Note 1 - Basis of Presentation

The accompanying unaudited consolidated financial statements of Horace Mann Educators Corporation (“HMEC”; and together with its subsidiaries, the “Company” or “Horace Mann”) have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) and with the rules and regulations of the Securities and Exchange Commission (“SEC”), specifically Regulation S-X and the instructions to Form 10-Q. Certain information and note disclosures which are normally included in annual financial statements prepared in accordance with GAAP but are not required for interim reporting purposes have been omitted. The Company believes that these consolidated financial statements contain all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to present fairly the Company’s consolidated financial position as of September 30, 2014, the consolidated results of operations and comprehensive income (loss) for the three and nine months ended September 30, 2014 and 2013, and the consolidated changes in shareholders’ equity and cash flows for the nine months ended September 30, 2014 and 2013. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (1) the reported amounts of assets and liabilities, (2) disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and (3) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The subsidiaries of HMEC market and underwrite personal lines of property and casualty (primarily personal lines automobile and homeowners) insurance, retirement annuities (primarily tax-qualified products) and life insurance, primarily to K-12 teachers, administrators and other employees of public schools and their families. HMEC’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.

The Company has evaluated subsequent events through the date these consolidated financial statements were issued.

These consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes to consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full year.

Accounting Policy for Fixed Indexed Annuities

In 2014, the Company began offering fixed indexed annuity (“FIA”) products with interest crediting strategies linked to the Standard & Poor’s 500 Index and the Dow Jones Industrial Average. The Company purchases call options on the applicable indices as an investment to provide the income needed to fund the annual index credits on the indexed products. These products are deferred fixed annuities with a guaranteed minimum interest rate plus a contingent return based on equity market performance and are considered hybrid financial instruments under the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 815 “Derivatives and Hedging”. The Company elected to not use hedge accounting for derivative transactions related to the FIA products. As a result, the Company records the purchased call options and the embedded derivative related to the provision of a contingent return at fair value, with changes in fair value reported in the Consolidated Statements of Operations. More information regarding the determination of fair value of the FIA embedded derivative and purchased call options, the only derivative instruments utilized by the Company, is included in “Note 3 — Fair Value of Financial Instruments”.

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) represents the accumulated change in shareholders’ equity from transactions and other events and circumstances from non-shareholder sources. For the Company, accumulated other comprehensive income (loss) includes the after-tax change in net unrealized gains and losses on fixed maturities and equity securities and the after-tax change in net funded status of pension and other postretirement benefit obligations as shown in the Consolidated Statements of Changes in Shareholders’ Equity. The following tables reconcile these components.

	Unrealized Gains
	and Losses on
	Fixed Maturities
	and Equity		Defined
	Securities (1)(2)		Benefit Plans (1)		Total (1)

Beginning balance, July 1, 2014	$	281,555	$	(11,776)	$	269,779
Other comprehensive income (loss) before reclassifications		(9,265)		-		(9,265)
Amounts reclassified from accumulated other comprehensive income (loss)		(2,283)		-		(2,283)
Net current period other comprehensive income (loss)		(11,548)		-		(11,548)
Ending balance, September 30, 2014	$	270,007	$	(11,776)	$	258,231

Beginning balance, January 1, 2014	$	133,990	$	(11,776)	$	122,214
Other comprehensive income (loss) before reclassifications		141,641		-		141,641
Amounts reclassified from accumulated other comprehensive income (loss)		(5,624)		-		(5,624)
Net current period other comprehensive income (loss)		136,017		-		136,017
Ending balance, September 30, 2014	$	270,007	$	(11,776)	$	258,231

(1)	All amounts are net of tax.

(2)

The pretax amounts reclassified from accumulated other comprehensive income (loss), $3,512 and $8,652, are included in net realized investment gains and losses and the related tax expenses, $1,229 and $3,028, are included in income tax expense in the Consolidated Statements of Operations for the three and nine months ended September 30, 2014, respectively.

	Unrealized Gains
	and Losses on
	Fixed Maturities
	and Equity		Defined
	Securities (1)(2)		Benefit Plans (1)		Total (1)

Beginning balance, July 1, 2013	$	196,847	$	(15,311)	$	181,536
Other comprehensive income (loss) before reclassifications		(37,211)		-		(37,211)
Amounts reclassified from accumulated other comprehensive income (loss)		915		-		915
Net current period other comprehensive income (loss)		(36,296)		-		(36,296)
Ending balance, September 30, 2013	$	160,551	$	(15,311)	$	145,240

Beginning balance, January 1, 2013	$	382,400	$	(15,311)	$	367,089
Other comprehensive income (loss) before reclassifications		(208,283)		-		(208,283)
Amounts reclassified from accumulated other comprehensive income (loss)		(13,566)		-		(13,566)
Net current period other comprehensive income (loss)		(221,849)		-		(221,849)
Ending balance, September 30, 2013	$	160,551	$	(15,311)	$	145,240

(1)

All amounts are net of tax.

(2)

The pretax amounts reclassified from accumulated other comprehensive income (loss), $(1,407) and $20,872, are included in net realized investment gains and losses and the related tax expenses (benefits), $(492) and $7,306, are included in income tax expense in the Consolidated Statements of Operations for the three and nine months ended September 30, 2013, respectively.

Comparative information for elements that are not required to be reclassified in their entirety to net income in the same reporting period is located in “Note 2 — Investments — Unrealized Gains and Losses on Fixed Maturities and Equity Securities”.