. Investments (at amortized cost) decreased 1.7%, or $45.7 million, from March 31, 1997 excluding $84.0 million of short-term investments held at March 31, 1998 as securities lending collateral required to be classified as investments beginning in 1998 under Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The pretax yield on average investments (excluding the securities lending collateral) was 7.3% (4.8% after tax) for the three months ended March 31, 1998 compared to a pretax yield of 7.3% (4.9% after tax) for the same period in 1997. Realized Investment Gains and Losses Realized investment gains were $6.4 million for the three months ended March 31, 1998, compared to $0.9 million for the same period in 1997. Benefits, Claims and Settlement Expenses Total benefits, claims and settlement expenses increased 7.6% to $97.4 million for the three months ended March 31, 1998, compared to $90.5 million for the same period in 1997. Property and casualty claims and settlement expenses were $86.0 million for the three months ended March 31, 1998, compared to $80.8 million for the same period in 1997. The property and casualty loss ratio of 74.4% for the three months ended March 31, 1998 was equal to the same period in 1997. Improvements in both the frequency and severity of non-weather-related claims offset higher weather-related losses in the first quarter of 1998. Losses from severe weather in the first quarter of 1997 were unusually low. Catastrophe losses after reinsurance but before federal income tax benefits for the three months ended March 31, 1998 were $3.8 million and accounted for 3.2 points on the loss ratio, compared to catastrophe losses of $1.2 million, 1.1 points on the loss ratio, for the same period in 1997. The provision for claims and claim adjustment expenses for insured events in prior years continued to reflect favorable development in the first three months of both 1998 and 1997. Property and casualty claims and settlement expenses were reduced by a decrease in estimated losses and loss adjustment expenses for claims occurring in prior years of $5.8 million and $10.9 million for the three months ended March 31, 1998 and 1997, respectively. The Company's catastrophe reinsurance program covers 95% of catastrophe losses above a retention of $7.5 million up to $80 million for each catastrophe in 1998. The Company's catastrophe reinsurance program is augmented by a $100 million equity put that provides an option to sell shares of the Company's convertible preferred stock with a floating rate dividend at a pre-negotiated price in the event losses from catastrophes, individually or in the aggregate during a calendar year, exceed the catastrophe reinsurance program coverage limit. Before tax benefits, the equity put provides a source of capital for up to $154 million of catastrophe losses above the reinsurance coverage limit. 13 Life benefits were $11.4 million for the three months ended March 31, 1998, reflecting a 17.5% increase, compared to $9.7 million for the same period in 1997. The first quarter of 1998 reflected higher individual life mortality experience compared to the same period in 1997. Interest Credited to Policyholders Interest credited to policyholders was $24.1 million for the three months ended March 31, 1998, compared to $24.4 million interest credited for the same period in 1997. Interest credited to fixed annuity contracts decreased $0.9 million, or 4.6%, to $18.6 million for the three months ended March 31, 1998, from $19.5 million for the same period in 1997. The fixed annuity average annual interest rate credited was 5.6% for the three months ended March 31, 1998, compared to a rate of 5.7% for the same period in 1997. Fixed rate annuity accumulated deposits decreased 3.1% over the 12 months ended March 31, 1998. Life insurance interest credited increased $0.6 million, or 12.2%, to $5.5 million for the three months ended March 31, 1998, compared to the same period in 1997, primarily as a result of continued growth in the interest-sensitive whole life insurance reserves and account balances. Policy Acquisition and Operating Expenses Policy acquisition and operating expenses represent the Company's insurance underwriting expenses. For the three months ended March 31, 1998, policy acquisition and operating expenses of $38.7 million increased $3.4 million, or 9.6%, compared to $35.3 million for the first three months of 1997. The property and casualty expense ratio was 20.0% for the three months ended March 31, 1998, compared to 19.2% for the same period last year and includes an increase due to timing for some items related to state insurance facilities. Effective January 1, 1998, the Company adopted the accounting treatment required by the American Institute of Certified Public Accountants' Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." It is anticipated that adoption of this statement will initially decrease the Company's operating expenses by approximately $2.5 million before income taxes for the year ended December 31, 1998 as costs incurred to develop internal-use software are capitalized and depreciated over their expected useful lives. First quarter 1998 capitalized costs were $0.6 million before income taxes, less than $0.01 per share. Amortization of Intangible Assets Amortization of intangible assets decreased by $0.9 million to $1.8 million for the three months ended March 31, 1998, compared to $2.7 million for the same period in 1997. This decrease resulted from lower amortization of the value of annuity business acquired in the 1989 acquisition of the Company. The value of annuity business acquired is amortized in relation to the present value of the estimated future gross profit amounts expected to be realized over the life of the book of contracts. The estimates of expected gross profit are evaluated periodically, and the amortization is adjusted when actual experience or other evidence suggests that earlier estimates should be revised. Accordingly, the amortization decreased as the estimated expected future gross profits increased due to significant recent market appreciation and retention of the business. 14 Interest Expense The Company's interest expense of $2.4 million for the three months ended March 31, 1998 was comparable to the same period last year. The debt to capital ratio of 21.8% as of March 31, 1998 was within the Company's target operating range of 20% to 25%. Income Tax Expense The effective income tax rate was 29.0% for the three months ended March 31, 1998 compared to the 27.3% effective income tax rate for last year reflecting an increase in realized investment gains at a rate of 35.0%. Income from investments in tax-advantaged securities reduced the effective income tax rate 3 percentage points in the three months ended March 31, 1998 and 1997, and acquisition related tax benefits reduced the effective rate 5 and 6 percentage points in the three months ended March 31, 1998 and 1997, respectively. Operating Income Operating income (net income before realized investment gains and losses) was $18.4 million for the three months ended March 31, 1998, compared to $18.8 million for the same period in 1997, a decrease of $0.4 million, or 2.1%. Operating income in the first quarter of 1997 was helped by unusually mild weather and a low level of weather-related property insurance claims which benefited property insurance results. Earnings and investment income were reduced compared to the first quarter last year due to the utilization of capital in the Company's share repurchase programs. Included in the Company's operating income are non-cash charges for the amortization of the value of acquired insurance in force and goodwill related to the 1989 acquisition of the Company. Excluding these non-cash charges for the amortization of intangible assets, operating income was $19.6 million for the three months ended March 31, 1998, compared to $20.6 million for the same period in 1997. Property and casualty segment operating income was $12.6 million for the three months ended March 31, 1998, compared to $13.8 million for the same period in 1997. Unusually mild weather, that benefited property insurance results in 1997, and reduced investment income in 1998, primarily from utilization of capital in the Company's share repurchase programs, contributed to the change in these results. For the first three months, after tax catastrophe losses were $2.4 million in 1998, compared to $0.8 million for 1997. The property and casualty combined loss and expense ratio for the three months ended March 31, 1998 was 94.1%, compared to the 93.6% reported for the same period in 1997, reflecting the higher weather-related claims. Before catastrophe losses, the combined loss and expense ratio was 90.9% for the first three months of 1998, compared to 92.5% for the same period in 1997. Annuity segment operating income of $5.3 million for the three months ended March 31, 1998 increased 26.2%, compared to the $4.2 million reported for the same period in 1997, reflecting 51.7% growth in variable annuity deposits and a fixed net interest margin that was comparable to the same period last year. Annuity segment profit continues to shift from the interest margin on fixed annuity accumulations to fees on variable mutual fund deposits. Variable annuity deposits were $1.1 billion at March 31, 1998. Total accumulated fixed and variable annuity deposits of $2,437.4 million increased $327.1 million, or 15.5%, compared to March 31, 1997. This increase resulted from a net increase in variable funds on deposit of $249.9 million, or 38.7%, plus net increases in market value of underlying mutual funds of $120.3 million, and a decrease in fixed annuity funds on deposit of $43.1 million, or 3.1%. 15 Life insurance segment operating income was $2.7 million for the three months ended March 31, 1998, compared to the $2.9 million reported for the same period in 1997. The first quarter 1998 life results reflect higher individual life mortality experience, compared to the same period in 1997. Net Income Net income, which includes realized investment gains, for the three months ended March 31, 1998 was $22.5 million, or $0.50 per diluted share, reflecting a 16.0% increase in income and a 25.0% increase in net income per diluted share compared to the same period in 1997. The Company's share repurchase program reduced net income by $1.2 million for the three months ended March 31, 1998, but resulted in an increase of $0.01 in first quarter 1998 earnings per share. After tax realized investment gains were $4.1 million for the three months ended March 31, 1998, compared to $0.6 million for the same period in 1997. Liquidity and Financial Resources Investments The Company's investment strategy emphasizes investment grade, publicly traded fixed income securities. At March 31, 1998, fixed income securities comprised 95.8% of investments excluding the securities lending collateral. Of the fixed income investment portfolio, 93.5% was investment grade and 99.7% was publicly traded. The average quality of the total fixed income portfolio was A+ at March 31, 1998. The duration of the investment portfolio is managed to provide cash flow to satisfy policyholder liabilities as they become due. The average option adjusted duration of total investments was 4.4 years at March 31, 1998 and 4.3 years at December 31, 1997. The Company has included in its annuity products substantial surrender penalties to reduce the likelihood of unexpected increases in policy or contract surrenders. All annuities issued since 1982 and approximately 75% of all outstanding fixed annuity accumulated cash values are subject in most cases to substantial early withdrawal penalties. Cash Flow The short-term liquidity requirements of the Company, within a 12-month operating cycle, are for the timely payment of claims and benefits to policyholders, operating expenses, interest payments and federal income taxes. Cash flow in excess of these amounts has been used to fund business growth, retire short-term debt, pay dividends to shareholders and repurchase shares of the Company's common stock. Long-term liquidity requirements, beyond one year, are principally for the payment of future insurance policy claims and benefits and retirement of long-term notes. 16 Operating Activities As a holding company, HMEC conducts its principal operations in the personal lines segment of the property and casualty and life insurance industries through its subsidiaries. HMEC's insurance subsidiaries generate cash flow from premium and investment income, generally well in excess of their immediate needs for policy obligations, operating expenses and other cash requirements. Net cash provided by operating activities was $52.7 million for the three months ended March 31, 1998 compared to $15.8 million for the same period in 1997 with the increase primarily due to a decrease in federal income tax payments. In both years, cash provided by operating activities primarily reflected net cash generated by the insurance subsidiaries. Payment of principal and interest on debt, fees related to the catastrophe- linked equity put option, dividends to shareholders and parent company operating expenses, as well as the share repurchase program, are dependent upon the ability of the insurance subsidiaries to pay cash dividends or make other cash payments to HMEC, including tax payments pursuant to tax sharing agreements. The insurance subsidiaries are subject to various regulatory restrictions which limit the amount of annual dividends or other distributions, including loans or cash advances, available to HMEC without prior approval of the insurance regulatory authorities. Dividends which may be paid by the insurance subsidiaries to HMEC during 1998 without prior approval are approximately $82 million. Although regulatory restrictions exist, dividend availability from subsidiaries has been, and is expected to be, more than adequate for HMEC's capital needs. Investing Activities HMEC's insurance subsidiaries maintain significant investments in fixed maturity securities to meet future contractual obligations to policyholders. In conjunction with its management of liquidity and other asset/liability management objectives, the Company, from time to time, will sell fixed maturity securities prior to maturity and reinvest the proceeds in other investments with different interest rates, maturities or credit characteristics. Accordingly, the Company has classified the entire fixed maturities portfolio as available for sale. During the first three months of 1998, net cash used in investing activities was $11.0 million. This net amount reflects $330.1 million in purchases of fixed maturity investments, funded by net investment sales or maturities of $319.1 million and net cash provided by operating activities. Financing Activities Financing activities include primarily repurchases of the Company's common stock, payment of scheduled dividends, the receipt and withdrawal of funds by annuity policyholders and borrowings and repayments under the Company's debt facilities. Shareholder dividends paid for the three months ended March 31, 1998 were $3.5 million. In the three months ended March 31, 1998, the Company paid fees of $1.5 million related to the catastrophe-linked equity put which augments its reinsurance program and such fees were charged directly to additional paid- in capital. For the three months ended March 31, 1998, receipts from annuity contracts of $54.3 million were greater than contract maturities and withdrawals of $45.1 million. Net transfers to variable annuity assets were $27.2 million during the first three months of 1998, compared to $26.3 million during the same period in 1997. Interest-sensitive life account balances decreased $0.1 million during the first three months of 1998. 17 During the three months ended March 31, 1998, the Company repurchased 297,000 shares of its common stock at an aggregate cost of $10.2 million, or $34.34 per share, $8 million completed the $100 million share repurchase program announced in 1997 and the remainder was acquired under an additional $100 million share repurchase program announced in January 1998 . The repurchase of these shares was financed with cash from operations. During the three months ended March 31, 1998, the Company received $1.4 million related to the exercise of common stock options including tax benefits. Capital Resources Historically, the Company's insurance subsidiaries have generated capital in excess of what has been needed to fund business growth. These excess amounts have been paid to HMEC through dividends. HMEC has then utilized these dividends and its access to the capital markets to retire long-term debt, repurchase shares of its common stock, increase dividends to its shareholders and 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. In January 1998, the Company's Board of Directors adopted an additional repurchase program for shares of the Company's common stock of up to $100 million. The total capital of the Company was $650.3 million at March 31, 1998, including $99.6 million of long-term debt and $42.0 million of short-term debt. Long-term debt as a percentage of total shareholders' equity was 19.6% as of March 31, 1998, compared to 19.7% as of December 31, 1997 with the change including the effects of the repurchase of shares for treasury stock. Total debt to capital at March 31, 1998 was 21.8%, well within the Company's target operating range of 20% to 25%. Shareholders' equity was $508.1 million at March 31, 1998, including an unrealized gain in the Company's investment portfolio of $55.6 million after taxes and the related impact on deferred policy acquisition costs associated with interest-sensitive policies. In December 1997, the Company's common stock was split two-for-one. The market value of the Company's common stock and the market value per share were $1,547.1 million and $35 1/8, respectively, at March 31, 1998. Book value per share was $11.54 at March 31, 1998, $10.28 excluding investment market value adjustments. In January 1996, the Company issued $100.0 million face amount of 6 5/8% Senior Notes ("Senior Notes"), which will mature on January 15, 2006, at a discount of 0.5%. Interest on the Senior Notes is payable semi-annually. The Senior Notes are redeemable in whole or in part, at any time at the Company's option. The Senior Notes have an investment grade rating from Standard & Poor's Corporation ("S&P") (A-), Duff & Phelps Credit Rating Co. ("Duff & Phelps") (A), and Moody's Investors Service, Inc. ("Moody's") (Baa2) and are traded on the New York Stock Exchange (HMN 6 5/8). The net proceeds from the sale of the Senior Notes were used to finance the redemption of the Company's convertible notes. As of both March 31, 1998 and December 31, 1997, the Company had short-term debt comprised of $42.0 million outstanding under the Bank Credit Facility. The Bank Credit Facility allows unsecured borrowings of up to $65.0 million at Interbank Offering Rates plus 0.3% to 0.5% or Bank of America National Trust and Savings Association reference rates. The rate on the borrowings under the Bank Credit Facility was Interbank Offering Rate plus 0.3%, or 6.0%, as of March 31, 1998. The commitment for the Bank Credit Facility terminates on December 31, 2001. The Company's ratio of earnings to fixed charges for the three months ended March 31, 1998 was 14.2x compared to 11.7x for the same period in 1997. 18 Total shareholder dividends were $3.5 million for the three months ended March 31, 1998. In February 1997, the Board authorized the fifth consecutive annual increase in the Company's dividend since the Company's initial public offering in 1991 and increased the quarterly dividend by 22.7% to $0.0675 per share. In November 1997, in conjunction with the Company's two-for-one stock split, the Board of Directors authorized the sixth increase to the Company's quarterly dividend, the second increase in 1997. The regular quarterly dividend increased by 19% to $0.08 per share. In January 1998, the Company's Board of Directors adopted an additional repurchase program for shares of the Company's common stock of up to $100 million. Based on the market price of the Company's common shares at the time the Board adopted this program, $100 million would represent approximately 8% of the Company's outstanding shares. Shares of common stock may be purchased from time to time through open market and private purchases, as available. The repurchase program will be financed through use of cash and, if needed, the Bank Credit Facility. At March 31, 1998, HMEC (the holding company) had cash and invested assets of $34.5 million available for the share repurchase program. During the first three months of 1998, options were exercised for the issuance of 77,532 shares, 0.2% of the Company's shares outstanding at December 31, 1997. The Company's catastrophe reinsurance program is augmented by a $100 million equity put. This equity put provides for an option to sell shares of the Company's convertible preferred stock with a floating rate dividend at a pre- negotiated price in the event losses from catastrophes, individually or in the aggregate during a calendar year, exceed $80 million, the 1998 coverage limit of the reinsurance program. Year 2000 In 1990, the Company established programming standards to address the year 2000 for new computer systems. By early 1995, the Company had developed a comprehensive plan to address the issue and began converting its existing computer systems to be year 2000 compliant. At March 31, 1998, over 60% of all business applications, representing more than 40% of all of the Company's program code, were year 2000 compliant. Management anticipates completing conversion of the remaining internal business applications by the end of 1998. Vendors that have not already completed conversion have indicated their plans to become year 2000 compliant by the end of 1998. During 1999, additional testing of all systems and final reviews of individual personal computer applications will be completed. Costs for this compliance project represent the allocation of existing internal information technology resources to address year 2000 compliance and are not expected to be incremental costs to the Company. The total cost of the compliance project is estimated to be $6 million, before tax benefits, and is being funded through operating cash flows. The Company is expensing all costs associated with these system changes and through March 31, 1998 has expensed $3.8 million before tax benefits, including a cost of $0.5 million for the three months ended March 31, 1998. 19 Recent Accounting Changes Employers' Disclosures about Pensions and Other Postretirement Benefits In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which will be implemented in the Company's December 31, 1998 financial statements. SFAS No. 132 will not affect employee benefits expense or net income. SFAS No. 132 standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer as useful as they were when SFAS No. 87, 88 and 106 were issued. PART II: OTHER INFORMATION Item 4: Submission of Matters to a Vote of Security Holders None. Item 6: Exhibits and Reports on Form 8-K (a) The following items are filed as Exhibits. (10) Material contracts: 10.1 Catastrophe Equity Securities Issuance Option Agreement entered by and between HMEC and Centre Reinsurance, dated February 15, 1997 and related letter from Centre Reinsurance, incorporated by reference to Exhibit 10.12 to HMEC's Annual Report on Form 10-K for the year ended December 31, 1996, filed with the Securities and Exchange Commission on March 26, 1997. 10.1(a) Amendment effective February 15, 1997 to Catastrophe Equity Securities Issuance Option Agreement. (11) Statement re computation of per share earnings. (27) Financial Data Schedule. (b) No reports on Form 8-K were filed by the Company during the first quarter of 1998. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HORACE MANN EDUCATORS CORPORATION (Registrant) Date May 14, 1998 /s/ Paul J. Kardos --------------------------- --------------------------------------- Paul J. Kardos, President and Chief Executive Officer Date May 14, 1998 /s/ Larry K. Becker --------------------------- --------------------------------------- Larry K. Becker, Executive Vice President and Chief Financial Officer 21 EX-10.1(A) 2 AMENDMENT TO CATASTROPHE AGREEMENT Exhibit 10.1(a) AMENDMENT NO. 1 TO CATASTROPHE EQUITY SECURITIES ISSUANCE OPTION AGREEMENT This Amendment No. 1 (this "Amendment") is entered into and effective as of February 15, 1997 with respect to that certain Catastrophe Equity Securities Issuance Option Agreement dated February 15, 1997 (together with all the Exhibits and Schedules and all ancillary, related or supporting documents, the "Agreement") between Horace Mann Educators Corporation, a Delaware corporation ("HM"), and Centre Reinsurance (U.S.) Limited, a Bermuda corporation ("Option Writer"). RECITALS WHEREAS, HM and Option Writer have previously entered into the Agreement; WHEREAS, certain ancillary, related or supporting documents or instruments to the Agreement have been executed by affiliates of Option Writer; and WHEREAS, HM, Option Writer and those certain affiliates of Option Writer are agreeable to amendment the Agreement as set forth below in this Amendment; NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, HM and Option Writer agree as follows: AGREEMENT 1. Agreement Name. The name of the Agreement is hereby changed from "Catastrophe Equity Securities Issuance Option Agreement" to "Catastrophe Equity Securities Issuance Option and Reinsurance Option Agreement", and this change shall apply to all references to the name of the Agreement contained in the Agreement, its Exhibits and Schedules, and all ancillary, related or supporting documents or instruments. 2. Section 1.24A. The following Section 1.24A is hereby inserted immediately following Section 1.24 of the Agreement: "1.24A "Quota Share Reinsurance Right" means HM's right, but not obligation, to bind Option Writer to participate in a ten percent (10%) property quote share reinsurance treaty on the terms set forth in the attached Exhibit 1.24A." A copy of such Exhibit 1.24A is attached to this Amendment. 3. Section 2.1. The first sentence of Section 2.1 is hereby amended by inserting "(a)" immediately following the word "exercise" in line 1, and by inserting "and (b) the Quota Share Reinsurance Right," immediately following the word "Event," in line 2. 1 4. Section 6.8. The first sentence of Section 6.8 is hereby amended by (a) replacing "be obligated" with "have the option" in line 2, and (b) inserting ", in the event of such redemption" immediately following the word "and" in line 4. 5. Section 9.2. Section 9.2 is hereby amended by replacing "ZC Resource Limited" with "Zurich Centre Group LLC" in subpart (ii). 6. Exhibit 1.3, Section 2(a). Section 2(a) of Exhibit 1.3 is hereby amended by deleting ", Special Redemption Date" from line 13. 7. Exhibit 1.3, Section 3(a). The first sentence immediately following the heading of Section 3(a) of Exhibit 1.3 is hereby amended by inserting "Unless a Special Redemption Event shall have occurred," at the beginning of such sentence, and by inserting "or at any time after the occurrence of a Special Redemption Event" immediately prior to the comma following the word "date" in line 4 of such sentence. 8. Exhibit 1.3, Sections 3(e) and (f). Section 3 of Exhibit 1.3 is hereby amended by deleting Section 3(e) in its entirety, and renumbering former Section 3(f) as new Section 3(e). 9. Exhibit 1.3, Section 4(b). Section 4(b) of Exhibit 1.3 is hereby amended by renumbering former Section 4(b) as new Section 4(b)(A), and inserting, immediately following such new Section 4(b)(A), a new Section 4(b)(B) which reads in full as follows: "(B) Notwithstanding anything to the contrary in paragraph (a) of this Section 4, at any time after the occurrence of 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 conversion rate set forth in paragraph (d) of this Section 4 as of the Proposed Conversion Date specified in such holder's notice to the Corporation delivered pursuant to paragraph (e) of this Section 4. Such notice shall be effective only to the extent that a Change of Control Conversion Event has occurred prior to the delivery of such notice." 10. Exhibit 1.3, Section 4(c). Section 4(c) is hereby amended by adding the following sentence to the end of such Section: "Notwithstanding the foregoing, with respect to a notice of conversion which is superseded by a notice of redemption, such notice of conversion shall again become effective if the notice of redemption is subsequently revoked, and the Conversion Date pursuant to such notice of conversion shall occur on the later of (a) thirty (30) days following revocation of the notice of redemption, or (b) the Proposed Conversion Date originally set forth in the notice of conversion. 11. Exhibit 1.3, Section 4(d). Section 4(d) of Exhibit 1.3 is hereby amended to read in full as follows: "(d) Conversion Rate. For purposes of conversion of Series A Preferred Shares to shares of Common Stock pursuant to this Section 4 other than a Special Conversion Event 2 under part A of paragraph (b) of this Section 4, each Series A Preferred Share shall be converted into the number of Common Stock shares resulting from dividing (i) the Original Value of Such Series A Preferred Share, plus Unpaid Dividend Yield to and including the Conversion Date, by (ii) the greater of (A) the product of the Liquidity Factor multiplied by the Market Price at Conversion, or (B) the product of the Liquidity Factor multiplied by the Minimum Book Value Price (such greater value to be referred to as the "Conversion Price")." 12. Exhibit 1.3, Section 4(e). The second paragraph of Section 4(e) is hereby amended by inserting "part A of" immediately following the word "to" in line 1. 13. Exhibit 1.3, Section 4(j)(A). The second paragraph of Section 4(j) (A) is hereby amended by deleting "(e) or" from the last line of such paragraph. 14. Exhibit 1.3, Section 8. Section 8 of Exhibit 1.3 is hereby amended by: (a) Adding the following new definitions (where alphabetically appropriate): "Change of Control Conversion Event" means the occurrence of a Change of Control without the written consent of the holders of more than 50% of the Series A Preferred Shares then outstanding. "Liquidity Factor" means, with respect to any conversion other than pursuant to a Special Conversion Event, an amount equal to (i) 0.90 if the Conversion Date for such conversion falls 60 days or more after a Change of Control Conversion Event, or (ii) 1.00 if the Conversion Date does not fall 60 days or more after the occurrence of a Change of Control Conversion Event. (b) Deleting ", Special Redemption Date" from line 9 of the definition of "Dividend Yield". (c) Deleting "after the first anniversary but" from line 4 of the definition of "Redemption Price". (d) Replacing "HM" with "the Corporation" in line 2 of the definition of "Special Conversion Event". (e) Revising the definition of "Special Redemption Event" to read in full as follows: "Special Redemption Event" means the earlier to occur of (i) a Change of Control Conversion Event, or (ii) any date on which the Company submits to the holders of its Common Stock a proposal for a Change of Control or any other matter which requires the affirmative vote of the holders of the Series A Preferred Shares at the time outstanding, acting as a single class. 3 15. Conformed Copies. The amendments to the Agreement described in the Amendment shall be contained in conformed copies of the Agreement, its Exhibits and Schedules to be exchanged between the parties. No conformed copies of any ancillary, supporting or related documents or instruments other than the Exhibits and Schedules shall be delivered, it being understood that any such ancillary, supporting or related documents or instruments remain in full force and effect subject to the amendments set forth above. 16. Counterparts. This Amendment may be executed in one or more counterparts, each of which when so executed and delivered shall be an original, but all of which together shall constitute one and the same instrument. 4 IN WITNESS WHEREOF, the undersigned parties have caused this Amendment to be duly executed as of the date first written above. Horace Mann Educators Corporation Centre Reinsurance (U.S.) Limited /s/ Paul J. Kardos /s/ Tara Leonard - --------------------------------- --------------------------------- Paul J. Kardos Tara Leonard President Senior Vice President /s/ George J. Zock - --------------------------------- George J. Zock Executive Vice President 5 Exhibit 1.24A Horace Mann Educators Corporation 10% Quota Share Treaty Option In connection with the valid exercise, if any, by Horace Mann Educators Corporation ("HMEC") of the Securities Issuance Option as described in the Catastrophe Equity Securities Issuance Option and Reinsurance Option Agreement dated as of February 15, 1997 between HMEC and Centre Reinsurance (U.S.) Limited ("Centre Re"), Centre Re shall grant, at the time of such exercise by HMEC, to Horace Mann Insurance Company, Allegiance Insurance Company, Teachers Insurance Company, and such other insurance company subsidiaries of HMEC as HMEC and Centre Re shall agree in writing (collectively, the "Optionees"), an irrevocable option (the "Option") to obligate Centre Re, or its appropriate affiliate as set forth below, to participate in a 10% property quota-share reinsurance treaty in accordance with the terms and conditions specified below. The Option may be exercised by any Optionee by giving notice to Centre Re within five (5) business days following HMEC's valid exercise of said Securities Issuance Option. If the Option is so exercised, Centre Re shall enter into a 10% Quota Share Treaty, substantially on the terms specified below. The Option may not be assigned by the Optionees, but may be assigned by Centre Re without the consent of the Optionees to an affiliate of Centre Re. 10% Quota Share Treaty ("Reinsurance Agreement") terms and conditions: - ---------------------------------------------------------------------- Reinsurer: Zurich Reinsurance (North America), Inc., Centre Re or one of its affiliates with equal of better credit ratings and admitted status (or appropriate statutory security if non-admitted in respective jurisdiction, at no additional cost to the Reinsured). Reinsured: Horace Mann Insurance Company, an Illinois insurance company; and/or Allegiance Insurance Company, a California insurance company; and/or Teachers Insurance Company, an Illinois insurance company; and such other HMEC insurance company subsidiaries as may be agreed in writing by Centre Re and HMEC. Effective Date: The Effective Date of the Reinsurance Agreement shall be the first day of the calendar quarter next following the receipt by Centre Re of the Reinsured's notice of the exercise of the Option. Term: One (1) year from the Effective Date. Page 1 Expiration: At expiration of the Term, Reinsurer shall remain liable for run-off with respect to all Business Covered written or renewed during the Term or which constitutes prospective inforce business at the Effective Date, including Covered Business renewed by the request of regulatory authorities, if any. Run-off limited to twelve (12) months plus odd time, not to exceed eighteen (18) months in all except as respects Course of Construction/Builders' Risk coverages written for the term of a job, for which the Reinsurer's liability will extend for a total run-off period, including any extension as original, until job completion but no more than thirty-six (36) months from the date of expiration of the Term. Cancellation: If at any time the Reinsurer becomes insolvent, is placed in conservation, rehabilitation, or liquidation, has a receiver appointed, or is acquired or controlled by, merged with, or reinsures its entire business with any non-affiliated company or corporation, the Reinsured will have the right to cancel this Reinsurance Agreement (with return of premium as applicable) by giving 15 days notice in writing. Similarly, should there be a greater than 50% change in ownership of the Reinsured, excluding changes in control caused by sales of the Reinsured's shares under the direct or indirect control of the Reinsurer, the Reinsurer will have the option to cancel this Reinsurance Agreement by giving 30 days notice in writing. Business Covered: All property and casualty insurance business which (1) constitutes prospective business in force (and for which premiums are then unearned) at the Effective Date which business can be subjected to the Reinsurance Agreement through a portfolio transfer, and (2) is written or renewed by the Reinsured during the Term, including renewal business requested by the regulatory authorities, if any. With respect to prospective business inforce at the Effective Date with a policy period of greater than one year, the Reinsurer shall only be liable for losses that occur during the Term. Exclusions: As attached. Territory: To follow the Reinsured's policies. Page 2 Limit: 10% quota share of Business Covered, subject to an aggregate limit of 250% of the difference of Premium ceded under the Reinsurance Agreement minus the Ceding Commission, as illustrated by the following formula: Limit = 2.5 x (Premium - Ceding Commission) Premium: Pro-rata of (a) gross written premium income on Business Covered that is written or renewed during the Term, and (b) premiums earned after the Effective Date on Business Covered which constitutes prospective business inforce at the Effective Date (but excluding premiums earned after the end of the Term on such prospective inforce business with policy periods of greater than one year); provided that Premium ceded shall be subject to a maximum of 110% of the Reinsured's gross written premium during the one year period immediately preceding the Effective Date. Ceding Commission: 20% flat rate of Premium ceded under the Reinsurance Agreement. Funding of Reserves: Any non-admitted Reinsurer will provide a clean, irrevocable, and unconditional Letter of Credit (and/or OCA's as respects Canadian business) that may be adjusted no more than quarterly. Such Letter of Credit will include losses and loss expenses paid by the Reinsured but not yet recovered from the Reinsurer, or not reported to the Reinsurer, reserves for losses and loss expenses incurred outstanding, reserves for losses and loss expenses incurred but not reported and unearned premium reserves. Alternatively, a Trust Agreement which meets the provisions of Regulation No. 114 of the New York Insurance Department can be provided to satisfy the above funding. Cash Losses: Remittance within five working days for individual losses in excess of $100,000 for 100% of the ground up loss. Reports and Remittances: Report and remittances within 60 days following the end of each quarter. Amounts due the Reinsured within 30 days following receipt of report. Additionally, the Reinsured will provide a quarterly report showing unearned premium and outstanding losses. Page 3 Original Conditions and Liability of the Reinsurer: The liability of the Reinsurer under each and every policy ceded to this Reinsurance Agreement will be subject in all respects to the same interpretations, terms, rates, conditions, waivers, modifications, alterations and cancellations as the respective policies of the Reinsured to which this Reinsurance Agreement relates. Other Provisions: Access to Records Clause Agency Clause Aon Re Inc. Intermediary Clause Arbitration Clause Currency Clause Definition of Loss Occurrence (both property and casualty) Delays, Errors or Omissions Clause Extra Contractual Obligations (subject to the Limit)/ Excess of Policy Limits (subject to the Limit) Entire Agreement / Amendment Clause - Horace Mann Educators Corporation Catastrophe Equity Securities Insurance Option and Reinsurance Option Agreement Extended Termination Clause (property only) Federal Excise Tax Clause Insolvency Clause - for IL and CA domiciled Companies Loss Notices & Settlements Clause Net Retained Liability Clause Offset Clause - this Reinsurance Agreement only Reports and Remittances Clause Salvage and Subrogation Clause Service of Suit Clause Taxes Clause Ultimate Net Loss Clause (incuding ALAE, subject to the Limit) Intermediary: Aon Re Inc. Page 4 EXCLUSIONS ---------- Unless otherwise agreed between HMEC and Centre Re, no reinsurance indemnity will be afforded under this Agreement for: A. Loss or liability excluded by the Pools, Associations, and Syndicates Exclusion Clause attached to this Agreement. B. Loss or liability excluded by the Nuclear Incident Exclusion Clauses - Physical Damage - Reinsurance U.S.A. and Canada, and Nuclear Energy Risks Exclusion Clause (Reinsurance) 1994 attached to this Agreement, or as may be revised hereafter by the Lloyd's Underwriter's Non-Marine Association. C. Loss or damage occasioned by war, invasion, 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; however, the foregoing will not apply to reinsured policies containing a standard war exclusion clause. D. Pollution, seepage and/or contamination. This exclusion does not apply, however, in any jurisdiction where it is illegal to exclude pollution, seepage and/or contamination or where there has been a final court ruling that the Company's pollution, seepage, and/or contamination exclusion is not valid or enforceable. If any risks reinsured hereunder as set forth in the Business Covered Sections but falling within the scope of the above exclusions are assigned to the reinsured under an Assigned Risk Plan the coverage afforded by this Agreement will apply to such risks, but only for the policy limits prescribed by said Plan, and subject to the limits of this Agreement. The exclusions enumerated above, with the exception of A, B, and C will not apply when they are merely incidental to the main operations of the insured, provided such main operations are covered by the Reinsured and are not themselves excluded from the scope of this Agreement. Should the Reinsured, by reason of an inadvertent act, error, or omission, be bound to afford coverages excluded hereunder the Reinsurer will waive the exclusion(s) with the exception of A, B, and C. The duration of said waiver will not extend beyond the time that notice of such coverage has been received by the home office underwriting department of the Reinsured plus the minimum time period required thereafter for the Reinsured to terminate such coverage. Page 5 EX-11 3 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS Exhibit 11 Horace Mann Educators Corporation Computation of Net Income per Share For the Three Months Ended March 31, 1998 and 1997 (Amounts in thousands, except per share data)
Three Months Ended March 31, 1998 1997 ------- ------- Basic - assumes no dilution: Net income for the period $22,459 $19,400 ------- ------- Weighted average number of common shares outstanding during the period 44,176 47,330 ------- ------- Net income per share - basic $ 0.51 $ 0.41 ======= ======= Diluted - assumes full dilution: Net income for the period $22,459 $19,400 ------- ------- Weighted average number of common shares outstanding during the period 44,176 47,330 Weighted average number of common equivalent shares to reflect the dilutive effect of common stock equivalent securities: Warrants 259 246 Stock options 492 449 Common stock units related to Deferred Equity Compensation Plan for Directors 34 20 ------- ------- Total common and common equivalent shares adjusted to calculate diluted earnings per share 44,961 48,045 ------- ------- Net income per share - diluted $ 0.50 $ 0.40 ======= ======= Percentage of dilution compared to basic net income per share 2.0% 2.4%
EX-27 4 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 2,674,555 0 0 0 31,934 1,288 2,874,572 10,187 0 90,545 4,358,377 2,109,573 166,353 0 123,586 141,609 0 0 59 508,023 4,358,377 141,207 48,520 6,371 0 97,430 11,446 27,225 31,672 9,213 22,459 0 0 0 22,459 0.51 0.50 0 0 0 0 0 0 0 Refer to Note 3 - Investments of the Company's Consolidated Notes to Financial Statements for March 31, 1998. Refer to the Company's Consolidated Balance Sheet as of March 31, 1998.
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