================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[x]QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-10890
HORACE MANN EDUCATORS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 37-0911756
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Horace Mann Plaza, Springfield, Illinois 62715-0001
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: 217-789-2500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of October 31, 1997, 22,363,706 shares of Common Stock, par value $0.001
per share, were outstanding, net of 7,216,298 shares of treasury stock.
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HORACE MANN EDUCATORS CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996............................................... 1
Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1997
and 1996............................................................................... 2
Consolidated Statements of Changes in Shareholders'
Equity for the Nine Months Ended September 30, 1997
and 1996............................................................................... 3
Consolidated Statements of Cash Flows for the
Three and Nine Months Ended September 30, 1997
and 1996............................................................................... 4
Notes to Consolidated Financial Statements................................................ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................. 10
PART II - OTHER INFORMATION................................................................................ 21
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES................................................................................................. 22
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
1997 1996
------------- ------------
ASSETS
Investments
Fixed maturities, available for sale, at market (amortized
cost, 1997, $2,553,344; 1996, $2,609,077)...................................... $2,640,070 $2,658,512
Short-term and other investments................................................ 132,082 125,824
---------- ----------
Total investments......................................................... 2,772,152 2,784,336
Cash............................................................................. 14,398 13,704
Accrued investment income and premiums receivable................................ 94,835 107,682
Value of acquired insurance in force and goodwill................................ 110,561 118,638
Other assets..................................................................... 182,818 151,830
Variable annuity assets.......................................................... 936,895 684,836
---------- ----------
Total assets.............................................................. $4,111,659 $3,861,026
========== ==========
LIABILITIES, REDEEMABLE SECURITIES AND SHAREHOLDERS' EQUITY
Policy liabilities
Annuity contract liabilities.................................................... $1,267,925 $1,286,110
Interest-sensitive life contract liabilities.................................... 355,306 326,955
Unpaid claims and claim expenses................................................ 335,124 358,853
Future policy benefits.......................................................... 178,942 182,336
Unearned premiums............................................................... 162,402 155,776
---------- ----------
Total policy liabilities.................................................. 2,299,699 2,310,030
Other policyholder funds......................................................... 120,887 118,549
Other liabilities................................................................ 118,753 129,075
Short-term debt.................................................................. 42,000 34,000
Long-term debt................................................................... 99,590 99,564
Variable annuity liabilities..................................................... 933,795 684,836
---------- ----------
Total liabilities......................................................... 3,614,724 3,376,054
---------- ----------
Warrants, subject to redemption.................................................. 577 577
---------- ----------
Preferred stock.................................................................. - -
Common stock..................................................................... 30 29
Additional paid-in capital....................................................... 340,755 330,263
Net unrealized gains on fixed
maturities and equity securities................................................ 50,914 29,736
Retained earnings................................................................ 327,559 278,669
Treasury stock, at cost.......................................................... (222,900) (154,302)
---------- ----------
Total shareholders' equity................................................ 496,358 484,395
---------- ----------
Total liabilities, redeemable
securities, and shareholders' equity................................... $4,111,659 $3,861,026
========== ==========
See accompanying notes to consolidated financial statements.
1
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
Insurance premiums written
and contract deposits................. $188,911 $180,551 $563,834 $520,894
======== ======== ======== ========
Revenues
Insurance premiums and
contract charges earned............. $135,078 $126,156 $402,385 $372,486
Net investment income................. 49,271 49,451 148,979 148,642
Realized investment gains (losses).... 1,585 (132) 3,230 2,603
-------- -------- -------- --------
Total revenues..................... 185,934 175,475 554,594 523,731
-------- -------- -------- --------
Benefits, losses and expenses
Benefits, claims and
settlement expenses................. 89,925 89,022 271,714 261,172
Interest credited..................... 24,227 23,923 73,082 71,225
Policy acquisition
expenses amortized.................. 10,937 10,306 33,035 30,236
Operating expenses.................... 27,484 23,644 77,090 71,763
Amortization of intangible assets..... 2,666 2,802 8,077 8,501
Interest expense...................... 1,842 2,552 7,067 8,022
Debt retirement costs................. - - - 1,319
-------- -------- -------- --------
Total benefits, losses
and expenses..................... 157,081 152,249 470,065 452,238
-------- -------- -------- --------
Income from continuing operations
before income taxes and
discontinued operations............... 28,853 23,226 84,529 71,493
Income tax expense...................... 7,376 5,334 22,756 19,078
-------- -------- -------- --------
Income from continuing operations....... 21,477 17,892 61,773 52,415
Discontinued operations:
Loss from operations, net of
applicable income tax benefits....... - (1,568) - (3,577)
Loss on discontinuation, net of
applicable income tax benefits....... (3,481) - (3,481) -
-------- -------- -------- --------
Net income.............................. $ 17,996 $ 16,324 $ 58,292 $ 48,838
======== ======== ======== ========
Earnings (loss) per share
Income from continuing operations..... $ 0.95 $ 0.77 $ 2.67 $ 2.24
Discontinued operations:
Loss from operations................. - (0.08) - (0.16)
Loss on discontinuation.............. (0.15) - (0.15) -
-------- -------- -------- --------
Net income.............................. $ 0.80 $ 0.69 $ 2.52 $ 2.08
======== ======== ======== ========
Weighted average number of shares
and equivalent shares (in thousands).. 22,585 23,474 23,111 23,449
See accompanying notes to consolidated financial statements.
2
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share data)
Nine Months Ended
September 30,
-----------------------
1997 1996
---- ----
Common stock
Beginning balance..................................... $ 29 $ 29
Options exercised, 1997, 363,212 shares;
1996, 136,000 shares................................. 1 -
Conversion of Director Stock
Plan units, 1997, 1,144 shares....................... - -
--------- ---------
Ending balance........................................ 30 29
--------- ---------
Additional paid-in capital
Beginning balance..................................... 330,263 323,920
Options exercised and conversion of
Director Stock Plan units............................ 11,742 3,335
Catastrophe-linked equity
put option premium................................... (1,250) -
--------- ---------
Ending balance........................................ 340,755 327,255
--------- ---------
Net unrealized gains (losses) on
fixed maturities and equity securities
Beginning balance.................................... 29,736 76,151
Increase (decrease) for the period................... 21,178 (63,762)
--------- ---------
Ending balance....................................... 50,914 12,389
--------- ---------
Retained earnings
Beginning balance.................................... 278,669 224,366
Net income........................................... 58,292 48,838
Cash dividends, 1997, $0.405; 1996,
$0.33 per share..................................... (9,402) (7,739)
--------- ---------
Ending balance....................................... 327,559 265,465
--------- ---------
Treasury stock, at cost
Beginning balance, 5,588,098 shares.................. (154,302) (154,302)
Purchase of 1,449,800 shares (See note 5)............ (68,598) -
--------- ---------
Ending balance, 1997, 7,037,898 shares;
1996, 5,588,098 shares.............................. (222,900) (154,302)
--------- ---------
Shareholders' equity at end of period................. $ 496,358 $ 450,836
========= =========
See accompanying notes to consolidated financial statements.
3
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Cash flows from operating activities
Premiums collected............................ $ 154,356 $ 146,670 $ 462,657 $ 427,886
Policyholder benefits paid.................... (116,508) (116,876) (353,003) (335,378)
Policy acquisition and other
operating expenses paid...................... (44,727) (39,220) (126,977) (121,105)
Federal income taxes paid..................... (2,626) - (46,703) (10,651)
Investment income collected................... 53,111 51,094 152,853 151,796
Interest expense paid......................... (2,610) (4,226) (8,423) (7,382)
Other......................................... (2,853) (4,639) (4,354) (2,437)
--------- --------- --------- ---------
Net cash provided
by operating activities.................... 38,143 32,803 76,050 102,729
--------- --------- --------- ---------
Cash flows from investing activities
Fixed maturities
Purchases.................................... (189,029) (206,079) (768,418) (722,154)
Sales........................................ 191,994 152,155 648,621 512,435
Maturities................................... 42,679 46,391 173,986 149,764
Net cash received from
short-term and other investments............. (30,245) (2,321) (9,056) 33,161
--------- --------- --------- ---------
Net cash provided by
(used in) investing activities............. 15,399 (9,854) 45,133 (26,794)
--------- --------- --------- ---------
Cash flows from financing activities
Dividends paid to shareholders................ (3,047) (2,580) (9,402) (7,739)
Principal borrowing (payments) on
Bank Credit Facility......................... - (8,000) 8,000 (25,000)
Purchase of treasury stock.................... (7,163) - (68,598) -
Exercise of stock options..................... 2,270 1,688 11,743 3,335
Catastrophe-linked equity
put option premium........................... - - (1,250) -
Proceeds from issuance
of Senior Notes.............................. - - - 98,530
Retirement of Convertible Notes............... - - - (102,890)
Annuity contracts, variable and fixed
Deposits..................................... 42,165 36,698 143,947 122,241
Maturities and withdrawals................... (51,951) (33,355) (122,061) (99,982)
Net transfer to variable
annuity assets.............................. (29,938) (19,405) (84,005) (62,966)
Net increase in interest-sensitive
life account balances........................ 144 320 1,137 1,045
--------- --------- --------- ---------
Net cash used
in financing activities.................... (47,520) (24,634) (120,489) (73,426)
--------- --------- --------- ---------
Net increase (decrease) in cash................ 6,022 (1,685) 694 2,509
Cash at beginning of period.................... 8,376 13,712 13,704 9,518
--------- --------- --------- ---------
Cash at end of period.......................... $ 14,398 $ 12,027 $ 14,398 $ 12,027
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
4
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997 and 1996
(Dollars in thousands)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of Horace Mann
Educators Corporation (the "Company") have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. The Company believes that these financial statements contain all
adjustments (consisting of normal recurring accruals) necessary to present
fairly the Company's consolidated financial position as of September 30, 1997
and December 31, 1996 and the consolidated results of operations, changes in
shareholders' equity and cash flows for the three and nine months ended
September 30, 1997 and 1996.
It is suggested that these financial statements be read in conjunction with
the financial statements and the notes thereto contained in the December 31,
1996 Form 10-K filed by the Company.
The results of operations for the three and nine months ended September 30,
1997 are not necessarily indicative of the results to be expected for the full
year.
The Company has reclassified the presentation of certain prior period
information to conform with the 1997 presentation including the presentation of
discontinued operations for all periods.
Note 2 - Discontinued Operations
In December 1996, the Company announced its strategic decision to withdraw
from the group medical insurance business over the following two years. The
Company's results of operations for the year ended December 31, 1996 included an
accrual for anticipated losses during the phase-out period and a related income
tax recoverable.
The Company has accelerated the timetable for its withdrawal from the group
medical insurance business anticipating termination of more than 90% of that
business by December 1997 and the remaining business in 1998. As a result of
this acceleration and higher-than-expected claims, net income for the three and
nine months ended September 30, 1997 includes a charge of $3,481 for anticipated
additional losses during the remainder of the phase-out period, net of related
income tax benefits of $1,874.
5
Note 3 - Debt
Indebtedness outstanding was as follows:
September 30, December 31,
1997 1996
------------- ------------
Short-term debt:
$65,000 Bank Credit Facility, IBOR + 0.325%
(6.1% as of September 30, 1997)............. $ 42,000 $ 34,000
Long-term debt:
6 5/8% Senior Notes, due January 15, 2006.
Face amount less unaccrued discount
of $410 and $436 (6.7% imputed rate)......... 99,590 99,564
-------- --------
Total...................................... $141,590 $133,564
======== ========
Note 4 - Investments
The following sets forth the composition and value of the Company's fixed
maturity securities portfolio by rating category. The Company has classified
the entire fixed maturity securities portfolio as available for sale, which is
carried at market value.
Percent of
Carrying Value September 30, 1997
---------------------------- ----------------------
Rating of Fixed September 30, December 31, Carrying Amortized
Maturity Securities(1) 1997 1996 Value Cost
- ---------------------- ------------- ------------- ---------- ----------
AAA..................... 40.7% 46.4% $1,073,211 $1,045,800
AA...................... 7.6 9.4 199,386 192,115
A....................... 20.1 22.3 530,342 512,617
BBB..................... 25.1 16.4 663,852 639,476
BB...................... 2.0 1.4 53,550 50,851
B....................... 3.8 3.7 100,876 94,836
CCC or lower............ - - 782 567
Not rated(2)............ 0.7 0.4 18,071 17,082
----- ----- ---------- ----------
Total................... 100.0% 100.0% $2,640,070 $2,553,344
===== ===== ========== ==========
(1) Ratings are as assigned primarily by Standard & Poor's Corporation ("S&P")
when available, with remaining ratings as assigned on an equivalent basis by
Moody's Investors Service, Inc. ("Moody's"). Ratings for publicly traded
securities are determined when the securities are acquired and are updated
monthly to reflect any changes in ratings.
(2) This category is comprised primarily of private placement securities not
rated by either S&P or Moody's. The National Association of Insurance
Commissioners (the "NAIC") has rated 86.8% of these private placements as
investment grade. $0.8 million of the remaining $1.3 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.
6
Note 4 - Investments - (Continued)
The following table presents a maturity schedule of the Company's fixed
maturity securities. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Percent Carrying
of Total Value
---------------------------- --------------
September 30, December 31, September 30,
Scheduled Maturity 1997 1996 1997
- ------------------ ------------- ------------ -------------
Due in 1 year or less................ 6.1% 5.7% $ 162,055
Due after 1 year through 5 years..... 24.7 28.7 652,620
Due after 5 years through 10 years... 34.2 32.9 902,085
Due after 10 years through 20 years.. 20.3 18.9 536,481
Due after 20 years................... 14.7 13.8 386,829
----- ----- ----------
Total................................ 100.0% 100.0% $2,640,070
===== ===== ==========
Note 5 - Shareholders' Equity
Subsequent Events-Stock Split and Dividend Increase
On November 12, 1997, the Board of Directors authorized a two-for-one stock
split distributable on December 15, 1997 to shareholders of record on November
28, 1997. On November 12, 1997, the Board of Directors also authorized the sixth
increase in the Company's quarterly dividend since the Company's initial public
offering in November 1991. The regular dividend increased by 19% to $0.16 per
share on a pre-split basis.
Share Repurchase Program
In February 1997, the Company's Board of Directors adopted a repurchase
program for shares of the Company's common stock, with an initial repurchase
limit of $100 million. Based on the market price of the Company's common shares
at the time the Board adopted this program, $100 million represented
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. Share repurchases will be financed with cash from operations and, if
needed, the Bank Credit Facility.
As of September 30, 1997, the Company had repurchased 1,449,800 shares at
an aggregate cost of $68,598, or $47.32 per share, which was financed primarily
with cash from operations, including dividends of $80,000 from the property and
casualty subsidiaries.
7
Note 6 - Reinsurance
The Company recognizes the cost of reinsurance premiums over the
contract periods for such premiums in proportion to the insurance protection
provided. Amounts recoverable from reinsurers for unpaid claims and claim
settlement expenses, including estimated amounts for unsettled claims, claims
incurred but not reported and policy benefits are estimated in a manner
consistent with the insurance liability associated with the policy. The effect
of reinsurance on premiums written; premiums earned; and benefits, claims and
settlement expenses were as follows:
Ceded to Assumed
Gross Other from State
Amount Companies Facilities Net
-------- --------- ----------- --------
Three months ended
September 30, 1997
- ------------------
Premiums written................. $195,463 $ 6,429 $ (123) $188,911
Premiums earned.................. 136,904 6,035 4,209 135,078
Benefits, claims and
settlement expenses............. 94,065 7,961 3,821 89,925
Three months ended
September 30, 1996
- ------------------
Premiums written................. $178,628 $ 5,507 $ 7,430 $180,551
Premiums earned.................. 124,864 5,636 6,928 126,156
Benefits, claims and
settlement expenses............. 88,771 6,969 7,220 89,022
Nine months ended
September 30, 1997
- ------------------
Premiums written................. $572,842 $17,390 $ 8,382 $563,834
Premiums earned.................. 402,404 16,011 15,992 402,385
Benefits, claims and
settlement expenses............. 280,178 25,169 16,705 271,714
Nine months ended
September 30, 1996
- ------------------
Premiums written................. $516,584 $17,095 $21,405 $520,894
Premiums earned.................. 368,428 17,447 21,505 372,486
Benefits, claims and
settlement expenses............. 259,076 20,647 22,743 261,172
8
Note 6 - Reinsurance - (Continued)
The Company maintains an excess and catastrophe treaty reinsurance program
for its property and casualty subsidiaries. In 1997, the Company reinsures 95%
of catastrophe losses above a retention of $7.5 million per occurrence up to $65
million per occurrence. The Company's catastrophe reinsurance program is
augmented by a $100 million equity put. This equity put provides for an option
to sell shares of the Company's convertible preferred stock with a floating rate
dividend at a pre-negotiated price in the event of losses from a catastrophe,
individually or in the aggregate, which exceed $65 million. The fee for the
equity put has been charged directly to additional paid-in capital. For
liability coverages, including the educator professional liability policy, the
Company reinsures each loss 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.
9
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.
10
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.
Announcing in October, 1997 that it was accelerating the withdrawal, the Company
anticipates termination of more than 90% of that business by December 1997 and
the remaining business in 1998. In the following discussions of results of
operations, group medical results are reported separately as discontinued
operations for all periods.
Nine Months Ended September 30, 1997 Compared With Nine Months Ended September
30, 1996
Insurance Premiums and Contract Charges Earned
Insurance premiums and contract charges earned, which excludes annuity and
life contract deposits, increased 8.0% for the nine months ended September 30,
1997, compared to the same period in 1996.
Insurance premiums written and contract deposits of $563.8 million for the
nine months ended September 30, 1997 increased 8.3%, compared to $520.8 million
for the same period in 1996, driven principally by a 17.8% increase in annuity
deposits and a 5.8% growth in property and casualty premiums written. Insurance
premiums written and contract deposits in the Company's primary product lines,
automobile (excluding involuntary), property, annuity and life, increased 9.8%
to $546.9 million for the nine months ended September 30, 1997, compared to
$498.3 million for the same period in 1996. Involuntary automobile business
includes allocations of business from state mandatory automobile insurance
facilities and assigned risk business. Involuntary automobile premiums written
for the nine months ended September 30, 1997 decreased 24.9% compared to the
same period in 1996.
Automobile (excluding involuntary) and homeowners earned premiums increased
7.7% to $312.1 million for the nine months ended September 30, 1997, compared to
$289.8 million for the same period in 1996, primarily as a result of a 7.1%
increase in automobile (excluding involuntary) and homeowners policies in force.
The 828,000 automobile (excluding involuntary) and homeowners policies in force
at September 30, 1997 represented an increase of 55,000 policies since September
30, 1996 and an increase of 42,000 policies since December 31, 1996.
Automobile (excluding involuntary) and homeowners premiums written
increased 8.2% to $321.1 million for the nine months ended September 30, 1997,
compared to $296.9 million for the same period in 1996. For the nine months
ended September 30, 1997, new direct premiums written of $37.0 million increased
16.4% compared to $31.8 million for the same period last year. Renewal direct
premiums written of $287.9 million for the nine months ended September 30, 1997
increased 7.3% compared to $268.4 million for the same period in 1996.
For the nine months ended September 30, 1997, life insurance premiums and
contract charges earned were $61.9 million, compared to $59.6 million for the
same period in 1996,
11
representing an increase of 3.9%. Life insurance in force on September 30, 1997
increased 4.7% compared to September 30, 1996. The lapse rate of 7.5% for the
nine months ended September 30, 1997 improved 0.5 percentage points compared to
8.0% reported for the same period in 1996. In the first quarter of 1997, the
Company began selling five new term life products developed to meet customer
needs. These products started to contribute to premium growth in the second
quarter of 1997 and have generated approximately $1.7 million of premium through
September 30, 1997.
Annuity contract charges earned increased 36.9% to $8.9 million for the
nine months ended September 30, 1997, compared to $6.5 million for the same
period in 1996, due to a 53% increase in variable annuity cash value on deposit.
Total annuity deposits received during the nine months ended September 30, 1997
increased 17.8% to $143.9 million, compared to $122.2 million for the same
period in 1996, reflecting an $11.6 million, or 13.1%, increase in scheduled
deposits for retirement annuities and a $10.1 million, or 30.0%, increase in
rollover deposits from other companies and single premiums. Three new variable
annuity funds were added to the Horace Mann family of funds in the first quarter
of 1997 in response to educators' requests for additional investment options.
The addition of a small cap fund, an international equity fund and a socially
responsible fund brings the total variable annuity fund options to seven.
Net Investment Income
Net investment income of $149.0 million for the nine months ended September
30, 1997 increased 0.3% compared to $148.6 million for the same period in 1996.
Investments (at amortized cost) decreased 1.2%, or $33.5 million, from September
30, 1996. The pretax yield on average investments was 7.4% (4.9% after tax) for
both the nine months ended September 30, 1997 and the same period in 1996.
Realized Investment Gains and Losses
Realized investment gains were $3.2 million for the nine months ended
September 30, 1997, compared to $2.6 million for the same period in 1996.
Benefits, Claims and Settlement Expenses
Total benefits, claims and settlement expenses increased 4.0% to $271.7
million for the nine months ended September 30, 1997, compared to $261.2 million
for the same period in 1996.
Property and casualty claims and settlement expenses were $243.3 million
for the nine months ended September 30, 1997, compared to $231.3 million for the
same period in 1996. The property and casualty loss ratio of 73.4% for the nine
months ended September 30, 1997 was 2.1 percentage points less than the 75.5%
reported for the same period in 1996. For the first nine months of 1996, losses
from severe weather were higher than those incurred in the current year.
Catastrophe losses after reinsurance but before federal income tax benefits for
the nine months ended September 30, 1997 were $6.2 million and accounted for 1.9
points on the loss ratio, compared to catastrophe losses of $19.3 million, 6.3
points on the loss ratio, for the same period
12
in 1996. The provision for losses and loss adjustment expenses for insured
events in prior years continued to reflect favorable development. Income before
income taxes benefited by $39.2 million and $47.4 million for the nine months
ended September 30, 1997 and 1996, respectively, including $12.3 million and
$14.3 million for the three months ended September 30, 1997 and 1996,
respectively, as a result of a reduction in the estimated amounts needed to
settle prior years' claims.
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 is augmented by a $100 million equity put. This equity put
provides for an option to sell shares of the Company's convertible preferred
stock with a floating rate dividend at a pre-negotiated price in the event of
losses from a catastrophe, individually or in the aggregate, which exceed $65
million.
Life benefits were $28.4 million for the nine months ended September 30,
1997, reflecting a 5.0% decrease, compared to $29.9 million for the same period
in 1996. For the nine months ended September 30, 1996, claims for group
disability business were unusually low and returned to more normal levels in the
current year. The first nine months of 1997 also reflected average individual
life mortality experience compared to higher mortality in the same period last
year.
Interest Credited to Policyholders
Interest credited to policyholders was $73.1 million for the nine months
ended September 30, 1997, 2.7% more than the $71.2 million interest credited for
the same period in 1996. Interest credited to fixed annuity contracts increased
0.3% to $57.7 million for the nine months ended September 30, 1997, from $57.5
million for the same period in 1996. The fixed annuity average annual interest
rate credited was 5.6% for the nine months ended September 30, 1997 and 1996.
Fixed rate annuity accumulated deposits decreased 0.9% over the 12 months ended
September 30, 1997.
Life insurance interest credited increased $1.7 million, or 12.4%, to $15.4
million for the nine months ended September 30, 1997, compared to the same
period in 1996, 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 nine months ended September 30, 1997, policy
acquisition and operating expenses of $110.1 million increased $8.1 million, or
7.9%, compared to $102.0 million for the first nine months of 1996. The 1997
property and casualty expense ratio was 19.3%, compared to 19.2% for the same
period in 1996.
13
Amortization of Intangible Assets
Amortization of intangible assets decreased by $0.4 million to $8.1 million
for the nine months ended September 30, 1997, compared to $8.5 million for the
same period in 1996, 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 $7.1 million for the nine months ended
September 30, 1997 was $0.9 million, or 11.3%, less than the same period in 1996
as a result of repayments of borrowings related to the repurchase of shares of
its common stock during the second quarter of 1995. The debt to capital ratio
of 22.2% as of September 30, 1997 was within the Company's target operating
range of 20% to 25%.
Income Tax Expense
The effective income tax rate was 26.9% for the nine months ended September
30, 1997 compared to the 26.7% effective income tax rate for the same period
last year. Income from investments in tax-advantaged securities reduced the
effective income tax rate 3 percentage points in 1997 and 1996 and acquisition
related tax benefits reduced the effective rate 6 percentage points in 1997 and
1996.
Operating Income
Operating income (income from continuing operations before realized
investment gains and losses and 1996 debt retirement costs) was $59.7 million
for the nine months ended September 30, 1997, compared to $51.6 million for the
same period in 1996, an increase of 15.7%. Operating income in 1997 benefited
from mild weather.
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 $65.0 million for the
nine months ended September 30, 1997, compared to $57.1 million for the same
period in 1996.
Property and casualty segment operating income was $43.0 million for the
nine months ended September 30, 1997, compared to $36.5 million for the same
period in 1996. Milder weather compared to the same period last year contributed
to these results. For the first nine months, after tax catastrophe losses were
$4.1 million in 1997, compared to $12.5 million for 1996. The property and
casualty combined loss and expense ratio for the nine months ended September 30,
1997 was 92.7%, compared to the 94.7% reported for the same period in 1996.
Life insurance segment operating income was $9.4 million for the nine
months ended September 30, 1997, compared to the $9.2 million reported for the
same period in 1996. The
14
1997 life results reflect modest growth in business volume offset by a return to
more normal levels of both group disability claims and individual life mortality
experience, compared to lower-than-average disability claims and higher-than-
average life mortality in the first nine months of 1996.
Annuity segment operating income of $13.9 million for the nine months ended
September 30, 1997 increased 14.9%, compared to the $12.1 million reported for
the same period in 1996, reflecting strong growth in variable annuity deposits
and an increase in the fixed net interest margin. Annuity segment profit
continues to shift from the interest margin on fixed annuity accumulations to
fees on variable mutual fund deposits. Total accumulated fixed and variable
annuity deposits of $2,313.1 million increased $310.8 million, or 15.5%,
compared to September 30, 1996. This increase resulted from a net increase in
funds on deposit of 9.0% plus net increases in market value of underlying mutual
funds of $139.5 million.
Income from Continuing Operations
Income from continuing operations, which includes realized investment
gains, for the nine months ended September 30, 1997 was $61.8 million, or $2.67
per share, reflecting a 17.9% increase in income and a 19.2% increase in income
per share compared to the same period in 1996. The Company's share repurchase
program had a minimal impact on earnings and earnings per share for the first
nine months of 1997; however, the impact will be recognized more fully in future
quarters. After tax realized investment gains were $2.1 million for the nine
months ended September 30, 1997, compared to $1.7 million for the same period in
1996. Income from continuing operations for the nine months ended September 30,
1996 also reflected the costs of the early redemption of $100 million of
convertible notes of $0.9 million, or $0.04 per share.
Net Income
Net income, which includes discontinued operations, was $58.3 million, or
$2.52 per share, for the nine months ended September 30, 1997, compared to $48.8
million, or $2.08 per share, for the same period in 1996, an increase of 21.2%
on a per share basis.
The Company has accelerated the timetable for its withdrawal from the group
medical insurance business anticipating termination of more than 90% of that
business by December 1997 and the remaining business in 1998. As a result of
this acceleration and higher-than-expected claims, net income for the three and
nine months ended September 30, 1997 includes an after tax charge of $3.5
million, or $0.15 per share, for anticipated additional losses during the
remainder of the phase-out period.
The discontinued group medical business operating loss was $3.6 million for
the nine months ended September 30, 1996. The Company's net income for the year
ended December 31, 1996 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.
15
Liquidity and Financial Resources
Investments
The Company's investment strategy emphasizes high quality investment grade,
publicly traded fixed income securities. At September 30, 1997, fixed income
securities comprised 95.2% of total investments. Of the fixed income investment
portfolio, 93.5% was investment grade and 99.6% was publicly traded. The
average quality of the total fixed income portfolio was A+ at September 30,
1997.
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 4.3 years at September 30, 1997 and
4.4 years at December 31, 1996. 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.
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, retire short-term debt and repurchase shares of the Company's
common stock. Long-term liquidity requirements, beyond one year, are
principally for the payment of future insurance policy claims and benefits and
retirement of long-term notes.
Operating Activities
As a holding company, HMEC conducts its principal operations in the
personal lines segment of the property and casualty and life insurance
industries through its subsidiaries. HMEC's insurance subsidiaries generate cash
flow from premium and investment income, generally well in excess of their
immediate needs for policy obligations, operating expenses and other cash
requirements. Net cash provided by operating activities was $76.1 million for
the nine months ended September 30, 1997 compared to $102.7 million for the same
period in 1996 with the decrease primarily due to an increase in federal income
tax payments. In both years, cash provided by operating activities primarily
reflected net cash generated by the insurance subsidiaries.
Payment of principal and interest on debt, fees related to the catastrophe-
linked equity put option, dividends to shareholders and parent company operating
expenses, as well as the share repurchase program, are dependent upon the
ability of the insurance subsidiaries to pay cash dividends or make other cash
payments to HMEC, including tax payments pursuant to tax sharing agreements.
The insurance subsidiaries are subject to various regulatory restrictions which
limit the amount of annual dividends or other distributions, including loans or
cash advances, available
16
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. In 1997, the Company
received approval from the Illinois and California Departments of Insurance for
extraordinary dividends and a total of $70 million in extraordinary dividends
have been paid by the property and casualty subsidiaries. HMEC used cash from
the extraordinary dividends primarily to repurchase shares of the Company's
common stock. Although regulatory restrictions exist, dividend availability
from subsidiaries has been, and is expected to be, more than adequate for HMEC's
capital needs.
Investing Activities
HMEC's insurance subsidiaries maintain significant investments in fixed
maturity securities to meet future contractual obligations to policyholders. In
conjunction with its management of liquidity and other asset/liability
management objectives, the Company, from time to time, will sell fixed maturity
securities prior to maturity and reinvest the proceeds in other investments with
different interest rates, maturities or credit characteristics. Accordingly,
the Company has classified the entire fixed maturities portfolio as available
for sale. During the first nine months of 1997, net cash provided by investing
activities was $45.1 million. This net amount reflects $768.4 million in
purchases of fixed maturity investments, funded by net investment sales or
maturities of $813.5 million.
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 nine months ended September 30,
1997 were $9.4 million. In 1997, the Company paid fees of $1.3 million related
to the catastrophe-linked equity put which augments its reinsurance program and
such fees were charged directly to additional paid-in capital.
For the nine months ended September 30, 1997, receipts from annuity
contracts of $143.9 million were greater than contract maturities and
withdrawals of $122.0 million. Net transfers to variable annuity assets were
$84.0 million during the first nine months of 1997 compared to $63.0 million
during the same period in 1996. Interest-sensitive life account balances
increased $1.1 million during the first nine months of 1997.
Through September 30, 1997, the Company had repurchased 1,449,800 shares at
an aggregate cost of $68.6 million, or $47.32 per share, which was financed
primarily with cash from operations, including extraordinary dividends of $70.0
million from the property and casualty subsidiaries. Of these treasury shares,
293,200, 1,026,900 and 129,700 were repurchased during the first, second and
third quarters, respectively, of 1997. During the nine months ended September
30, 1997, the Company received $11.7 million related to the exercise of common
stock options.
17
Capital Resources
Historically, the Company's insurance subsidiaries have generated capital
in excess of what has been needed to support business growth. These excess
amounts have been paid to HMEC through dividends. HMEC has then utilized these
dividends and its access to the capital markets to retire long-term debt,
repurchase shares of its common stock, increase dividends to its shareholders
and fulfill other corporate purposes. Management anticipates that the Company's
sources of capital will continue to generate capital in excess of the needs for
business growth, debt interest payments and shareholder dividends.
The total capital of the Company was $638.6 million at September 30, 1997,
including $99.6 million of long-term debt and $42.0 million of short-term debt.
Long-term debt as a percentage of total shareholders' equity was 20.1% as of
September 30, 1997, compared to 20.6% as of December 31, 1996 with the change
including the effects of the repurchase of shares for treasury stock. Total
debt-to-capital at September 30, 1997 was 22.2%, well within the Company's
target operating range of 20% to 25%.
Shareholders' equity was $496.4 million at September 30, 1997, including an
unrealized after tax gain in the Company's investment portfolio of $50.9 million
and the related impact on deferred policy acquisition costs associated with
interest-sensitive policies. The market value of the Company's common stock and
the market value per share were $1,265.0 million and $56 1/8, respectively, at
September 30, 1997. Book value per share was $22.02 at September 30, 1997,
$19.76 excluding investment market value adjustments.
In January 1996, the Company issued $100.0 million face amount of 6 5/8%
Senior Notes ("Senior Notes"), which will mature on January 15, 2006, at a
discount of 0.5%. Interest on the Senior Notes is payable semi-annually. The
Senior Notes are redeemable in whole or in part, at any time at the Company's
option. The net proceeds from the sale of the Senior Notes were used to finance
the redemption of the Company's convertible notes.
As of September 30, 1997 and December 31, 1996, the Company had short-term
debt comprised of $42.0 million and $34.0 million, respectively, outstanding
under the Bank Credit Facility. The Bank Credit Facility allows unsecured
borrowings of up to $65.0 million at Interbank Offering Rates plus 0.3% to 0.5%
or Bank of America National Trust and Savings Association reference rates. The
rate on the borrowings under the Bank Credit Facility was Interbank Offering
Rate plus 0.3%, or 6.1%, as of September 30, 1997. The commitment for the Bank
Credit Facility terminates on December 31, 2001.
The Company's ratio of earnings to fixed charges for the nine months ended
September 30, 1997 was 12.9x compared to 9.9x for the same period in 1996.
Total shareholder dividends were $9.4 million for the nine months ended
September 30, 1997.
18
Recent Accounting Changes
Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." SFAS No. 128 supersedes previous accounting guidance on this subject
and specifies the computation, presentation and disclosure requirements for
earnings per share ("EPS"). SFAS No. 128 will be implemented in the Company's
December 31, 1997 financial statements; earlier application is not permitted.
Upon implementation, SFAS No. 128 requires restatement of all prior-period EPS
data presented.
SFAS No. 128 requires dual presentation of EPS replacing primary EPS with a
presentation of basic EPS and replacing fully diluted EPS with diluted EPS. The
effects on the Company's EPS of implementing SFAS No. 128 are not anticipated to
be material.
Capital Structure Disclosures
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure" which will be implemented in the Company's 1997
financial statements. It is not anticipated that the implementation of SFAS No.
129 will require significant revision of prior disclosures because the
information required by SFAS No. 129 had been covered in previous accounting
guidance.
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" which will be implemented in the Company's March 31, 1998 financial
statements. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income will represent the change in
shareholders' equity during a reporting period from transactions and other
events and circumstances from non-owner sources. For the Company, it is
anticipated that comprehensive income will be substantially equal to net income
plus the change in net unrealized gains and losses on fixed maturities and
equity securities for the period.
Segment Disclosures
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which will be implemented in the
Company's March 31, 1998 financial statements. SFAS No. 131 establishes
standards for the way public companies are to report information about operating
segments in annual financial statements and requires those companies to report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The Company
anticipates that implementation of this pronouncement will not have a material
effect on the disclosures contained in its annual
19
financial statements and related notes but will expand its interim financial
statements and related notes to include segment information such as revenues,
earnings, assets and a reconciliation of segment earnings to consolidated
earnings. The Company's operations will continue to include the following
segments consistent with previously reported financial information: property and
casualty insurance, annuities, life insurance, and corporate and other.
20
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders
None.
Item 6: Exhibits and Reports on Form 8-K
(a) The following items are filed as Exhibits. Management contracts
and compensatory plans are indicated by an asterisk (*).
(10) Material contracts:
10.1* Horace Mann Supplemental Employee Retirement Plan,
1997 Restatement.
(11) Statement re computation of per share earnings.
(27) Financial Data Schedule.
(b) No reports on Form 8-K were filed by the Company during the third
quarter of 1997.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HORACE MANN EDUCATORS CORPORATION
(Registrant)
Date November 14, 1997 Paul J. Kardos
--------------------------- ---------------------------------
Paul J. Kardos, President and
Chief Executive Officer
Date November 14, 1997 Larry K. Becker
--------------------------- ---------------------------------
Larry K. Becker, Executive
Vice President and Chief
Financial Officer
22