================================================================================

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

[ ] 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

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.

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.

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.

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.

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.

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.

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
======== ========

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.

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.

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.

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.

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.

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.

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.

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
========== ==========

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.

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.

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
====== ====== =====

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

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

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.

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.

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

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

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

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.

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.

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.

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.

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.

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

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.

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

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

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

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.

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.

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.

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