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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-10890

HORACE MANN EDUCATORS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 37-0911756
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

1 HORACE MANN PLAZA, SPRINGFIELD, 62715-0001
ILLINOIS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 217-789-2500

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
COMMON STOCK, PAR VALUE $0.001 PER NEW YORK STOCK EXCHANGE
SHARE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE

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 [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 1, 1997, was approximately $1.0 billion.

As of March 1, 1997, 23,742,722 shares of Common Stock, par value $0.001 per
share, were outstanding, net of 5,626,398 shares of treasury stock.

DOCUMENTS INCORPORATED BY REFERENCE

Proxy Statement for the 1997 Annual Meeting of Shareholders, exclusive of
disclosures made pursuant to Regulation S-K, (S) 402 (i), (k) and (l).

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HORACE MANN EDUCATORS CORPORATION

FORM 10-K

YEAR ENDED DECEMBER 31, 1996

INDEX

ITEM
NUMBER PAGE
------ ----
PART I

1. Business......................................................... 1
2. Properties....................................................... 25
3. Legal Proceedings................................................ 25
4. Submission of Matters to a Vote of Security Holders.............. 25

PART II

5. Market for Registrant's Common Equity and Related Stockholder
Matters.......................................................... 25
6. Selected Financial Data.......................................... 26
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 26
8. Consolidated Financial Statements and Supplementary Data......... 26
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................. 26

PART III

10. Directors and Executive Officers of the Registrant............... 26
11. Executive Compensation........................................... 26
12. Security Ownership of Certain Beneficial Owners and Management... 27
13. Certain Relationships and Related Transactions................... 27

PART IV

14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 27
SIGNATURES....................................................... 31
Index to Financial Information................................... F-1

PART I

ITEM 1. BUSINESS

FORWARD-LOOKING INFORMATION

It is important to note that the Company's actual results could differ
materially from those projected in forward-looking statements. Additional
information concerning factors that could cause actual results to differ
materially from those in the forward-looking statements is contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

OVERVIEW

Horace Mann Educators Corporation (together with its subsidiaries, the
"Company" or "HMEC") is an insurance holding company incorporated in Delaware.
Through its subsidiaries, HMEC markets and underwrites personal lines of
property and casualty and life insurance and retirement annuities. HMEC's
principal insurance subsidiaries are Horace Mann Insurance Company ("HMIC"),
Teachers Insurance Company ("TIC") and Horace Mann Life Insurance Company
("HMLIC"), each of which is an Illinois corporation, and Allegiance Insurance
Company ("Allegiance"), a California domiciled personal lines property and
casualty insurance company.

The Company markets its products primarily to educators and other employees
of public schools and their families. Customers of the Company typically have
moderate annual incomes, with many belonging to two-income households. Their
financial planning tends to focus on security, savings and primary insurance
needs.

The Company sells and services its products through an exclusive sales force
of full-time agents employed by the Company. The Company's agents sell only
the Company's products. Many of the Company's agents are former educators who
utilize their contacts within, and knowledge of, the target market.
Compensation for sales agents includes an incentive element based upon the
profitability of the business they write.

The Company's insurance premiums written and contract deposits for the year
ended December 31, 1996 were $704.8 million and operating income (income from
continuing operations before realized investment gains and losses and debt
retirement costs) was $73.1 million. The Company's total assets were $3.9
billion at December 31, 1996. The property and casualty segment accounted for
60% of the Company's insurance premiums written and contract deposits for the
year ended December 31, 1996, while accounting for 64% of earnings from
continuing operations before interest and taxes for the period. The annuity
and life insurance segments together accounted for 40% of insurance premiums
written and contract deposits for the year ended December 31, 1996 (24% and
16%, respectively), and provided 41% (24% and 17%, respectively) of earnings
from continuing operations before interest and taxes for the period.

In December 1996, the Company announced its strategic decision to withdraw
from the group medical insurance business over the following two years. The
Company stopped writing new group medical insurance policies in January 1997
and intends to stop renewing group medical insurance policies in January 1998.
In the Company's financial statements and discussions of operating results,
group medical results are reported separately as discontinued operations.

In each of the last 10 years, the Company's combined loss and expense ratio
for its property and casualty product lines outperformed the total property
and casualty industry combined loss and expense ratio, as reported by A.M.
Best Company ("A.M. Best"), an independent insurance rating agency. During
this period, the Company's combined loss and expense ratio was better than the
total property and casualty insurance industry combined loss and expense ratio
by an average of approximately 11 percentage points per year. During the same
period of time, the Company's combined loss and expense ratio was better than
the personal lines insurance industry segment combined loss and expense ratio
by an average of approximately 9 percentage points per year.

One of the reasons why the Company's property and casualty lines have
performed better than the industry is the Company's property and casualty
expense ratio, which has been consistently better than the industry ratio
since 1983. During the last 10 years, the Company's property and casualty
expense ratio has been better than the property and casualty industry personal
lines average expense ratio as reported by A.M. Best by an average of 4.7
percentage points per year. The Company's property and casualty expense ratio
for the year ended December 31, 1996 was 19.4%, well within the lowest 20% of
expense ratios of the 100 largest property and casualty groups, based on A.M.
Best's reports.

At December 31, 1996, the accumulated value of annuity contracts was $2.1
billion. For the year ended December 31, 1996, 94% of the accumulated cash
value of the Company's annuity business remained on deposit. All annuities
issued since 1982 and approximately 70% of all outstanding fixed annuity
accumulated cash values are subject in most cases to substantial early
withdrawal penalties, typically ranging from 5% to 13% of the amount
withdrawn. Withdrawals of outstanding variable annuities are limited to
amounts less than or equal to the then current market value of the annuity.
Tax-qualified annuities represented 95% of the Company's annuity policy
reserves at December 31, 1996, and, generally, a penalty is imposed under the
Internal Revenue Code of 1986, as amended, on amounts withdrawn from tax-
qualified annuities prior to age 59 1/2.

The investment portfolio of the Company, including variable annuity assets
under management of $685 million, had an aggregate market value of $3.5
billion at December 31, 1996. Investments other than variable annuity assets
consist principally of investment grade publicly traded fixed income
securities. At December 31, 1996, investments in non-investment grade
securities represented 5.1% of total investments excluding variable annuity
assets. There are no significant investments in mortgage loans and real estate
or privately placed securities.

HISTORY

The Company's business was founded in Springfield, Illinois in 1945 by two
Illinois teachers to sell automobile insurance to other teachers within the
State of Illinois.

In 1968, INA Corporation ("INA") acquired a 25% interest in HMEC, and
completed its acquisition of HMEC in 1975. In 1982, INA and Connecticut
General Corporation merged to form CIGNA. In August 1989 an investor group
directed by Gibbons, Green, van Amerongen, L.P. (subsequently Gibbons,
Goodwin, van Amerongen) ("GGvA") and certain members of the Company's senior
management acquired HMEC from CIGNA. In November 1991, HMEC completed an
initial public offering of its common stock (the "IPO") which is traded on the
New York Stock Exchange under the symbol "HMN."

Following the initial public offering, GGvA owned approximately 44% of the
outstanding shares of the common stock. Pursuant to an agreement with GGvA, in
May 1995 HMEC purchased approximately one-half of the shares of its common
stock owned by GGvA and in July 1995 completed a secondary public offering of
most of the remaining shares of its common stock owned by GGvA.

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following statement of operations and balance sheet data have been
derived from the consolidated financial statements of the Company. The
consolidated financial statements of the Company for each of the periods in
the five year period ended December 31, 1996 have been audited by KPMG Peat
Marwick LLP. The following selected historical consolidated financial data
should be read in conjunction with the consolidated financial statements of
HMEC and its subsidiaries and Management's Discussion and Analysis of
Financial Condition and Results of Operations.

YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

STATEMENT OF OPERATIONS
DATA:
Insurance premiums written
and contract deposits...... $ 704.8 $ 654.0 $ 637.3 $ 589.1 $ 573.5
Insurance premiums and
contract charges earned.... 502.7 485.4 472.4 437.9 423.4
Net investment income....... 198.6 198.4 185.3 184.2 194.2
Net investment income, after
tax........................ 132.4 132.2 124.9 123.2 130.2
Realized investment gains
(losses)................... 2.5 8.6 (0.9) 26.8 27.5
Total revenues.............. 703.8 692.4 656.8 648.9 645.1
Amortization of intangible
assets(1).................. 11.2 11.7 12.6 13.1 14.9
Interest expense............ 10.5 11.6 9.5 9.1 18.3
Income from continuing
operations before income
taxes...................... 100.6 103.6 86.2 112.8 94.2
Income from continuing
operations................. 73.8 75.2 64.6 76.8 72.4
Discontinued operations(2).. (9.2) (1.2) - 0.4 (0.6)
Income before extraordinary
item....................... 64.6 74.0 64.6 77.2 71.8
Extraordinary item(3)....... - - (1.7) - (13.7)
Net income.................. 64.6 74.0 62.9 77.2 58.1
Operating income(4)......... 73.1 70.9 65.2 59.4 54.3
Ratio of earnings to fixed
charges(5)................. 10.6x 9.9x 10.1x 13.4x 6.1x
PER SHARE DATA:
Assuming no dilution:
Operating income(4)........ $ 3.11 $ 2.83 $ 2.25 $ 2.05 $ 1.87
Realized investment gains
(losses), after tax....... 0.07 0.22 (0.02) 0.60 0.63
Income from continuing
operations................ 3.14 3.00 2.23 2.65 2.50
Discontinued operations(2). (0.39) (0.05) - 0.02 (0.02)
Income before extraordinary
item...................... 2.75 2.95 2.23 2.67 2.48
Net income................. 2.75 2.95 2.17 2.67 2.01
Assuming full dilution:
Operating income(4)........ $ 3.11 $ 2.64 $ 2.15 $ 1.97 $ 1.87
Realized investment gains
(losses), after tax....... 0.07 0.20 (0.02) 0.54 0.63
Income from continuing
operations................ 3.14 2.79 2.13 2.51 2.50
Discontinued operations(2). (0.39) (0.04) - 0.01 (0.02)
Income before extraordinary
item...................... 2.75 2.75 2.13 2.52 2.48
Net income................. 2.75 2.75 2.08 2.52 2.01
Shares of Common Stock--
weighted average:
Assuming no dilution....... 23.5 25.0 29.0 29.0 28.9
Assuming full dilution(6).. 23.5 28.3 32.1 32.2 28.9
Cash dividends.............. $ 0.44 $ 0.36 $ 0.29 $ 0.24 $ 0.20
BALANCE SHEET DATA, AT YEAR
END:
Total investments........... $2,784.3 $2,798.5 $2,533.4 $2,493.8 $2,359.7
Total assets................ 3,861.0 3,662.3 3,285.5 3,147.6 2,909.4
Short-term debt............. 34.0 75.0 - - 17.0
Long-term debt.............. 99.6 100.0 100.0 111.7 111.7
Total shareholders' equity.. 484.4 470.2 412.0 429.9 357.1
Book value per share(7)..... $ 20.50 $ 20.10 $ 14.23 $ 14.85 $ 12.34
SEGMENT INFORMATION:
Insurance premiums written
and contract deposits
Property and casualty...... $ 427.1 $ 405.8 $ 398.8 $ 366.0 $ 359.5
Annuity.................... 166.9 142.9 136.6 123.4 116.7
Life....................... 110.8 105.3 101.9 99.7 97.3
Total...................... 704.8 654.0 637.3 589.1 573.5
Operating income(4)
Property and casualty...... $ 54.0 $ 56.4 $ 52.6 $ 44.9 $ 36.3
Annuity.................... 16.3 14.8 14.2 11.7 9.8
Life....................... 12.1 10.4 7.7 9.6 14.0
Corporate and other,
including interest
expense................... (9.3) (10.7) (9.3) (6.8) (5.8)
Total...................... 73.1 70.9 65.2 59.4 54.3

(continued on next page)

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA--(CONTINUED)

YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)

STATUTORY OPERATING DATA(8):
Property and casualty:
Loss and loss adjustment
expense ratio.............. 74.1% 73.5% 73.8% 73.6% 77.3%
Expense ratio............... 19.4% 19.8% 19.8% 19.6% 19.6%
Combined loss and expense
ratio(9)................... 93.5% 93.3% 93.7% 93.3% 97.1%
Industry average combined
loss and expense ratio(10). 107.0% 106.4% 108.4% 106.9% 115.7%
Personal lines industry
segment average combined
loss and expense ratio(10). 105.5% 103.5% 104.5% 103.9% 112.5%
Annuity accumulated value on
deposit..................... $2,075.5 $1,866.0 $1,673.2 $1,584.5 $1,451.0
Life insurance in force...... $ 10,645 $ 10,235 $ 9,707 $ 9,281 $ 9,033
Adjusted capital and surplus
of insurance subsidiaries
(includes investment
reserves)(11)............... $ 404.6 $ 389.8 $ 358.3 $ 344.2 $ 301.4

- --------
(1) Amortization of intangible assets is comprised of amortization of goodwill
and amortization of acquired value of insurance in force and is the result
of purchase accounting adjustments related to the 1989 acquisition of the
Company and the 1994 acquisition of Allegiance. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995."
(2) In December 1996, the Company announced its strategic decision to withdraw
from the group medical insurance business. Group medical results net of
taxes are reported separately as discontinued operations and 1996 includes
an additional after tax charge of $3.9 million, or $0.17 per share, for
estimated losses during the phase-out period.
(3) The extraordinary items for the years ended December 31, 1994 and 1992 each
represent non-recurring losses from early retirement of debt and are net of
tax benefits.
(4) Income from continuing operations before realized investment gains and
losses, debt retirement costs, cost of the additional rights relating to
the 1995 share repurchase, discontinued operations, and extraordinary
items.
(5) For the purpose of determining the ratio of earnings to fixed charges,
"earnings" consist of income from continuing operations before income taxes
and interest expense (including amortization of debt issuance cost), and
"fixed charges" consist of interest expense (including amortization of debt
issuance cost).
(6) Earnings per share assuming full dilution is computed based on the weighted
average of the fully diluted number of shares. The convertible notes, which
were redeemed in February 1996, were considered potentially dilutive
securities and common stock equivalents relating to outstanding warrants
and common stock options are also included in the calculation of fully
diluted earnings per share, to the extent dilutive by 3% or more.
(7) Due to the adoption by the Company on January 1, 1994 of Financial
Accounting Standard No. 115 ("FAS 115"), total shareholders' equity
included an increase of $29.7 million and $76.2 million at December 31,
1996 and 1995, respectively, and a reduction of $70.9 million at December
31, 1994. Excluding the FAS 115 market value accounting for investments,
book value per share was $19.25, $16.84 and $16.68 at December 31, 1996,
1995 and 1994, respectively.
(8) Statutory data has been derived from the financial statements of the
Company prepared in accordance with statutory accounting practices and
filed with insurance regulatory authorities.
(9) Property and casualty combined loss and expense ratio includes policyholder
dividends.
(10) Source: Best's Aggregates and Averages (1993 through 1996 Eds.). The
industry averages for the year ended December 31, 1996 are from Best Week,
Property/Casualty Supplement, A Special Report, January 6, 1997, published
by A.M. Best.
(11) Investment reserves were the Asset Valuation Reserves.

GENERAL

The Company markets and underwrites personal lines of property and casualty
and life insurance and retirement annuities. The following table sets forth by
segment the amount of insurance premiums written and contract deposits for the
Company for the periods indicated.

INSURANCE PREMIUMS WRITTEN AND CONTRACT DEPOSITS
(Dollars in millions)

YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------

Property and casualty.............. $427.1 60.6% $405.8 62.0% $398.8 62.6%
Annuity............................ 166.9 23.7 142.9 21.9 136.6 21.4
Life............................... 110.8 15.7 105.3 16.1 101.9 16.0
------ ----- ------ ----- ------ -----
Total.......................... $704.8 100.0% $654.0 100.0% $637.3 100.0%
====== ===== ====== ===== ====== =====

CORPORATE STRATEGY AND MARKETING

The Company's target market consists of educators and other employees of
public schools and their families. It is estimated that there are approximately
3 million elementary and secondary public school teachers and administrators in
the United States. The Company also sells its products to other education-
related customers, including private school teachers, education support
personnel, and their families. In addition to changes in the number of teachers
that may result from growth in the general population and changes in the number
of school age children, the Company believes that turnover among the teacher
population increases the size of its target market. New teachers and
educational support personnel are solicited by the Company's agents and the
Company attempts to retain customers who have retired or left the teaching
profession. Customers of the Company typically have moderate annual incomes,
with many belonging to two-income households. Their financial planning tends to
focus on security, savings and primary insurance needs.

Exclusive Agency Force

A cornerstone of the Company's marketing strategy is its exclusive sales
force of full-time agents who are employees of the Company. As of December 31,
1996, the Company employed 1,022 full-time agents. Many of these agents were
previously teachers or other members of the education profession. The Company's
agents market and write the full range of the Company's products. They are
under contract to market and write only those products authorized by the
Company.

The Company's service commitment to its policyholders begins with personal
contact at the point of sale between the Company's agents and potential
policyholders. In addition, the Company's agents often have direct access to
school premises, placing them in a position to write and service individual
insurance business. Management believes that Horace Mann's name recognition and
policyholder loyalties lead to new customers and cross-selling of additional
insurance products.

The Company's agents pre-underwrite policy applicants. The Company structures
its agent compensation to provide incentives for agents to adhere to the
Company's underwriting standards and practices and business growth plans. Agent
compensation after an initial two-year period is comprised entirely of
commissions and incentive bonuses based on profitability of insurance written,
retention of customers and sales. In 1996, incentive bonuses represented 29% of
agent compensation with 78% of the bonuses based on profitability and the
remaining 22% based on sales. The profitability related portion of agent
compensation is based on loss ratios in the case of property and casualty
policies, where permitted by law, and persistency in the case of life policies.
Management believes that this compensation structure, which rewards the
individual agent's selection of profitable business, helps to produce more
profitable business than might result under other compensation arrangements.

Alternate Distribution Program

The Company has established an Alternate Distribution program to develop new
sales channels that supplement and complement the exclusive agency force. As of
December 31, 1996, the Company had established relationships with 34 educator
credit unions in 14 states. At some of those credit unions, a salaried
representative of the Company is available to meet with prospective customers
while other of those credit unions refer their members to the Company.

Geographic Composition of Business

The Company's business is geographically diversified. Based on direct
insurance premiums earned and contract deposits for all continuing product
lines for the year ended December 31, 1996, the top five states and their
portion of total premium were North Carolina, 8.1%; Texas, 6.7%; Illinois,
5.5%; Minnesota, 5.4%; and California, 4.8%.

HMEC's property and casualty subsidiaries are licensed in 49 states, the
District of Columbia and Puerto Rico. The following table sets forth the
Company's top ten property and casualty states based on total direct premiums
in 1996:

PROPERTY AND CASUALTY SEGMENT TOP TEN STATES
(Dollars in millions)

PROPERTY AND
CASUALTY
SEGMENT
-------------------
PERCENT
DIRECT OF
STATE PREMIUMS(1) TOTAL
----- ----------- -------

Texas.................................................... $ 30.9 7.6%
North Carolina........................................... 29.1 7.2
California............................................... 28.1 6.9
Minnesota................................................ 26.5 6.5
Pennsylvania............................................. 22.3 5.5
Massachusetts............................................ 20.4 5.0
South Carolina........................................... 18.9 4.6
Michigan................................................. 18.2 4.5
Florida.................................................. 16.3 4.0
Georgia.................................................. 15.5 3.8
------ -----
Total of top ten states.............................. 226.2 55.6
All other areas.......................................... 180.6 44.4
------ -----
Total direct premiums................................ $406.8 100.0%
====== =====

- --------
(1) Defined as earned premiums before reinsurance and is determined under
statutory accounting practices.

HMEC's principal life insurance subsidiary is licensed in 48 states and the
District of Columbia. The following table sets forth the Company's top ten
combined life and annuity states based on total direct premiums and contract
deposits in 1996:

COMBINED LIFE AND ANNUITY SEGMENTS TOP TEN STATES
(Dollars in millions)

DIRECT PREMIUMS PERCENT
AND CONTRACT OF
STATE DEPOSITS(1) TOTAL
----- ------------------- -------

North Carolina................................... $ 25.3 9.4%
Illinois......................................... 24.6 9.2
Virginia......................................... 14.6 5.4
Texas............................................ 14.6 5.4
Tennessee........................................ 14.2 5.3
Indiana.......................................... 11.7 4.4
Wisconsin........................................ 10.1 3.8
Minnesota........................................ 10.0 3.7
South Carolina................................... 8.1 3.0
Iowa............................................. 7.8 2.9
------ -----
Total of top ten states...................... 141.0 52.5
All other areas.................................. 127.0 47.5
------ -----
Total direct premiums........................ $268.0 100.0%
====== =====

- --------
(1) Excludes discontinued group medical business and is determined under
statutory accounting practices.

National, State and Local Education Associations

The Company estimates that less than half of its policyholders are members
of the National Education Association ("NEA"), the nation's largest
confederation of state and local teachers' associations. NEA has approximately
2.3 million members. Management estimates that in each of the Company's last
three fiscal years, less than one-half of its total revenue came from sales of
insurance products to NEA members and their families.

The Company has had a long relationship with NEA and many of the state and
local education associations affiliated with NEA. The Company maintains a
special advisory board, primarily composed of leaders of state education
associations, that meets with Company management on a regular basis. These
meetings provide management with the opportunity to better assess the present
and future needs of its target market and to cultivate better relations with
education association leaders. In certain states, where approved by the
applicable state insurance departments, state or local association members are
entitled to a discount on premiums for certain property and casualty insurance
products sold by the Company.

From 1984 to September 1993 and beginning again in September 1996, NEA
purchased from the Company educator professional liability insurance for its
members. Between September 1993 and September 1996, the Company did not write
this policy.

It is the practice of NEA and affiliated state and local education
associations to "sponsor" various insurance products and services, including
those of the Company and its competitors. "Sponsorship" is generally
determined independently by each of these organizations. Being "sponsored"
generally means that NEA and such state and local associations evaluate a
product, authorize the use of their names in connection with the marketing of
the product and, in some instances, recommend that their membership consider
buying the product. From time to time during the past 25 years, NEA has
sponsored various Company products and currently sponsors the Company's
homeowners policy, which was co-sponsored by 40 state associations as of
December 31, 1996. In each of the Company's last three fiscal years, the
Company's homeowners policy was the only product of the Company that was
sponsored by NEA (exclusive of the educator professional liability insurance
policy purchased by NEA in 1996). NEA-affiliated education associations in 35
states sponsor products of the Company other than homeowners. Education
associations in 42 states sponsor one or more of the Company's products. In
each of the last three fiscal years, premium revenues from those products of
the Company sold in states where such products were sponsored accounted for
approximately one-half of total revenues in each such year. Total premium
revenues from sales of products sponsored by NEA and by state and local
education associations were approximately $250 million for each of the three
years ended December 31, 1996. In many cases, associations that sponsor one of
the Company's products also sponsor competing products. The Company does not
pay NEA or any affiliated associations any consideration in exchange for
sponsorship of Company products. The Company does pay for advertising that
appears in NEA and state education association publications.

Some of the advantages of education association sponsorship include prestige
and enhanced brand awareness, increased opportunity for the Company's agents
to market products on school premises, and improved agent recruiting,
especially among former teachers. The Company's customers decide whether to
purchase the Company's products for a number of reasons, including pricing and
service of the product and the customer's relationship with the selling
agent--education association sponsorship may be one factor in such a decision.

PROPERTY AND CASUALTY

The primary property and casualty product offered by the Company is private
passenger automobile insurance, which in 1996 represented 79% of property and
casualty net written premiums. Homeowners insurance represented 19% of
property and casualty premiums and the educator professional liability
insurance represented the remaining 2% of the Company's property and casualty
premiums. As of December 31, 1996, the Company had approximately 556,000
voluntary automobile

policies in force with annual premiums of approximately $366 million and
approximately 230,000 homeowners policies in force with annual premiums of
approximately $86 million. Voluntary automobile policies exclude those policies
described in "Business--Regulation--Mandatory Insurance Facilities" and
assigned risk policies. See "Business--Corporate Strategy and Marketing--
National, State and Local Education Associations."

The results of companies in the insurance industry have historically been
subject to significant fluctuations due to competition, economic conditions,
interest rates and other factors. In particular, the property and casualty
insurance industry has historically experienced pricing and profitability
cycles. With respect to these cycles, the factors most affecting current and
prospective results of operations are intense price competition and aggressive
marketing by property and casualty insurers, which have historically resulted
in higher combined loss and expense ratios. Periods characterized by higher
combined loss and expense ratios have typically been followed by withdrawal of
capacity in the property and casualty industry and a firming of prices,
resulting in lower combined loss and expense ratios. Because of the nature of
the property and casualty cycle, it is difficult to predict future trends in
the industry's overall combined loss and expense ratio. Management of the
Company believes that these factors will continue to produce pricing and
profitability cycles for the industry in the future. During the past ten years,
the personal lines segment of the property and casualty insurance market has
been less subject to the pricing and profitability cycles that have affected
the commercial lines segment and the overall industry. Because virtually all
the Company's property and casualty business is personal lines business,
management believes the Company's operations are less subject to pricing and
profitability cycles than the operations of many other insurers.

Results of property insurers are also subject to weather and other conditions
prevailing in an accident year. While one year may be relatively free of major
weather or other disasters, another year may have numerous such events causing
results for such a year to be materially worse than for other years.

Selected Historical Financial Information For Property and Casualty Segment

The following table sets forth certain financial information with respect to
the property and casualty segment for the periods indicated.

PROPERTY AND CASUALTY SEGMENT
SELECTED HISTORICAL FINANCIAL INFORMATION
(Dollars in millions)

YEAR ENDED DECEMBER 31,
----------------------
1996 1995 1994
------ ------ ------

STATEMENT OF OPERATIONS DATA:
Insurance premiums written........................ $427.1 $405.8 $398.8
Insurance premiums earned......................... 413.2 403.8 395.0
Net investment income............................. 46.4 48.8 44.9
Realized investment gains (losses)................ 0.2 2.9 (3.1)
Income before income taxes........................ 70.6 75.3 64.6
Net income before realized investment gains
(losses)......................................... 54.0 56.4 52.6
Net income........................................ 54.1 58.3 50.6
Net investment income, after tax.................. 33.5 35.0 33.7
Catastrophe losses, after tax..................... 13.6 9.0 11.1
STATUTORY OPERATING STATISTICS:
Loss and loss adjustment expense ratio............ 74.1% 73.5% 73.8%
Expense ratio..................................... 19.4% 19.8% 19.8%
Combined loss and expense ratio (including
policyholder dividends).......................... 93.5% 93.3% 93.7%

(continued on next page)

PROPERTY AND CASUALTY SEGMENT
SELECTED HISTORICAL FINANCIAL INFORMATION--(CONTINUED)
(Dollars in millions)

YEAR ENDED DECEMBER 31,
----------------------
1996 1995 1994
------ ------ ------

GAAP OPERATING STATISTICS:
Loss and loss adjustment expense ratio............ 74.1% 73.6% 73.9%
Expense ratio..................................... 19.8% 20.1% 19.5%
Combined loss and expense ratio (including
policyholder dividends).......................... 93.9% 93.7% 93.4%
AUTOMOBILE AND HOMEOWNERS (VOLUNTARY):
Insurance premiums written........................ $400.0 $381.8 $372.7
Insurance premiums earned......................... 390.0 378.9 369.3
Policies in force (in thousands).................. 786 743 733

Property and Casualty Ratios

In each of the last 10 years, the Company's combined loss and expense ratio
for its property and casualty product lines outperformed the total property and
casualty industry combined loss and expense ratio, as reported by A.M. Best.
During this period, the Company's combined loss and expense ratio was better
than the total property and casualty insurance industry combined loss and
expense ratio by an average of approximately 11 percentage points per year.
During the same period of time, the Company's combined loss and expense ratio
was better than the personal lines insurance industry segment combined loss and
expense ratio by an average of approximately 9 percentage points per year.

The table below compares the Company's combined loss and expense ratios with
published industry averages.

PROPERTY AND CASUALTY COMBINED LOSS AND EXPENSE RATIO(1)

PERSONAL PROPERTY
LINES AND
THE INDUSTRY CASUALTY
COMPANY(2) SEGMENT(3) INDUSTRY(3)
---------- --------- ----------

Year Ended December 31,
1996........................................ 93.5% 105.5% 107.0%
1995........................................ 93.3 103.5 106.4
1994........................................ 93.7 104.5 108.4
1993........................................ 93.3 103.9 106.9
1992........................................ 97.1 112.5 115.7
1991........................................ 98.4 107.1 108.8
1990........................................ 101.8 109.8 109.6
1989........................................ 106.9 109.9 109.2
1988........................................ 99.6 105.5 105.4
1987........................................ 98.6 104.2 104.6

- --------
(1) Combined loss and expense ratio includes policyholder dividends and is
determined according to statutory accounting practices.
(2) The Company did not have any California property and casualty business
during each of the years from 1989 through 1993.
(3) Source: Best's Aggregates and Averages (1988 through 1996 Eds.). 1996 is an
estimate from Best Week, Property/Casualty Supplement, A Special Report,
January 6, 1997, published by A.M. Best.

Catastrophe losses before federal income tax benefits for the Company and
the property and casualty industry for the eight years ended December 31, 1996
were as follows:

CATASTROPHE LOSSES
(Dollars in millions)

THE PROPERTY AND CASUALTY
COMPANY(1) INDUSTRY(2)
---------- ---------------------

Year Ended December 31,
1996......................................... $20.9 $ 7,350.0
1995......................................... 13.9 7,425.0
1994......................................... 17.0 17,030.0
1993......................................... 8.5 5,705.0
1992......................................... 13.3 22,870.0
1991......................................... 10.3 4,698.0
1990......................................... 5.8 2,560.0
1989......................................... 12.2 7,371.0

- --------
(1) Net of reinsurance and before federal income tax benefits. Includes
allocated loss adjustment expenses. The Company's individually significant
catastrophe losses net of reinsurance were as follows:
1996--$8.2 million, Hurricane Fran.
1995--$2.9 million, Texas wind/hail/tornadoes; $2.2 million Hurricane
Opal.
1994--$6.0 million, Northridge, California earthquake.
1993--$2.2 million, East Coast blizzard.
1992--$1.9 million, Hurricane Andrew.
1991--$1.0 million, Hurricane Bob.
1990--$2.8 million, Denver, Colorado hailstorm.
1989--$4.0 million, Hurricane Hugo.
(2) Source: Insurance Trends, Property-Casualty Edition, First Quarter 1997,
published by Conning & Company. These amounts are before reinsurance and
federal income tax benefits and exclude all loss adjustment expenses.

During the last 10 years, the Company's property and casualty expense ratio
has been better than the property and casualty industry personal lines average
expense ratio as reported by A.M. Best by an average of 4.7 percentage points
per year. The Company's property and casualty expense ratio for the year ended
December 31, 1996 was 19.4%, well within the lowest 20% of expense ratios of
the 100 largest property and casualty groups, based on A.M. Best's reports.

The table below compares the Company's expense ratios with published
industry averages.

PROPERTY AND CASUALTY EXPENSE RATIO(1)

THE PERSONAL LINES PROPERTY AND CASUALTY
COMPANY(2) INDUSTRY SEGMENT(3) INDUSTRY(3)
---------- ------------------- ---------------------

Year ended December 31,
1996..................... 19.4% 23.6% 26.2%
1995..................... 19.8 23.7 26.1
1994..................... 19.8 23.5 26.0
1993..................... 19.6 23.9 26.2
1992..................... 19.6 24.4 26.6
1991..................... 19.8 24.7 26.4
1990..................... 19.1 24.3 26.0
1989..................... 19.0 24.5 26.0
1988..................... 18.7 24.4 25.7
1987..................... 19.8 24.5 25.3

- --------
(1) Determined according to statutory accounting practices.
(2) The Company did not have any California property and casualty business
during each of the years from 1989 through 1993.
(3) Source: Best's Aggregates and Averages (1988 through 1996 Eds.). 1996
amounts are estimates from A.M. Best.

Property and Casualty Reserves

In the last ten consecutive years the Company's property and casualty
reserves have developed cumulative redundancies. Reserves for losses and loss
adjustment expenses ("LAE") are carried at the full value of estimated
liabilities and are not discounted for interest expected to be earned on
reserves. The Company's reserves for losses and LAE represent the estimated
indemnity cost and loss adjustment expenses necessary to cover the ultimate
net cost of investigating and settling claims. Such estimates are based upon
individual case estimates for reported claims, estimates from state insurance
facilities for reinsurance assumed and actuarial estimates for losses which
have been incurred but not yet reported. These estimates are adjusted in the
aggregate for ultimate loss expectations based upon historical experience
patterns and current economic trends and experience, with any change in
probable ultimate liabilities being reflected in results of operations
currently. Expected inflation rates, along with other factors, are considered
in estimating future claims costs and related reserves. As additional
information becomes available and is reviewed, the estimates and judgments
reflected in earlier reserves may be revised, which may result in adjustment
to reserves for insured events of prior years. The Company has no exposure to
claims for toxic waste cleanup, other environmental remediation or asbestos-
related illnesses.

Due to the inherent uncertainty in estimating reserves for losses and LAE,
there can be no assurance that ultimate liabilities will not exceed amounts
reserved, with a resulting adverse effect on the Company. Management believes
that the Company's overall reserve levels at December 31, 1996 are adequate to
meet its future obligations.

The following table sets forth an analysis of loss reserves and LAE for the
Company's property and casualty lines and provides a reconciliation of
beginning and ending reserves for the periods indicated.

RECONCILIATION OF PROPERTY AND CASUALTY LOSS AND LAE RESERVES
(Dollars in millions)

YEAR ENDED DECEMBER 31,
----------------------
1996 1995 1994
------ ------ ------

Reserves at beginning of year...................... $369.7 $388.1 $373.5
Less reinsurance recoverables.................... 23.8 18.5 21.6
------ ------ ------
Net reserves at beginning of year.................. 345.9 369.6 351.9
------ ------ ------
Increase in reserves due to purchase of Allegiance
Insurance Company................................. - - 30.0
------ ------ ------
Losses and LAE incurred:
Claims occurring in the current period........... 368.6 352.5 346.0
Decrease in reserves for losses and LAE for
claims occurring in prior periods(1):
Policies written by the Company................ (56.4) (49.8) (47.2)
Business assumed from state reinsurance
facilities.................................... (6.1) (5.8) (7.1)
------ ------ ------
(62.5) (55.6) (54.3)
------ ------ ------
Losses and LAE incurred........................ 306.1 296.9 291.7
------ ------ ------
Losses and LAE payments for claims occurring
during:
Current year..................................... 206.4 179.8 170.6
Prior years...................................... 139.3 140.8 133.4
------ ------ ------
Losses and LAE payments........................ 345.7 320.6 304.0
------ ------ ------
Net reserves at end of period...................... 306.3 345.9 369.6
Plus reinsurance recoverables(2)................. 34.1 23.8 18.5
------ ------ ------
Reserves at end of period(3)....................... $340.4 $369.7 $388.1
====== ====== ======

RECONCILIATION OF PROPERTY AND CASUALTY LOSS AND LAE RESERVES--(CONTINUED)
- --------
and changes in their projected final settlement costs. Favorable reserve
development generally occurs as a result of subsequent adjustment of
reserves to reflect additional information.
(2) Generally accepted accounting principles ("GAAP") require that insurance
liabilities on the balance sheet be reported without reduction for
anticipated recoverables under reinsurance contracts. These anticipated
recoverables on unpaid losses and loss adjustment expenses are reported as
assets on the balance sheet. Statutory accounting practices continue to
permit reporting on a net basis.
(3) Unpaid claims and claim expenses as reported in the consolidated balance
sheets also include life, annuity, and group accident and health reserves
of $18.4 million, $15.4 million and $17.6 million at December 31, 1996,
1995 and 1994, respectively, in addition to property and casualty
reserves.

The provision for losses and LAE for insured events in prior years decreased
by $62.5 million, $55.6 million and $54.3 million for the years ended December
31, 1996, 1995 and 1994, respectively. The favorable loss development results
primarily from improving trends in the frequency and severity of voluntary
automobile claims.

Analysis of Loss and LAE Reserves

The following table reflects the development of losses and LAE for the
periods indicated at the end of that year and each subsequent year. The first
line shows the reserves, net of reinsurance recoverables, as originally
reported at the end of the stated year. Each calendar year-end reserve
includes the estimated unpaid liabilities for that accident year and for all
prior accident years. The section under the caption "Cumulative Amount Paid as
of" shows the cumulative amounts paid of that reserve as of the end of each
subsequent year. The section under the caption "Reserves Reestimated as of"
shows the original recorded reserve as adjusted as of the end of each
subsequent year to reflect the cumulative amounts paid and all other facts and
circumstances discovered during each such year. The line "Cumulative
Redundancy" reflects the difference between the latest reestimated reserve
amount and the reserve amount as originally established.

In evaluating the information in the table below, it should be noted that
each amount includes the effects of all changes in amounts of prior periods.
For example, if a loss determined in 1995 to be $150 thousand was first
reserved in 1986 at $100 thousand, the $50 thousand deficiency (actual loss
minus original estimate) would be included in the cumulative deficiency in
each of the years 1986-1994 shown below. This table presents development data
by calendar year and does not relate the data to the year in which the
accident actually occurred. Conditions and trends that have affected the
development of these reserves in the past will not necessarily recur in the
future. It may not be appropriate to use this cumulative history in the
projection of future performance.

ANALYSIS OF PROPERTY AND CASUALTY
LOSSES AND LAE RESERVES DEVELOPMENT
(Dollars in millions)

YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------

Reserves for Losses and
LAE.................... $306.3 $345.9 $369.6 $351.9 $340.5 $316.7 $298.5 $274.0 $277.8 $242.6 $199.2
Increase in reserves due
to purchase of
Allegiance Insurance
Company................ - - 30.0 - - - - - - -
Cumulative Amount Paid
as of:
One year later......... 139.3 140.8 133.4 117.6 116.1 111.3 115.0 120.2 115.6 93.4
Two years later........ 194.5 190.5 169.6 170.0 167.4 163.9 175.9 163.5 136.9
Three years later...... 218.4 197.8 197.2 197.1 192.6 204.3 194.3 159.3
Four years later....... 213.6 212.1 212.9 208.2 220.1 208.3 174.1
Five years later....... 220.5 220.7 216.4 227.7 215.6 179.7
Six years later........ 225.3 219.3 232.2 218.9 183.2
Seven years later...... 221.7 234.0 220.8 185.1
Eight years later...... 235.5 221.6 186.4
Nine years later....... 222.4 186.7
Ten years later........ 187.0
Reserves Reestimated as
of:
One year later......... 283.4 314.0 327.6 306.1 297.3 279.9 265.9 275.6 244.1 196.6
Two years later........ 269.2 281.9 267.7 272.1 266.7 254.5 269.2 243.1 197.8
Three years later...... 258.1 246.4 246.8 246.7 239.4 259.0 243.3 196.0
Four years later....... 233.3 235.2 236.5 233.2 243.0 235.4 196.4
Five years later....... 229.8 232.4 227.8 239.7 226.0 192.6
Six years later........ 230.8 225.4 239.3 224.7 188.1
Seven years later...... 224.9 237.4 225.0 188.2
Eight years later...... 237.5 224.1 188.5
Nine years later....... 224.0 188.1
Ten years later........ 188.2
Cumulative Redundancy... $ 62.5 $100.4 $123.8 $107.2 $ 86.9 $ 67.7 $ 49.1 $ 40.3 $ 18.6 $ 11.0

Property and Casualty Reinsurance

All reinsurance is obtained through contracts which generally are renewed
each calendar year. Although reinsurance does not legally discharge the
Company from primary liability for the full amount of its policies, it does
make the assuming reinsurer liable to the extent of the reinsurance ceded.
Historically, the Company's losses from uncollectible reinsurance recoverables
have been insignificant. Past due reinsurance recoverables as of December 31,
1996 were also insignificant.

catastrophe as well as the severity of the event. The Company seeks to reduce
its exposure to catastrophe losses through the geographic diversification of
its insurance coverage, the purchase of catastrophe reinsurance, and the
purchase in 1997 of a catastrophe-linked equity put option.

The Company maintains an excess and catastrophe treaty reinsurance program.
In 1996, the Company reinsured 95% of catastrophe losses above a retention of
$5.5 million per occurrence up to $54 million per occurrence with an aggregate
annual deductible of $2.0 million. With regard to liability coverages in 1996,
the Company reinsured each loss up to $10 million above a retention of
$500,000. The Company reinsured each property loss above a retention of
$500,000 up to $1.0 million in 1996.

In 1997, the Company reinsures 95% of catastrophe losses above a retention
of $7.5 million per occurrence up to $65 million per occurrence. In 1997, the
Company's catastrophe reinsurance program will be augmented by a $100 million
equity put. This equity put provides for an option to sell shares of the
Company's convertible preferred stock at a pre-negotiated floating rate in the
event of losses from a catastrophe, individually or in the aggregate, which
exceed $65 million. For liability coverages, including the educator
professional liability policy, the Company reinsures each loss up to $20
million above a retention of $500,000. The Company reinsures each property
loss up to $1.5 million above a retention of $500,000.

The following table identifies the Company's most significant reinsurers
under the traditional reinsurance program, their percentage participation in
the Company's aggregate reinsured risk based on premiums paid by the Company
and their rating by A.M. Best. No other single reinsurer's percentage
participation in 1997 or 1996 exceeds 5%.

PROPERTY AND CASUALTY REINSURANCE PARTICIPANTS IN EXCESS OF 5%

PARTICIPATION
A.M. BEST --------------
RATING REINSURER PARENT 1997 1996
--------- --------- ------ ------ ------

NR Lloyd's of London 10% *
A+ PMA Reinsurance Pennsylvania Manufacturers
Corporation Corporation 8% 0%
A Signet Star Reinsurance W.R. Berkley Corporation
Company 8% 5%
A+ St. Paul Fire and Marine The St. Paul Companies,
Insurance Company Inc. 7% 9%
A+ Motors Insurance General Motors Corporation
Corporation 7% 7%
NR G.I.O. Australia
Holdings, Ltd. 7% 7%
A+ St. Paul Reinsurance The St. Paul Companies, Inc.
Company, Ltd. 5% 0%
A Kemper Reinsurance Lumbermens Mutual Casualty
Company Company * 5%
A NAC Reinsurance NAC Re Corporation
Corporation * 5%
A- LaSalle Reinsurance Ltd. 0% 9%
A+ Transatlantic American International Group,
Reinsurance Company Inc. (AIG) 0% 5%

- --------
NR--These foreign reinsurers are not rated by A.M. Best.
* Less than 5%.

For 1997, all of the Company's property and casualty reinsurers that were
rated by A.M. Best were rated "A- (Excellent)" or above. The Company has
placed 37% of its reinsurance coverage with foreign reinsurers that are not
rated by A.M. Best.

ANNUITIES

Educators in the Company's target market, as public school employees,
benefit from the provisions of Section 403(b) of the Internal Revenue Code.
This section of the Code allows public school employees to reduce their pretax
income by making periodic contributions to an individual

qualified retirement plan. The Company has offered tax-qualified annuities to
its marketplace, designed to allow contractholders to benefit from these tax
provisions, since 1961, the year Congress created this option for educators.

The Company sells fixed and variable tax-qualified annuities. Under the
fixed annuities, both the principal and a rate of return are guaranteed.
Variable annuity contract deposits are invested as designated by the
contractholder in mutual funds managed by the Company--a common stock fund, a
bond fund, a combination bond and stock fund, and a short-term fund; and
beginning in 1997--a small cap growth fund, an international equity fund, and
a "socially responsible" fund. Total accumulated fixed and variable annuity
cash value on deposit at December 31, 1996 of $2,075.5 million increased
$209.5 million, or 11.2%, compared to December 31, 1995. This increase
resulted from a net increase in funds on deposit of 10.0% plus net increases
in market value of underlying mutual funds of $26.7 million. The liability for
all annuity contracts issued by the Company on a generally accepted accounting
principles ("GAAP") basis is established at the contract's accumulated cash
value before reduction for surrender charges.

For the year ended December 31, 1996, 94% of the accumulated cash value of
the Company's annuity business remained on deposit, compared to average
retention of 90% for stock life insurance companies for 1995, as reported by
A.M. Best. All annuities issued since 1982 and approximately 70% of all
outstanding fixed annuity accumulated cash values are subject in most cases to
substantial early withdrawal penalties, typically ranging from 5% to 13% of
the amount withdrawn. Withdrawals of outstanding variable annuities are
limited to amounts less than or equal to the then current market value of the
annuity. Tax-qualified annuities represented 95% of the Company's annuity
policy reserves at December 31, 1996, and, generally, a penalty is imposed
under the Internal Revenue Code of 1986, as amended, on amounts withdrawn from
tax-qualified annuities prior to age 59 1/2.

Selected Historical Financial Information For Annuity Segment

The following table sets forth certain information with respect to the
Company's annuity products for the periods indicated.

ANNUITY SEGMENT
SELECTED HISTORICAL FINANCIAL INFORMATION
(Dollars in millions, unless otherwise indicated)

YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------

STATEMENT OF OPERATIONS DATA:
Contract deposits.............................. $ 166.9 $ 142.9 $ 136.6
Contract charges earned........................ 9.2 6.8 5.4
Net investment income.......................... 111.4 110.3 105.0
Net interest margin (without realized gains)... 34.7 35.8 35.3
Net margin (includes contract charges earned).. 43.9 42.6 40.7
Realized investment gains...................... 1.6 4.3 1.7
Income before income taxes..................... 26.5 27.1 23.6
Net income before realized investment gains.... 16.3 14.8 14.2
Net income..................................... 17.4 17.6 15.3
OPERATING STATISTICS:
Fixed annuity:
Accumulated value............................ $1,390.6 $1,378.4 $1,339.1
Accumulated value persistency................ 93.9% 94.5% 94.8%
Variable annuity accumulated value............. $ 684.9 $ 487.6 $ 334.1
Number of contracts in force................... 106,476 101,641 98,379
Average accumulated cash value (in dollars).... $ 19,493 $ 18,358 $ 17,008
Average annual deposit by policyholders (in
dollars)...................................... $ 2,382 $ 2,350 $ 2,300
Maturity schedule for all annuity contracts:
Matured...................................... $ 184.4 $ 176.8 $ 170.6
5 years or less.............................. 397.9 371.7 354.5
After 5 years through 10 years............... 408.9 351.5 300.9
After 10 years through 20 years.............. 732.8 664.9 596.2
After 20 years............................... 351.5 301.1 251.0
Total accumulated cash value............... $2,075.5 $1,866.0 $1,673.2
Annuity contracts terminated due to surrender,
death, maturity or other:
Number of contracts.......................... 5,977 5,645 5,345
Amount....................................... $ 90.9 $ 90.0 $ 82.4
Accumulated fixed annuity value grouped by
applicable surrender charge:
0%........................................... $ 344.6 $ 364.9 $ 384.3
5% and greater but less than 10%............. 827.5 804.6 772.5
10% and greater.............................. 141.2 138.2 116.5
Supplementary contracts with life
contingencies not subject to discretionary
withdrawal.................................. 77.3 70.7 65.8
Total accumulated fixed annuity value...... $1,390.6 $1,378.4 $1,339.1

LIFE

The Company entered the individual life insurance business in 1949 with
traditional term and whole life insurance products. In 1984, the Company
introduced "Experience Life," a flexible life insurance contract which allows
the customer to combine elements of term life insurance, interest-sensitive
whole life insurance and an interest-bearing account. At December 31, 1996
this business consisted of approximately 99,000 Experience Life policies
representing approximately $6.6 billion of life insurance in force with annual
insurance premiums and contract deposits of approximately $69.6 million. The
Company's traditional term, whole life and group life business in force
consists of

approximately 156,000 policies, representing approximately $4.0 billion of life
insurance in force with annual insurance premiums and contract deposits of
approximately $26.3 million as of December 31, 1996. In 1997, the Company
introduced a new series of five limited duration term life insurance products.
The Company does not charge any penalty for withdrawal of life insurance cash
values. The life segment also includes the Company's group life and group
disability income business which represented approximately 2% of all insurance
premiums written and contract deposits of the Company.

During 1996, the average face amount of ordinary life insurance policies
issued by the Company was $102,196 and the average face amount of all ordinary
life insurance policies it has in force was $48,650. A.M. Best reported that
during 1995, for stock life insurance companies, the average face amount of
ordinary life insurance policies issued was $70,056 and the average face amount
of all ordinary life insurance policies in force was $46,852. The maximum life
insurance risk retained by the Company is $200,000 combined for group and
individual coverages on any individual life. Any risk in excess of $200,000 is
reinsured. All of the Company's life reinsurers are rated "A (Excellent)" or
above by A.M. Best.

The life insurance and annuity industry, while it has not generally been
subject to the factors that produce cyclicality in the property and casualty
insurance industry, is nonetheless subject to competitive pressures and
interest rate fluctuations. As a result, the life insurance and annuity
industry has developed new products designed to shift investment and credit
risk to policy or contract holders while still providing death benefits. This
trend has generally caused profit margins to shrink on new products relative to
older life insurance and annuity products and has provided more competitive
returns to the holders of the new products than those available under other
investment alternatives. Management cannot predict whether these trends will
continue in the future.

Selected Historical Financial Information For Life Segment

The following table sets forth certain information with respect to the
Company's life products for the periods indicated.

LIFE SEGMENT
SELECTED HISTORICAL FINANCIAL INFORMATION
(Dollars in millions, unless otherwise indicated)

YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------

STATEMENT OF OPERATIONS DATA:
Insurance premiums and contract deposits....... $ 110.8 $ 105.3 $ 101.9
Insurance premiums and contract charges earned. 80.3 74.8 72.0
Net investment income.......................... 41.7 39.8 36.0
Realized investment gains...................... 0.7 1.4 0.5
Income before income taxes..................... 19.1 17.4 12.3
Net income before realized investment gains.... 12.1 10.4 7.7
Net income..................................... 12.5 11.2 8.0
OPERATING STATISTICS:
Life insurance in force:
Ordinary life................................ $ 9,682 $ 9,304 $ 8,857
Group life................................... 963 931 850
Total...................................... 10,645 10,235 9,707
Number of policies in force:
Ordinary life................................ 199,031 198,541 197,131
Group life................................... 55,525 53,225 49,551
Total...................................... 254,556 251,766 246,682
Average face amount in force (in dollars):
Ordinary life................................ $ 48,650 $ 46,900 $ 44,900
Group life................................... 17,350 17,500 17,150
Total...................................... 41,800 40,650 39,350
Persistency rate (ordinary life insurance in
force)........................................ 92.0% 92.2% 92.1%
Lapse ratio (ordinary life insurance in force). 8.0% 7.8% 7.9%
Ordinary life insurance terminated due to
death, surrender, lapse or other:
Face amount of insurance surrendered or
lapsed...................................... $ 862.1 $ 808.1 $ 780.5
Number of policies......................... 9,660 9,380 9,888
Amount of death claims....................... $ 22.4 $ 19.3 $ 19.6
Number of death claims..................... 1,305 1,166 1,211

Acquired Immune Deficiency Syndrome ("AIDS") is expected to affect mortality
adversely for the life insurance industry although the extent of the impact
cannot be predicted at this time. Where permitted by law, the Company has
responded by considering AIDS information in underwriting and pricing
decisions. From 1992 through 1996, the Company has paid $3.6 million in death
benefits under 95 individual life policies due to known AIDS-related deaths,
representing 4% of total death benefits paid during this period.

INVESTMENTS

The Company's investments are selected to balance the objectives of
minimizing interest rate exposure, providing a high current yield and
protecting principal. These objectives are implemented through a portfolio
that emphasizes high quality investment grade, publicly traded bonds. When
impairment of the value of an investment is considered other than temporary,
the decrease in value is recorded as an adjustment to the valuation reserve
and a new cost basis is established. At December 31, 1996, investments in non-
investment grade securities represented 5.1% of total investments. There are
no significant investments in mortgage loans and real estate or privately
placed securities.

The Company's investments are managed by outside managers and advisors which
follow investment guidelines established by the Company. The Company has
separate investment strategies and guidelines for its property and casualty
assets and for its life and annuity assets, which recognize different
characteristics of the associated insurance liabilities, as well as different
tax and regulatory environments. The Company manages interest rate exposure
for its portfolios through asset/liability management techniques that attempt
to match the duration of the assets with the duration of the liabilities under
insurance policies. Duration of assets and liabilities will generally differ
only because of opportunities to significantly increase yields or because
policy values are not interest-sensitive, as in the property and casualty
segment.

The investments of each insurance subsidiary must comply with the insurance
laws of such insurance subsidiary's domiciliary state. These laws prescribe
the type and amount of investments that may be made by insurance companies. In
general, these laws permit investments, within specified limits and subject to
certain qualifications, in federal, state and municipal obligations, corporate
bonds, preferred stocks, common stocks, real estate mortgages and real estate.

The following table sets forth the carrying and market values of the
Company's investment portfolio as of December 31, 1996:

INVESTMENT PORTFOLIO
(Dollars in millions)

PERCENTAGE CARRYING VALUE
OF TOTAL ------------------------------
CARRYING LIFE AND PROPERTY AND AMORTIZED
VALUE TOTAL ANNUITY CASUALTY COST
---------- -------- -------- ------------ ---------

PUBLICLY TRADED FIXED
MATURITY SECURITIES AND
CASH EQUIVALENTS:
U.S. government and
agency obligations(1):
Mortgage-backed
securities........... 23.5% $ 654.0 $ 503.9 $150.1 $ 644.2
Other................. 9.3% 259.5 227.0 32.5 257.5
Investment grade
corporate and public
utility bonds.......... 37.3% 1,039.4 880.0 159.4 1,020.5
Municipal bonds......... 8.3% 230.1 20.4 209.7 221.9
Other mortgage-backed
securities............. 10.3% 285.7 232.0 53.7 282.6
Non-investment grade
corporate and public
utility bonds(2)....... 5.0% 140.6 105.2 35.4 134.8
Foreign government
bonds.................. 1.3% 36.0 36.0 - 34.7
Short-term
investments(3)......... 1.3% 36.9 12.8 24.1 36.9
----- -------- -------- ------ --------
Total publicly
traded securities.. 96.3% 2,682.2 2,017.3 664.9 2,633.1
----- -------- -------- ------ --------
OTHER INVESTMENTS:
Investment grade private
placements(4).......... 0.4% 11.5 11.1 0.4 10.8
Non-investment grade
private
placements(2)(4)....... 0.1% 1.7 1.5 0.2 2.1
Mortgage loans and real
estate(5).............. 1.6% 43.0 43.0 - 43.0
Policy loans and other.. 1.6% 45.9 44.1 1.8 45.9
----- -------- -------- ------ --------
Total other
investments........ 3.7% 102.1 99.7 2.4 101.8
----- -------- -------- ------ --------
Total
investments(6)..... 100.0% $2,784.3 $2,117.0 $667.3 $2,734.9
===== ======== ======== ====== ========

- --------
(1) Includes $468.2 million market value of investments guaranteed by the full
faith and credit of the United States government and $445.3 million market
value of federally sponsored agency securities.
(continued on next page)

INVESTMENT PORTFOLIO--(CONTINUED)
- --------
(2) A non-investment grade rating is assigned to a security when it is
acquired, primarily on the basis of the Standard & Poor's Corporation
("S&P") rating for such security, or if there is no S&P rating, the
Moody's Investors Service, Inc. ("Moody's") rating for such security, or
if there is no S&P or Moody's rating, the National Association of
Insurance Commissioners (the "NAIC") rating for such security.
(3) Short-term investments mature within one year of being acquired and are
carried at cost, which approximates market value. Short-term investments
include $27.8 million in a money market fund rated "AAA" (S&P or its
equivalent), $4.2 million in a Federal National Mortgage Association Note,
$2.5 million in a Federal Home Loan Mortgage Corporation Note, $2.3
million in a Federal Home Loan Bank Discount Note and $0.1 million in
certificates of deposit.
(4) Market values for private placements are estimated by the Company with the
assistance of its investment advisors.
(5) Mortgage loans are carried at amortized cost or unpaid principal balance
less valuation reserves and real estate acquired in the settlement of debt
is carried at the lower of cost or market. Carrying value is net of a $2.6
million valuation reserve for anticipated losses.
(6) Approximately 5% of the Company's investment portfolio, having a carrying
value of $145.4 million as of December 31, 1996, consisted of securities
with some form of credit support, such as insurance. All of these
securities have the highest investment grade rating.

Fixed Maturity Securities

The following table sets forth the composition of the Company's fixed
maturity securities portfolio by rating as of December 31, 1996:

RATING OF FIXED MATURITY SECURITIES(1)
(Dollars in millions)

PERCENT
OF TOTAL
CARRYING CARRYING AMORTIZED
VALUE VALUE COST
-------- -------- ---------

AAA.............................................. 46.4% $1,233.0 $1,215.9
AA............................................... 9.4 251.0 244.2
A................................................ 22.3 593.2 579.8
BBB.............................................. 16.4 435.8 429.1
BB............................................... 1.4 36.4 37.3
B................................................ 3.7 97.6 91.4
CCC or lower..................................... - 0.6 0.6
Not rated(2)..................................... 0.4 10.9 10.8
----- -------- --------
Total.......................................... 100.0% $2,658.5 $2,609.1
===== ======== ========

- --------
(1) Ratings are as assigned primarily by S&P when available, with remaining
ratings as assigned on an equivalent basis by 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 is comprised primarily of private placement securities not
rated by either S&P or Moody's. The NAIC has rated 71.4% of these private
placements as investment grade. $0.9 million of the remaining $1.7 million
of private placements were rated as investment grade by the NAIC in 1995
and are under review for the assignment of a current rating.

At December 31, 1996, 34.4% of the Company's fixed maturity securities
portfolio was scheduled to mature within the next 5 years. Mortgage-backed
securities, including mortgage-backed securities of United States governmental
agencies, represented 33.8% of the total investment portfolio at December 31,
1996. These securities typically have effective maturities shorter than their
scheduled maturities due to unscheduled prepayments on the underlying
mortgages. Mortgages are prepaid for a variety of reasons, including sales of
existing homes, interest rate changes over time that encourage homeowners to
refinance their mortgages and defaults by homeowners on mortgages that are
then paid by guarantors.

For financial reporting purposes, the Company has classified the entire
fixed maturity portfolio as "available for sale". Fixed maturities to be held
for indefinite periods of time and not intended to be held to maturity are
classified as available for sale and carried at market value. Fixed maturities
held for indefinite periods of time include securities that management intends
to use as part of its asset/liability management strategy and that may be sold
in response to changes in interest rates, resultant prepayment risk and other
factors related to interest rate and resultant prepayment risk.

CASH FLOW

As a holding company, HMEC conducts its principal operations through its
subsidiaries. Payment by HMEC of principal and interest with respect to HMEC's
indebtedness, and payment by HMEC of dividends to its shareholders, are
dependent upon the ability of its insurance subsidiaries to pay cash dividends
or make other cash payments to HMEC, including tax payments pursuant to tax
sharing agreements. Restrictions on the subsidiaries' ability to pay dividends
or to make other cash payments to HMEC may materially affect HMEC's ability to
pay principal and interest on its indebtedness and dividends on its common
stock.

The ability of the insurance subsidiaries to pay cash dividends to HMEC is
subject to state insurance department regulations which generally permit
dividends to be paid for any 12 month period in amounts equal to the greater
of (i) net gain from operations in the case of a life insurance company or net
income in the case of all other insurance companies for the preceding calendar
year or (ii) 10% of surplus as of the preceding December 31st. Any dividend in
excess of these levels requires the prior approval of the Director or
Commissioner of the state insurance department of the state in which the
dividend paying insurance subsidiary is domiciled. The aggregate amount of
dividends that may be paid in 1997 from all of HMEC's insurance subsidiaries
without prior regulatory approval is approximately $89 million.

Notwithstanding the foregoing, if insurance regulators otherwise determine
that payment of a dividend or any other payment to an affiliate would be
detrimental to an insurance subsidiary's policyholders or creditors, because
of the financial condition of the insurance subsidiary or otherwise, the
regulators may block dividends or other payments to affiliates that would
otherwise be permitted without prior approval.

The insurance subsidiaries' sources of funds consist primarily of premiums
and contract fees, investment income and proceeds from sales and redemption of
investments. Such funds are applied primarily to payment of claims, insurance
operating expenses, income taxes and the purchase of investments, as well as
dividends and other payments to HMEC.

COMPETITION

The Company operates in a highly competitive environment. There are numerous
insurance companies that compete with the Company, although management
believes that the Company is one of the few multi-line insurance companies to
target teachers as its primary business nationally. In some specific instances
and geographic locations competitors have specifically targeted the teacher
marketplace with specialized products and programs. The Company competes in
its target market with a number of national providers of personal automobile
and homeowners insurance and life insurance.

For annuity business, the marketplace has begun to see a competitive impact
from new entrants such as mutual funds and banks into the tax deferred annuity
products market. Among the major national providers of annuities to educators,
Variable Annuity Life Insurance Company, a subsidiary of American General
Corporation, and Nationwide are among the Company's major tax-qualified
annuity competitors.

The Company competes with a number of national providers of automobile and
homeowners insurance, such as State Farm, Allstate and Nationwide, and several
regional companies. The Company also competes for automobile business with
certain direct marketing companies, such as 20th Century, American
International Group (AIG) and GEICO.

The insurance industry consists of a large number of insurance companies,
some of which have substantially greater financial resources, more diversified
product lines, and lower cost marketing approaches, such as direct marketing,
mail and telemarketing, compared to the Company. The Company believes that the
principal competitive factors in the sale of property and casualty insurance
products are price, service and name recognition. The Company believes that the
principal competitive factors in the sale of life insurance and annuity
products are product features, perceived stability of the insurer, service,
name recognition and price.

INSURANCE FINANCIAL RATINGS

The Company believes that the ratings assigned to its principal insurance
subsidiaries by Standard & Poor's, A.M. Best and Duff & Phelps Credit Rating
Co. ("Duff & Phelps") contribute to the Company's competitiveness.

Each of HMEC's principal insurance subsidiaries is rated "AA- (Excellent)"
for claims-paying ability by Standard & Poor's. The S&P claims-paying ability
ratings definitions from Standard & Poor's Internet Website, February 1997, are
as follows. A Standard & Poor's insurance claims-paying ability rating is an
opinion of an operating insurance company's financial capacity to meet the
obligations of its insurance policies in accordance with their terms. This
opinion is not specific to any particular insurance policy or contract, nor
does it address the suitability of a particular insurance policy or contract
for a specific purpose or purchaser. Furthermore, the opinion does not take
into account deductibles, surrender or cancellation penalties, the timeliness
of payment, or the likelihood of the use of a defense such as fraud to deny
claims. Claims-paying ability ratings do not refer to an insurer's ability to
meet nonpolicy obligations (i.e., debt contracts). The claims-paying ability
ratings are based on current information furnished by the insurance company or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information or based on other
circumstances. Claims-paying ability ratings are divided into two broad
classifications. Rating categories from "AAA" to "BBB" are classified as
"secure" claims-paying ability ratings and are used to indicate insurers whose
financial capacity to meet policyholder obligations is viewed, on balance, as
sound. Among factors considered in placing insurers within the spectrum of
"secure" rating categories is the time frame within which policyholder security
could be damaged by adverse economic and underwriting conditions. That time
frame grows shorter as ratings move down the "secure" rating scale. Rating
categories from "BB" to "CCC" are classified as "vulnerable" claims-paying
ability ratings and are used to indicate insurers whose financial capacity to
meet policyholder obligations is viewed as vulnerable to adverse economic and
underwriting conditions. Claims-paying ability ratings are assigned at the
request of the insurers and based on extensive quantitative and qualitative
analysis including consideration of ownership and support factors, if
applicable. The rating process includes meetings with insurers' management.
Plus (+) and minus (-) signs show relative standing within a category; they do
not suggest likely upgrades or downgrades. Insurers rated "AAA" offer superior
financial security on an absolute and relative basis. Capacity to meet
policyholder obligations is overwhelming under a variety of economic and
underwriting conditions. Insurers rated "AA" offer excellent financial
security. Capacity to meet policyholder obligations is strong under a variety
of economic and underwriting conditions.

HMIC, TIC and Allegiance are rated "A+ (Superior)" and HMLIC is rated "A
(Excellent)" by A.M. Best. Ratings for the industry range from "A++ (Superior)"
to "F (In Liquidation)", and some companies are not rated. Publications of A.M.
Best indicate that the "A++ and A+ (Superior)" ratings are assigned to those
companies that in A.M. Best's opinion have demonstrated superior overall
performance when compared to the standards established by A.M. Best and have a
very strong ability to meet their obligations to policyholders over a long
period of time. The "A and A- (Excellent)" ratings are assigned to those
companies that in A.M. Best's opinion have demonstrated excellent overall
performance when compared to the standards established by A.M. Best and have a
strong ability to meet their obligations to policyholders over a long period of
time. In evaluating a company's financial and operating

performance, A.M. Best reviews the company's profitability, leverage and
liquidity as well as the company's spread of risk, the quality and
appropriateness of its reinsurance, the quality and diversification of its
assets, the adequacy of its policy or loss reserves, the adequacy of its
surplus, its capital structure, the experience and objectives of its
management, and market presence. A.M. Best's ratings are based on factors
relevant to policyholders, agents, insurance brokers and intermediaries and
are not directed to the protection of investors.

HMLIC is rated "AA" for claims paying ability by Duff & Phelps. Duff &
Phelps' life insurance company Claims Paying Ability ("CPA") ratings provide
analytical insight into the ability of a company to meet its policyholder
obligations in a timely manner. According to Duff & Phelps "Claims Paying
Ability Rating Methodology for Life Insurers," 1995, the approach used to
analyze an insurance company's claims paying ability is prospective in nature.
The long duration of liabilities of the typical life insurance company
requires a forward-looking analysis of the risks the company faces. The
analytical process stresses not only the current financial position of the
company, but puts considerable weight on the company's future direction and
expected financial performance. A key part of the overall CPA rating process
is an annual meeting with the senior executives who set the future direction
of the company. Regular contact with company representatives throughout the
year supplements this process. The process used to determine a CPA rating is
comprehensive and combines quantitative and qualitative analysis of both
public and non-public information. The CPA ratings use a scale of "AAA
(Highest claims paying ability--the risk factors are negligible)" through "DD
(Company is under an order of liquidation)." The CPA rating of "AA" is
assigned for very high claims paying ability. The protection factors are
strong; risk is modest, but may vary slightly over time due to economic and/or
underwriting conditions. A CPA rating only indicates an insurance company's
ability to make timely payment of policyholder obligations. It does not refer
to the ability of either the rated company or its affiliates to meet
nonpolicyholder obligations, such as debt repayment or payment of preferred
dividends. The most important factors considered in the qualitative analysis
are: economic fundamentals of the company's principal insurance lines, the
company's competitive position, management's capability, the relationship of
the rated entity to either parent, affiliate, or subsidiary, asset/liability
and liquidity management practices and investment quality and management.

REGULATION

General Regulation at State Level

As an insurance holding company, HMEC is subject to regulation by the states
in which its insurance subsidiaries are domiciled or transact business. Most
states have enacted legislation that requires each insurance company in a
holding company system to register with the insurance regulatory authority of
its state of domicile and furnish to it financial and other information
concerning the operations of companies within the holding company system that
may materially affect the operations, management or financial condition of the
insurers within the system. All transactions within a holding company system
affecting insurers must be fair and equitable and the insurer's policyholder
surplus following any transaction must be both reasonable in relation to its
outstanding liabilities and adequate for its needs. Notice to applicable
regulators is required prior to the consummation of certain transactions
affecting insurance subsidiaries of the holding company system.

In addition, the laws of the various states establish regulatory agencies
with broad administrative powers to grant and revoke licenses to transact
business, regulate trade practices, license agents, require statutory
financial statements, and prescribe the type and amount of investments
permitted. See "Business--Investments" for discussion of investment
restrictions or limitations imposed upon the Company under applicable
insurance laws and regulations.

The NAIC annually calculates financial ratios to assist state insurance
regulators in monitoring the financial condition of insurance companies. A
"usual range" of results for each ratio is used as a benchmark. Separate
ratios are established for property and casualty and life insurance companies.
Departure from the usual range in any of the ratios could lead to inquiries
from individual state

regulators, and further investigation or other actions may result. In 1995, no
unusual ratios were reported by the principal insurance subsidiaries of HMEC.

As part of their regulatory oversight process, state insurance departments
routinely conduct detailed financial examinations (generally not more
frequently than once every three years) of the books, records and accounts of
insurance companies domiciled in their states. Typically, such examinations
are conducted concurrently by two or three states under guidelines promulgated
by the NAIC. The last financial examinations for the Company's principal
insurance subsidiaries, HMLIC, HMIC and TIC, occurred during 1993 for the
period ended December 31, 1992. A financial examination of Allegiance was
completed for the period ended December 31, 1994. Management believes that
HMEC and its subsidiaries are in compliance in all material respects with all
applicable regulatory requirements.

The NAIC has adopted risk-based capital guidelines to evaluate the adequacy
of statutory capital and surplus in relation to an insurance company's risks.
State insurance regulations prohibit insurance companies from making any
public statements or representations with regard to their risk-based capital
levels. Based on current guidelines, the risk-based capital statutory
requirements will have no negative regulatory impact on the Company's
insurance subsidiaries.

Assessments Against Insurers

Under insurance insolvency or guaranty laws in most states in which the
Company operates, insurers doing business therein can be assessed for
policyholder losses related to insurance company insolvencies. The amount and
timing of any future assessments on the Company under these laws cannot be
reasonably estimated and are beyond the control of the Company. Most of these
laws do provide, however, that an assessment may be excused or deferred if it
would threaten an insurer's financial strength, and most assessments paid by
the Company pursuant to these laws may be used as credits for a portion of the
Company's premium taxes. The Company paid $0.8 million, $0.9 million and $1.2
million in connection with insurer insolvency proceedings for the years ended
December 31, 1996, 1995 and 1994, respectively, of which $0.6 million, $0.9
million and $1.2 million for the same periods, respectively, is recoverable as
premium tax credits in future periods.

Mandatory Insurance Facilities

The Company is required to participate in various mandatory insurance
facilities in amounts related to the amount of the Company's direct writings
in the applicable state. In 1996, the Company reflected a net loss from
participation in such mandatory pools and underwriting associations of $1.0
million before federal income taxes.

California Earthquake Authority

The California Earthquake Authority ("CEA") was formed by the California
Legislature to encourage companies to write residential property insurance in
California and began operating in December 1996. All companies which write
residential property insurance in California are also required to offer
earthquake coverage. The CEA will operate as an insurance company providing
residential property earthquake coverage under policies sold by companies
which have chosen to participate in the CEA. The participating companies will
fund the CEA and share in earthquake losses covered by the CEA in proportion
to their market share.

The Company has not joined the CEA. The Company's exposure to losses from
earthquakes is managed through its underwriting standards, its earthquake
policy coverage limits and deductible levels, and the geographic distribution
of its business, as well as its reinsurance program. After reviewing the
exposure to earthquake losses from its own policies and from participation in
the CEA, management believes it is in the Company's best economic interest to
offer earthquake coverage directly to its homeowners policyholders. See
"Property and Casualty--Property and Casualty Reinsurance."

Regulation at Federal Level

Although the federal government generally does not directly regulate the
insurance business, federal initiatives often impact the insurance business.
Current and proposed federal measures which may significantly affect the
insurance business include employee benefits regulation, controls on the costs
of medical care, medical entitlement programs such as Medicare, changes to the
insurance industry anti-trust exemption, minimum solvency requirements and
allowing national banks to engage in the insurance, annuity and mutual fund
businesses.

Federal income taxation of the build-up of cash value within a life insurance
policy or an annuity contract could have a material adverse impact on the
Company's ability to market and sell such products. Various legislation to this
effect has been proposed in the past, but has not been enacted. Although no
such legislative proposals are known to exist at this time, such proposals may
be made again in the future.

The variable annuities underwritten by HMLIC and the mutual funds used as
investment vehicles for those products are regulated by the Securities and
Exchange Commission (the "Commission"). Horace Mann Investors, Inc., the
broker-dealer subsidiary of HMEC, performs certain management functions for the
mutual funds and also is regulated by the Commission and the National
Association of Securities Dealers.

EMPLOYEES

At December 31, 1996, the Company had approximately 2,700 employees,
including 1,022 full-time agents. The Company has no collective bargaining
agreement with any employees.

ITEM 2. PROPERTIES

HMEC's home office property at 1 Horace Mann Plaza in Springfield, Illinois
consists of an office building totaling approximately 230,000 square feet. HMEC
also owns buildings with an aggregate of approximately 209,000 square feet at
other locations in Springfield. These properties are adequate and suitable for
the Company's current and anticipated future needs.

ITEM 3. LEGAL PROCEEDINGS

The Company is not currently party to any material pending legal proceedings
other than ordinary routine litigation incidental to its business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

HMEC's common stock began trading on the New York Stock Exchange ("NYSE") in
November 1991 under the symbol of HMN at a price of $18 per share. The
following table sets forth the high and low sales prices of the common stock on
the NYSE Composite Tape and the cash dividends paid per share of common stock
during the periods indicated.

MARKET PRICE
--------------- DIVIDEND
FISCAL PERIOD HIGH LOW PAID
------------- ------- ------- --------

1996:
Fourth Quarter.................................... $40 3/4 $31 1/2 $0.11
Third Quarter..................................... 35 7/8 29 1/8 0.11
Second Quarter.................................... 33 1/2 28 0.11
First Quarter..................................... 35 3/4 29 1/4 0.11
1995:
Fourth Quarter.................................... $31 1/4 $25 3/4 $0.09
Third Quarter..................................... 29 1/4 22 5/8 0.09
Second Quarter.................................... 24 1/2 20 1/8 0.09
First Quarter..................................... 24 21 1/4 0.09

As of March 1, 1997, the approximate number of holders of common stock was
4,500.

In February 1997, the Board of Directors authorized the fifth consecutive
annual increase in the Company's dividend. The regular quarterly dividend
increased by 23% to $0.135 per share. The payment of dividends in the future is
subject to the discretion of the Board of Directors and will depend upon
general business conditions, legal restrictions and other factors the Board of
Directors of HMEC may deem to be relevant.

In February 1997, the Company's Board of Directors adopted a repurchase
program for shares of the Company's common stock of up to $100 million. Based
on the market price of the Company's common shares at the time the Board
adopted this program, $100 million would represent approximately 9% of the
Company's outstanding shares. Shares of common stock may be purchased from time
to time through open market and private purchases, as available. The repurchase
program will be financed through use of cash and, if needed, the existing bank
line of credit.

As an insurance holding company, HMEC depends on dividends and other
permitted payments from its insurance subsidiaries to pay cash dividends to
shareholders of HMEC. The payment of dividends and such other payments to HMEC
by its insurance subsidiaries is restricted by the laws of each subsidiary's
state of domicile, and insurance regulators have authority in certain
circumstances to block payments of dividends and other amounts by the insurance
subsidiaries that would otherwise be permitted without regulatory approval. See
"Business--Cash Flow" and "Business--Regulation."

ITEM 6. SELECTED FINANCIAL DATA

The information required by Item 301 of Regulation S-K is contained in the
table in Item 1--"Business--Selected Historical Consolidated Financial Data."

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The information required by Item 303 of Regulation S-K is contained in the
Index to Financial Information on page F-1 herein.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's consolidated financial statements, the report of its
independent accountants and the selected quarterly financial data required by
Item 302 of Regulation S-K are contained in the Index to Financial Information
on page F-1 herein.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Items 401 and 405 of Regulation S-K is
incorporated by reference to the Company's Proxy Statement for the 1997 Annual
Meeting of Shareholders.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 402 of Regulation S-K is incorporated by
reference to the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 403 of Regulation S-K is incorporated by
reference to the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 404 of Regulation S-K is incorporated by
reference to the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) The following consolidated financial statements of the Company listed
below are contained in the Index to Financial Information on Page F-1 herein:

Consolidated Balance Sheets as of December 31, 1996, 1995 and 1994.

Consolidated Statements of Operations for the Years Ended December 31,
1996, 1995 and 1994.

Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994

Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994.

(a)(2) The following consolidated financial statement schedules of the
Company listed below are contained in the Index to Financial Information on
page F-1 herein:

Schedule I--Summary of Investments--Other than Investments in Related
Parties.

Schedule II--Condensed Financial Information of Registrant.

Schedules III and VI Combined--Supplementary Insurance Information and
Supplemental Information Concerning Property and Casualty Insurance
Operations.

Schedule IV--Reinsurance.

(a)(3) The following items are filed as Exhibits. Management contracts and
compensatory plans are indicated by an asterisk (*).

EXHIBIT
NO. DESCRIPTION
- ------- -----------
(3) Articles of incorporation and bylaws:

3.1 Restated Certificate of Incorporation of HMEC, filed with the Delaware
Secretary of State on October 6, 1989, incorporated by reference to Exhibit
3.1 to HMEC's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996, filed with the Securities and Exchange Commission on November 14,
1996.
3.2 Certificate of Amendment to Restated Certificate of Incorporation of HMEC,
filed with the Delaware Secretary of State on October 18, 1991, incorporated
by reference to Exhibit 3.2 to HMEC's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996, filed with the Securities and Exchange
Commission on November 14, 1996.
3.3 Certificate of Amendment to Restated Certificate of Incorporation of HMEC,
filed with the Delaware Secretary of State on August 23, 1995, incorporated
by reference to Exhibit 3.3 to HMEC's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996, filed with the Securities and Exchange
Commission on November 14, 1996.

EXHIBIT
NO. DESCRIPTION
- ------- -----------

3.4 Certificate of Amendment to Restated Certificate of Incorporation of HMEC,
filed with the Delaware Secretary of State on September 23, 1996,
incorporated by reference to Exhibit 3.4 to HMEC's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996, filed with the Securities and
Exchange Commission on November 14, 1996.
3.5 Form of Certificate for shares of Common Stock, $0.001 par value per share,
of HMEC, incorporated by reference to Exhibit 4.5 to HMEC's Registration
Statement on Form S-3 (Registration No. 33-53118) filed with the Securities
and Exchange Commission on October 9, 1992.
3.6 Bylaws of HMEC, incorporated by reference to Exhibit 4.6 to HMEC's
Registration Statement on Form S-3 (Registration No. 33-80059) filed with
the Securities and Exchange Commission on December 6, 1995.

(4) Instruments defining the rights of security holders, including indentures:

4.1 Warrant Agreement dated as of August 29, 1989 (the "Warrant Agreement"),
between HMEC (as successor to HME Acquisition Corporation) and Bankers Trust
Company, as warrant agent (the "Warrant Agent"), with regard to Warrants to
Purchase Common Stock, incorporated by reference to Exhibit 4.6 to HMEC's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1989 (the
"September 1989 Form 10-Q").
4.2 Supplemental Warrant Agreement dated as of August 29, 1989 to the Warrant
Agreement, between HMEC and the Warrant Agent, incorporated by reference to
Exhibit 4.7 to the September 1989 Form 10-Q.
4.3 Form of Warrant (included in Exhibit 4.1).
4.4 Indenture dated as of January 17, 1996, between HMEC and U.S. Trust Company
of California, N.A. as trustee, with regard to HMEC's 6 5/8% Senior Notes
Due 2006, incorporated by reference to Exhibit 4.4 to HMEC's Annual Report
on Form 10-K for the year ended December 31, 1995, filed with the Securities
and Exchange Commission on March 13, 1996.
4.5 Form of 6 5/8% Senior Notes Due 2006 (included in Exhibit 4.4).
4.6 Certificate of Designations for HMEC Series A Cumulative Preferred Stock
(included in Exhibit 10.12).

(10) Material contracts:

10.1 Credit Agreement dated as of December 31, 1996 (the "Bank Credit Facility")
among HMEC, certain banks named therein and Bank of America National Trust
and Savings Association, as administrative agent (the "Agent").
10.2* Stock Subscription Agreement among HMEC (as successor to HME Holdings,
Inc.), The Fulcrum III Limited Partnership, The Second Fulcrum III Limited
Partnership and each of the Management Investors, incorporated by reference
to Exhibit 10.17 to HMEC's Annual Report on Form 10-K for the year ended
December 31, 1989, filed with the Securities and Exchange Commission on
April 2, 1990.
10.3* Horace Mann Educators Corporation Deferred Equity Compensation Plan for
Directors, incorporated by reference to Exhibit 10.1 to HMEC's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, filed with the
Securities and Exchange Commission on November 14, 1996.
10.4* Horace Mann Educators Corporation 1991 Stock Incentive Plan, incorporated by
reference to Exhibit 10.4 to HMEC's Annual Report on Form 10-K for the year
ended December 31, 1991, filed with the Securities and Exchange Commission
on March 27, 1992.

EXHIBIT
NO. DESCRIPTION
- ------- -----------

10.4(a)* Specimen Employee Stock Option Agreement under the Horace Mann Educators
Corporation 1991 Stock Incentive Plan, incorporated by reference to Exhibit
10.5 to HMEC's Annual Report on Form 10-K for the year ended December 31,
1991, filed with the Securities and Exchange Commission on March 27, 1992.
10.4(b)* Specimen Director Stock Option Agreement under the Horace Mann Educators
Corporation 1991 Stock Incentive Plan, incorporated by reference to Exhibit
10.6 to HMEC's Annual Report on Form 10-K for the year ended December 31,
1991, filed with the Securities and Exchange Commission on March 27, 1992.
10.4(c)* Amendment to Horace Mann Educators Corporation 1991 Stock Incentive Plan,
dated September 11, 1996, incorporated by reference to Exhibit 10.2(c) to
HMEC's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, filed with the Securities and Exchange Commission on November 14,
1996.
10.5* Severance Agreements between HMEC and certain officers of HMEC, incorporated
by reference to Exhibit 10.9 to HMEC's Annual Report on Form 10-K for the
year ended December 31, 1993, filed with the Securities and Exchange
Commission on March 31, 1994.
10.6* Specimen Continuation of Employment Agreement between HMEC and certain
officers, incorporated by reference to Exhibit 10.21(a) to HMEC's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994, filed with the
Securities and Exchange Commission on November 14, 1994.
10.6(a)* Schedule of Continuation of Employment Agreements between HMEC and certain
officers, incorporated by reference to Exhibit 10.21(b) to HMEC's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994, filed with the
Securities and Exchange Commission on November 14, 1994.
10.7* Horace Mann Incentive Compensation Program.
10.8* Horace Mann Supplemental Employee Retirement Plan, incorporated by reference
to Exhibit 10.19(a) to HMEC's Annual Report on Form 10-K for the year ended
December 31, 1992, filed with the Securities and Exchange Commission on
March 22, 1993.
10.9* Form of Horace Mann Executive Supplemental Employee Retirement Plan,
incorporated by reference to Exhibit 10.12 to HMEC's Annual Report on Form
10-K for the year ended December 31, 1993, filed with the Securities and
Exchange Commission on March 31, 1994.
10.10* Agreement entered by and between HMEC and Richard Stilwell as of December
22, 1995, incorporated by reference to Exhibit 10.11 to HMEC's Annual Report
on Form 10-K for the year ended December 31, 1995, filed with the Securities
and Exchange Commission on March 13, 1996.
10.11* Agreement entered by and between HMEC and Paul J. Kardos as of August 1,
1996, incorporated by reference to Exhibit 10.1 to HMEC's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996, filed with the Securities
and Exchange Commission on August 13, 1996.
10.12 Catastrophe Equity Securities Issuance Option Agreement entered by and
between HMEC and Centre Reinsurance, dated February 15, 1997 and related
letter from Centre Reinsurance.

(11) Statement re computation of per share earnings.

(12) Statement regarding computation of ratios.

(21) Subsidiaries of HMEC.

(23) Consent of KPMG Peat Marwick LLP.

(27) Financial Data Schedule.

(28) Information from reports furnished to state insurance regulatory
authorities:

28.1(p) 1996 Combined Annual Statement of HMEC's property and casualty subsidiaries,
Schedule P, Analysis of Losses and Loss Expenses, filed with the Securities
and Exchange Commission in paper format under cover of Form SE on March 19,
1997.

(b) No Reports on Form 8-K were filed by HMEC during the fourth quarter of
1996.

(d) See list of financial statement schedules in this Item 14.

Copies of Exhibits may be obtained by writing to Investor Relations, Horace
Mann Educators Corporation, 1 Horace Mann Plaza, Springfield, Illinois 62715-
0001. Persons requesting copies will be charged a reasonable fee to cover
reproduction and mailing expenses.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Horace Mann Educators Corporation has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.

HORACE MANN EDUCATORS CORPORATION

/s/ Paul J. Kardos
By: _________________________________
Paul J. Kardos
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Horace Mann
Educators Corporation and in the capacities and on the date(s) indicated.

Principal Executive Officer: Directors:

/s/ Paul J. Kardos /s/ Ralph S. Saul
___________________________________________ ___________________________________________
Paul J. Kardos Ralph S. Saul, Chairman of the Board of
President, Chief Executive Officer Directors
and a Director /s/ William W. Abbott
___________________________________________
Principal Financial Officer: William W. Abbott, Director
/s/ Leonard I. Green
/s/ Larry K. Becker ___________________________________________
___________________________________________ Leonard I. Green, Director
Larry K. Becker /s/ Donald G. Heth
Executive Vice President and ___________________________________________
Chief Financial Officer Donald G. Heth, Director
/s/ Dr. Emita B. Hill
Principal Accounting Officer: ___________________________________________
Dr. Emita B. Hill, Director
/s/ Roger W. Fisher /s/ Jeffrey L. Morby
___________________________________________ ___________________________________________
Roger W. Fisher Jeffrey L. Morby, Director
Vice President and Controller /s/ Shaun F. O'Malley
___________________________________________
Shaun F. O'Malley, Director
/s/ William J. Schoen
___________________________________________
William J. Schoen, Director

Dated: March 25, 1997.

HORACE MANN EDUCATORS CORPORATION

INDEX TO FINANCIAL INFORMATION

PAGE
----

Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... F-2
Report of Management Responsibility for Financial Statements.............. F-13
Independent Auditors' Report.............................................. F-14
Consolidated Balance Sheets............................................... F-15
Consolidated Statements of Operations..................................... F-16
Consolidated Statements of Changes in Shareholders' Equity................ F-17
Consolidated Statements of Cash Flows..................................... F-18
Notes to Consolidated Financial Statements................................ F-19
Financial Statement Schedules............................................. F-44

F-1

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING INFORMATION

Statements made in the following discussion that state the Company's or
management's intentions, hopes, beliefs, expectations or predictions of the
future are forward-looking statements. It is important to note that the
Company's actual results could differ materially from those projected in such
forward-looking statements due to, among other risks and uncertainties
inherent in the Company's business, the following important factors:

. Changes in the composition of the Company's assets and liabilities
through acquisitions or divestitures.

. Prevailing interest rate levels, including the impact of interest rates
on (i) unrealized gains and losses on the Company's investment portfolio
and the related after-tax effect on the Company's shareholders' equity
and total capital and (ii) the book yield of the Company's investment
portfolio.

. The impact of fluctuations in the capital markets on the Company's
ability to refinance outstanding indebtedness or repurchase shares of the
Company's outstanding common stock.

. The frequency and severity of catastrophes such as hurricanes,
earthquakes and storms, and the ability of the Company to maintain a
favorable catastrophe reinsurance program.

. The Company's ability to develop and expand its agency force and its
direct product distribution systems, as well as the Company's ability to
maintain and secure product sponsorships by local, state and national
education associations.

. The competitive impact of new entrants such as mutual funds and banks
into the tax deferred annuity products markets, and the Company's ability
to profitably expand its property and casualty business in highly
competitive environments.

. Changes in insurance regulations, including (i) those effecting the
ability of the Company's insurance subsidiaries to distribute cash to the
holding company and (ii) those impacting the Company's ability to
profitably write property and casualty insurance policies in one or more
states.

. Changes in federal income tax laws and changes resulting from federal tax
audits effecting corporate tax rates or taxable income, and regulations
changing the relative tax advantages of the Company's life and annuity
products to customers.

. The Company's ability to maintain favorable claims-paying ability
ratings.

. Adverse changes in policyholder mortality and morbidity rates.

DISCONTINUED OPERATIONS

On December 9, 1996, the Company announced its strategic decision to
withdraw from the group medical insurance business over the following two
years. The Company stopped writing new group medical insurance policies in
January 1997 and intends to stop renewing group medical insurance policies in
January 1998. In the following discussions of results of operations, group
medical results are reported separately as discontinued operations for all
years.

YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995

Insurance Premiums and Contract Charges Earned

Insurance premiums and contract charges earned, which excludes annuity and
life contract deposits, increased 3.6% for the year ended December 31, 1996,
compared to 1995.

Insurance premiums written and contract deposits of $704.8 million for the
year ended December 31, 1996 increased 7.8%, compared to $654.0 million for
1995, driven principally by 16.8% growth in annuity deposits. The first annual
premium, of approximately $7 million, for Horace Mann's three year

F-2

contract to provide professional liability insurance for the 2.3 million
members of the National Education Association is included in the Company's
total insurance premiums written and contract deposits for the year ended
December 31, 1996. No such premium was written in 1995. Insurance premiums
written and contract deposits in the Company's primary product lines,
automobile (excluding involuntary), property, annuity and life, increased 7.6%
to $677.7 million for the year ended December 31, 1996, compared to $630.0
million for 1995. Involuntary automobile business includes allocations of
business from state mandatory automobile insurance facilities and assigned risk
business. Involuntary automobile premiums written for the year ended December
31, 1996 decreased 6.3% compared to 1995.

Automobile (excluding involuntary) and homeowners earned premiums increased
2.9% to $390.0 million for the year ended December 31, 1996, compared to $378.9
million for 1995, primarily as a result of a 5.8% increase in automobile
(excluding involuntary) and homeowners policies in force, partially offset by a
0.7% decrease in average premium earned per automobile policy. The 786,000
automobile (excluding involuntary) and homeowners policies in force at December
31, 1996 represented an increase of 43,000 policies since December 31, 1995.

Automobile (excluding involuntary) and homeowners premiums written increased
4.8% to $400.0 million for the year ended December 31, 1996, compared to $381.8
million for 1995. Fourth quarter 1996 premium growth reflected an 8.8% increase
compared to the same period in 1995 reflecting growth in the number of policies
in force including new policies from the Florida state homeowners insurance
pool. For the year ended December 31, 1996, new direct premiums written of
$46.9 million increased 26.4% compared to $37.1 million for last year. Renewal
direct premiums written of $357.0 million for the year ended December 31, 1996
increased 2.2% compared to $349.3 million for 1995.

For the year ended December 31, 1996, life insurance premiums and contract
charges earned were $80.3 million, compared to $74.8 million for 1995,
representing an increase of 7.4%. Life insurance in force on December 31, 1996
increased 4.0% compared to a year earlier. The lapse rate of 8.0% for the year
ended December 31, 1996 increased slightly compared to 7.8% for 1995.

Annuity contract charges earned increased 35.3% to $9.2 million for the year
ended December 31, 1996, compared to $6.8 million for 1995, due to a 40%
increase in variable annuity cash value on deposit. Total annuity deposits
received during the year ended December 31, 1996 increased 16.8% to $166.9
million, compared to $142.9 million for 1995, reflecting a $7.1 million, or
6.2%, increase in scheduled deposits for retirement annuities and a $16.9
million, or 58.6%, increase in single premiums and rollover deposits from other
companies. For the fourth quarter of 1996, annuity deposits received of $44.7
million were 10.9% greater than the same period in 1995 reflecting growth in
single premiums and rollover deposits from other companies which was somewhat
lower than the full year growth rate.

Net Investment Income

Net investment income of $198.6 million for the year ended December 31, 1996
was comparable to 1995. Investments (at amortized cost) increased 2.0%, or
$52.4 million, from December 31, 1995. The pretax yield on average investments
was 7.4% (4.9% after tax) for the year ended December 31, 1996 compared to a
pretax yield of 7.5% (5.0% after tax) for 1995.

Realized Investment Gains and Losses

Realized investment gains were $2.5 million for the year ended December 31,
1996, compared to $8.6 million for 1995.

Benefits, Claims and Settlement Expenses

Total benefits, claims and settlement expenses increased 3.3% to $346.7
million for the year ended December 31, 1996, compared to $335.7 million for
1995.

F-3

Property and casualty claims and settlement expenses were $306.1 million for
the year ended December 31, 1996, compared to $297.1 million for 1995. The
property and casualty loss ratio was 74.1% for the year ended December 31,
1996, compared to 73.5% for 1995. For 1996, higher first quarter losses from
severe winter weather and third quarter losses from hurricanes were partially
offset by continued favorable trends in losses on voluntary automobile
insurance for the year. The provision for losses and loss adjustment expenses
for insured events in prior years decreased by $62.5 million and $55.6 million
for the years ended December 31, 1996 and 1995, respectively. The favorable
loss development results primarily from improving trends in the frequency and
severity of voluntary automobile claims. Catastrophe losses after reinsurance
but before federal income tax benefits for the year ended December 31, 1996
were $20.9 million, compared to catastrophe losses of $13.9 million for 1995.
Hurricane Fran, which occurred during the third quarter of 1996, represented
$8.2 million in losses.

The Company increased its catastrophe reinsurance coverage for 1997. The 1997
reinsurance program covers 95% of catastrophe losses in excess of $7.5 million
up to $65 million for each catastrophe. The Company's catastrophe reinsurance
program will be augmented by a $100 million equity put. This equity put
provides for an option to sell shares of the Company's convertible preferred
stock at a pre-negotiated floating rate in the event of losses from a
catastrophe, individually or in the aggregate, which exceed $65 million.

Life benefits were $40.6 million for the year ended December 31, 1996,
reflecting a 5.2% increase, compared to $38.6 million for 1995. The increase in
life benefits was comparable to the 7.4% increase in life earned premiums.

Interest Credited to Policyholders

Interest credited to policyholders was $95.3 million for the year ended
December 31, 1996, 4.8% more than the $90.9 million interest credited for 1995.
Interest credited to fixed annuity contracts increased 3.0% to $76.7 million
for the year ended December 31, 1996, from $74.5 million for 1995. The increase
reflects a slightly higher average annual interest rate credited of 5.7% for
the year ended December 31, 1996, compared to 5.6% for 1995, and a growth of
fixed rate annuity accumulated deposits of 0.9%.

Life insurance interest credited increased $2.2 million, or 13.4%, to $18.6
million for the year ended December 31, 1996, compared to 1995, primarily as a
result of continued growth in the interest-sensitive whole life insurance
reserves and account balances.

Policy Acquisition and Operating Expenses

Policy acquisition and operating expenses represent the Company's insurance
underwriting expenses. For the year ended December 31, 1996, policy acquisition
and operating expenses of $138.2 million increased $0.6 million, or 0.4%,
compared to $137.6 million for 1995. The 1996 property and casualty expense
ratio improved to 19.4%, four tenths of a percentage point lower than 19.8% for
1995.

Amortization of Intangible Assets

Amortization of intangible assets decreased by $0.5 million to $11.2 million
for the year ended December 31, 1996, compared to $11.7 million for 1995, as a
result of a scheduled decrease in the non-cash amortization of the value of
acquired insurance in force related to the 1989 acquisition of the Company.

Interest Expense

The Company's interest expense of $10.5 million for the year ended December
31, 1996 was $1.1 million, or 9.5%, less than in 1995 as a result of repayments
of borrowings related to the repurchase

F-4

of shares of its common stock during the second quarter of 1995. Interest
expense of $2.5 million for the fourth quarter of 1996 was $0.7 million less
than the $3.2 million reported for the same period in 1995 as the debt to
capital ratio was reduced to 21.6%, within the Company's target operating range
of 20% to 25%.

Income Tax Expense

The 1996 effective income tax rate was 27%, equal to the 1995 effective
income tax rate. Income from investments in tax-advantaged securities reduced
the effective income tax rate 3 percentage points and acquisition related tax
benefits reduced the effective rate 6 percentage points in both 1996 and 1995.
The 1995 effective income tax rate also reflected the charge to income for
additional rights relating to the repurchase of shares of the Company's common
stock in 1995 that was not deductible for federal income tax purposes.

Operating Income

Operating income (income from continuing operations before realized
investment gains and losses, 1996 debt retirement costs and the 1995 cost of
additional rights related to the share repurchase) was $73.1 million for the
year ended December 31, 1996, compared to $70.9 million for 1995. Operating
income in 1996 reflected excellent voluntary automobile insurance results and
an increase in annuity segment earnings, partially offset by high first quarter
severe winter storm losses and high third quarter hurricane losses.

Included in the Company's operating income are non-cash charges for the
amortization of the value of acquired insurance in force and goodwill related
to the 1989 acquisition of the Company. Excluding these non-cash charges for
the amortization of intangible assets, operating income was $80.4 million for
the year ended December 31, 1996 compared to $78.5 million for 1995.

Property and casualty segment operating income was $54.0 million for the year
ended December 31, 1996, compared to $56.4 million for 1995. Higher first
quarter 1996 losses from severe winter weather and after tax catastrophe losses
of $5.5 million from hurricanes in the third quarter of 1996 were partially
offset by continued favorable trends in voluntary automobile losses. For the
year, after tax catastrophe losses were $13.6 million in 1996, compared to $9.0
million for 1995. The property and casualty combined loss and expense ratio for
the year ended December 31, 1996 was 93.5%, compared to the 93.3% reported for
1995.

Life insurance segment operating income of $12.1 million for the year ended
December 31, 1996 increased 16.3% compared to the $10.4 million reported for
1995. The 1996 life results reflect growth in business volume and lower
dividends to life policyholders, more than offsetting higher mortality
experience, compared to 1995.

Annuity segment operating income of $16.3 million for the year ended December
31, 1996 increased 10.1%, compared to 1995, resulting primarily from an
increase in cash value on deposit. Total accumulated fixed and variable annuity
cash value on deposit of $2,075.5 million increased $209.5 million, or 11.2%,
compared to December 31, 1995. This increase resulted from a net increase in
funds on deposit of 10.0% plus net increases in market value of underlying
mutual funds of $26.7 million.

Income from Continuing Operations

Income from continuing operations, which includes realized investment gains,
for the year ended December 31, 1996 was $73.8 million, or $3.14 per share,
reflecting a 1.9% decrease in income and a 12.5% increase in income per share
on a fully diluted basis compared to 1995. The share repurchase completed in
May 1995 and the redemption of the convertible notes in February 1996 resulted
in decreases in shares and equivalent shares outstanding, increasing income per
share from continuing

F-5

operations. Realized investment gains after tax were $1.6 million for the year
ended December 31, 1996, compared to $5.6 million for 1995. Income from
continuing operations for the year ended December 31, 1996 reflects a reduction
of $0.9 million, or $0.04 per share, for the costs of the early redemption of
$100 million of convertible notes. Income from continuing operations for the
year ended December 31, 1995 included a reduction of $1.3 million, or $0.05 per
share, for the cost of the additional rights granted in connection with the
share repurchase.

Net Income

Net income, which includes discontinued operations, was $64.6 million for the
year ended December 31, 1996 compared to $74.0 million for 1995, representing
$2.75 per share for both periods.

The discontinued group medical business operating loss was $5.3 million for
the year ended December 31, 1996, compared to an operating loss of $1.2 million
for 1995. The discontinued group medical combined loss and expense ratio
increased to 118.1% for the year ended December 31, 1996, compared to 106.4%
for 1995, primarily due to an increase in claims. The Company's net income for
the fourth quarter and year ended December 31, 1996 also included an after tax
charge of $3.9 million for anticipated losses during the two year phase-out
period for the discontinued group medical insurance business.

YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994

Insurance Premiums and Contract Charges Earned

Insurance premiums and contract charges earned increased 2.8% for the year
ended December 31, 1995 compared to 1994. Insurance premiums written and
contract deposits in the Company's primary product lines, automobile (excluding
involuntary), property, annuity and life, reflected growth of 3.1%, increasing
to $630.0 million for the year ended December 31, 1995, compared to $611.2
million for 1994. For all product lines, insurance premiums written and
contract deposits of $654.0 million for the year ended December 31, 1995
increased 2.6%, compared to $637.3 million for 1994. This increase was less
than the growth in insurance premiums written and contract deposits for the
Company's primary product lines primarily due to reduced allocation of business
from state mandatory automobile insurance facilities. Involuntary automobile
business includes assigned risk business as well as state mandatory insurance
facilities.

Automobile (excluding involuntary) and homeowners earned premiums increased
2.6% to $378.9 million for the year ended December 31, 1995, compared to $369.3
million for 1994, primarily as a result of a 1% increase in average premium
earned per automobile policy and a 1% increase in automobile (excluding
involuntary) and homeowners policies in force. The 743,000 automobile
(excluding involuntary) and homeowners policies in force at December 31, 1995
represented an increase of 10,000 policies since December 31, 1994.

Automobile (excluding involuntary) and homeowners premiums written increased
2.4% to $381.8 million for the year ended December 31, 1995 compared to $372.7
million for 1994. For the year ended December 31, 1995, new direct premiums
written of $37.1 million were equal to 1994. Renewal premiums written of $349.3
million for the year ended December 31, 1995 increased 2.4% compared to 1994.
Partially offsetting this growth was an 8.0% decrease in involuntary automobile
and other property and casualty premiums written to $24.0 million for 1995,
compared to $26.1 million for 1994.

For the year ended December 31, 1995, life insurance premiums and contract
charges earned were $74.8 million compared to $72.0 million for 1994,
representing an increase of 3.9%. Life insurance in force increased 5.4%
compared to December 31, 1994. These results reflect a lapse rate of 7.8% for
the year ended December 31, 1995, compared to 7.9% for 1994.

Annuity contract charges earned increased 25.9% to $6.8 million for the year
ended December 31, 1995, compared to $5.4 million for 1994, primarily due to a
46% increase in variable annuity cash

F-6

value on deposit. Total annuity deposits received during the year ended
December 31, 1995 increased 4.6% to $142.9 million, compared to $136.6 million
for 1994, reflecting a 6.5% increase in scheduled deposits for retirement
annuities offset by a decline in rollover deposits from other companies and
single premiums. Annuity deposits received in the second half of 1995 were
11.9% greater than the amounts received during the same period in 1994. This
increase in the second half of 1995 contrasts to a decrease of 1.9% for the
first six months of 1995 compared to the first six months of 1994.

Net Investment Income

Net investment income of $198.4 million for the year ended December 31, 1995
increased 7.1% compared to the prior year. Investments (at amortized cost)
increased 1.5%, or $38.7 million, from December 31, 1994. The pretax yield on
average investments increased to 7.5% for the year ended December 31, 1995 from
7.2% for 1994. After tax investment income increased 5.8% to $132.2 million for
the year ended December 31, 1995, the result of a 5.0% after tax yield,
compared to $124.9 million and a 4.8% after tax yield for 1994.

Realized Investment Gains and Losses

Realized investment gains were $8.6 million for the year ended December 31,
1995 compared to realized investment losses of $0.9 million for 1994.

Benefits, Claims and Settlement Expenses

Total benefits, claims and settlement expenses increased 1.3% to $335.7
million for the year ended December 31, 1995, compared to $331.5 million for
1994, reflecting lower losses from catastrophes in 1995 and no increase in life
benefits.

Property and casualty claims and settlement expenses increased 1.8% to $297.1
million for the year ended December 31, 1995 from $291.9 million for 1994.
Reflecting continued strong underwriting results in the automobile and
homeowners lines, the property and casualty loss ratio, including catastrophe
losses, was 73.5% for the year ended December 31, 1995, compared to 73.8% for
1994. Catastrophe losses after reinsurance but before federal income tax
benefits were $13.9 million for 1995 compared to $17.0 million reported in
1994. For 1995, the Company's catastrophe losses included hailstorms in Texas
during May, Hurricane Opal in October and a number of smaller weather-related
events. The Company's 1994 catastrophe losses consisted of $6.0 million of
losses from the Northridge, California earthquake and $11.0 million due to
severe winter weather and a series of tornadoes and wind storms.

Life benefits were $38.6 million for the year ended December 31, 1995,
compared to $39.6 million for 1994. The decrease was attributable to no
increase in individual life benefits and a lower volume of business for group
life and group disability income compared to 1994.

Interest Credited to Policyholders

Interest credited to policyholders was $90.9 million for the year ended
December 31, 1995, 8.2% more than the $84.0 million interest credited for 1994.
Interest credited to annuity contracts increased 6.9% to $74.5 million for the
year ended December 31, 1995 from $69.7 million for 1994. The increase reflects
a higher average annual interest rate credited of 5.6% for the year ended
December 31, 1995, compared to 5.4% for 1994, and a growth of fixed accumulated
deposits of 2.9%.

Life insurance interest credited increased $2.1 million, or 14.7%, to $16.4
million for the year ended December 31, 1995, compared to 1994, primarily as a
result of growth in the interest-sensitive whole life insurance reserves and
account balances.

F-7

Policy Acquisition and Operating Expenses

Policy acquisition and operating expenses represent the Company's insurance
underwriting expenses. For the year ended December 31, 1995, policy acquisition
and operating expenses increased 3.5%, or $4.6 million, to $137.6 million,
compared to $133.0 million for 1994, primarily due to business growth and
inflation. For the year ended December 31, 1995, the property and casualty
expense ratio of 19.8% was equal to 1994.

Amortization of Intangible Assets

Amortization of intangible assets decreased by $0.9 million to $11.7 million
for the year ended December 31, 1995, compared to $12.6 million for 1994. The
lower amortization was due to the scheduled decrease in the amortization of the
value of acquired insurance in force related to the 1989 acquisition of the
Company.

Interest Expense

As a result of borrowings on the Bank Credit Facility related to the
repurchase of shares of its common stock during the second quarter of 1995, the
Company's interest expense of $11.6 million for the year ended December 31,
1995 was $2.1 million, or 22.1%, greater than in 1994.

Income Tax Expense

The 1995 effective income tax rate of 27% was higher than the 1994 effective
income tax rate of 25% due to a decrease in tax-advantaged securities and the
earnings charge for additional rights relating to the repurchase of shares of
the Company's common stock in 1995 that is not deductible for federal income
tax purposes. Income from investments in tax-advantaged securities reduced the
1995 effective income tax rate 4 percentage points compared to a reduction of 5
percentage points in 1994. Acquisition related tax benefits reduced the
effective income tax rate 6 percentage points in 1995 and 5 percentage points
in 1994.

Operating Income

Operating income (income from continuing operations before realized
investment gains and losses, the 1995 cost of additional rights related to the
share repurchase, and the extraordinary item in 1994) increased 8.7% to $70.9
million for the year ended December 31, 1995 compared to $65.2 million for
1994, primarily due to growth in property and casualty operating income
(including a reduction in catastrophe losses) and improvement in operating
earnings of the life and annuity segments. Costs of the share repurchase
completed in 1995 reduced operating income as a result of increased interest
expense and reductions to net investment income. Excluding the share
repurchase, operating income for 1995 would have been $76.2 million, which
would have represented a 16.9% increase compared to 1994.

Property and casualty segment operating income increased 7.2% to $56.4
million for the year ended December 31, 1995, compared to $52.6 million for
1994, due to strong underwriting results and a decrease in catastrophe losses
of $2.1 million after tax. Strong property and casualty underwriting results
were reflected in the combined loss and expense ratio, excluding catastrophe
losses, for the year ended December 31, 1995 of 89.9%, compared to the 89.5%
reported for 1994, with the increase primarily attributable to higher levels of
losses from involuntary state insurance pools. Including catastrophe losses,
the property and casualty combined loss and expense ratio was 93.3% for the
year ended December 31, 1995 compared to 93.7% for 1994.

Life insurance segment operating income increased $2.7 million for the year
ended December 31, 1995 to $10.4 million, compared to $7.7 million for 1994,
due primarily to higher net investment income and a 2.5% decrease in benefits
compared to a 3.9% increase in premiums and contract charges earned.

F-8

The Company maintained strong annuity net margins in 1995 although the net
margin percentage declined slightly compared to 1994. Annuity segment operating
income of $14.8 million for the year ended December 31, 1995 increased 4.2%
compared to 1994 resulting from an increase in cash value on deposit. Total
accumulated fixed and variable annuity cash value on deposit of $1,866.0
million increased $192.8 million, or 11.5%, compared to December 31, 1994. This
increase resulted from a net increase in funds on deposit of 7.3% plus net
increases in market value of underlying mutual funds of $68.1 million.

Income from Continuing Operations

Income from continuing operations, which includes realized investment gains
and losses, for the year ended December 31, 1995 was $75.2 million, or $2.79
per share on a fully diluted basis, reflecting a 16.4% increase in income and a
31.0% increase in income per share compared to 1994. The share repurchase
completed in 1995 contributed to the increase in income per share from
continuing operations. Excluding the share repurchase, income per share from
continuing operations would have been $2.66, which would have represented a
24.9% increase compared to 1994. Income from continuing operations for the year
ended December 31, 1994 was reduced by $11.1 million, or $0.34 per share, due
to claims from the Northridge, California earthquake, severe winter weather and
a series of tornadoes and wind storms; by comparison, catastrophe claims in
1995 reduced the Company's income from continuing operations by $9.0 million,
or $0.32 per share. Realized investment gains after tax were $0.20 per share
for the year ended December 31, 1995, compared to realized investment losses
after tax of $0.02 per share for 1994. Income from continuing operations for
the year ended December 31, 1995 also included a reduction of $1.3 million, or
$0.05 per share, for the cost of the additional rights granted in connection
with the share repurchase.

Net Income

Net income, which includes discontinued operations and extraordinary charges,
was $74.0 million, or $2.75 per share on a fully diluted basis, for the year
ended December 31, 1995 compared to $62.9 million, or $2.08 per share, for
1994.

The discontinued group medical business reported an operating loss of $1.2
million for 1995 compared to break-even results for the year ended December 31,
1994. The combined loss and expense ratio for the discontinued group medical
business increased to 106.4% for the year ended December 31, 1995, compared to
101.6% for 1994.

Net income for the year ended December 31, 1994 reflected an extraordinary
charge of $1.7 million after tax, or $0.05 per share, as a result of the early
redemption of $47.1 million of subordinated debentures.

LIQUIDITY AND FINANCIAL RESOURCES

Investments

The Company's investment strategy emphasizes high quality investment grade,
publicly traded fixed income securities. At December 31, 1996, fixed income
securities comprised 95.5% of total investments. Of the fixed income investment
portfolio, 94.4% was investment grade and 99.5% was publicly traded. The
average quality of the total fixed income portfolio was AA- at December 31,
1996.

The duration of the investment portfolio is managed to provide cash flow to
satisfy policyholder liabilities as they become due. The average option
adjusted duration of total investments was 4.4 years at December 31, 1996, 1995
and 1994. 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 70%
of all outstanding fixed annuity accumulated cash values are subject in most
cases to substantial early withdrawal penalties.

F-9

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 pay dividends to
shareholders and retire short-term debt. 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.
Net cash provided by operating activities was $139.2 million for the year ended
December 31, 1996 compared to $153.3 million for 1995. In both years, cash
provided by operating activities primarily reflected net cash generated by the
insurance subsidiaries.

Payment of principal and interest on long-term debt, 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. These payments from
insurance subsidiaries, net of federal income taxes paid by HMEC, were $60.2
million in 1996 compared to $95.0 million in 1995 with the decrease due
primarily to the timing of tax sharing payments.

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 1997 without prior approval are approximately $89
million. Although regulatory restrictions exist, dividend availability from
subsidiaries has been, and is expected to be, more than adequate for parent
Company capital needs.

Investing Activities

HMEC's insurance subsidiaries maintain significant investments in fixed
maturity securities to meet future contractual obligations to policyholders. In
conjunction with its management of liquidity and other asset/liability
management objectives, the Company, from time to time, will sell fixed maturity
securities prior to maturity and reinvest the proceeds in other investments
with different interest rates, maturities or credit characteristics.
Accordingly, the Company has classified the entire fixed maturities portfolio
as available for sale. During 1996, net cash used in investing activities was
$32.7 million. This net amount reflects $989.0 million in purchases of fixed
maturity investments, funded by investment sales or maturities of $956.3
million and net cash provided by operating activities.

Financing Activities

Financing activities include the receipt and withdrawal of funds by annuity
policyholders, payment of scheduled dividends, transactions related to the
Company's common stock and borrowings and repayments under the Company's debt
facilities. Shareholder dividends paid for the year ended December 31, 1996
were $10.3 million.

For the year ended December 31, 1996, receipts from annuity contracts of
$166.9 million were greater than contract maturities and withdrawals of $135.2
million. Net transfers to variable annuity assets were $86.1 million during
1996 compared to $50.4 million during 1995. Interest-sensitive life account
balances increased $1.5 million during 1996.

F-10

In January 1996, the Company issued $100.0 million face amount of 6 5/8%
Senior Notes ("Senior Notes"), which will mature on January 15, 2006, at a
discount of 0.5%. The net proceeds from the sale of the Senior Notes were used
to finance most of the cost of the full redemption of the $100.0 million of
outstanding convertible notes at an aggregate cost of $102.9 million. The
redemption of the convertible notes extended the maturity of the Company's
long-term debt and eliminated the potential dilutive impact of these
securities.

Interest on the Senior Notes is payable semi-annually at a rate of 6 5/8%.
The Senior Notes are redeemable in whole or in part, at any time at the
Company's option, at a redemption price equal to the greater of (i) 100% of
their principal amount and (ii) the sum of the present values of the remaining
scheduled payments of principal and interest thereon discounted, on a semi-
annual basis, at the Treasury yield (as defined in the indenture) plus 15
basis points, together with accrued interest to the date of redemption. The
Senior Notes have an investment grade rating from both Standard & Poor's
Corporation ("S&P") (A-) and Moody's Investors Service, Inc. ("Moody's")
(Baa2) and are traded on the New York Stock Exchange (HMN 6 5/8).

In May 1995, the Company repurchased 6.5 million shares of its common stock
at an aggregate price of $174.9 million, financed by cash provided by
operating activities and $140.0 million borrowed under an existing bank line
of credit. Short-term borrowings under the bank line of credit were
subsequently reduced to $34 million and $75 million as of December 31, 1996
and 1995, respectively.

Capital Resources

The total capital of the Company was $618.6 million at December 31, 1996,
including $99.6 million of long-term debt and $34.0 million of short-term
debt. Long-term debt as a percentage of total shareholders' equity was 20.6%
as of December 31, 1996, compared to 21.3% as of December 31, 1995.

Shareholders' equity was $484.4 million at December 31, 1996, including an
unrealized gain in the Company's investment portfolio of $29.7 million after
taxes and the related impact on deferred policy acquisition costs. The market
value of the Company's common stock and the market value per share were $953.9
million and $40 3/8, respectively, at December 31, 1996. Book value per share
was $20.50 at December 31, 1996, $19.25 excluding investment market value
adjustments.

As of December 31, 1996, the Company had short-term debt comprised of $34.0
million outstanding under the Bank Credit Facility. The Bank Credit Facility,
as amended in December 1996, allows unsecured borrowings of up to $65.0
million at Interbank Offering Rates plus 0.3% to 0.5% or Bank of America
National Trust and Savings Association reference rates. The rate on the
borrowings under the Bank Credit Facility was Interbank Offering Rate plus
0.3%, or 5.9%, as of December 31, 1996. The commitment for the Bank Credit
Facility terminates on December 31, 2001.

The Company's ratio of earnings to fixed charges for 1996 was 10.6x compared
to 9.9x for 1995.

Total shareholder dividends were $10.3 million for the year ended December
31, 1996. In February 1997, the Board of Directors authorized the fifth
consecutive annual increase in the Company's dividend. The regular quarterly
dividend increased by 23% to $0.135 per share.

In February 1997, the Company's Board of Directors adopted a repurchase
program for shares of the Company's common stock of up to $100 million. Based
on the market price of the Company's common shares at the time the Board
adopted this program, $100 million would represent approximately 9% of the
Company's outstanding shares. Shares of common stock may be purchased from
time to time through open market and private purchases, as available. The
repurchase program will be financed through use of cash and, if needed, the
Bank Credit Facility.

In 1997, the Company's catastrophe reinsurance program will be augmented by
a $100 million equity put. This equity put provides for an option to sell
shares of the Company's convertible preferred

F-11

stock at a pre-negotiated floating rate in the event of losses from a
catastrophe, individually or in the aggregate, which exceed $65 million.

EFFECTS OF INFLATION AND CHANGES IN INTEREST RATES

The Company's operating results are affected significantly in at least three
ways by changes in interest rates and inflation. First, inflation directly
affects property and casualty claims costs. Second, the investment income
earned on the Company's investment portfolio and the market value of the
investment portfolio are related to the yields available in the fixed-income
markets. An increase in interest rates will decrease the market value of the
investment portfolio, but will increase investment income as investments mature
and proceeds are reinvested at higher rates. Third, as interest rates increase,
competitors will typically increase crediting rates on annuity and interest-
sensitive life products, and may lower premium rates on property and casualty
lines to reflect the higher yields available in the market. The risk of
interest rate fluctuation is controlled through asset/liability management
techniques, including cash flow analysis.

EFFECTS OF RECESSION

The Company markets its products primarily to educators and other employees
of public schools and their families located throughout the United States.
Although this market is affected by school budgetary constraints, as well as
general economic downturns that result in decreased purchases of new
automobiles and homes and reductions in individual savings, management believes
that this market historically has continued to purchase insurance even in
periods of recession. Historically, despite changing economic conditions, sales
of insurance products to the Company's market have remained stable or
increased, suggesting continuation of this historical trend.

F-12

REPORT OF MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS

HORACE MANN EDUCATORS CORPORATION

The consolidated balance sheets of Horace Mann Educators Corporation and
subsidiaries as of December 31, 1996, 1995 and 1994, and the related
consolidated statements of operations, cash flows and shareholders' equity for
the years ended December 31, 1996, 1995 and 1994 have been prepared by
management, which is responsible for their integrity and objectivity. The
statements have been prepared in accordance with generally accepted accounting
principles and include some amounts that are based upon management's best
estimates and judgements. The financial information contained elsewhere in
this annual report on Form 10-K is consistent with that contained in the
financial statements.

Management is responsible for establishing and maintaining a system of
internal control designed to provide reasonable assurance as to the integrity
and reliability of financial reporting. The concept of reasonable assurance is
based on the recognition that there are inherent limitations in all systems of
internal control, and that the cost of such systems should not exceed the
benefits derived therefrom. A professional staff of internal auditors reviews
on an ongoing basis the related internal control system design, the accounting
policies and procedures supporting this system and compliance therewith.
Management believes this system of internal control effectively meets its
objective of reliable financial reporting.

In connection with their annual audits, independent certified public
accountants perform an examination, in accordance with generally accepted
auditing standards, which includes the consideration of the system of internal
control to the extent necessary to form an independent opinion on the fairness
of presentation of the financial statements prepared by management.

The Board of Directors, through its Audit Committee composed solely of
directors who are not employees of the Company, is responsible for overseeing
the integrity and reliability of the Company's accounting and financial
reporting practices and the effectiveness of its system of internal controls.
The independent certified public accountants and internal auditors meet
regularly with, and have access to, this committee, with and without
management present, to discuss the results of their audit work.

F-13

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Horace Mann Educators Corporation:

We have audited the accompanying consolidated balance sheets of Horace Mann
Educators Corporation and subsidiaries (the Company) as of December 31, 1996,
1995 and 1994, and the related consolidated statements of operations, changes
in shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996. In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedules, as listed in the accompanying index. These consolidated financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Horace Mann
Educators Corporation and subsidiaries as of December 31, 1996, 1995 and 1994,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.

LOGO
KPMG PEAT MARWICK LLP

Chicago, Illinois
January 27, 1997

F-14

HORACE MANN EDUCATORS CORPORATION

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 1996, 1995 AND 1994

(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

1996 1995 1994
---------- ---------- ----------
ASSETS

Investments
Fixed maturities, available for sale, at
market (amortized cost 1996, $2,609,077;
1995, $2,527,032; 1994, $2,449,440)..... $2,658,512 $2,643,060 $2,339,118
Short-term and other investments......... 125,824 155,489 194,323
---------- ---------- ----------
Total investments...................... 2,784,336 2,798,549 2,533,441
Cash....................................... 13,704 9,518 5,997
Accrued investment income and premiums
receivable................................ 107,682 94,359 83,954
Value of acquired insurance in force and
goodwill.................................. 118,638 129,843 141,509
Other assets............................... 151,830 142,442 186,487
Variable annuity assets.................... 684,836 487,543 334,145
---------- ---------- ----------
Total assets........................... $3,861,026 $3,662,254 $3,285,533
========== ========== ==========

LIABILITIES, REDEEMABLE SECURITIES AND SHAREHOLDERS' EQUITY

Policy liabilities
Annuity contract liabilities............. $1,286,110 $1,275,117 $1,235,550
Interest-sensitive life contract
liabilities............................. 326,955 289,310 253,393
Unpaid claims and claim expenses......... 358,853 385,064 405,602
Future policy benefits................... 182,336 185,449 184,515
Unearned premiums........................ 155,776 141,105 138,380
---------- ---------- ----------
Total policy liabilities............... 2,310,030 2,276,045 2,217,440
Other policyholder funds................... 118,549 119,070 119,565
Other liabilities.......................... 129,075 133,855 101,843
Short-term debt............................ 34,000 75,000 -
Long-term debt............................. 99,564 100,000 100,000
Variable annuity liabilities............... 684,836 487,543 334,145
---------- ---------- ----------
Total liabilities...................... 3,376,054 3,191,513 2,872,993
---------- ---------- ----------
Warrants, subject to redemption............ 577 577 577
---------- ---------- ----------
Preferred stock, $0.001 par value,
authorized 1,000,000 shares; none issued
in 1996................................... - - -
Common stock, $0.001 par value, authorized
75,000,000 shares; issued, 1996,
29,213,398; 1995, 28,977,429; 1994,
28,958,229................................ 29 29 29
Additional paid-in capital................. 330,263 323,920 323,517
Net unrealized gains (losses) on fixed
maturities and equity securities.......... 29,736 76,151 (70,861)
Retained earnings.......................... 278,669 224,366 159,278
Treasury stock, at cost, 5,588,098 shares.. (154,302) (154,302) -
---------- ---------- ----------
Total shareholders' equity............. 484,395 470,164 411,963
---------- ---------- ----------
Total liabilities, redeemable
securities and shareholders' equity... $3,861,026 $3,662,254 $3,285,533
========== ========== ==========

See accompanying notes to consolidated financial statements.

F-15

HORACE MANN EDUCATORS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------

Insurance premiums written and contract
deposits.................................. $ 704,832 $ 653,970 $ 637,347
========== ========== ==========
Revenues
Insurance premiums and contract charges
earned.................................. $ 502,699 $ 485,444 $ 472,417
Net investment income.................... 198,607 198,370 185,309
Realized investment gains (losses)....... 2,451 8,604 (917)
---------- ---------- ----------
Total revenues....................... 703,757 692,418 656,809
---------- ---------- ----------
Benefits, losses and expenses
Benefits, claims and settlement expenses. 346,691 335,705 331,511
Interest credited........................ 95,322 90,911 83,959
Policy acquisition expenses amortized.... 41,063 40,018 38,696
Operating expenses....................... 97,021 97,609 94,292
Amortization of intangible assets........ 11,205 11,666 12,630
Interest expense......................... 10,517 11,589 9,483
Debt retirement costs (See note 4)....... 1,319 - -
Additional rights relating to share
repurchase
(See note 5)............................ - 1,347 -
---------- ---------- ----------
Total benefits, losses and expenses.. 603,138 588,845 570,571
---------- ---------- ----------
Income from continuing operations before
income taxes, discontinued operations and
extraordinary item........................ 100,619 103,573 86,238
Income tax expense......................... 26,817 28,463 21,618
---------- ---------- ----------
Income from continuing operations.......... 73,802 75,110 64,620
Discontinued operations (See note 2):
Loss from operations, net of applicable
income tax benefits of 1996, $2,764;
1995, $647; 1994, $34................... (5,280) (1,184) (61)
Loss on discontinuation, representing
provision of $5,974 for operating losses
during phase-out period, net of
applicable income tax benefits of
$2,091.................................. (3,883) - -
---------- ---------- ----------
Income before extraordinary item........... 64,639 73,926 64,559
Loss from early retirement of debt, net of
taxes..................................... - - (1,704)
---------- ---------- ----------
Net income................................. $ 64,639 $ 73,926 $ 62,855
========== ========== ==========
Earnings (loss) per share
Assuming no dilution
Income from continuing operations...... $ 3.14 $ 3.00 $ 2.23
Discontinued operations:
Loss from operations................. (0.22) (0.05) -
Loss on discontinuation.............. (0.17) - -
---------- ---------- ----------
Income before extraordinary item....... 2.75 2.95 2.23
Loss from early retirement of debt, net
of taxes.............................. - - (0.06)
---------- ---------- ----------
Net income........................... $ 2.75 $ 2.95 $ 2.17
========== ========== ==========
Assuming full dilution
Income from continuing operations...... $ 3.14 $ 2.79 $ 2.13
Discontinued operations:
Loss from operations................. (0.22) (0.04) -
Loss on discontinuation.............. (0.17) - -
---------- ---------- ----------
Income before extraordinary item....... 2.75 2.75 2.13
Loss from early retirement of debt, net
of taxes.............................. - - (0.05)
---------- ---------- ----------
Net income........................... $ 2.75 $ 2.75 $ 2.08
========== ========== ==========
Weighted average number of shares and
equivalent shares
Assuming no dilution..................... 23,478,921 25,038,530 28,958,229
Assuming full dilution................... 23,478,921 28,330,833 32,123,779

See accompanying notes to consolidated financial statements.

F-16

HORACE MANN EDUCATORS CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------

Common stock
Beginning balance............................. $ 29 $ 29 $ 29
Options exercised, 1996, 235,969 shares; 1995,
19,200 shares................................ - - -
-------- -------- --------
Ending balance................................ 29 29 29
-------- -------- --------
Additional paid-in capital
Beginning balance............................. 323,920 323,517 323,517
Options exercised............................. 6,343 403 -
-------- -------- --------
Ending balance................................ 330,263 323,920 323,517
-------- -------- --------
Net unrealized gains (losses) on fixed
maturities and equity securities
Beginning balance............................. 76,151 (70,861) 1,575
Effect of change in accounting principle (See
note 1)...................................... - - 72,838
Increase (decrease) for the period............ (46,415) 147,012 (145,274)
-------- -------- --------
Ending balance................................ 29,736 76,151 (70,861)
-------- -------- --------
Retained earnings
Beginning balance............................. 224,366 159,278 104,821
Net income.................................... 64,639 73,926 62,855
Cash dividends, 1996, $0.44 per share; 1995,
$0.36 per share;
1994, $0.29 per share........................ (10,336) (8,838) (8,398)
-------- -------- --------
Ending balance................................ 278,669 224,366 159,278
-------- -------- --------
Treasury stock, at cost
Beginning balance............................. (154,302) - -
Purchase of 6,500,000 shares (See note 5)..... - (174,870) -
Issuance of 911,902 shares (See note 5)....... - 20,568 -
-------- -------- --------
Ending balance................................ (154,302) (154,302) -
-------- -------- --------
Shareholders' equity at end of period........... $484,395 $470,164 $411,963
======== ======== ========

See accompanying notes to consolidated financial statements.

F-17

HORACE MANN EDUCATORS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(AMOUNTS IN THOUSANDS)

YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- ----------

Cash flows from operating activities
Premiums collected........................... $575,601 $550,596 $ 549,422
Policyholder benefits paid................... (453,687) (414,399) (399,301)
Policy acquisition and other operating
expenses paid............................... (159,635) (155,336) (153,402)
Federal income taxes paid.................... (10,651) (17,065) (10,534)
Investment income collected.................. 200,201 198,415 184,528
Interest expense paid........................ (8,653) (11,180) (9,853)
Other........................................ (3,962) 2,313 (2,553)
-------- -------- ----------
Net cash provided by operating
activities.............................. 139,214 153,344 158,307
-------- -------- ----------
Cash flows from investing activities
Fixed maturities
Purchases.................................. (989,009) (983,067) (1,129,394)
Sales...................................... 720,175 732,501 741,919
Maturities................................. 205,380 173,711 209,889
Net cash received from short-term and other
investments................................. 30,728 41,341 84,611
-------- -------- ----------
Net cash used in investing activities.... (32,726) (35,514) (92,975)
-------- -------- ----------
Cash flows from financing activities
Dividends paid to shareholders............... (10,336) (8,838) (8,398)
Proceeds from issuance of Senior Notes....... 98,530 - -
Proceeds from issuance of common stock....... - 20,568 -
Principal borrowings (payments) on Bank
Credit Facility............................. (41,000) 75,000 -
Retirement of Convertible Notes.............. (102,890) - -
Purchase of treasury stock................... - (174,870) -
Exercise of stock options.................... 6,343 403 -
Acquisition of Allegiance Insurance Company
Issuance of long-term debt at fair value... - - 40,115
Acquisition consideration.................. - - (42,323)
Retirement of Debentures..................... - - (50,603)
Annuity contracts, variable and fixed
Deposits................................... 166,871 142,885 136,648
Maturities and withdrawals................. (135,212) (121,582) (107,867)
Net transfer to variable annuity assets.... (86,097) (50,358) (58,960)
Net increase in interest-sensitive life
account balances............................ 1,489 2,483 3,320
-------- -------- ----------
Net cash used in financing activities.... (102,302) (114,309) (88,068)
-------- -------- ----------
Net increase (decrease) in cash................ 4,186 3,521 (22,736)
Cash at beginning of period.................... 9,518 5,997 28,733
-------- -------- ----------
Cash at end of period.......................... $ 13,704 $ 9,518 $ 5,997
======== ======== ==========

See accompanying notes to consolidated financial statements.

F-18

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1996, 1995 AND 1994

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements are prepared on the basis
of generally accepted accounting principles ("GAAP"). The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

The consolidated financial statements include the accounts of Horace Mann
Educators Corporation and its wholly-owned subsidiaries ("HMEC"; and together
with its subsidiaries, the "Company"). All significant intercompany balances
and transactions have been eliminated in consolidation.

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. In 1996, the Company discontinued its group medical business.
The Company's principal operating subsidiaries are Horace Mann Life Insurance
Company, Horace Mann Insurance Company, Teachers Insurance Company and
Allegiance Insurance Company.

Investments

The Company invests primarily in fixed maturity investments. Effective
January 1, 1994, the Company adopted Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and
classified the fixed maturity investment securities as available for sale. The
carrying value of fixed maturity securities, which had previously been carried
at the lower of aggregate amortized cost or market value, was changed to market
value. The net adjustment for unrealized gains and losses on securities
available for sale, carried at market, is recorded as a separate component of
shareholders' equity, net of applicable deferred tax asset or liability.

Short-term and other investments are comprised of mortgage loans, carried at
unpaid principal less a valuation allowance for estimated uncollectible
amounts; policy loans, carried at unpaid principal balances; short-term fixed
interest securities, carried at cost which approximates market value; real
estate acquired in the settlement of debt, carried at the lower of cost or
market; and equity securities, carried at market.

Interest income is recognized as earned. Investment income reflects
amortization of premiums and accrual of discounts on an effective-yield basis.

Realized gains and losses arising from the sale of securities are determined
based upon specific identification of securities sold.

Deferred Policy Acquisition Costs

Deferred policy acquisition costs net of accumulated amortization are
included in other assets in the consolidated balance sheets and were $75,071,
$66,866 and $59,095 as of December 31, 1996, 1995 and 1994, respectively.

F-19

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996, 1995 AND 1994

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

Acquisition costs, consisting of commissions, premium taxes and other costs,
which vary with and are primarily related to the production of insurance
business, are capitalized and amortized as follows. Capitalized acquisition
costs for interest-sensitive life contracts are amortized over 20 years in
proportion to estimated gross profits. For other individual life contracts,
acquisition costs are amortized in proportion to anticipated premiums over the
terms of the insurance policies (10 and 15 years). For investment (annuity)
contracts, acquisition costs are amortized in proportion to estimated gross
profits over 20 years. For property and casualty policies, acquisition costs
are amortized over the terms of the insurance policies (six and twelve months).

Deferred policy acquisition costs for interest-sensitive life and investment
contracts are 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.

Deferred acquisition costs are reviewed for recoverability from future
income, including investment income, and costs which are deemed unrecoverable
are expensed in the period in which the determination is made. No such costs
have been deemed unrecoverable during the periods reported.

When the Company was acquired in 1989, deferred acquisition costs were
reduced to zero in connection with establishing the value of acquired insurance
in force in the application of purchase accounting.

Property and Equipment

Property and equipment are carried at cost less accumulated depreciation and
are included in other assets in the consolidated balance sheets. Depreciation
and amortization are calculated on the straight-line method based on the
estimated useful lives of the assets.

DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------

Property and equipment.............................. $44,562 $42,203 $40,331
Less: accumulated depreciation...................... 20,956 17,953 13,851
------- ------- -------
Total........................................... $23,606 $24,250 $26,480
======= ======= =======

Value of Acquired Insurance In Force and Goodwill

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 of $22,003 was recorded in January
1994 related to the purchase of Allegiance Insurance Company.

F-20

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996, 1995 AND 1994

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

The value of acquired insurance in force by operating segment and goodwill,
net of amortization, were as follows:

DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------

Value of acquired insurance in force
Property and casualty.......................... $ 2,783 $ 3,815 $ 4,847
Life........................................... 21,253 23,902 26,774
Annuity........................................ 39,116 45,022 51,166
-------- -------- --------
Subtotal..................................... 63,152 72,739 82,787
Goodwill......................................... 55,486 57,104 58,722
-------- -------- --------
Total........................................ $118,638 $129,843 $141,509
======== ======== ========

The value of acquired insurance in force is being amortized over the
following periods utilizing the indicated methods for property and casualty,
life and annuity, respectively, as follows: 10 years, double declining
balance; 20 years, in proportion to coverage provided; 20 years, in proportion
to projected future gross profits at the date of the acquisition of the
Company. Goodwill is amortized over 40 years on a straight-line basis.

The Company reviews the value of acquired insurance in force and goodwill
for impairment under the standards established by SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." Any impairment is recognized in the period in which the
determination is made. There have been no adjustments to the carrying value of
the value of acquired insurance in force and goodwill.

Scheduled amortization of the December 31, 1996 balances of value of
acquired insurance in force by segment and goodwill over the next five years
is as follows:

YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999 2000 2001
------- ------- ------ ------ ------

Scheduled amortization of:
Value of acquired insurance in force
Property and casualty.............. $ 1,052 $ 1,038 $ 693 $ - $ -
Life............................... 2,449 2,275 2,120 1,975 1,839
Annuity............................ 5,563 5,274 5,013 4,692 4,220
------- ------- ------ ------ ------
Subtotal......................... 9,064 8,587 7,826 6,667 6,059
Goodwill............................. 1,618 1,618 1,618 1,618 1,618
------- ------- ------ ------ ------
Total............................ $10,682 $10,205 $9,444 $8,285 $7,677
======= ======= ====== ====== ======

The accumulated amortization of intangibles as of December 31, 1996, 1995
and 1994 was $114,034, $102,829 and $91,163, respectively.

F-21

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996, 1995 AND 1994

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

Variable Annuity Assets and Liabilities

Variable annuity assets, carried at market value, and liabilities represent
tax-qualified variable annuity funds invested in the Horace Mann mutual funds.
Variable annuity assets were invested in the Horace Mann mutual funds as
follows:

DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------

Horace Mann Growth Fund.......................... $372,824 $248,320 $163,569
Horace Mann Balanced Fund........................ 299,977 227,705 160,242
Horace Mann Income Fund.......................... 10,857 10,513 9,250
Horace Mann Short-Term Fund...................... 1,178 1,005 1,084
-------- -------- --------
Total variable annuity assets.................. $684,836 $487,543 $334,145
======== ======== ========

The investment income, gains and losses of these accounts accrue directly to
the policyholders and are not included in the operations of the Company.

Future Policy Benefits, Interest-sensitive Life Contract Liabilities and
Annuity Contract Liabilities

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 upon
assumptions as to future investment yield, mortality and withdrawals.
Estimated liabilities are established for policies that contain experience
rating provisions. As a result of the application of purchase accounting,
future policy benefits for direct individual life insurance policies issued
through August 29, 1989 were revalued using interest rates of 9% graded to 8%
over 10 years. For policies issued from August 30, 1989 through December 31,
1992, future policy benefits are computed using an interest rate of 6.5%. An
interest rate of 5.5% is used to compute future policy benefits for policies
issued after December 31, 1992. 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. The liability also includes provisions for the unearned
portion of certain policy charges.

Unpaid Claims and Claim Expenses

Liabilities for property and casualty unpaid claims and claim expenses
include provisions for payments to be made on reported losses, losses incurred
but not reported and associated settlement expenses; are carried at the full
value of estimated liabilities; and are not discounted for interest expected
to be earned on reserves. Estimated amounts of salvage and subrogation on
unpaid property and casualty losses are deducted from the liability for unpaid
claims.

The process by which liabilities are established for insured events requires
reliance upon estimates based on experience and available data. 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

F-22

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996, 1995 AND 1994

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

these adjustments are charged or credited to income for the period in which
the adjustments are made. No unusual adjustments were made in the
determination of the liabilities during the periods covered by these financial
statements. The Company has no exposure to claims for toxic waste cleanup,
other environmental remediation or asbestos-related illnesses. Management
believes that, based on data currently available, it has reasonably estimated
the Company's ultimate losses.

The following table sets forth an analysis of property and casualty unpaid
claims and claim expenses and provides a reconciliation of beginning and
ending reserves for the periods indicated.

YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------

Reserves at beginning of year................ $369,653 $388,038 $373,541
Less reinsurance recoverables.............. 23,764 18,475 21,613
-------- -------- --------
Net reserves at beginning of year............ 345,889 369,563 351,928
-------- -------- --------
Increase in reserves due to purchase of
Allegiance Insurance Company................ - - 30,017
-------- -------- --------
Losses and LAE incurred:
Claims occurring in the current period..... 368,648 352,513 346,025
Decrease in reserves for losses and LAE for
claims occurring in prior periods(1):
Policies written by the Company.......... (56,446) (49,830) (47,271)
Business assumed from state reinsurance
facilities.............................. (6,100) (5,800) (7,100)
-------- -------- --------
(62,546) (55,630) (54,371)
-------- -------- --------
Losses and LAE incurred.................. 306,102 296,883 291,654
-------- -------- --------
Losses and LAE payments for claims occurring
during:
Current year............................... 206,370 179,747 170,621
Prior years................................ 139,272 140,810 133,415
-------- -------- --------
Losses and LAE payments.................. 345,642 320,557 304,036
-------- -------- --------
Net reserves at end of period................ 306,349 345,889 369,563
Plus reinsurance recoverables.............. 34,062 23,764 18,475
-------- -------- --------
Reserves at end of period(2)................. $340,411 $369,653 $388,038
======== ======== ========

- --------
(1) Shows the amounts by which the Company decreased its reserves in each of
the periods indicated for claims occurring in previous periods to reflect
subsequent information on such claims and changes in their projected final
settlement costs. Favorable reserve development generally occurs as a
result of subsequent adjustment of reserves to reflect additional
information.
(2) Unpaid claims and claims expenses as reported in the consolidated balance
sheets also include life, annuity, and group accident and health reserves
of $18,442, $15,411 and $17,564 at December 31, 1996, 1995 and 1994,
respectively, in addition to property and casualty reserves.

The provision for losses and LAE for insured events in prior years decreased
by $62,546, $55,630 and $54,371 for the years ended December 31, 1996, 1995
and 1994, respectively. The favorable loss

F-23

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996, 1995 AND 1994

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

development results primarily from improving trends in the frequency and
severity of voluntary automobile claims.

Insurance Premiums and Contract Charges Earned

Property and casualty insurance premiums are recognized as revenue ratably
over the related contract periods in proportion to the risks insured. The
unexpired portions of these property and casualty premiums are recorded as
unearned premiums, using the monthly pro rata method.

Premiums and contract charges for interest-sensitive life and annuity
contracts consist of charges for the cost of insurance, policy administration
and withdrawals. Premiums for long-term traditional life policies are
recognized as revenues when due over the premium-paying period. Annuity and
interest-sensitive life contract deposits represent funds deposited by
policyholders and are not included in the Company's premiums or contract
charges.

Stock Based Compensation

The Company grants stock options for a fixed number of shares to employees
with an exercise price which has generally been equal to the fair market value
of the shares on the date of grant. The Company accounts for stock option
grants in accordance with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and accordingly, recognizes no
compensation expense for the stock option grants.

Income Taxes

The Company uses the liability method for calculating deferred federal income
taxes. Income tax provisions are generally based on income reported for
financial statement purposes. The provisions for federal income taxes for the
years ended December 31, 1996, 1995 and 1994 include amounts currently payable
and deferred income taxes resulting from the cumulative differences in the
Company's assets and liabilities, determined on a tax return and financial
statement basis.

Deferred tax assets and liabilities include provisions for unrealized
investment gains and losses with the change for each period included in net
unrealized gains and losses in shareholders' equity.

Earnings Per Share

Earnings per share assuming no dilution is computed based on the weighted
average number of shares outstanding. Prior to their early retirement in
February 1996, convertible notes described in Note 4 were considered
potentially dilutive securities for purposes of calculating earnings per share
assuming full dilution. Common stock equivalents relating to outstanding
warrants and common stock options are also included in the calculation of
earnings per share, to the extent dilutive.

Statements of Cash Flows

For purposes of the statements of cash flows, cash constitutes cash on
deposit at banks.

F-24

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996, 1995 AND 1994

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

Reclassification

The Company has reclassified the presentation of certain prior period
information to conform with the 1996 presentation including the presentation
of discontinued operations for all periods (also see Note 2).

NOTE 2--DISCONTINUED OPERATIONS

On December 9, 1996, the Company announced its strategic decision to
withdraw from the group medical insurance business over the following two
years. The Company stopped writing new group medical insurance policies in
January 1997 and intends to stop renewing group medical insurance policies in
January 1998. The Company's results of operations for the year ended December
31, 1996 include an accrual of $5,974 for anticipated losses during the phase-
out period and a related income tax recoverable of $2,091.

The consolidated statements of operations and related disclosures for all
years have been restated to separately report discontinued operations.
Premiums written from the discontinued group medical business were $47,382,
$47,512 and $55,447 for the years ended December 31, 1996, 1995 and 1994,
respectively. The losses from operations from the discontinued group medical
business were $5,280, $1,184 and $61 for the years ended December 31, 1996,
1995 and 1994, respectively, exclusive of the accrual for anticipated losses
during the phase-out period recorded in 1996.

At December 31, 1996, the following were attributable to the discontinued
operations: $12,490 of investments, $4,090 of premiums receivable, $2,030 of
ceded policy liabilities (classified as Other Assets in the Consolidated
Balance Sheet), $143 of other assets, $12,533 of policy liabilities and $6,220
of other liabilities, including the provision for operating losses during the
phase-out period.

NOTE 3--INVESTMENTS

Net Investment Income

The components of net investment income for the following periods were:

YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------

Fixed maturities................................ $190,836 $183,845 $170,375
Short-term and other investments................ 11,931 18,101 18,965
-------- -------- --------
Total investment income....................... 202,767 201,946 189,340
Less investment expenses........................ 4,160 3,576 4,031
-------- -------- --------
Net investment income......................... $198,607 $198,370 $185,309
======== ======== ========

Realized Investment Gains (Losses)

Realized investment gains (losses) for the following periods were:

YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------

Fixed maturities................................ $ 1,052 $ 6,961 $ (1,007)
Short-term and other investments................ 1,399 1,643 90
-------- -------- --------
Realized investment gains (losses)............ $ 2,451 $ 8,604 $ (917)
======== ======== ========

F-25

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996, 1995 AND 1994

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 3--INVESTMENTS--(CONTINUED)

Fixed Maturity Securities

The amortized cost, unrealized investment gains and losses, and market values
of investments in debt securities as of December 31, 1996, 1995 and 1994 were
as follows:

AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------

AS OF DECEMBER 31, 1996
U.S. government and agency
obligations
Mortgage-backed securities..... $ 644,197 $ 13,008 $ 3,217 $ 653,988
Other.......................... 257,498 2,436 431 259,503
Municipal bonds.................. 221,851 8,660 378 230,133
Foreign government bonds......... 34,684 1,340 1 36,023
Corporate bonds.................. 1,163,631 37,510 12,221 1,188,920
Other mortgage-backed securities. 287,216 4,600 1,871 289,945
---------- -------- -------- ----------
Totals....................... $2,609,077 $ 67,554 $ 18,119 $2,658,512
========== ======== ======== ==========
AS OF DECEMBER 31, 1995
U.S. government and agency
obligations
Mortgage-backed securities..... $ 659,380 $ 23,205 $ 451 $ 682,134
Other.......................... 260,314 11,355 181 271,488
Municipal bonds.................. 218,776 9,766 240 228,302
Foreign government bonds......... 39,065 3,334 - 42,399
Corporate bonds.................. 1,105,760 68,946 6,930 1,167,776
Other mortgage-backed securities. 243,737 8,760 1,536 250,961
---------- -------- -------- ----------
Totals....................... $2,527,032 $125,366 $ 9,338 $2,643,060
========== ======== ======== ==========
AS OF DECEMBER 31, 1994
U.S. government and agency
obligations
Mortgage-backed securities..... $ 677,545 $ 480 $ 35,432 $ 642,593
Other.......................... 316,102 206 12,524 303,784
Municipal bonds.................. 228,926 2,168 10,489 220,605
Foreign government bonds......... 46,527 64 1,803 44,788
Corporate bonds.................. 994,325 4,571 50,156 948,740
Other mortgage-backed securities. 186,015 560 7,967 178,608
---------- -------- -------- ----------
Totals....................... $2,449,440 $ 8,049 $118,371 $2,339,118
========== ======== ======== ==========

The Company's investment portfolio includes no derivative financial
instruments (futures, forwards, swaps, option contracts or other financial
instruments with similar characteristics).

F-26

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996, 1995 AND 1994

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 3--INVESTMENTS--(CONTINUED)

Maturity/Sales Of Investments

The market value and amortized cost of fixed maturity securities at December
31, 1996, by contractual maturity, are shown below. 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
OF
TOTAL
MARKET MARKET AMORTIZED
VALUE VALUE COST
------- ---------- ----------

Due in 1 year or less......................... 5.7% $ 151,847 $ 151,502
Due after 1 year through 5 years.............. 28.7% 761,990 751,964
Due after 5 years through 10 years............ 32.9% 874,562 855,112
Due after 10 years through 20 years........... 18.9% 503,649 493,750
Due after 20 years............................ 13.8% 366,464 356,749
----- ---------- ----------
Total................................... 100.0% $2,658,512 $2,609,077
===== ========== ==========

Proceeds from sales/maturities of fixed maturities and gross gains and gross
losses realized for each year were:

YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------

Proceeds....................................... $925,555 $906,212 $951,808
Gross gains realized........................... 11,378 16,820 15,657
Gross losses realized.......................... (10,326) (9,859) (16,768)

Unrealized Gains (Losses) on Fixed Maturities

Net unrealized gains (losses) are computed as the difference between market
and amortized cost for fixed maturities. A summary of the net increase
(decrease) in unrealized investment gains (losses) on fixed maturities, less
applicable income taxes, is as follows:

YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- --------- ---------

Unrealized gains (losses) on fixed
maturities
Beginning of period....................... $116,028 $(110,322) $ 111,599
End of period............................. 49,435 116,028 (110,322)
-------- --------- ---------
Increase (decrease) for the period...... (66,593) 226,350 (221,921)
Income taxes (benefit)...................... (23,308) 79,223 (77,672)
-------- --------- ---------
Increase (decrease) in net unrealized gains
(losses) on fixed maturities before the
valuation impact on deferred policy
acquisition costs.......................... $(43,285) $ 147,127 $(144,249)
======== ========= =========

Investment in Entities Exceeding 10% of Shareholders' Equity

At December 31, 1996, the Company's investment portfolio included $51,972 of
fixed maturity securities issued by Ford Motor Company and its affiliates.
There were no other investments which exceeded 10% of total shareholders'
equity in entities other than obligations of the United States Government and
government agencies and authorities at December 31, 1996 and there were no such
investments at December 31, 1995 and 1994.

F-27

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996, 1995 AND 1994

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 3--INVESTMENTS--(CONTINUED)

Deposits

At December 31, 1996, securities with a carrying value of $13,019 were on
deposit with governmental agencies as required by law in various states in
which the insurance subsidiaries of HMEC conduct business.

NOTE 4--DEBT AND WARRANTS

Indebtedness and scheduled maturities at December 31, 1996, 1995 and 1994
consisted of the following:

EFFECTIVE DECEMBER 31,
INTEREST FINAL --------------------------
RATES MATURITY 1996 1995 1994
--------- -------- -------- -------- --------

Short-term debt:
Bank Credit Facility........... Variable 2001 $ 34,000 $ 75,000 $ -
Long-term debt:
6 5/8% Senior Notes, Face
amount less unaccrued discount
of $436....................... 6.7% 2006 99,564 - -
4%/6 1/2% Convertible Notes,
redeemed February 1996........ 5.7% 1999 - 100,000 100,000
-------- -------- --------
Total........................ $133,564 $175,000 $100,000
======== ======== ========

Issuance of 6 5/8% Senior Notes ("Senior Notes") and Redemption of
Convertible Notes

On January 17, 1996, the Company issued $100,000 face amount of Senior Notes
at an effective yield of 6.7%, which will mature on January 15, 2006. The net
proceeds from the sale of the Senior Notes were used to finance the redemption
of the Convertible Notes. Interest on the Senior Notes is payable semi-
annually at a rate of 6 5/8%. The Senior Notes are redeemable in whole or in
part, at any time, at the Company's option, at a redemption price equal to the
greater of (i) 100% of their principal amount and (ii) the sum of the present
values of the remaining scheduled payments of principal and interest thereon
discounted, on a semi-annual basis, at the Treasury yield (as defined in the
indenture) plus 15 basis points, together with accrued interest to the date of
redemption.

Bank Credit Facility

The Bank Credit Facility, as amended in December 1996, provides for
unsecured borrowings of up to $65,000. 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
0.325% at December 31, 1996). The unused portion of the Bank Credit Facility
is subject to a variable commitment fee which was 0.1% on an annual basis at
December 31, 1996. The commitment for the Bank Credit Facility terminates on
December 31, 2001. The Company's obligations under the Bank Credit Facility
are unsecured.

4%/6 1/2% Convertible Notes ("Convertible Notes")

All of the outstanding Convertible Notes were redeemed on February 6, 1996
at an aggregate cost of $102,890. The early redemption of the Convertible
Notes resulted in a charge to 1996 income of $1,319 ($857 net of tax
benefits).

F-28

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996, 1995 AND 1994

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 4--DEBT AND WARRANTS--(CONTINUED)

15.00% Subordinated Debentures ("Debentures")

In August 1994, all of the outstanding Debentures, in the aggregate
principal amount of $47,073, were redeemed at an aggregate cost to HMEC of
$50,603. The early redemption of the Debentures resulted in an extraordinary
charge to income in 1994 of $1,704 net of tax benefits.

Warrants

At December 31, 1996, 1995 and 1994, warrants to purchase 140,625 shares of
the Company's common stock at $5.40 per share were outstanding.

Covenants

The Company is in compliance with all of the covenants contained in the
Senior Notes indenture and the Bank Credit Facility Agreement.

NOTE 5--SHAREHOLDERS' EQUITY AND STOCK OPTIONS

Share Repurchase Program

In February 1997, the Company's Board of Directors adopted a repurchase
program for shares of the Company's common stock of up to $100,000. Based on
the market price of the Company's common shares at the time the Board adopted
this program, $100,000 would represent approximately 9% of the Company's
outstanding shares. Shares of common stock may be purchased from time to time
through open market and private purchases, as available. The repurchase
program will be financed through use of cash and, if needed, the Bank Credit
Facility.

Authorization of Preferred Stock

In September 1996, the shareholders of HMEC approved authorization of
1,000,000 shares of $0.001 par value preferred stock. The Board of Directors
is authorized to (i) direct the issuance of the preferred stock in one or more
series, (ii) fix the dividend rate, conversion or exchange rights, redemption
price and liquidation preference, of any series of the preferred stock, (iii)
fix the number of shares for any series and (iv) increase or decrease the
number of shares of any series. No shares of preferred stock were outstanding
at December 31, 1996.

In 1997, the Company's catastrophe reinsurance program will be augmented by
a $100,000 equity put. This equity put provides for an option to sell shares
of the Company's convertible preferred stock at a pre-negotiated floating rate
in the event of losses from a catastrophe, individually or in the aggregate,
which exceed $65,000.

In connection with the equity put described in the preceding paragraph, the
Board of Directors has designated a series of preferred stock to be available
for use in the put. The Series so designated is Series A Cumulative
Convertible Preferred Stock (the "Series A Stock") and 100,000 shares have
been assigned to this series. None are currently issued or outstanding. The
Series A Stock is dividend paying, at a floating rate which varies with
movements in the London Interbank Offered Rate and with changes in the risk
rating of the Series A Stock as determined by Standard & Poor's. The Series A

F-29

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996, 1995 AND 1994

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 5--SHAREHOLDERS' EQUITY AND STOCK OPTIONS--(CONTINUED)

Stock does not require any sinking fund or similar mechanism regarding payment
of such dividends. The Series A Stock is redeemable by the Company beginning
one year after its issuance at rates declining from an initial rate of 102% of
the purchase price of the Series A Stock and accumulated unpaid dividends to
100% of such sum (beginning three years after issuance). The Series A Stock
must be redeemed by the Company if there is a change in control of the Company
and the holders of that stock request redemption. Beginning on the fourth
anniversary of the issuance of Series A Stock, the holders thereof have the
right to demand conversion of the Series A Stock into common stock of the
Company at a conversion rate based on then prevailing market prices for the
common stock; however, upon receipt of a conversion demand, the Company has
the right to redeem the Series A Stock prior to such conversion. The Series A
Stock has liquidation rights which place the Series A Stock ahead of the
common stock in priority. The Series A Stock has no voting rights other than
the requirement that the Series A Stock approve any changes in the Series A
Stock, the creation of any other class of stock on a par with or superior to
the Series A Stock and certain extraordinary transactions such as certain
mergers involving the Company.

Director Stock Plan

In September 1996, the shareholders of HMEC approved the Deferred Equity
Compensation Plan ("Director Stock Plan") for directors of the Company and
reserved 300,000 shares for issuance pursuant to the Director Stock Plan.
Shares of the Company's common stock issued under the Director Stock Plan may
be either authorized and unissued shares or shares that have been reacquired
by the Company. As of December 31, 1996, 9,197 units had been awarded under
this plan representing an equal number of common shares to be issued in the
future.

1995 Purchase of the Company's Common Stock

On May 3, 1995, the Company repurchased 6.5 million shares of common stock.
The shares were purchased at a price of $169,000, before a contingent payment
and expenses of the transaction. The Company borrowed $140,000 of the purchase
price under its existing Bank Credit Facility and the balance was paid from
cash on hand. In July 1995, the Company sold 911,902 shares in a secondary
public offering, the $20,568 net proceeds of which were used to reduce
borrowings under the Bank Credit Facility.

Stock Options

In 1991, HMEC adopted and the shareholders approved the 1991 Stock Incentive
Plan (the "1991 Plan") and reserved 2 million shares of common stock for
issuance under the 1991 Plan. Under the 1991 Plan, options to purchase shares
of HMEC common stock may be granted to executive officers, other employees and
certain directors. The options are exercisable in installments beginning in
the first year from the date of grant and expiring 10 years from the date of
grant. No options were granted during 1996 and 20,000 options were granted
during 1995.

The Company accounts for the 1991 Plan in accordance with APB Opinion No.
25, under which no compensation cost has been recognized. Had compensation
cost been recognized under SFAS No. 123 "Accounting for Stock-Based
Compensation," the Company has determined the effects on 1996 and 1995 net
income to be immaterial.

F-30

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996, 1995 AND 1994

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 5--SHAREHOLDERS' EQUITY AND STOCK OPTIONS--(CONTINUED)

Changes in outstanding options and shares available for grant were as
follows:

OPTIONS
WEIGHTED AVERAGE RANGE OF ---------------------------------
OPTION PRICE OPTION PRICES VESTED AND AVAILABLE
PER SHARE PER SHARE OUTSTANDING EXERCISABLE FOR GRANT
---------------- ------------- ----------- ----------- ---------

At December 31, 1993.... $22.39 $18.00-$30.30 1,128,222 653,847 859,000
--------- --------- -------
Granted............... $24.06 10,000 2,500 (10,000)
Vested................ $18.00-$30.30 - 274,375 -
--------- --------- -------
At December 31, 1994.... $22.40 $18.00-$30.30 1,138,222 930,722 849,000
--------- --------- -------
Granted............... $22.24 20,000 5,000 (20,000)
Vested................ $23.38-$30.30 - 104,375 -
Exercised............. $18.00 (19,200) (19,200) -
--------- --------- -------
At December 31, 1995.... $22.47 $18.00-$30.30 1,139,022 1,020,897 829,000
--------- --------- -------
Vested................ $22.24-$30.30 - 105,625 -
Exercised............. $22.07 $18.00-$30.30 (235,969) (235,969) -
--------- --------- -------
At December 31, 1996.... $22.58 $18.00-$30.30 903,053 890,553 829,000
========= ========= =======

As of December 31, 1996, the weighted average life of vested and exercisable
options was 5.5 years and the weighted average price of such options was
$22.58 per option. The weighted average prices of vested and exercisable
options as of December 31, 1995 and 1994 were $21.72 and $20.72, respectively.

NOTE 6--INCOME TAXES

The federal income tax liabilities and recoverables included in other
liabilities and other assets, respectively, in the consolidated balance sheets
as of December 31, 1996, 1995 and 1994 were as follows:

DECEMBER 31,
------------------------
1996 1995 1994
------- ------- --------

Current liability................................... $27,995 $15,174 $ 19,961
Deferred liability (asset).......................... 7,193 32,870 (61,769)

F-31

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996, 1995 AND 1994

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 6--INCOME TAXES--(CONTINUED)

Deferred tax assets and liabilities are recognized for all future tax
consequences attributable to "temporary differences" between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. The "temporary differences" that give rise to the
deferred tax balances at December 31, 1996, 1995 and 1994 were as follows:

DECEMBER 31,
------------------------
1996 1995 1994
------- ------- --------

Deferred tax assets
Discounting of unpaid loss and loss expense tax
reserves....................................... $ 8,066 $13,172 $ 16,898
Life insurance future policy benefit reserve
revaluation.................................... 22,436 16,198 18,531
Unearned premium reserve reduction.............. 10,528 9,521 9,411
Postretirement benefits other than pension...... 8,003 7,715 7,374
Investment valuation reserves................... 907 924 1,288
Unrealized losses on securities................. - - 38,156
Other, net...................................... - - 5,789
------- ------- --------
Total gross deferred tax assets............... 49,940 47,530 97,447
------- ------- --------
Deferred tax liabilities
Unrealized gains on securities.................. 16,010 41,004 -
Amortization of intangible assets............... 20,074 20,508 21,431
Deferred policy acquisition costs............... 19,982 16,211 14,247
Other, net...................................... 1,067 2,677 -
------- ------- --------
Total gross deferred tax liabilities.......... 57,133 80,400 35,678
------- ------- --------
Net deferred tax liability (asset).......... $ 7,193 $32,870 $(61,769)
======= ======= ========

Based on the Company's historical earnings, future expectations of adjusted
taxable income, as well as reversing gross deferred tax liabilities, the
Company believes it is more likely than not that gross deferred tax assets
will be fully realized and that a valuation allowance with respect to the
realization of the total gross deferred tax assets is not necessary.

The components of federal income tax expense (benefit) were as follows:

YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
------- ------- -------

Current........................................... $27,502 $12,982 $28,266
Deferred.......................................... (685) 15,481 (6,648)
------- ------- -------
Tax expense on income from continuing
operations..................................... 26,817 28,463 21,618
Tax benefit on extraordinary item................. - - (917)
------- ------- -------
Total tax expense before discontinued
operations..................................... $26,817 $28,463 $20,701
======= ======= =======

F-32

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996, 1995 AND 1994

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 6--INCOME TAXES--(CONTINUED)

Income tax expense for the following periods differed from the expected tax
computed by applying the federal corporate tax rate of 35% to income before
income taxes as follows:

YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------

Expected federal tax on income from continuing
operations...................................... $35,217 $36,257 $30,184
Add (deduct) tax effects of:
Tax-exempt interest............................ (3,322) (3,293) (4,427)
Goodwill....................................... 566 566 558
Cost of additional rights relating to share
repurchase.................................... - 471 -
Acquisition related benefits and other, net.... (5,644) (5,538) (4,697)
------- ------- -------
Income tax expense provided on income from
continuing operations........................... $26,817 $28,463 $21,618
======= ======= =======

NOTE 7--FAIR VALUE OF FINANCIAL INSTRUMENTS

Generally accepted accounting principles require that the Company disclose
estimated fair values for certain financial instruments. Fair values of the
Company's insurance contracts other than annuity contracts are not required to
be disclosed. However, the fair values of liabilities under all insurance
contracts are taken into consideration in the Company's overall management of
interest rate risk through the matching of investment maturities with amounts
due under insurance contracts. The following methods and assumptions were used
to estimate the fair value of financial instruments.

Investments--For fixed maturities and short-term and other investments, fair
value equals quoted market price, if available. If a quoted market price is
not available, fair value is estimated using quoted market prices for similar
securities, adjusted for differences between the quoted securities and the
securities being valued. The fair value of mortgage loans is estimated by
discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and the same
remaining maturities. The fair value of policy loans is based on estimates
using discounted cash flow analysis and current interest rates being offered
for new loans. The carrying value of real estate is an estimate of fair value
based on discounted cash flows from operations.

Annuity Contract Liabilities and Policyholder Account Balances on Interest-
sensitive Life Contracts--The fair values of annuity contract liabilities and
policyholder account balances on interest-sensitive life contracts are equal to
the discounted estimated future cash flows (using the Company's current interest
rates earned on its investments) including an adjustment for risk that the
timing or amount of cash flows will vary from management's estimate.

Other Policyholder Funds--Other policyholder funds are supplementary
contract reserves and dividend accumulations which represent deposits that do
not have defined maturities. The carrying value of these funds is used as a
reasonable estimate of fair value.

Long-term Debt--The fair value of long-term debt is estimated based on
quoted market prices of publicly traded issues.

F-33

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996, 1995 AND 1994

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 7--FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)

The carrying amounts and fair values of financial instruments at December 31,
1996, 1995 and 1994 consisted of the following:

DECEMBER 31,
-----------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ---------------------
CARRYING CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ---------- ---------- ----------

Financial Assets
Investments
Fixed maturities..... $2,658,512 $2,658,512 $2,643,060 $2,643,060 $2,339,118 $2,339,118
Short-term and other
investments......... 125,824 124,571 155,489 155,646 194,323 195,111
---------- ---------- ---------- ---------- ---------- ----------
Total investments.. 2,784,336 2,783,083 2,798,549 2,798,706 2,533,441 2,534,229
Cash................... 13,704 13,704 9,518 9,518 5,997 5,997
Financial Liabilities
Policyholder account
balances on interest-
sensitive life
contracts............. 89,987 79,702 88,141 82,494 85,219 73,970
Annuity contract
liabilities........... 1,286,110 1,136,494 1,275,117 1,132,742 1,235,550 1,105,817
Other policyholder
funds................. 118,549 118,549 119,070 119,070 119,565 119,565
Short-term debt........ 34,000 34,000 75,000 75,000 - -
Long-term debt......... 99,564 96,500 100,000 102,890 100,000 92,000

Fair value estimates shown above are dependent upon subjective assumptions
and involve significant uncertainties resulting in variability in estimates
with changes in assumptions. Fair value assumptions are based upon subjective
estimates of market conditions and perceived risks of financial instruments at
a certain point in time. The disclosed fair values do not reflect any premium
or discount that could result from offering for sale at one time an entire
holding of a particular financial instrument. In addition, potential taxes and
other expenses that would be incurred in an actual sale or settlement are not
reflected in amounts disclosed.

NOTE 8--STATUTORY SURPLUS AND SUBSIDIARY DIVIDEND RESTRICTIONS

The insurance departments of various states in which the insurance
subsidiaries of HMEC are domiciled recognize as net income and surplus those
amounts determined in conformity with statutory accounting practices prescribed
or permitted by the insurance departments, which differ in certain respects
from generally accepted accounting principles.

F-34

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996, 1995 AND 1994

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 8--STATUTORY SURPLUS AND SUBSIDIARY DIVIDEND RESTRICTIONS--(CONTINUED)

Reconciliations of statutory capital and surplus and net income, as
determined using statutory accounting practices, to the amounts included in the
accompanying financial statements are as follows:

DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------

Statutory capital and surplus of insurance
subsidiaries................................. $377,337 $361,775 $331,601
Shareholders' equity of non-insurance
subsidiaries................................. 1,612 1,315 1,399
-------- -------- --------
Combined statutory capital and surplus........ 378,949 363,090 333,000
Increase (decrease):
Deferred policy acquisition costs........... 75,071 66,866 59,095
Difference in policyholder reserves......... (4,054) 12,180 12,031
Goodwill.................................... 55,486 57,104 58,722
Value of acquired insurance in force........ 63,152 72,739 82,787
Liability for postretirement benefits, other
than pensions.............................. (22,877) (22,043) (21,039)
Investment market value adjustments on fixed
maturities................................. 49,435 116,028 (110,322)
Difference in investment reserves........... 36,967 37,440 29,873
Federal income tax (liability) asset........ (3,599) (51,242) 54,573
Liability for discontinued operations, net
of tax benefits............................ (3,883) - -
Non-admitted assets and other, net.......... (6,688) (6,998) 13,243
Parent company short-term and long-term
debt....................................... (133,564) (175,000) (100,000)
-------- -------- --------
Shareholders' equity as reported herein... $484,395 $470,164 $411,963
======== ======== ========

YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------

Statutory net income of insurance
subsidiaries................................. $ 72,924 $ 90,981 $ 88,199
Net loss of non-insurance companies........... (2,417) (2,473) (3,264)
Interest expense.............................. (10,517) (11,589) (9,483)
Tax benefit of interest expense and other
parent company current tax adjustments....... 5,372 3,598 (14,554)
Extraordinary item, net of tax................ - - (1,704)
-------- -------- --------
Combined net income........................... 65,362 80,517 59,194
Increase (decrease):
Deferred policy acquisition costs........... 11,973 7,771 11,004
Policyholder benefits....................... 826 2,080 739
Federal income tax expense (benefit)........ 2,137 (9,131) 6,648
Amortization of intangible assets........... (11,205) (11,666) (12,681)
Investment reserves......................... 366 6,191 (2,076)
Loss on discontinuation of group medical
business, net of tax benefits.............. (3,883) - -
Other adjustments, net...................... (937) (1,836) 27
-------- -------- --------
Net income as reported herein............. $ 64,639 $ 73,926 $ 62,855
======== ======== ========

F-35

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996, 1995 AND 1994

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 8--STATUTORY SURPLUS AND SUBSIDIARY DIVIDEND RESTRICTIONS--(CONTINUED)

The Company has principal insurance subsidiaries domiciled in Illinois and
California. The statutory financial statements of these subsidiaries are
prepared in accordance with accounting practices prescribed or permitted by the
Illinois Department of Insurance and the California Department of Insurance as
applicable. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners ("NAIC"),
as well as state laws, regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not so
prescribed.

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. The maximum dividend which may be paid by the
insurance subsidiaries to HMEC during 1997 without prior approval is
approximately $89 million.

The NAIC has adopted risk-based capital guidelines that establish minimum
adequate levels of statutory capital and surplus based on risk assumed in
investments, reserving policies, and volume and types of insurance business
written. State insurance regulations prohibit insurance companies from making
any public statements or representations with regard to their risk-based
capital levels. Based on current guidelines, the risk-based capital statutory
requirements will have no negative regulatory impact on the Company's insurance
subsidiaries.

NOTE 9--PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

All employees of the Company are covered under a defined benefit plan and a
defined contribution plan, and certain employees participate in supplemental
retirement plans.

Benefits under the defined benefit and supplemental retirement plans are
based on employees' years of service and compensation for the highest 36
consecutive months of earnings under the plan. Under the defined contribution
plan, contributions are made to employees' accounts based on a percentage of
compensation that is determined by the employees' years of service. Retirement
benefits to employees are paid first from their accumulated accounts under the
defined contribution plan with the balance funded by the defined benefit and
supplemental retirement plans.

The Company's policy with respect to funding the defined benefit plan is to
contribute amounts which are actuarially determined to provide the plan with
sufficient assets to meet future benefit payments consistent with the funding
requirements of federal laws and regulations.

Employees of the Company are also eligible to participate in the Supplemental
Retirement and Savings Plan, a 401(k) plan, and may generally contribute up to
10% of eligible compensation on a before tax basis. The Company contributes an
amount equal to 50% of the first 6% of eligible compensation contributed each
month by participating employees.

Total pension expense was $7,855, $7,768 and $8,064 for the years ended
December 31, 1996, 1995 and 1994, respectively.

F-36

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996, 1995 AND 1994

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 9--PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS--(CONTINUED)

Defined Contribution Plan

Pension benefits under the defined contribution plan were fully funded.
Contributions to employees' accounts under the defined contribution plan,
which were expensed in the Company's statements of operations, and total plan
assets were as follows:

YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------

Contributions to employees accounts................. $ 5,199 $ 4,859 $ 4,460
Total assets at the end of the year................. 62,113 55,050 48,752

Defined Benefit Plan and Supplemental Retirement Plans

The following table summarizes the funding status of the defined benefit and
supplemental retirement pension plans at the end of each year and identifies
the assumptions used to determine the projected benefit obligation.

SUPPLEMENTAL
DEFINED BENEFIT PLAN RETIREMENT PLANS
------------------------- -------------------------
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
1996 1995 1994 1996 1995 1994
------- ------- ------- ------- ------- -------

Actuarial present value
of benefit obligations
Vested benefit
obligation............ $32,941 $32,808 $25,359 $ 4,083 $ 3,262 $ 2,581
Nonvested benefit
obligation............ 2,916 2,692 2,137 294 147 96
------- ------- ------- ------- ------- -------
Accumulated benefit
obligation.............. 35,857 35,500 27,496 4,377 3,409 2,677
Effect of projecting
future salary increases
on past service......... 3,508 5,086 5,442 411 1,167 1,962
------- ------- ------- ------- ------- -------
Projected benefit
obligation.............. 39,365 40,586 32,938 4,788 4,576 4,639
Plan assets at market
value................... 42,262 41,137 34,569 - - -
------- ------- ------- ------- ------- -------
Plan assets in excess of
(less than) projected
benefit obligation...... $ 2,897 $ 551 $ 1,631 $(4,788) $(4,576) $(4,639)
======= ======= ======= ======= ======= =======
Assumptions:
Discount rate.......... 7.50% 7.00% 8.50% 7.50% 7.00% 8.50%
Expected return on
assets................ 8.75% 8.75% 8.75% 8.75% 8.75% 8.75%
Rate of salary
increases............. 4.00% 4.00% 5.00% 4.00% 4.00% 5.00%

The defined benefit plan is fully funded and investments have been set aside
in a trust fund. The supplemental retirement plans are non-qualified, unfunded
plans.

F-37

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996, 1995 AND 1994

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 9--PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS--(CONTINUED)

Components of net pension cost for the defined benefit plan and supplemental
retirement plans for the following periods are:

SUPPLEMENTAL
DEFINED BENEFIT PLAN RETIREMENT PLANS
------------------------- -------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------- -------------------------
1996 1995 1994 1996 1995 1994
------- ------- ------- ------- ------- -------

Service cost-benefits
earned during the year.. $ 1,686 $ 1,447 $ 1,735 $ 192 $ 142 $ 209
Interest accrued on
projected benefit
obligation.............. 2,779 2,715 2,584 320 324 319
Actual return on assets.. (3,688) (7,888) (16) - - -
Net amortization and
deferral................ (449) 4,368 (3,322) 235 197 264
------- ------- ------- ------- ------- -------
Net periodic pension
cost.................. $ 328 $ 642 $ 981 $ 747 $ 663 $ 792
======= ======= ======= ======= ======= =======

The pension liabilities of the defined benefit plan and supplemental
retirement plans were as follows:

Plan assets in excess of
(less than) projected
benefit obligation...... $ 2,897 $ 551 $ 1,631 $(4,788) $(4,576) $(4,639)
Unrecognized prior
service (asset) cost.... (5,645) (6,255) (6,865) 3,209 3,522 3,805
Unrecognized net (gain)
loss from past
experience different
from that assumed....... 1,358 4,642 4,814 (1,342) (1,159) (731)
------- ------- ------- ------- ------- -------
Pension liability
included in the
consolidated balance
sheets.................. (1,390) (1,062) (420) (2,921) (2,213) (1,565)
Additional liability to
recognize unfunded
accumulated benefit
obligation.............. - - - (1,474) (1,321) (1,259)
------- ------- ------- ------- ------- -------
Pension liability........ $(1,390) $(1,062) $ (420) $(4,395) $(3,534) $(2,824)
======= ======= ======= ======= ======= =======

Postretirement Benefits Other than Pensions

In addition to providing pension benefits, the Company also provides certain
health care and life insurance benefits to retired employees and eligible
dependents. Employees with ten years of service are eligible to receive these
benefits upon retirement. Postretirement benefits other than pensions of
active and retired employees are accrued as expense over the employees'
service years.

F-38

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996, 1995 AND 1994

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 9--PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS--(CONTINUED)

The following table presents the funded status of postretirement benefits
other than pensions of active and retired employees (including employees on
disability more than 2 years) as of December 31, 1996, 1995 and 1994
reconciled with amounts recognized in the Company's statement of financial
position:

DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------

Accumulated postretirement benefit obligation:
Retirees........................................ $12,830 $10,534 $ 8,753
Fully eligible active plan participants......... 2,049 1,488 1,217
Other active plan participants.................. 10,274 11,028 7,422
------- ------- -------
Total unfunded accumulated postretirement benefit
obligation....................................... 25,153 23,050 17,392
Unrecognized net gain (loss) from past experience
different from that assumed...................... (2,276) (1,007) 3,647
------- ------- -------
Accrued postretirement benefit cost............. $22,877 $22,043 $21,039
======= ======= =======

Components of the cost of postretirement benefits other than pensions for the
following periods were:

YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------

Service cost-benefits earned during the year...... $ 801 $ 600 $ 718
Interest accrued on accumulated benefit
obligation....................................... 1,845 1,330 1,319
------- ------- -------
Net expense..................................... $ 2,646 $ 1,930 $ 2,037
======= ======= =======

The assumed annual rates of increase in the per capita cost of covered
benefits for participants in the plan who retired prior to January 1, 1994
were 7.8%, 8.1% and 8.3% as of December 31, 1996, 1995 and 1994, respectively.
For those participants retiring after December 31, 1993, benefits are provided
at a level amount of $10.00 per month per year of employment. The weighted
average discount rate used in determining the accumulated postretirement
benefit obligation was 7.50%, 7.00% and 8.50% at December 31, 1996, 1995 and
1994, respectively.

A one percentage point increase in the assumed health care cost trend rate
for each year would increase the accumulated postretirement benefit obligation
at December 31, 1996 by approximately $1,733 and the sum of the service and
interest cost components of the net periodic postretirement expense for the
year ended December 31, 1996 would increase by approximately $122.

NOTE 10--REINSURANCE

In the normal course of business, the insurance subsidiaries assume and cede
reinsurance with other insurers. Reinsurance is ceded primarily to limit
losses from large exposures and to permit recovery of a portion of direct
losses; however, such a transfer does not relieve the originating insurance
company of contingent liability.

F-39

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996, 1995 AND 1994

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 10--REINSURANCE--(CONTINUED)

The Company is a national underwriter and therefore has exposure to
catastrophic losses in certain coastal states and other regions throughout the
United States. Catastrophes can be caused by various events including
hurricanes, windstorms, earthquakes, hail, severe winter weather, and fires,
and the frequency and severity of catastrophes are inherently unpredictable.
The financial impact from catastrophic losses results from both the total
amount of insured exposure in the area affected by the catastrophe as well as
the severity of the event. The Company seeks to reduce its exposure to
catastrophe losses through the geographic diversification of its insurance
coverage, the purchase of catastrophe reinsurance, and the purchase in 1997 of
a catastrophe-linked equity put option (also see Note 5).

The total amounts of reinsurance recoverable on unpaid losses classified as
assets and reported in other assets in the balance sheets were as follows:

DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------

Reinsurance Recoverables on Unpaid Losses
Life and health................................... $ 2,863 $ 1,369 $ 1,715
Property and casualty
State insurance facilities...................... 24,445 19,903 16,111
Other insurance companies....................... 9,617 3,861 2,364
------- ------- -------
Total......................................... $36,925 $25,133 $20,190
======= ======= =======

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
-------- --------- ---------- --------

YEAR ENDED DECEMBER 31, 1996
Premiums written................... $699,701 $23,214 $28,345 $704,832
Premiums earned.................... 497,705 23,887 28,881 502,699
Benefits, claims and settlement
expenses.......................... 347,352 32,159 31,498 346,691
YEAR ENDED DECEMBER 31, 1995
Premiums written................... 647,390 22,656 29,236 653,970
Premiums earned.................... 481,192 20,499 24,751 485,444
Benefits, claims and settlement
expenses.......................... 341,538 27,669 21,836 335,705
YEAR ENDED DECEMBER 31, 1994
Premiums written................... 638,376 21,495 20,466 637,347
Premiums earned.................... 473,195 21,834 21,056 472,417
Benefits, claims and settlement
expenses.......................... 341,429 20,569 10,651 331,511

F-40

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996, 1995 AND 1994

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 10--REINSURANCE--(CONTINUED)

There were no losses from uncollectible reinsurance recoverables in the
three years ended December 31, 1996. Past due reinsurance recoverables as of
December 31, 1996 were not material.

NOTE 11--CONTINGENCIES

Lawsuits and Legal Proceedings

There are various lawsuits and other legal proceedings against the Company.
Management and legal counsel are of the opinion that the ultimate disposition
of such litigation will have no material adverse effect on the Company's
financial position or results of operations.

Assessments for Insolvencies of Unaffiliated Insurance Companies

The Company is also contingently liable for possible assessments under
regulatory requirements pertaining to potential insolvencies of unaffiliated
insurance companies. Liabilities, which are established based upon regulatory
guidance, have been insignificant.

NOTE 12--SUPPLEMENTARY DATA ON CASH FLOWS

A reconciliation of net income to net cash provided by operating activities
as presented in the consolidated statements of cash flows is as follows:

YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------

Cash flows from operating activities
Net income................................. $ 64,639 $ 73,926 $ 62,855
Adjustments to reconcile net income to net
cash provided by operating activities:
Realized investment (gains) losses....... (2,451) (8,604) 917
Depreciation and amortization............ 13,050 15,595 19,690
Increase in insurance liabilities........ 74,621 79,739 87,755
Increase in premium receivables.......... (14,397) (9,651) (566)
Increase in deferred policy acquisition
costs................................... (11,973) (7,771) (11,004)
Increase (decrease) in accrued interest
expense................................. 1,769 731 (451)
(Increase) decrease in reinsurance
recoverable............................. (2,030) 52 (2,376)
Increase in federal income tax
liabilities............................. 12,136 10,693 4,624
Accrued loss on discontinued operations.. 5,974 - -
Loss from early retirement of debt....... 1,319 - 2,621
Other.................................... (3,443) (1,366) (5,758)
-------- -------- --------
Total adjustments...................... 74,575 79,418 95,452
-------- -------- --------
Net cash provided by operating
activities............................ $139,214 $153,344 $158,307
======== ======== ========

The Company's early retirement of debt in 1996 and 1994 resulted in noncash
financing (benefits) and charges of ($1,571) and $1,742, respectively.

F-41

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996, 1995 AND 1994

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 13--SEGMENT INFORMATION

The Company's operations include the following segments: property and
casualty, annuity and life insurance.

The property and casualty insurance segment includes primarily personal
lines automobile and homeowners products. The annuity segment includes both
fixed and variable tax-qualified annuity products. The life insurance segment
includes primarily interest-sensitive life and traditional life products.

Summarized financial information for these segments is as follows:

YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 % CHANGE 1994 % CHANGE
---------- ---------- -------- ---------- --------

Revenues
Property and casualty.. $ 459,783 $ 455,578 0.9% $ 436,863 4.3%
Annuity................ 122,251 121,375 0.7% 112,074 8.3%
Life................... 122,667 115,932 5.8% 108,444 6.9%
Other.................. (944) (467) (572)
---------- ---------- ----------
Total................ $ 703,757 $ 692,418 1.6% $ 656,809 5.4%
========== ========== ==========
Realized investment
gains (losses)
Property and casualty. $ 201 $ 2,940 $ (3,057)
Annuity............... 1,584 4,367 1,683
Life.................. 666 1,297 457
---------- ---------- ----------
Total................ $ 2,451 $ 8,604 $ (917)
========== ========== ==========
Income (loss) from
continuing operations
before income taxes,
discontinued operations
and extraordinary item
Property and casualty. $ 70,522 $ 75,261 -6.3% $ 64,544 16.6%
Annuity............... 26,546 27,117 -2.1% 23,619 14.8%
Life.................. 19,129 17,428 9.8% 12,371 40.9%
Interest expense and
other................ (15,578) (16,233) (14,296)
---------- ---------- ----------
Total............... $ 100,619 $ 103,573 -2.9% $ 86,238 20.1%
========== ========== ==========
Amortization of
intangible assets
Value of acquired
insurance in force
Property and casualty. $ 1,032 $ 1,032 - $ 1,208 -14.6%
Annuity............... 5,906 6,144 -3.9% 6,280 -2.2%
Life.................. 2,649 2,872 -7.8% 3,547 -19.0%
---------- ---------- ----------
Subtotal............. 9,587 10,048 -4.6% 11,035 -8.9%
Goodwill............... 1,618 1,618 - 1,595 1.4%
---------- ---------- ----------
Total amortization of
intangible assets... $ 11,205 $ 11,666 -4.0% $ 12,630 -7.6%
========== ========== ==========
Assets
Property and casualty.. $ 712,419 $ 712,979 -0.1% $ 676,692 5.4%
Annuity and Life....... 3,011,538 2,851,543 5.6% 2,464,130 15.7%
Other.................. 137,069 97,732 40.2% 144,711 -32.5%
---------- ---------- ----------
Total................ $3,861,026 $3,662,254 5.4% $3,285,533 11.5%
========== ========== ==========

Revenues include insurance premiums and contract charges earned, net
investment income and realized investment gains and losses. Total assets are
not allocated among the annuity and life segments. Capital expenditures and
depreciation expense were not material.

F-42

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1996, 1995 AND 1994

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 14--UNAUDITED INTERIM INFORMATION

Summary quarterly financial data is presented below. All periods have been
restated to reflect group medical results as discontinued operations (also see
Note 2).

THREE MONTHS ENDED
----------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
------------ ------------- -------- ---------
1996
- ----

Insurance premiums written and
contract deposits.............. $183,938 $180,551 $176,395 $163,948
Total revenues.................. 180,026 175,475 174,407 173,849
Income from continuing
operations..................... 21,387 17,892 18,097 16,426
Discontinued operations, after
tax............................ (5,586) (1,568) (1,016) (993)
Net income...................... 15,801 16,324 17,081 15,433
Per share information
Assuming no dilution
Realized investment gains
(losses), after tax......... $ (0.01) - $ 0.02 $ 0.06
Income from continuing
operations.................. 0.90 $ 0.77 0.77 0.70
Net income................... 0.67 0.69 0.73 0.66
Assuming full dilution
Realized investment gains
(losses), after tax......... (0.01) - 0.02 0.06
Income from continuing
operations.................. 0.90 0.77 0.77 0.70
Net income................... 0.67 0.69 0.73 0.66

1995
- ----

Insurance premiums written and
contract deposits.............. $171,440 $163,417 $161,869 $157,244
Total revenues.................. 176,540 171,894 174,022 169,962
Income from continuing
operations..................... 22,012 19,674 16,238 17,186
Discontinued operations, after
tax............................ (589) (517) (8) (70)
Net income...................... 21,423 19,157 16,230 17,116
Per share information
Assuming no dilution
Realized investment gains,
after tax................... $ 0.08 $ 0.04 $ 0.10 $ -
Income from continuing
operations.................. 0.94 0.85 0.66 0.59
Net income................... 0.92 0.83 0.66 0.59
Assuming full dilution
Realized investment gains,
after tax................... 0.07 0.03 0.10 0.01
Income from continuing
operations.................. 0.86 0.78 0.62 0.57
Net income................... 0.84 0.76 0.62 0.57

1994
- ----

Insurance premiums written and
contract deposits.............. $162,507 $155,141 $161,692 $158,007
Total revenues.................. 162,873 165,609 162,334 165,993
Income from continuing
operations..................... 17,145 19,514 16,166 11,795
Discontinued operations, after
tax............................ 119 (217) (239) 276
Income before extraordinary
item........................... 17,264 19,297 15,927 12,071
Net income...................... 17,264 17,593 15,927 12,071
Per share information
Assuming no dilution
Realized investment gains
(losses), after tax......... $ (0.07) $ 0.04 $ (0.07) $ 0.08
Income from continuing
operations.................. 0.59 0.67 0.56 0.41
Income before extraordinary
item........................ 0.60 0.66 0.55 0.42
Net income................... 0.60 0.60 0.55 0.42
Assuming full dilution
Realized investment gains
(losses), after tax......... (0.06) 0.03 (0.06) 0.07
Income from continuing
operations.................. 0.57 0.64 0.53 0.41
Income before extraordinary
item........................ 0.57 0.63 0.52 0.41
Net income................... 0.57 0.58 0.52 0.41

F-43

SCHEDULE I

HORACE MANN EDUCATORS CORPORATION

SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES

DECEMBER 31, 1996

(AMOUNTS IN THOUSANDS)

AMOUNT
SHOWN IN
MARKET BALANCE
TYPE OF INVESTMENTS COST(1) VALUE SHEET
------------------- ---------- ---------- ----------

Fixed maturities:
U.S. Government and U.S. Government agencies
and authorities............................ $ 463,034 $ 469,527 $ 469,527
Foreign government bonds.................... 34,684 36,023 36,023
States, municipalities and political
subdivisions............................... 659,651 673,237 673,237
Public utilities............................ 43,152 43,394 43,394
Other corporate bonds....................... 1,408,556 1,436,331 1,436,331
---------- ---------- ----------
Total fixed maturity securities........... 2,609,077 $2,658,512 2,658,512
==========
Mortgage loans and real estate................ 43,008 xxx 43,008
Short-term investments........................ 36,900 xxx 36,897
Policy loans and other........................ 45,919 xxx 45,919
---------- ----------
Total investments......................... $2,734,904 xxx $2,784,336
========== ==========

- --------
(1) Bonds at original cost reduced by repayments and adjusted for amortization
of premiums or accrual of discounts and impairment in value of
specifically identified investments.

See accompanying Independent Auditors' Report.

F-44

SCHEDULE II

HORACE MANN EDUCATORS CORPORATION
(PARENT COMPANY ONLY)

CONDENSED FINANCIAL INFORMATION

BALANCE SHEETS

AS OF DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

1996 1995 1994
--------- --------- --------
ASSETS

Investments.................................... $ 9,014 $ 4,309 $ 9,629
Cash........................................... 4,325 3,757 1,825
Investment in subsidiaries..................... 654,959 701,725 538,248
Other assets................................... 36,013 35,993 45,386
--------- --------- --------
Total assets............................... $ 704,311 $ 745,784 $595,088
========= ========= ========

LIABILITIES, REDEEMABLE SECURITIES AND SHAREHOLDERS' EQUITY

Accounts payable and accrued expenses.......... $ 18,616 $ 36,134 $ 19,894
Other liabilities.............................. 56,325 52,958 51,598
Mortgage loan payable to subsidiary............ 10,834 10,951 11,056
Short-term debt................................ 34,000 75,000 -
Long-term debt................................. 99,564 100,000 100,000
--------- --------- --------
Total liabilities.......................... 219,339 275,043 182,548
--------- --------- --------
Warrants, subject to redemption................ 577 577 577
--------- --------- --------
Preferred stock, $0.001 par value, authorized
1,000,000 shares; none issued in 1996......... - - -
Common stock, $0.001 par value, authorized
75,000,000 shares; issued, 1996, 29,213,398;
1995, 28,977,429; 1994, 28,958,229............ 29 29 29
Additional paid-in capital..................... 330,263 323,920 323,517
Net unrealized gains (losses) on fixed
maturities and equity securities.............. 29,736 76,151 (70,861)
Retained earnings.............................. 278,669 224,366 159,278
Treasury stock, at cost, 5,588,098 shares...... (154,302) (154,302) -
--------- --------- --------
Total shareholders' equity................. 484,395 470,164 411,963
--------- --------- --------
Total liabilities, redeemable securities
and shareholders' equity.................. $ 704,311 $ 745,784 $595,088
========= ========= ========

See accompanying note to condensed financial statements.

See accompanying Independent Auditors' Report.

F-45

SCHEDULE II

HORACE MANN EDUCATORS CORPORATION
(PARENT COMPANY ONLY)

CONDENSED FINANCIAL INFORMATION

STATEMENTS OF OPERATIONS

(AMOUNTS IN THOUSANDS)

YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------

Revenues
Service fees...................................... $ - $ - $ 57
Net investment income............................. 165 659 544
Interest on note receivable from subsidiary....... - - 23,897
------- ------- -------
Total revenues.................................. 165 659 24,498
------- ------- -------
Expenses
Interest.......................................... 10,517 11,589 9,483
Amortization of goodwill.......................... 1,618 1,618 1,595
Other............................................. 2,566 2,532 4,426
Debt retirement costs............................. 1,319 - -
Cost of additional rights relating to share
repurchase....................................... - 1,347 -
------- ------- -------
Total expenses.................................. 16,020 17,086 15,504
------- ------- -------
Income (loss) from continuing operations before
income taxes and equity in net earnings of
subsidiaries....................................... (15,855) (16,427) 8,994
Income tax expense (benefit)........................ (4,519) (4,241) 3,221
------- ------- -------
Income (loss) from continuing operations before
equity in net earnings of subsidiaries............. (11,336) (12,186) 5,773
Equity in net earnings of subsidiaries.............. 85,138 87,296 58,847
------- ------- -------
Income from continuing operations................... 73,802 75,110 64,620
Discontinued operations:
Loss from operations, net of applicable income tax
benefits of 1996, $2,764; 1995, $647; 1994, $34.. (5,280) (1,184) (61)
Loss on discontinuation, representing provision of
$5,974 for operating losses during phase-out
period, net of applicable income tax benefits of
$2,091........................................... (3,883) - -
------- ------- -------
Income before extraordinary item.................... 64,639 73,926 64,559
Loss from early retirement of debt, net of taxes.... - - (1,704)
------- ------- -------
Net income.......................................... $64,639 $73,926 $62,855
======= ======= =======

See accompanying note to condensed financial statements.

See accompanying Independent Auditors' Report.

F-46

SCHEDULE II

HORACE MANN EDUCATORS CORPORATION
(PARENT COMPANY ONLY)

CONDENSED FINANCIAL INFORMATION

STATEMENTS OF CASH FLOWS

(AMOUNTS IN THOUSANDS)

YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------

Cash flows from operating activities
Interest expense paid....................... $ (8,653) $ (11,180) $ (9,853)
Surplus note interest received.............. - - 30,616
Federal income taxes recovered (paid)....... (10,154) 21,509 (4,460)
Cash dividends received from subsidiaries... 72,700 75,471 44,700
Other, net.................................. 3,342 324 7,204
--------- --------- ---------
Net cash provided by operating activities. 57,235 86,124 68,207
--------- --------- ---------
Cash flows from investing activities
Repayment of surplus note receivable from
subsidiary................................. - - 245,000
Increase investment in subsidiary........... - - (245,000)
Net (increase) decrease in short-term
investments................................ (3,052) 5,699 (581)
Net increase in long-term investments....... (1,081) (378) -
Net increase in other investments........... (572) - -
Capital expenditures for property and
equipment.................................. (2,609) (1,776) (5,935)
--------- --------- ---------
Net cash provided by (used in) investing
activities............................... (7,314) 3,545 (6,516)
--------- --------- ---------
Cash flows from financing activities
Dividends paid to shareholders.............. (10,336) (8,838) (8,398)
Proceeds from issuance of Senior Notes...... 98,530 - -
Proceeds from issuance of common stock...... - 20,568 -
Principal borrowings (payments) on Bank
Credit Facility............................ (41,000) 75,000 -
Retirement of Convertible Notes............. (102,890) - -
Purchase of treasury stock.................. - (174,870) -
Exercise of stock options................... 6,343 403 -
Acquisition of Allegiance Insurance Company
Issuance of long-term debt at fair value... - - 40,115
Acquisition consideration.................. - - (42,323)
Retirement of Debentures.................... - - (50,603)
--------- --------- ---------
Net cash used in financing activities..... (49,353) (87,737) (61,209)
--------- --------- ---------
Net increase in cash.......................... 568 1,932 482
Cash at beginning of period................... 3,757 1,825 1,343
--------- --------- ---------
Cash at end of period......................... $ 4,325 $ 3,757 $ 1,825
========= ========= =========

See accompanying note to condensed financial statements.

See accompanying Independent Auditors' Report.

F-47

SCHEDULE II

HORACE MANN EDUCATORS CORPORATION
(PARENT COMPANY ONLY)

CONDENSED FINANCIAL INFORMATION

NOTE TO CONDENSED FINANCIAL STATEMENTS

DECEMBER 31, 1996, 1995 AND 1994

The accompanying condensed financial statements should be read in conjunction
with the Consolidated Financial Statements and the accompanying notes thereto.

See accompanying Independent Auditors' Report.

F-48

SCHEDULE III & VI (COMBINED)
HORACE MANN EDUCATORS CORPORATION

SUPPLEMENTARY INSURANCE INFORMATION

(AMOUNTS IN THOUSANDS)

FUTURE
POLICY OTHER CLAIMS AND CLAIM
BENEFITS, DISCOUNT, POLICY BENEFITS, ADJUSTMENT EXPENSES
DEFERRED LOSSES, IF ANY, CLAIMS PREMIUM CLAIMS, INCURRED RELATED TO
POLICY CLAIMS AND DEDUCTED IN AND REVENUE/ NET LOSSES AND -------------------
ACQUISITION LOSS PREVIOUS UNEARNED BENEFITS PREMIUM INVESTMENT SETTLEMENT CURRENT PRIOR
SEGMENT COSTS EXPENSES COLUMN PREMIUMS PAYABLE EARNED INCOME EXPENSES YEAR YEARS
------- ----------- ---------- ----------- -------- -------- -------- ---------- ---------- -------------------

YEAR ENDED DECEMBER 31, 1996
Property and
casualty........ $13,855 $ 340,411 $ 0 $150,368 $ 305 $413,219 $ 46,363 $306,102 $ 368,648 $ (62,546)
Annuity........... 14,230 1,287,815 xxx - 102,681 9,191 111,476 76,762 xxx xxx
Life.............. 46,986 526,028 xxx 5,408 15,563 80,289 41,712 59,149 xxx xxx
Other............. N/A N/A xxx N/A N/A N/A (944) N/A xxx xxx
------- ---------- -------- -------- -------- -------- --------
Total........... $75,071 $2,154,254 xxx $155,776 $118,549 $502,699 $198,607 $442,013 xxx xxx
======= ========== ======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1995
Property and
casualty........ $12,515 $ 369,653 $ 0 $136,441 $ 305 $403,796 $ 48,842 $297,078 $ 352,513 $ (55,630)
Annuity........... 12,497 1,276,227 xxx - 101,943 6,798 110,210 74,424 xxx xxx
Life.............. 41,854 489,060 xxx 4,664 16,822 74,850 39,785 55,114 xxx xxx
Other............. N/A N/A xxx N/A N/A N/A (467) N/A xxx xxx
------- ---------- -------- -------- -------- -------- --------
Total........... $66,866 $2,134,940 xxx $141,105 $119,070 $485,444 $198,370 $426,616 xxx xxx
======= ========== ======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1994
Property and
casualty........ $13,356 $ 388,038 $ 0 $134,443 $ 305 $394,985 $ 44,935 $291,923 $ 346,025 $ (54,371)
Annuity........... 9,908 1,237,007 xxx - 102,001 5,442 104,949 69,656 xxx xxx
Life.............. 35,831 454,015 xxx 3,937 17,259 71,990 35,997 53,891 xxx xxx
Other............. N/A N/A xxx N/A N/A N/A (572) N/A xxx xxx
------- ---------- -------- -------- -------- -------- --------
Total........... $59,095 $2,079,060 xxx $138,380 $119,565 $472,417 $185,309 $415,470 xxx xxx
======= ========== ======== ======== ======== ======== ========

AMORTIZATION PAID
OF DEFERRED CLAIMS
POLICY OTHER AND CLAIM
ACQUISITION OPERATING ADJUSTMENT PREMIUMS
SEGMENT...... COSTS EXPENSES EXPENSES WRITTEN
-------...... ------------ --------- ---------- --------

YEAR ENDED DECEMBER 31, 1996
Property and
casualty........ $36,652 $ 46,507 $345,642 $427,146
Annuity........... 1,300 17,643 xxx xxx
Life.............. 3,111 41,278 xxx xxx
Other............. N/A 13,315 xxx xxx
------------ ---------
Total........... $41,063 $118,743 xxx xxx
============ =========
YEAR ENDED DECEMBER 31, 1995
Property and
casualty........ $36,405 $ 46,834 $320,557 $405,795
Annuity........... 71 19,763 xxx xxx
Life.............. 3,542 39,848 xxx xxx
Other............. N/A 14,419 xxx xxx
------------ ---------
Total........... $40,018 $120,864 xxx xxx
============ =========
YEAR ENDED DECEMBER 31, 1994
Property and
casualty........ $36,053 $ 44,343 $304,036 $398,770
Annuity........... 7 18,792 xxx xxx
Life.............. 2,636 39,546 xxx xxx
Other............. N/A 13,724 xxx xxx
------------ ---------
Total........... $38,696 $116,405 xxx xxx
============ =========

- -----
N/A Not applicable.

See accompanying Independent Auditors' Report.

F-49

SCHEDULE IV

HORACE MANN EDUCATORS CORPORATION

REINSURANCE

(AMOUNTS IN THOUSANDS)

COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
CEDED TO ASSUMED PERCENTAGE
GROSS OTHER FROM STATE OF AMOUNT
AMOUNT COMPANIES FACILITIES NET ASSUMED
----------- --------- ---------- ----------- ----------

YEAR ENDED DECEMBER 31,
1996
Life insurance in
force................ $10,645,393 $222,611 $ - $10,422,782 -
Premiums
Property and
casualty........... $ 406,778 $ 22,440 $28,881 $ 413,219 7.0%
Annuity............. 9,191 - - 9,191 -
Life................ 81,736 1,447 - 80,289 -
----------- -------- ------- -----------
Total premiums.... $ 497,705 $ 23,887 $28,881 $ 502,699 5.7%
=========== ======== ======= ===========
YEAR ENDED DECEMBER 31,
1995
Life insurance in
force................ $10,234,655 $174,002 $ - $10,060,653 -
Premiums
Property and
casualty........... $ 398,639 $ 19,594 $24,751 $ 403,796 6.1%
Annuity............. 6,798 - - 6,798 -
Life................ 75,755 905 - 74,850 -
----------- -------- ------- -----------
Total premiums.... $ 481,192 $ 20,499 $24,751 $ 485,444 5.1%
=========== ======== ======= ===========
YEAR ENDED DECEMBER 31,
1994
Life insurance in
force................ $ 9,707,332 $160,082 $ - $ 9,547,250 -
Premiums
Property and
casualty........... $ 394,902 $ 20,973 $21,056 $ 394,985 5.3%
Annuity............. 5,442 - - 5,442 -
Life................ 72,851 861 - 71,990 -
----------- -------- ------- -----------
Total premiums.... $ 473,195 $ 21,834 $21,056 $ 472,417 4.5%
=========== ======== ======= ===========

- --------
NOTE: Premiums above include insurance premiums earned and contract charges
earned.

See accompanying Independent Auditors' Report.

F-50

LOGO
HA-C00302