HORACE MANN EDUCATORS CORP /DE/ - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

¨	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 incorporation or organization)		(I.R.S. Employer Identification No.)

1 Horace Mann Plaza, Springfield, Illinois 62715-0001

(Address of principal executive offices, including 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 ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

As of October 29, 2004, 42,807,903 shares of Common Stock, par value $0.001 per share, were outstanding, net of 17,503,371 shares of treasury stock.

HORACE MANN EDUCATORS CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2004

INDEX


		Page
PART I -	FINANCIAL INFORMATION

	Item 1. Financial Statements

	Review Report of Independent Registered Public Accounting Firm	1

	Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003	2

	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2004 and 2003	3

	Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2004 and 2003	4

	Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2004 and 2003	5

	Notes to Consolidated Financial Statements	6

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

	Item 3. Quantitative and Qualitative Disclosures about Market Risk	39

	Item 4. Controls and Procedures	39

PART II -	OTHER INFORMATION

	Item 4. Submission of Matters to a Vote of Security Holders	39

	Item 5. Other Information	39

	Item 6. Exhibits	40

SIGNATURES		41

REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Horace Mann Educators Corporation:

We have reviewed the consolidated balance sheet of Horace Mann Educators Corporation and subsidiaries as of September 30, 2004, and the related consolidated statements of operations and cash flows for the three-month and nine-month periods ended September 30, 2004 and 2003, and the related consolidated statements of changes in shareholders’ equity for the nine-month periods ended September 30, 2004 and 2003. These consolidated financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards established by the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Horace Mann Educators Corporation and subsidiaries as of December 31, 2003, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 17, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2003, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it was derived.

/s/ KPMG LLP

KPMG LLP

Chicago, Illinois

November 3, 2004

HORACE MANN EDUCATORS CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)


	September 30, 2004			December 31, 2003
	(Unaudited)
ASSETS
Investments
Fixed maturities, available for sale, at fair value (amortized cost, 2004, $3,352,754; 2003, $3,124,861)	$	3,489,057		$	3,258,674
Short-term and other investments		126,100			104,904
Short-term investments, loaned securities collateral		446,914			22,147

Total investments		4,062,071			3,385,725
Cash		24,245			19,773
Accrued investment income and premiums receivable		105,819			99,370
Deferred policy acquisition costs		206,795			193,703
Goodwill		47,396			47,396
Value of acquired insurance in force		23,636			27,259
Other assets		136,691			80,531
Variable annuity assets		1,146,306			1,119,231

Total assets	$	5,752,959		$	4,972,988

LIABILITIES AND SHAREHOLDERS’ EQUITY
Policy liabilities
Fixed annuity contract liabilities	$	1,653,205		$	1,526,174
Interest-sensitive life contract liabilities		586,759			567,209
Unpaid claims and claim expenses		480,170			350,501
Future policy benefits		181,625			181,344
Unearned premiums		210,778			198,991

Total policy liabilities		3,112,537			2,824,219
Other policyholder funds		140,243			129,888
Liability for securities lending agreements		446,914			22,147
Other liabilities		191,347			177,325
Short-term debt		25,000			25,000
Long-term debt		144,715			144,703
Variable annuity liabilities		1,146,306			1,119,231

Total liabilities		5,207,062			4,442,513

Preferred stock, $0.001 par value, shares authorized 1,000,000; none issued		—			—
Common stock, $0.001 par value, shares authorized 75,000,000; shares issued, 2004, 60,298,124; 2003, 60,225,311		60			60
Additional paid-in capital		342,349			342,306
Retained earnings		470,837			456,330
Accumulated other comprehensive income (loss), net of taxes:
Net unrealized gains on fixed maturities and equity securities		82,480			81,608
Minimum pension liability adjustment		(17,252	)		(17,252	)
Treasury stock, at cost, 17,503,371 shares		(332,577	)		(332,577	)

Total shareholders’ equity		545,897			530,475

Total liabilities and shareholders’ equity	$	5,752,959		$	4,972,988

See accompanying notes to consolidated financial statements.

See accompanying accountants’ review report.

HORACE MANN EDUCATORS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(Dollars in thousands, except per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004		2003
Revenues
Insurance premiums and contract charges earned	$	165,111		$	158,314		$	501,771	$	478,039
Net investment income		47,988			45,438			143,461		138,531
Net realized investment gains		4,791			7,262			9,262		4,742

Total revenues		217,890			211,014			654,494		621,312

Benefits, losses and expenses
Benefits, claims and settlement expenses		159,424			148,412			377,852		388,589
Interest credited		27,316			25,915			80,599		76,770
Policy acquisition expenses amortized		18,058			16,444			51,841		50,285
Operating expenses		30,166			33,013			98,297		99,433
Amortization of intangible assets		1,350			2,273			3,804		4,798
Interest expense		1,710			1,552			5,085		4,656
Restructuring charge adjustments		—			(408	)		—		(408	)

Total benefits, losses and expenses		238,024			227,201			617,478		624,123

Income (loss) before income taxes		(20,134	)		(16,187	)		37,016		(2,811	)
Income tax expense (benefit)		(7,490	)		(1,921	)		9,032		1,273

Net income (loss)	$	(12,644	)	$	(14,266	)	$	27,984	$	(4,084	)

Net income (loss) per share
Basic	$	(0.30	)	$	(0.34	)	$	0.65	$	(0.10	)

Diluted	$	(0.30	)	$	(0.34	)	$	0.65	$	(0.10	)

Weighted average number of shares and equivalent shares (in thousands)
Basic		42,773			42,722			42,743		42,710
Diluted		43,022			42,933			42,974		42,902

See accompanying notes to consolidated financial statements.

See accompanying accountants’ review report.

HORACE MANN EDUCATORS CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

(Dollars in thousands, except per share data)


	Nine Months Ended September 30,
	2004			2003
Common stock
Beginning balance	$	60		$	60
Options exercised, 2004, 52,302 shares		—			—
Conversion of Director Stock Plan units, 2004, 20,511 shares; 2003, 30,696 shares		—			—

Ending balance		60			60

Additional paid-in capital
Beginning balance		342,306			342,749
Options exercised and conversion of Director Stock Plan units		1,168			645
Catastrophe-linked equity put option premium		(1,125	)		(1,088	)

Ending balance		342,349			342,306

Retained earnings
Beginning balance		456,330			455,308
Net income (loss)		27,984			(4,084	)
Cash dividends, 2004, $0.315 per share; 2003, $0.315 per share		(13,477	)		(13,464	)

Ending balance		470,837			437,760

Accumulated other comprehensive income, net of taxes:
Beginning balance		64,356			63,302
Change in net unrealized gains on fixed maturities and equity securities		872			21,998
Change in minimum pension liability adjustment		—			—

Ending balance		65,228			85,300

Treasury stock, at cost
Beginning and ending balance, 2004 and 2003, 17,503,371 shares		(332,577	)		(332,577	)
		(332,577	)		(332,577	)

Shareholders’ equity at end of period	$	545,897		$	532,849

Comprehensive income
Net income (loss)	$	27,984		$	(4,084	)
Other comprehensive income, net of taxes:
Change in net unrealized gains on fixed maturities and equity securities		872			21,998
Change in minimum pension liability adjustment		—			—

Other comprehensive income		872			21,998

Total	$	28,856		$	17,914

See accompanying notes to consolidated financial statements.

See accompanying accountants’ review report.

HORACE MANN EDUCATORS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Cash flows from operating activities
Premiums collected	$	173,303		$	175,751		$	522,158		$	505,127
Policyholder benefits paid		(108,208	)		(129,386	)		(331,351	)		(369,099	)
Policy acquisition and other operating expenses paid		(55,995	)		(33,326	)		(159,918	)		(139,730	)
Federal income taxes paid		—			—			(3,933	)		(16,426	)
Investment income collected		46,602			46,604			141,010			139,821
Interest expense paid		(1,106	)		(961	)		(4,043	)		(3,675	)
Contribution to defined benefit pension plan trust fund		(3,500	)		(8,780	)		(3,500	)		(8,780	)
Other		7,937			6,215			8,800			4,671

Net cash provided by operating activities		59,033			56,117			169,223			111,909

Cash flows from investing activities
Fixed maturities
Purchases		(454,475	)		(397,562	)		(1,218,703	)		(1,014,041	)
Sales		301,439			204,421			732,466			419,213
Maturities		102,514			160,786			268,524			441,802
Net cash used in short-term and other investments		(29,870	)		(37,478	)		(21,288	)		(11,148	)
Net cash used in short-term and other investments		(29,870	)		(37,478	)		(21,288	)		(11,148	)

Net cash used in investing activities		(80,392	)		(69,833	)		(239,001	)		(164,174	)

Cash flows from financing activities
Dividends paid to shareholders		(4,496	)		(4,489	)		(13,477	)		(13,464	)
Exercise of stock options		503			—			1,168			—
Catastrophe-linked equity put option premium		—			(150	)		(1,125	)		(1,088	)
Annuity contracts, variable and fixed
Deposits		78,397			78,008			248,424			212,288
Benefits and withdrawals		(26,431	)		(22,244	)		(72,928	)		(71,725	)
Net transfer to variable annuity assets		(22,107	)		(26,080	)		(83,677	)		(75,353	)
Net decrease in life policy account balances		(1,771	)		(2,050	)		(4,135	)		(10,752	)

Net cash provided by financing activities		24,095			22,995			74,250			39,906

Net increase (decrease) in cash		2,736			9,279			4,472			(12,359	)
Cash at beginning of period		21,509			38,524			19,773			60,162

Cash at end of period	$	24,245		$	47,803		$	24,245		$	47,803

See accompanying notes to consolidated financial statements.

See accompanying accountants’ review report.

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2004 and 2003

(Dollars in thousands, except per share data)

Note 1 - Basis of Presentation

The accompanying unaudited consolidated financial statements of Horace Mann Educators Corporation (“HMEC”; and together with its subsidiaries, the “Company”) have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and with the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP 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, 2004, the consolidated results of operations and cash flows for the three and nine months ended September 30, 2004 and 2003 and the consolidated changes in shareholders’ equity for the nine months ended September 30, 2004 and 2003. 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, 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 subsidiaries of HMEC market and underwrite tax-qualified retirement annuities and private passenger automobile, homeowners, and life insurance products, primarily to educators and other employees of public schools and their families. The Company’s principal operating subsidiaries are Horace Mann Life Insurance Company, Horace Mann Insurance Company, Teachers Insurance Company, Horace Mann Property & Casualty Insurance Company and Horace Mann Lloyds.

It is suggested that these financial statements be read in conjunction with the financial statements and the related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for the full year.

Note 2 - Stock Based Compensation and Stock Options

The Company grants stock options to executive officers, other employees and directors. The exercise price of the option is equal to the fair market value of the Company’s common stock on the date of grant. Additional information regarding the Company’s stock-based compensation plans is contained below and in Note 6 - Shareholders’ Equity and Stock Options of the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. The Company accounts for stock option grants using the intrinsic value based method 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.

Note 2 - Stock Based Compensation and Stock Options-(Continued)

Alternatively, Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”, allows companies to recognize compensation cost for stock-based compensation plans, determined based on the fair value at the grant dates. If the Company had applied this alternative accounting method, net income (loss) and net income (loss) per share would have been reduced to the pro forma amounts indicated below:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004		2003
Net income (loss)
As reported	$	(12,644	)	$	(14,266	)	$	27,984	$	(4,084	)
Add: Stock-based compensation expense, after tax, included in reported net income (loss)		—			—			—		—
Deduct: Stock-based compensation expense, after tax, determined under the fair value based method for all awards ⁽¹⁾		5			1,348			10,961		4,026

Pro forma	$	(12,649	)	$	(15,614	)	$	17,023	$	(8,110	)

Net income (loss) per share – basic
As reported	$	(0.30	)	$	(0.34	)	$	0.65	$	(0.10	)
Pro forma	$	(0.29	)	$	(0.37	)	$	0.40	$	(0.19	)
Net income (loss) per share – diluted
As reported	$	(0.30	)	$	(0.34	)	$	0.65	$	(0.10	)
Pro forma	$	(0.29	)	$	(0.36	)	$	0.40	$	(0.19	)

⁽¹⁾

The fair value of each option grant was estimated on the date of grant using the Modified Roll-Geske option-pricing model with the following weighted average assumptions for 2004 and 2003, respectively: risk-free interest rates of 4.1% and 3.8%; dividend yield of 2.5% and 3.0%; expected lives of 10 years; and volatility of 23.8% and 28.3%. The nine-month expense amounts represent three-fourths of the full year expense reflecting options granted through September 30, 2004 and 2003, respectively, and vesting during the respective calendar years. The expense amount for the nine months ended September 30, 2004 also includes the impact of accelerated vesting of outstanding stock options, as described below.

Stock Options

The shareholders of HMEC approved the 1991 Stock Incentive Plan (the “1991 Plan”), the 2001 Stock Incentive Plan (the “2001 Plan”) and the 2002 Incentive Compensation Plan (the “2002 Plan”) and reserved a total of 9,000,000 shares of common stock for issuance under these plans. Under the 1991 Plan, the 2001 Plan and the 2002 Plan, options to purchase shares of HMEC common stock may be granted to executive officers, other employees and directors. The options are exercisable in installments generally beginning in the first year from the date of grant and generally expiring 10 years from the date of grant.

Note 2 - Stock Based Compensation and Stock Options-(Continued)

HMEC’s Board of Directors approved the acceleration of vesting of all outstanding stock options effective June 30, 2004. The Board placed certain restrictions on the transfer of shares obtained by this vesting acceleration for members of the Board of Directors and 10 of HMEC’s key executive officers. With regard to the accelerated vesting, application of Financial Accounting Standards Board Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation,” had an immaterial effect on the Company’s operating expenses.

Changes in outstanding options and shares available for grant under the 1991 Plan, the 2001 Plan and the 2002 Plan were as follows:


	Weighted Average Option Price per Share		Range of Option Prices per Share		Options
	Weighted Average Option Price per Share		Range of Option Prices per Share		Outstanding		Vested and Exercisable		Available for Grant
At December 31, 2003	$	18.96	$	11.12-$33.87	4,669,970		2,486,837		2,059,182

Granted	$	16.48	$	15.28-$16.96	18,500		3,750		(18,500	)
Vested	$	18.35	$	13.88-$21.77	—		2,190,383		—
Exercised	$	13.35	$	11.12-$13.88	(52,302	)	(52,302	)	—
Canceled	$	19.59	$	13.88-$33.87	(332,450	)	(332,450	)	332,450

At September 30, 2004	$	18.97	$	13.88-$33.87	4,303,718		4,296,218		2,373,132

The weighted average grant date fair value was $4.20 for options granted in the nine months ended September 30, 2004. For options outstanding at September 30, 2004, information segregated by ranges of exercise prices was as follows:


						Vested and Exercisable Options
	Weighted Average Option Price per Share		Range of Option Prices per Share		Total Options Outstanding	Options	Weighted Average Option Price per share		Weighted Average Life
At September 30, 2004	$	18.13	$	13.88-$20.80	3,839,493	3,831,993	$	18.14	6.8 years
	$	22.79	$	21.64-$29.21	334,275	334,275	$	22.79	5.1 years
	$	33.87	$	33.87	129,950	129,950	$	33.87	3.6 years

Total	$	18.97	$	13.88-$33.87	4,303,718	4,296,218	$	18.97	6.6 years

Note 3 - Restructuring Charges

Charges related to the restructure of the Company’s property and casualty claims operations were incurred and separately identified in the Statements of Operations for the year ended December 31, 2002, as described in Note 2 - Restructuring Charges of the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

The following table provides information about the charges taken in 2002, the balance of accrued amounts at December 31, 2003 and September 30, 2004 and payment activity during the nine months ended September 30, 2004.


	Original Pretax Charge		Reserve at December 31, 2003		Payments		Reserve at September 30, 2004
Charges to earnings:
Property and Casualty Claims Operations
Employee termination costs	$	2,542	$	226	$	175	$	51
Additional defined benefit pension plan costs		1,179		125		125		—
Termination of lease agreements		502		39		27		12

Total	$	4,223	$	390	$	327	$	63

Note 4 - Debt

Indebtedness outstanding, as described in the Company’s 2003 Annual Report on Form 10-K in the Notes to Financial Statements, Note 5 — Debt, was as follows:


	September 30, 2004		December 31, 2003
Short-term debt:
Bank Credit Facility	$	25,000	$	25,000
Long-term debt:
1.425% Senior Convertible Notes due May 14, 2032. Aggregate principal amount of $244,500 less unaccrued discount of $128,362 (3.0% imputed rate)		116,138		116,138
6 5/8% Senior Notes, due January 15, 2006. Aggregate principal amount of $28,600 less unaccrued discount of $23 and $35 (6.7% imputed rate)		28,577		28,565

Total	$	169,715	$	169,703

In June 2004, the Bank Credit Agreement was amended to provide for unsecured borrowings of up to $35,000, an increase of $10,000 compared to the prior agreement. All other terms of the Bank Credit Agreement remain unchanged.

Note 4 – Debt-(Continued)

The Senior Convertible Notes will be convertible at the option of the holders into shares of HMEC’s common stock at a conversion price of $26.74 if the conditions for conversion are satisfied. Although the Senior Convertible Notes are potentially convertible into 4,343,054 shares (17.763 shares per $1 thousand face amount), these shares are not included in the calculation of diluted earnings per share because the contingent conversion requirements were not met during the reporting periods. In addition, the Company may elect to pay holders surrendering notes cash or a combination of cash and shares of HMEC’s common stock for the notes surrendered. Holders may also surrender Senior Convertible Notes for conversion during any period in which the credit rating assigned to the Senior Convertible Notes is Ba2 or lower by Moody’s or BB+ or lower by S&P, the Senior Convertible Notes are no longer rated by either Moody’s or S&P, or the credit rating assigned to the Senior Convertible Notes has been suspended or withdrawn by either Moody’s or S&P. The Senior Convertible Notes will cease to be convertible pursuant to this credit rating criteria during any period or periods in which all of the credit ratings are increased above such levels. The Senior Convertible Notes are redeemable by HMEC in whole or in part, at any time on or after May 14, 2007, at redemption prices equal to the sum of the issue price plus accrued original issue discount and accrued cash interest, if any, on the applicable redemption date. The holders of the Senior Convertible Notes may require HMEC to purchase all or a portion of their Senior Convertible Notes on either May 14, 2007, 2012, 2017, 2022, or 2027 at stated prices plus accrued cash interest, if any, to the purchase date. HMEC may pay the purchase price in cash or shares of HMEC common stock or in a combination of cash and shares of HMEC common stock.

Note 5 - Investments

Fixed Maturity Securities

The following table presents the composition and value of the Company’s fixed maturity securities portfolio by rating category. The Company has classified the entire fixed maturity securities portfolio as available for sale, which is carried at fair value.


	Percent of Fair Value				September 30, 2004
Rating of Fixed Maturity Securities ⁽¹⁾	September 30, 2004		December 31, 2003		Fair Value ⁽²⁾		Amortized Cost
AAA	42.8	%	44.6	%	$	1,492,037	$	1,468,341
AA	7.1		7.7			247,089		238,446
A	24.4		23.2			853,612		800,775
BBB	20.1		18.6			700,793		658,182
BB	1.8		2.0			62,682		60,326
B	3.5		3.2			121,687		118,030
CCC or lower	0.2		0.6			8,093		5,580
Not rated ⁽³⁾	0.1		0.1			3,064		3,074

Total	100.0	%	100.0	%	$	3,489,057	$	3,352,754

⁽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⁾

Fair values are based on quoted market prices, when available. Fair values for private placements and certain other securities that are infrequently traded are estimated by the Company with the assistance of its investment advisors utilizing recognized valuation methodology, including cash flow modeling.

⁽³⁾	This category includes $3,064 of private placement securities not rated by either S&P or Moody’s. The National Association of Insurance Commissioners (“NAIC”) has rated 99.7% of these private placement securities as investment grade.

The following table presents the distribution of the Company’s fixed maturity securities portfolio by estimated expected maturity. Estimated expected maturities differ from contractual maturities by reflecting assumptions regarding borrowers’ utilization of the right to call or prepay obligations with or without call or prepayment penalties.


	Percent of Total				Fair Value
	September 30, 2004		December 31, 2003		September 30, 2004
Due in 1 year or less	6.5	%	7.4	%	$	227,323
Due after 1 year through 5 years	25.4		21.9			887,587
Due after 5 years through 10 years	39.4		41.3			1,375,022
Due after 10 years through 20 years	9.3		8.9			324,262
Due after 20 years	19.4		20.5			674,863

Total	100.0	%	100.0	%	$	3,489,057

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

Note 5 - Investments-(Continued)

Securities Lending

The Company loans fixed income securities to third parties, primarily major brokerage firms. As of September 30, 2004 and December 31, 2003, fixed maturities with a fair value of $446,914 and $22,147, respectively, were on loan. Loans of securities are required at all times to be secured by collateral from borrowers at least equal to 100% of the market value of the securities loaned. The Company maintains effective control over the loaned securities and therefore reports them as Fixed Maturity Securities in the Consolidated Balance Sheets. SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”, requires the securities lending collateral to be classified as an asset with a corresponding liability in the Company’s Consolidated Balance Sheets.

Note 6 – Pension Plans and Other Postretirement Benefits

All employees of the Company are covered by a defined contribution plan and participate in a 401(k) plan. Employees hired on or before December 31, 1998 are also covered under a defined benefit plan. In addition, certain employees participate in a supplemental defined benefit plan or a supplemental defined contribution plan or both.

Effective April 1, 2002, participants stopped accruing benefits under the defined benefit and supplemental defined benefit plans but continue to retain the benefits they had accrued to date. 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. For the defined contribution, 401(k) and defined benefit plans, investments have been set aside in trust funds; whereas the supplemental retirement plans are non-qualified, unfunded plans.

Note 6 – Pension Plans and Other Postretirement Benefits-(Continued)

The following table summarizes the components of net periodic pension cost for the defined benefit plan and the supplemental retirement plans for the three and nine months ended September 30, 2004 and 2003.


	Defined Benefit Plan						Supplemental Retirement Plans
	Three Months Ended September 30,						Three Months Ended September 30,
	2004			2003			2004		2003
Components of net periodic pension expense:
Service cost	$	—		$	—		$	38	$	140
Interest cost		777			799			264		253
Expected return on plan assets		(678	)		(571	)		—		—
Recognized net actuarial loss		382			523			276		88
Settlement loss (income)		(115	)		262			—		—

Net periodic pension expense	$	366		$	1,013		$	578	$	481


	Defined Benefit Plan						Supplemental Retirement Plans
	Nine Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004		2003
Components of net periodic pension expense:
Service cost	$	—		$	—		$	113	$	365
Interest cost		2,329			2,416			791		681
Expected return on plan assets		(2,034	)		(1,723	)		—		—
Recognized net actuarial loss		1,146			1,399			501		231
Settlement loss		932			1,942			—		—

Net periodic pension expense	$	2,373		$	4,034		$	1,405	$	1,277

In September 2004, the Company contributed $3,500 to the defined benefit plan and does not anticipate making any additional contributions during the remaining three months of 2004. The Company expects to contribute approximately $1,200 to the supplemental retirement plans in 2004. For the nine months ended September 30, 2004, $932 was contributed to the supplemental retirement plans and additional contributions of $268 are anticipated to be made during the remaining three months of 2004.

Note 6 – Pension Plans and Other Postretirement Benefits-(Continued)

In addition to providing pension benefits, the Company also provides certain health care and life insurance benefits to retired employees and eligible dependents. Effective January 1, 2004, only employees who were at least age 50 with at least 15 years of service by January 1, 2004 are eligible to participate in this program. The following table summarizes the components of the net periodic benefit cost of postretirement benefits other than pension for the three and nine months ended September 30, 2004 and 2003.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Components of net periodic cost:
Service cost	$	26		$	31		$	77		$	216
Interest cost		455			457			1,367			1,515
Amortization of prior service cost		(180	)		(179	)		(539	)		(179	)
Recognized net actuarial gain		(782	)		(418	)		(715	)		(1,774	)

Net periodic benefit cost	$	(481	)	$	(109	)	$	190		$	(222	)

As disclosed in its financial statements for the year ended December 31, 2003, the Company expects to contribute $2,300 to the postretirement benefit plan in 2004. For the nine months ended September 30, 2004, the Company contributed $992 to the postretirement benefit plan and anticipates contributing an additional $1,308 to the plan during the remaining three months of 2004.

Note 7 – Catastrophes and Reinsurance

The Company’s net catastrophe losses of approximately $55,500 for the three months ended September 30, 2004 were at an unprecedented level and primarily reflected losses from Hurricanes Charley, Frances, Ivan and Jeanne. Property and casualty net reserves for unpaid claims and claims expenses at September 30, 2004 of $398,860 included approximately $64,200 attributable to the four hurricanes mentioned above.

Note 7 Catastrophes and Reinsurance-(Continued)

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 effects of reinsurance on premiums written and contract deposits; premiums and contract charges earned; and benefits, claims and settlement expenses were as follows:


	Gross Amount		Ceded		Assumed			Net
Three months ended September 30, 2004
Premiums written and contract deposits	$	262,653	$	11,863	$	4,768		$	255,558
Premiums and contract charges earned		172,429		11,825		4,507			165,111
Benefits, claims and settlement expenses		240,336		83,927		3,015			159,424

Three months ended September 30, 2003
Premiums written and contract deposits	$	258,740	$	5,885	$	(1,419	)	$	251,436
Premiums and contract charges earned		165,958		5,905		(1,739	)		158,314
Benefits, claims and settlement expenses		152,175		3,483		(280	)		148,412

Nine months ended September 30, 2004
Premiums written and contract deposits	$	766,315	$	23,447	$	13,542		$	756,410
Premiums and contract charges earned		512,698		24,518		13,591			501,771
Benefits, claims and settlement expenses		461,538		93,276		9,590			377,852

Nine months ended September 30, 2003
Premiums written and contract deposits	$	716,377	$	17,331	$	6,690		$	705,736
Premiums and contract charges earned		489,658		17,396		5,777			478,039
Benefits, claims and settlement expenses		388,060		3,172		3,701			388,589

Gross and ceded benefits, claims and settlement expenses for the three and nine months ended September 30, 2004 reflect the impact of property and casualty losses from Hurricanes Charley, Frances, Ivan and Jeanne. Ceded premiums written and earned for the same periods include approximately $4 million of catastrophe reinsurance reinstatement premium.

Note 8 - Segment Information

The Company conducts and manages its business through four segments. The three operating segments, representing the major lines of insurance business, are: property and casualty insurance, principally personal lines automobile and homeowners products; annuity products, principally individual, tax-qualified fixed and variable deposits; and life insurance. The Company does not allocate the impact of corporate level transactions to the insurance segments, consistent with management’s evaluation of the results of those segments, but classifies those items in the fourth segment, Corporate and Other. Historically, in addition to debt service, realized investment gains and losses and certain public company expenses, such charges have included restructuring charges, debt retirement costs, litigation charges and the provision for prior years’ taxes. Summarized financial information for these segments is as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Insurance premiums written and contract deposits	$	255,558		$	251,436		$	756,410		$	705,736

Insurance premiums and contract charges earned
Property and casualty	$	136,467		$	130,330		$	417,459		$	395,758
Annuity		4,155			3,828			12,428			10,561
Life		24,489			24,359			71,884			72,537
Intersegment eliminations		—			(203	)		—			(817	)

Total	$	165,111		$	158,314		$	501,771		$	478,039

Net investment income
Property and casualty	$	8,495		$	7,922		$	25,462		$	23,893
Annuity		27,505			25,966			81,697			78,106
Life		12,290			11,855			37,212			37,381
Corporate and other		(16	)		(15	)		(48	)		24
Intersegment eliminations		(286	)		(290	)		(862	)		(873	)

Total	$	47,988		$	45,438		$	143,461		$	138,531

Net income (loss)
Property and casualty	$	(21,306	)	$	(22,118	)	$	7,003		$	(19,974	)
Annuity		2,491			2,958			9,083			8,732
Life		4,804			2,044			11,134			9,556
Corporate and other		1,367			2,850			764			(2,398	)

Total	$	(12,644	)	$	(14,266	)	$	27,984		$	(4,084	)

Amortization of intangible assets, pretax (included in segment net income)
Value of acquired insurance in force
Annuity	$	966		$	1,867		$	2,640		$	3,564
Life		384			406			1,164			1,234

Total	$	1,350		$	2,273		$	3,804		$	4,798


	September 30, 2004			December 31, 2003
Assets
Property and casualty	$	918,209		$	795,579
Annuity		3,581,406			3,163,808
Life		1,185,847			947,468
Corporate and other		93,373			95,505
Intersegment eliminations		(25,876	)		(29,372	)

Total	$	5,752,959		$	4,972,988

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in millions, except per share data)

Forward-looking Information

Statements made in the following discussion that state the Company’s or management’s intentions, hopes, beliefs, expectations or predictions of future events or the Company’s future financial performance are forward-looking statements and involve known and unknown risks, uncertainties and other factors. 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 which may result from occurrences such as acquisitions, divestitures, impairment in asset values or changes in estimates of insurance reserves.

•

Fluctuations in the market value of securities in the Company’s investment portfolio and the related after-tax effect on the Company’s shareholders’ equity and total capital through either realized or unrealized investment losses. In addition, the impact of fluctuations in the financial markets on the Company’s defined benefit pension plan assets and the related after-tax effect on the Company’s operating expenses, shareholders’ equity and total capital.

•

The impact of fluctuations in the financial markets on the Company’s variable annuity fee revenues, valuations of deferred policy acquisition costs and value of acquired insurance in force, and the level of guaranteed minimum death benefit reserves.

•

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

•

Defaults on interest or dividend payments in the Company’s investment portfolio due to credit issues and the resulting impact on investment income.

•

Prevailing interest rate levels, including the impact of interest rates on (i) unrealized gains and losses in the Company’s investment portfolio and the related after-tax effect on the Company’s shareholders’ equity and total capital, (ii) the book yield of the Company’s investment portfolio and (iii) the Company’s ability to maintain appropriate interest rate spreads over the fixed rates guaranteed in the Company’s life and annuity products.

•

The cyclicality of the insurance industry and the related effects of changes in price competition and industry-wide underwriting results.

•

The frequency and severity of catastrophes such as hurricanes, earthquakes, storms and wildfires and the ability of the Company to provide accurate estimates of ultimate catastrophe costs in its financial statements in light of such factors as: the proximity of the catastrophe occurrence date to the date of the financial statements, potential inflation of property repair costs in the effected area and the occurrence of multiple catastrophes in a geographic area over a relatively short period of time.

•

Based on property and casualty direct earned premiums for 2003, the Company’s ten largest states represented 55% of the segment total. Included in this top ten group are certain states in which catastrophe occurrences are relatively common: North Carolina, California, Florida, Texas, South Carolina and Louisiana.

•

The ability of the Company to maintain a favorable catastrophe reinsurance program considering both availability and cost; and the collectibility of reinsurance receivables.

•

Adverse development of property and casualty loss experience and its impact on estimated claims and claim settlement expenses for losses occurring in prior years.

•

Business risks inherent in the Company’s restructuring of its property and casualty claims operation.

•

Adverse changes in policyholder mortality and morbidity rates.

•

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

•

Changes in accounting standards issued by the FASB or other standard-setting bodies which may have an adverse effect on the Company’s results of operations and financial condition.

•

Changes in federal income tax laws and changes resulting from federal tax audits affecting corporate tax rates or taxable income.

•

Changes in federal and state laws and regulations which affect the relative tax and other advantages of the Company’s life and annuity products to customers.

•

The resolution of legal proceedings and related matters including the potential adverse impact on the Company’s reputation and charges against the Company’s earnings resulting from legal defense costs, a settlement agreement and/or an adverse finding or findings against the Company from the proceedings.

•

The Company’s ability to maintain favorable claims-paying ability, financial strength and debt ratings.

•

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.

•

The Company’s ability to develop and expand its agent 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 risk related to the Company’s dated and complex information systems, which are more prone to error than advanced technology systems.

•

Disruptions of the general business climate, investments, capital markets and consumer attitudes caused by geopolitical acts such as terrorism, war or other similar events.

•

The impact of a disaster or catastrophic event affecting the Company’s employees or its home office facilities and the Company’s ability to recover and resume its business operations on a timely basis.

Executive Summary

For the first nine months of 2004, the Company’s net income increased compared to the prior year, primarily reflecting improved property and casualty segment earnings, partially offset by the unprecedented level of catastrophe costs in the third quarter of 2004. This improvement was driven by aggressive pricing and underwriting actions taken over the last several quarters, favorable non-catastrophe claims frequency trends, and improvements in claims processes and cost containment initiatives, along with no adverse development of prior years’ reserves. Premiums written and contract deposits increased 7% compared to the first nine months of 2003, reflecting significant growth in new annuity deposits and rate increases in the property and automobile lines.

Critical Accounting Policies

The preparation of financial statements in conformity with United States generally accepted accounting principles (“GAAP”) requires the Company’s management to make estimates and assumptions based on information available at the time the financial statements are prepared. These estimates and assumptions affect the reported amounts of the Company’s assets, liabilities, shareholders’ equity and net income. Certain accounting estimates are particularly sensitive because of their significance to the Company’s financial statements and because of the possibility that subsequent events and available information may differ markedly from management’s judgements at the time the financial statements were prepared. Management has discussed with the Audit Committee the quality, not just the acceptability, of the Company’s accounting principles as applied in its financial reporting. The discussions generally included such matters as the consistency of the Company’s accounting policies and their application, and the clarity and completeness of the Company’s financial statements, which include related disclosures. For the Company, the areas most subject to significant management judgements include: liabilities for property and casualty claims and claim settlement expenses, liabilities for future policy benefits, deferred policy acquisition costs, value of acquired insurance in force, valuation of investments and valuation of assets and liabilities related to the defined benefit pension plan.

Liabilities for Property and Casualty Claims and Claim Settlement Expenses

Underwriting results of the property and casualty segment are significantly influenced by estimates of the Company’s ultimate liability for insured events. There is a high degree of uncertainty inherent in the estimates of ultimate losses underlying the liability for unpaid claims and claim settlement expenses. This inherent uncertainty is particularly significant for liability-related exposures due to the extended period, often many years, that transpires between a loss event, receipt of related claims data from policyholders and ultimate settlement of the claim. Reserves for property and casualty claims include provisions for payments to be made on reported claims, claims incurred but not yet reported and associated settlement expenses. The process by which these reserves are established requires reliance upon estimates based on known facts and on interpretations of circumstances, including the Company’s experience with similar cases and historical trends involving claim payment patterns, claim payments, pending levels of unpaid claims and product mix, as well as other factors including court decisions, economic conditions and public attitudes.

The Company continually updates loss estimates using both quantitative information from its reserving actuaries and qualitative information derived from other sources. Adjustments may be required as information develops which varies from experience, or, in some cases, augments data which previously were not considered sufficient for use in determining liabilities. The effects of these adjustments may be significant and are charged or credited to income for the period in which the adjustments are made. Detailed discussion of the impact of adjustments recorded during recent years is included in the Company’s 2003 Annual Report on Form 10-K in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations for the Three Years Ended December 31, 2003 — Benefits, Claims and Settlement Expenses”. Due to the nature of the Company’s personal lines business, the Company has no exposure to claims for toxic waste cleanup, other environmental remediation or asbestos-related illnesses other than claims under homeowners insurance policies for environmentally related items such as mold.

The Company completes a detailed study of property and casualty reserves based on information available at the end of each quarter and year. Trends of reported losses (paid amounts and case reserves on claims reported to the Company) for each accident year are reviewed and ultimate loss costs for those accident years are estimated. The Company engages an independent property and casualty actuarial consulting firm to prepare an independent study of the Company’s property and casualty reserves at June 30 and December 31.

Reserves for Future Policy Benefits

Liabilities for future benefits on life and annuity policies are established in amounts adequate to meet the estimated future obligations on policies in force. Liabilities for future policy benefits on certain life insurance policies are computed using the net level premium method and are based on assumptions as to future investment yield, mortality and withdrawals. Mortality and withdrawal assumptions for all policies have been based on actuarial tables which are consistent with the Company’s own experience. Liabilities for future benefits on annuity contracts and certain long-duration life insurance contracts are carried at accumulated policyholder values without reduction for potential surrender or withdrawal charges. In the event actual experience varies from the estimated liabilities, adjustments are charged or credited to income for the period in which the adjustments are made.

Deferred Policy Acquisition Costs and Value of Acquired Insurance in Force for Annuity and Interest-Sensitive Life Products

Policy acquisition costs, consisting of commissions, policy issuance and other costs, which vary with and are primarily related to the production of business, are capitalized and amortized on a basis consistent with the type of insurance coverage. For investment (annuity) contracts, acquisition costs, and also the value of annuity business acquired in the 1989 acquisition of the Company (“Annuity VIF”), are amortized over 20 years in proportion to estimated gross profits. Capitalized acquisition costs for interest-sensitive life contracts are also amortized over 20 years in proportion to estimated gross profits.

The most significant assumptions that are involved in the estimation of annuity gross profits include future financial market performance, interest rate spreads, business surrender/lapse rates and the impact of realized investment gains and losses. For the variable deposit portion of the annuity segment, the Company amortizes policy acquisition costs and the Annuity VIF utilizing a future financial market performance assumption of a 10% reversion to the mean approach with a 200 basis point corridor around the mean. At September 30, 2004, the ratio of capitalized annuity policy acquisition costs and the Annuity VIF asset to the total annuity accumulated cash value was approximately 4%.

In the event actual experience differs significantly from assumptions or assumptions are significantly revised, the Company may be required to record a material charge or credit to amortization expense for the period in which the adjustment is made. As noted above, there are a number of assumptions involved in the valuation of capitalized policy acquisition costs and the Annuity VIF. As one example of the volatility of this amortization, if all other assumptions are met, a 1% deviation from the targeted financial market performance for the underlying mutual funds of the Company’s variable annuities would currently impact amortization between $0.1 million and $0.2 million. This result may change depending on the magnitude and direction of the deviation. Detailed discussion of the impact of adjustments to the amortization of capitalized acquisition costs

and Annuity VIF is included in “Results of Operations — Amortization of Policy Acquisition Expenses and Intangible Assets”.

Valuation of Investments

The Company’s methodology of assessing other-than-temporary impairments is based on security-specific facts and circumstances as of the date of the reporting period. Based on these facts, if management believes it is probable that amounts due will not be collected according to the contractual terms of a debt security not impaired at acquisition, or if the Company does not have the ability or intent to hold a security with an unrealized loss until it matures or recovers in value, an other-than-temporary impairment shall be considered to have occurred. As a general rule, if the fair value of a debt security has fallen below 80% of book value for more than six months, this security will be reviewed for an other-than-temporary impairment. Additionally, if events become known that call into question whether the security issuer has the ability to honor its contractual commitments, whether or not such security has been trading above an 80% fair value to book value relationship, such security holding will be evaluated to determine whether or not such security has suffered an other-than-temporary decline in value.

The Company reviews the fair value of all investments in its portfolio on a monthly basis to assess whether an other-than-temporary decline in value has occurred. These reviews, in conjunction with the Company’s investment managers’ monthly credit reports and relevant factors such as (1) the financial condition and near-term prospects of the issuer, (2) the Company’s intent and ability to retain the investment long enough to allow for the anticipated recovery in fair value, (3) the stock price trend of the issuer, (4) the market leadership position of the issuer, (5) the debt ratings of the issuer and (6) the cash flows of the issuer, are all considered in the impairment assessment. A write-down of an investment is recorded when a decline in the fair value of that investment is deemed to be other-than-temporary, with a realized investment loss charged to income for the period.

A decline in fair value below amortized cost is not assumed to be other-than-temporary for fixed maturity investments with unrealized losses due to market conditions or industry-related events where there exists a reasonable market recovery expectation and the Company has the intent and ability to hold the investment until maturity or a market recovery is realized. An other-than-temporary impairment loss will be recognized based upon all relevant facts and circumstances for each investment, as appropriate, in accordance with Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 59, “Accounting for Non-Current Marketable Equity Securities”, Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, and related guidance.

Valuation of Assets and Liabilities Related to the Defined Benefit Pension Plan

Effective April 1, 2002, participants stopped accruing benefits under the defined benefit pension plan but continue to retain the benefits they had accrued to date.

The Company’s cost estimates for its defined benefit pension plan are determined annually based on assumptions which include the discount rate, expected return on plan assets, anticipated retirement rate and estimated lump sum distributions. A discount rate of 6.25% was used by the Company at December 31, 2003, which was based on the average yield for long-term, high grade securities having maturities generally consistent with the defined benefit pension payout period. To set its discount rate, the Company looks to leading indicators, including Moody’s Aa long-term

bond index. The expected annual return on plan assets assumed by the Company at December 31, 2003 was 7.50%. The assumption for the long-term rate of return on plan assets was determined by considering actual investment experience during the lifetime of the plan, balanced with reasonable expectations of future growth considering the various classes of assets and percentage allocation for each asset class. Management believes that it has adopted realistic assumptions for investment returns, discount rates and other key factors used in the estimation of pension costs and asset values.

To the extent that actual experience differs from the Company’s assumptions, subsequent adjustments may be required, with the effects of those adjustments charged or credited to income and/or shareholders’ equity for the period in which the adjustments are made. Generally, a change of 50 basis points in the discount rate would inversely impact pension expense and accumulated other comprehensive income (“AOCI”) by approximately $0.2 million and $2 million, respectively. In addition, for every $1 million increase in the value of pension plan assets, there is an equal increase in AOCI.

Results of Operations

Insurance Premiums and Contract Charges

Insurance Premiums Written and Contract Deposits


	Nine Months Ended September 30,				Growth Over Prior Year
	2004		2003		Percent		Amount
Property & casualty
Automobile and property (voluntary)	$	420.4	$	410.2	2.5	%	$	10.2
Involuntary and other property & casualty		9.0		1.7				7.3

Total property & casualty		429.4		411.9	4.2	%		17.5
Annuity deposits		248.4		212.3	17.0	%		36.1
Life		78.6		81.5	-3.6	%		(2.9	)

Total	$	756.4	$	705.7	7.2	%	$	50.7

Insurance Premiums and Contract Charges Earned

(Excludes annuity and life contract deposits)


	Nine Months Ended September 30,					Growth Over Prior Year
	2004		2003			Percent		Amount
Property & casualty
Automobile and property (voluntary)	$	411.7	$	396.0		4.0	%	$	15.7
Involuntary and other property & casualty		5.8		(0.3	)				6.1

Total property & casualty		417.5		395.7		5.5	%		21.8
Annuity		12.4		10.6		17.0	%		1.8
Life		71.9		71.7		0.3	%		0.2

Total	$	501.8	$	478.0		5.0	%	$	23.8

For the first nine months of 2004, the Company’s premiums written and contract deposits increased 7.2% over the prior year as a result of growth in new annuity deposits and rate increases in the voluntary property and automobile lines. The 7.2% growth rate is net of the impact of $4.0 million of property and casualty catastrophe reinsurance reinstatement premiums incurred in the current period which reduced the growth rate by 0.6 percentage points. Voluntary property and casualty business represents policies sold through the Company’s marketing organization and issued under the Company’s underwriting guidelines. Involuntary property and casualty business consists of allocations of business from state mandatory insurance facilities and assigned risk business.

The Company’s exclusive agent force totaled 800 at September 30, 2004, reflecting a decrease of 11.0% compared to 899 agents a year earlier. Management currently anticipates modest growth in the size of the Company’s exclusive agent force in the remainder of 2004 and in 2005. Of the current period-end total, 281 agents were in their first 24 months with the Company, reflecting a decrease of 29.9% compared to September 30, 2003. Fewer new agents were hired in the first nine months of 2004, compared to the prior year, reflecting the Company’s more stringent selection criteria, while agent terminations were approximately three-fourths of the level experienced through September of the prior year. The number of experienced agents in the agent force, 519, increased 4.2% compared to a year earlier. Average agent productivity for all lines of business combined increased 24% compared to the first nine months of 2003, driven primarily by the growth in new annuity business. Average agent productivity is measured as new sales premiums from the exclusive agent force per the average number of exclusive agents for the period.

In the first nine months of 2004, total sales, which include the independent agent distribution channel, increased 17.3% compared to a year earlier, largely due to an increase in new annuity business.

The Company’s results have been impacted by ongoing and recurring proceedings in North Carolina challenging private passenger automobile rates. This has required the Company to escrow premiums received pending resolution of these proceedings, adversely impacting earned premiums and pretax income for the nine months ended September 30, 2003 by $2.8 million. No additional escrow amounts were required in the current period. In the second quarter of 2004, notification was received regarding resolution of the rate disputes for 2001 and 2002. The amounts previously escrowed are anticipated to be adequate to cover the Company’s premium refunds, including interest, to policyholders.

Total voluntary automobile and homeowners premium written increased 2.5% in the first nine months of 2004 net of the impact of the $4.0 million catastrophe reinsurance reinstatement premium described above, which reduced this growth rate by 1.0 percentage point. Voluntary automobile insurance premium written increased 2.2% ($6.5 million) compared to the first nine months of 2003, and homeowners premium increased 3.3% ($3.7 million). The increase in homeowners written premium was 6.9% ($7.7 million) excluding the impact of the catastrophe reinsurance reinstatement premium. The increases in property and casualty premiums resulted from the impact of rate increases on average premium per policy. Average written premium was up approximately 4% for voluntary automobile and approximately 10% for homeowners compared to the prior year. Average earned premium increased 5% for voluntary automobile and 11% for homeowners for the same period. Through September 30, 2004, approved rate increases for the Company’s automobile and homeowners business were 7% and 15%, respectively, equal to approved increases of 7% and 15%, respectively, during the first nine months of 2003. As of September 30, 2004, automobile policies in force decreased by 18,000 compared to December

31, 2003 and 21,000 compared to September 30, 2003. The Company continues to increase educator business as a percentage of voluntary automobile policies. Homeowners policies in force decreased 5,000 compared to December 31, 2003 and 4,000 compared to September 30, 2003, reflecting expected reductions due to the Company’s pricing and underwriting actions. At September 30, 2004, there were 553,000 voluntary automobile and 274,000 homeowners policies in force, for a total of 827,000 policies.

Based on policies in force, the property and casualty 12-month retention rate for new and renewal policies was 85% at September 30, 2004, compared to 86% at September 30, 2003. The Company plans additional rate increases and underwriting actions for the remainder of 2004 for both its automobile and homeowners lines of business, which may continue to have an adverse impact on policy retention.

Due to rate limitations for coastal homeowners policies in Florida and to further reduce exposure to catastrophic losses, in July 2004 the Company began a reunderwriting program which is anticipated to result in non-renewal of approximately 5,300 homeowners policies. Because of the four hurricanes that impacted Florida during August and September 2004, the Florida Department of Financial Services, Office of Insurance Regulation, issued emergency regulation temporarily prohibiting any cancellation of policies. As a result, the impact of non-renewals will be negligible in 2004. The Company’s non-renewal process is anticipated to begin again in 2005 with an estimated full year reduction of $4 million and $2 million for direct written premiums and direct earned premiums, respectively.

For the first nine months of 2003, involuntary and other property and casualty premiums written were comparable to the current year excluding the negative impact of an adjustment made in the third quarter of 2003 to anticipated premiums from state mandatory insurance facilities.

Compared to the first nine months of 2003, new annuity deposits increased 17.0%, reflecting a 35.3% increase in single premium and rollover deposits and a 2.7% increase in new scheduled annuity deposits. New deposits to fixed accounts were 15.0%, or $20.0 million, higher than in 2003 and new deposits to variable accounts increased 20.4%, or $16.1 million, compared to a year earlier.

In 2001, the Company began building a nationwide network of independent agents who will comprise a second distribution channel for the Company’s 403(b) tax-qualified annuity products. The independent agent distribution channel, which included 647 authorized agents at September 30, 2004, generated $31.9 million in annualized new Horace Mann annuity sales during the first nine months of 2004, compared to $21.0 million for the first nine months of 2003 and $38.1 million for the full year 2003.

Total annuity accumulated cash value of $2.9 billion at September 30, 2004 increased 10.9% compared to a year earlier, reflecting the growth in sales over the 12 months, continued favorable retention and improving equity markets. The number of annuity contracts outstanding increased 2.0%, or 3,000 contracts, compared to December 31, 2003 and 4.0%, or 6,000 contracts, compared to September 30, 2003.

For the nine months ended September 30, 2004, annuity segment contract charges earned increased 17.0%, or $1.8 million, compared to a year earlier. Market appreciation in the last three months of 2003 and the first nine months of 2004 contributed to the growth in variable annuity accumulated balances at September 30, 2004 which were 11.1% higher than at September 30, 2003.

Life segment premiums and contract deposits declined 3.6%, or $2.9 million, compared to the first nine months of 2003. The ordinary life insurance in force lapse ratio improved to 7.4% for the twelve months ended September 30, 2004 compared to 8.1% for the same period a year earlier.

Net Investment Income

Pretax investment income of $143.5 million for the nine months ended September 30, 2004 increased 3.6%, or $5.0 million, (4.5%, or $4.2 million, after tax) compared to the prior year. Prepayments on a structured mortgage-backed security and tender offer consent fees represented approximately $4 million of the variance, with a decline in the portfolio yield nearly offsetting growth in the size of the investment portfolio. Average investments (excluding securities lending collateral) increased 9.2% over the past 12 months. The average pretax yield on the investment portfolio was 5.7% (3.9% after tax) for the first nine months of 2004 compared to a pretax yield of 6.0% (4.1% after tax) for the same period in 2003.

Net Realized Investment Gains and Losses

Net realized investment gains were $9.3 million for the first nine months of 2004 compared to net realized investment gains of $4.7 million in the prior year. There were no investment impairment charges in the current period. For the first nine months of 2003, the Company recorded fixed income security impairment charges totaling $9.3 million, $3.0 million related to one of the Company’s collateralized debt obligation (“CDO”) securities, $3.1 million related to one manufactured housing asset-backed security and the remaining $3.2 million primarily related to two airline industry issuers. Net realized investment gains and losses for both periods also reflected gains realized from ongoing investment portfolio management activity.

The table below presents the Company’s fixed maturity securities portfolio as of September 30, 2004 by major asset class, including the ten largest sectors of the Company’s corporate bond holdings.


	Number of Issuers	Fair Value		Amortized Cost		Pretax Unrealized Gain
Corporate bonds
Banking and Finance	39	$	365.0	$	340.1	$	24.9
Energy	37		184.0		167.8		16.2
Utilities	24		182.3		174.0		8.3
Food and Beverage	27		135.1		129.1		6.0
Telecommunications	17		122.2		114.7		7.5
Insurance	12		100.3		95.5		4.8
Transportation	10		84.4		83.3		1.1
Industry, Manufacturing	28		77.1		72.5		4.6
Automobiles	11		72.9		69.2		3.7
Health Care	22		63.4		61.4		2.0
All Other Corporates ⁽¹⁾	161		484.0		455.5		28.5

Total corporate bonds	388		1,870.7		1,763.1		107.6

Mortgage-backed securities
Government	445		714.9		706.7		8.2
Other	18		33.2		31.6		1.6
Municipal bonds	159		538.3		526.6		11.7
Government bonds
U.S.	6		216.6		213.2		3.4
Foreign	9		35.9		32.6		3.3
Collateralized debt obligations ⁽²⁾	5		22.7		22.6		0.1
Asset-backed securities	11		56.8		56.4		0.4

Total fixed maturity securities	1,041	$	3,489.1	$	3,352.8	$	136.3

⁽¹⁾

The All Other Corporates category contains 19 additional industry classifications. Real estate, broadcasting and media, retail, paper, defense and consumer products represented $277.5 million of fair value at September 30, 2004, with the remaining 13 classifications each representing less than $29 million of the fair value at September 30, 2004.

⁽²⁾	All of the securities were rated investment grade by Standard and Poor’s Corporation and/or Moody’s Investors Service, Inc. at September 30, 2004.

At September 30, 2004, the Company’s diversified fixed maturity portfolio consisted of 1,223 investment positions, issued by 1,041 entities, and totaled approximately $3.5 billion in fair value. The portfolio was 94.4% investment grade, based on fair value, with an average quality rating of AA-. At September 30, 2004, the portfolio had approximately $10 million pretax of total gross unrealized losses related to 161 positions. At December 31, 2003, the total pretax gross unrealized losses were approximately $11 million related to 113 positions. The following table provides information regarding fixed maturity securities that had an unrealized loss at September 30, 2004, including the length of time that the securities have continuously been in an unrealized loss position.

Investment Positions With Unrealized Losses Segmented by Quality

and Period of Continuous Unrealized Loss

As of September 30, 2004


	Number of Positions	Fair Value		Amortized Cost		Pretax Unrealized Loss
Investment grade
6 Months or less	54	$	404.1	$	406.2	$	(2.1	)
7 through 12 months	21		84.0		85.9		(1.9	)
13 through 24 months	27		131.3		136.0		(4.7	)
25 through 36 months	1		2.9		3.0		(0.1	)
37 through 48 months	—		—		—		—
Greater than 48 months	—		—		—		—

Total	103	$	622.3	$	631.1	$	(8.8	)

Non-investment grade
6 Months or less	41	$	18.0	$	18.5	$	(0.5	)
7 through 12 months	11		4.9		5.1		(0.2	)
13 through 24 months	—		—		—		—
25 through 36 months	—		—		—		—
37 through 48 months	1		5.9		6.0		(0.1	)
Greater than 48 months	1		1.6		1.9		(0.3	)

Total	54	$	30.4	$	31.5	$	(1.1	)

Not rated
Total, all 25 through 36 months	4	$	2.5	$	2.5		*

Grand total	161	$	655.2	$	665.1	$	(9.9	)

*	Less than $(0.1) million

Of the securities with unrealized losses, no issuers had pretax unrealized losses greater than $1.0 million and no securities were trading below 80% of book value at September 30, 2004. The Company views the decrease in value of all of the securities with unrealized losses at September 30, 2004 as temporary, expects recovery in fair value, anticipates continued payments under the terms of the securities, and has the intent and ability to hold these securities until maturity or a recovery in fair value occurs. Therefore, no impairment of these securities was recorded at September 30, 2004. Future changes in circumstances related to these and other securities could require subsequent impairment in value. The Company’s investment guidelines generally limit single corporate issuer concentrations to 4.0% (after tax) of shareholders’ equity for “AA” or “AAA” rated securities, 2.5% (after tax) of shareholders’ equity for “A” rated securities, 2.0% (after tax) of shareholders’ equity for “BBB” rated securities, and 1.0% (after tax) of shareholders’ equity for non-investment grade securities.

Benefits, Claims and Settlement Expenses


	Nine Months Ended September 30,				Growth Over Prior Year
	2004		2003		Percent		Amount
Property and casualty
Before catastrophe losses and reestimates of prior years’ reserves	$	284.9	$	289.5	-1.6	%	$	(4.6	)
Catastrophe losses		59.2		19.2				40.0
Net increases in estimated reserves for claims occurring in prior years		—		44.3				(44.3	)

Total property and casualty		344.1		353.0	-2.5	%		(8.9	)
Annuity		1.4		0.7	100.0	%		0.7
Life		32.4		34.9	-7.2	%		(2.5	)

Total	$	377.9	$	388.6	-2.8	%	$	(10.7	)

Property and Casualty Claims and Claim Expenses


	Nine Months Ended September 30,
	2004			2003
Incurred claims and claim expenses:
Claims occurring in the current year	$	344.1		$	308.7
Increase in estimated reserves for claims occurring in prior years⁽¹⁾:
Policies written by the Company		—			43.8
Business assumed from state reinsurance facilities		—			0.5

Total increase		—			44.3

Total claims and claim expenses incurred	$	344.1		$	353.0

Net reserves, end of period	$	398.9		$	308.0
Plus reinsurance recoverables⁽²⁾		75.5			21.2

Gross reserves, end of period	$	474.4		$	329.2

Property and casualty GAAP loss ratio:
Before catastrophe losses		67.6	%		84.3	%
After catastrophe losses		82.4	%		89.2	%
Property and casualty loss ratio excluding net increases in estimated reserves for claims occurring in prior years ⁽³⁾:
Before catastrophe losses		67.6	%		73.1	%
After catastrophe losses		82.4	%		78.0	%

⁽¹⁾	Shows the amounts by which the Company increased 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.

⁽²⁾

The balance at September 30, 2004 includes approximately $61.2 million attributable to Hurricanes Charley, Frances and Ivan which occurred during the three months ended September 30, 2004. 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 a contingent liability. The Company experienced no losses from uncollectible reinsurance recoverables in the three years ended December 31, 2003 or in the nine months ended September 30, 2004. Past due reinsurance recoverables as of September 30, 2004 were not material.

⁽³⁾	As a supplement to reported results, this information is meaningful to assess the reported periods’ underlying property and casualty results.

The Company’s catastrophe losses were an unprecedented $55.5 million for the three months ended September 30, 2004 primarily reflecting losses from Hurricanes Charley, Frances, Ivan and Jeanne excluding the $4.0 million charge for additional premiums to reinstate catastrophe reinsurance coverage, as disclosed above. Further discussion of the Company’s property and casualty catastrophe reinsurance program is included in “Liquidity and Financial Resources — Capital Resources — Property and Casualty Reinsurance”. The current period increase in catastrophe costs generated an increase in the property and casualty loss ratio of 9.9 percentage points compared to the first nine months of 2003.

For the nine months ended September 30, 2004, the voluntary automobile loss ratio of 72.5% decreased by 16.5 percentage points compared to a year earlier, primarily reflecting adverse development and strengthening of prior years’ reserves recorded in 2003, as described below, which represented 14.9 percentage points of the prior year loss ratio. The Company’s benefits, claims and settlement expenses also reflected an 18.8 percentage point improvement in the homeowners non-catastrophe loss ratio as a result of the Company’s claims initiatives, which have focused on loss and expense control, as well as the favorable impact of rate increases on earned premiums.

Excluding involuntary business, net adverse development of reserves for property and casualty claims occurring in prior years was $43.8 million for the first nine months of 2003, primarily related to automobile liability loss reserves from the 2001 and 2002 accident years, compared to no adverse reserve development in the current period. The Company’s property and casualty reserves were $398.9 million and $320.9 million at September 30, 2004 and December 31, 2003, respectively, net of anticipated reinsurance recoverables. A significant portion of the increase in reserves at September 30, 2004 was due to the unprecedented level of catastrophe losses experienced in the third quarter.

The property loss ratio of 107.8% for the first nine months of 2004 increased 20.2 percentage points compared to a year earlier including the effect of catastrophe losses and reinsurance reinstatement premiums. Excluding catastrophes, the property loss ratio decreased 18.8 percentage points compared to a year earlier reflecting an increase in average premium per policy, benefits of the Company’s claims initiatives and an improvement in non-catastrophe loss frequency as a result of loss containment initiatives such as tightened underwriting guidelines, deductible management and an aggressive reunderwriting program.

Effective January 1, 2004, the Company adopted American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts for Separate Accounts”. The new rules changed the accounting for separate accounts and sales inducements and changed the liability model by expanding the definition of “account balance” and addressing annuitization guarantees and guaranteed minimum death benefits (“GMDB”) reserves. The adoption of this SOP reduced the Company’s GAAP GMDB reserve from $0.1 million at December 31, 2003 to zero at January 1, 2004. Reflecting subsequent fluctuations in the financial markets, the GAAP GMDB reserve was $0.1 million at September 30, 2004.

Interest Credited to Policyholders


	Nine Months Ended September 30,				Growth Over Prior Year
	2004		2003		Percent		Amount
Annuity	$	56.0	$	53.2	5.3	%	$	2.8
Life		24.6		23.6	4.2	%		1.0

Total	$	80.6	$	76.8	4.9	%	$	3.8

Compared to the prior year, the current period increase in annuity segment interest credited reflected a 10.2% increase in average accumulated fixed deposits, partially offset by a 20 basis point decline in the average annual interest rate credited to 4.4%. Life insurance interest credited increased as a result of the growth in interest-sensitive life insurance reserves.

Operating Expenses

For the first nine months of 2004, operating expenses decreased 0.8%, or $0.8 million, compared to the prior year. The property and casualty GAAP expense ratio of 22.3% for the nine months ended September 30, 2004 decreased 1.1 percentage points compared to the prior year, primarily reflecting the growth in premium for the property and casualty segment. Current period operating expenses for the life segment included an adjustment for agent commissions. While the Company’s projected net income for 2004 was significantly impacted by catastrophe losses in the third quarter, operating expenses continue to include a provision for incentive compensation reflective of improvements in the underlying non-catastrophe results. The targeted full year provision for annual and long-term incentive compensation was reduced at September 30, 2004 compared to June 30, 2004.

Amortization of Policy Acquisition Expenses and Intangible Assets

For the nine months ended September 30, 2004, the combined amortization of policy acquisition expenses and intangible assets was $55.6 million compared to $55.1 million recorded in the prior year. Amortization of intangible assets was $3.8 million for the nine months ended September 30, 2004, a decrease of $1.0 million compared to the same period a year earlier. The September 30, 2003 valuation of Annuity VIF resulted in no change in amortization, while a similar valuation at September 30, 2004 increased amortization by $0.8 million.

Amortized policy acquisition expenses were $51.8 million for the first nine months of 2004 compared to $50.3 million for the same period in the prior year. The September 30, 2004 valuation of annuity deferred policy acquisition costs resulted in a $0.4 million increase in amortization compared to a $1.0 million decrease in amortization resulting from a similar valuation at September 30, 2003. For the life segment, the September 30, 2004 valuation of deferred policy acquisition costs resulted in a $0.4 million increase in amortization compared to no impact from the prior year’s valuation.

Income Tax Expense

The effective income tax rate on the Company’s pretax income, including realized investment gains and losses, was 24.3% for the nine months ended September 30, 2004. For the same period in 2003, the effective income tax rate on the Company’s pretax loss, including realized investment gains and losses, was a tax of 46.4%.

Income from investments in tax-advantaged securities reduced the effective income tax rate 14.0 and 150.0 percentage points for the nine months ended September 30, 2004 and 2003, respectively. While the amount of income from tax-advantaged securities in the current period increased compared to a year earlier, the reduced level of income before income taxes in 2003 resulted in this having a more significant impact on the 2003 effective income tax rate.

Reflecting the property and casualty segment net losses recorded in the third quarter, the Company revised its 2004 estimated annual effective income tax rate on income before realized investment gains and losses to approximately 21% compared to the prior estimate of approximately 28%.

Net Income (Loss)

Net income (loss) by segment and net income (loss) per share were as follows:


	Nine Months Ended September 30,						Growth Over Prior Year
	2004			2003			Percent		Amount
Net income (loss)
Property and casualty
Before catastrophe costs	$	48.1		$	(7.6	)			$	55.7
Catastrophe costs, after tax		(41.1	)		(12.4	)				(28.7	)

Total including catastrophe costs		7.0			(20.0	)				27.0
Annuity		9.1			8.7		4.6	%		0.4
Life		11.1			9.6		15.6	%		1.5
Corporate and other ⁽¹⁾		0.8			(2.4	)				3.2

Total	$	28.0		$	(4.1	)			$	32.1

Net income (loss) per share, diluted	$	0.65		$	(0.10	)			$	0.75

Property and casualty GAAP combined ratio:
Before catastrophe costs		89.6	%		107.7	%				-18.1	%
After catastrophe costs		104.7	%		112.6	%				-7.9	%

Property and casualty combined ratio excluding net increases in estimated reserves for claims occurring in prior years ⁽²⁾:
Before catastrophe costs		89.6	%		96.5	%				-6.9	%
After catastrophe costs		104.7	%		101.4	%				3.3	%

⁽¹⁾

The Corporate and Other segment includes interest expense on debt, realized investment gains and losses, certain public company expenses and other corporate level items. The Company does not allocate the impact of corporate level transactions to the insurance segments, consistent with management’s evaluation of the results of those segments.

⁽²⁾	As a supplement to reported results, this information is meaningful to assess the reported periods’ underlying property and casualty results.

For the first nine months of 2004, net income for the property and casualty segment improved compared to the prior year, driven by aggressive pricing and underwriting actions taken over the last several quarters, favorable non-catastrophe frequency trends for automobile and property claims, the impact of the Company’s claims initiatives focused on loss and expense control, an improving expense ratio, and no adverse development of prior years’ reserves. In 2004, these improvements were partially offset by the unprecedented level of catastrophe costs.

Current period annuity segment net income increased compared to a year earlier. This increase primarily reflected growth in contract fees, which was a result of growth in the underlying accumulated variable amounts on deposit, more than offsetting the negative impact of valuations of deferred policy acquisition costs and Annuity VIF and the increase in GMDB reserves.

Life segment net income increased compared to the first nine months of 2003, due primarily to growth in income from partner company product sales, favorable mortality experience and improved group insurance earnings.

The change in net income for the Corporate and Other segment compared to the first nine months of 2003 primarily reflected a larger amount of realized investment gains in the current period compared to the prior year which included impairment charges.

Return on shareholders’ equity based on net income was 10% and 2% for the 12 months ended September 30, 2004 and 2003, respectively.

Based on results for the first nine months of the year, at the time of this Report on Form 10-Q management anticipates that 2004 full year net income before realized investment gains and losses will be within a range of $0.85 to $1.00 per share. This projection reflects management’s anticipation of improvement compared to 2003 in the underlying (current accident year) property and casualty combined ratio excluding catastrophe costs and incorporates the higher level of catastrophe losses experienced in 2004. As described in “Critical Accounting Policies”, certain of the Company’s significant accounting measurements require the use of estimates and assumptions. As additional information becomes available, adjustments may be required. Those adjustments are charged or credited to income for the period in which the adjustments are made and may impact actual results compared to management’s current estimate. A projection of net income is not accessible on a forward-looking basis because it is not possible to provide a reliable forecast of realized investment gains and losses, which can vary substantially from one period to another and may have a significant impact on net income.

Liquidity and Financial Resources

Special Purpose Entities

At September 30, 2004 and 2003, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As such, the Company is not exposed to any financing, liquidity, market or credit risk that could arise if the Company had engaged in such relationships.

Related Party Transactions

The Company does not have any contracts or other transactions with related parties that are required to be reported under the applicable securities laws and regulations.

Ariel Capital Management, Inc., HMEC’s largest shareholder with 24% of the common shares outstanding per their SEC filing on Form 13F as of June 30, 2004, is the investment adviser for two of the mutual funds offered to the Company’s annuity customers. In addition, T. Rowe Price Associates, Inc., HMEC’s second largest shareholder with 7% of the common shares outstanding per their SEC filing on Form 13F as of June 30, 2004, is the investment advisor for three of the mutual funds offered to the Company’s annuity customers.

Investments

Information regarding the Company’s investment portfolio, which is comprised primarily of investment grade, fixed income securities, is located in “Realized Investment Gains and Losses” and in the Notes to Financial Statements, “Note 5 — Investments”.

Cash Flow

The short-term liquidity requirements of the Company, within a 12-month operating cycle, are for the timely payment of claims and benefits to policyholders, operating expenses, interest payments and federal income taxes. Cash flow in excess of these amounts has been used to fund business growth, retire short-term debt, pay dividends to shareholders and repurchase shares of the Company’s common stock. Long-term liquidity requirements, beyond one year, are principally for the payment of future insurance policy claims and benefits and retirement of long-term debt.

Operating Activities

As a holding company, HMEC conducts its principal operations in the personal lines segment of the property and casualty and life insurance industries through its subsidiaries. HMEC’s insurance subsidiaries generate cash flow from premium and investment income, generally well in excess of their immediate needs for policy obligations, operating expenses and other cash requirements. Cash provided by operating activities primarily reflects net cash generated by the insurance subsidiaries. For the first nine months of 2004, net cash provided by operating activities increased compared to the same period in 2003 primarily reflecting increased insurance underwriting cash flow and a smaller amount of federal income tax payments in the current period.

Payment of principal and interest on debt, fees related to the catastrophe-linked equity put option and reinsurance agreement, dividends to shareholders and parent company operating expenses, as well as the share repurchase program, are dependent upon the ability of the insurance subsidiaries to pay cash dividends or make other cash payments to HMEC, including tax payments pursuant to tax sharing agreements. The insurance subsidiaries are subject to various regulatory restrictions which limit the amount of annual dividends or other distributions, including loans or cash advances, available to HMEC without prior approval of the insurance regulatory authorities. Dividends which may be paid by the insurance subsidiaries to HMEC during 2004 without prior approval are approximately $43 million, of which $11 million was paid during the nine months ended September 30, 2004. Although regulatory restrictions exist, dividend availability from subsidiaries has been, and is expected to be, adequate for HMEC’s capital needs.

Investing Activities

HMEC’s insurance subsidiaries maintain significant investments in fixed maturity securities to meet future contractual obligations to policyholders. In conjunction with its management of liquidity and other asset/liability management objectives, the Company, from time to time, will sell fixed maturity securities prior to maturity and reinvest the proceeds in other investments with different interest rates, maturities or credit characteristics. Accordingly, the Company has classified the entire fixed maturity securities portfolio as “available for sale”.

Financing Activities

Financing activities include primarily payment of dividends, the receipt and withdrawal of funds by annuity contractholders, repurchases of the Company’s common stock, and borrowings, repayments and repurchases related to its debt facilities. Fees related to the catastrophe-linked equity put option and reinsurance agreement, which augments the Company’s traditional reinsurance program, have been charged directly to additional paid-in capital.

For the nine months ended September 30, 2004, receipts from annuity contracts increased 17.0%. Annuity contract benefits and withdrawals increased 1.7% compared to the prior year. Cash value retentions for variable and fixed annuity options were 93.2% and 95.5%, respectively, for the 12 month period ended September 30, 2004. Net transfers to variable annuity accumulated cash values increased $8.3 million compared to the prior year.

Contractual Obligations


	Payments Due By Period As of December 31, 2003
	Total		Less Than 1 Year (2004)		1 –3 Years (2005 and 2006)		3 –5 Years (2007 and 2008)		More Than 5 Years (2009 and beyond)
Short-term Obligations ⁽¹⁾:
Bank Credit Facility (expires May 31, 2005)	$	25.8	$	0.6	$	25.2		—		—
Long-Term Debt Obligations ⁽¹⁾:
Convertible Notes Due 2032		256.7		3.5		7.0	$	1.7	$	244.5
Senior Notes Due January 15, 2006		33.3		1.9		31.4		—		—

Total	$	315.8	$	6.0	$	63.6	$	1.7	$	244.5

⁽¹⁾	Includes principal and interest.

The Company has entered into various operating lease agreements, primarily for computer equipment, computer software and real estate (agency and claims offices across the country and portions of the home office complex). These leases have varying commitment periods with most in the 1 to 3 year range. Payments on these leases were approximately $10 million in 2003. It is anticipated that the Company’s payments under operating leases for the full year 2004 will be comparable to the 2003 payments. The Company does not have any other arrangements that expose it to material liability that are not recorded in the financial statements.

Capital Resources

The Company has determined the amount of capital which is needed to adequately fund and support business growth, primarily based on risk-based capital formulas including those developed by the National Association of Insurance Commissioners (“NAIC”). Historically, the Company’s insurance subsidiaries have generated capital in excess of such needed capital. These excess amounts have been paid to HMEC through dividends. HMEC has then utilized these dividends and its access to the capital markets to service and retire long-term debt, increase and pay dividends to its shareholders, fund growth initiatives, repurchase shares of its common stock and for other corporate purposes. Management anticipates that the Company’s sources of capital will continue to generate capital in excess of the needs for business growth, debt interest payments and shareholder dividends.

The total capital of the Company was $715.6 million at September 30, 2004, including $144.7 million of long-term debt and $25.0 million of short-term debt outstanding. Total debt represented 26.8% of capital excluding unrealized investment gains and losses (23.7% including unrealized investment gains and losses) at September 30, 2004, slightly above the Company’s long-term target of 25%.

Shareholders’ equity was $545.9 million at September 30, 2004, including a net unrealized gain in the Company’s investment portfolio of $82.5 million after taxes and the related impact on deferred policy acquisition costs and the value of acquired insurance in force associated with annuity and interest-sensitive life policies. The market value of the Company’s common stock and the market value per share were $752.3 million and $17.58, respectively, at September 30, 2004. Book value per share was $12.76 at September 30, 2004 ($10.83 excluding investment fair value adjustments).

As of September 30, 2004, the Company had outstanding $244.5 million aggregate principal amount of 1.425% Senior Convertible Notes (“Senior Convertible Notes”), which will mature on May 14, 2032, issued at a discount of 52.5% resulting in an effective yield of 3.0%. Interest on the Senior Convertible Notes is payable semi-annually at a rate of 1.425% from November 14, 2002 until May 14, 2007. After that date, cash interest will not be paid on the Senior Convertible Notes prior to maturity unless contingent cash interest becomes payable. From May 15, 2007 through maturity of the Senior Convertible Notes, interest will be recognized at the effective rate of 3.0% and will represent the accrual of discount, excluding any contingent cash interest that may become payable. Contingent cash interest becomes payable if the average market price of a Senior Convertible Note for a five trading day measurement period preceding the applicable six-month period equals 120% or more of the sum of the Senior Convertible Note’s issue price, accrued original issue discount and accrued cash interest, if any, for such Senior Convertible Note. The contingent cash interest payable per Senior Convertible Note with respect to any quarterly period within any six-month period will equal the then applicable conversion rate multiplied by the greater of (1) $0.105 or (2) any regular cash dividends paid by the Company per share on HMEC’s common stock during that quarterly period. Information regarding the conversion and redemption terms of the Senior Convertible Notes is contained in the Notes to Financial Statements, “Note 4 — Debt”.

The Senior Convertible Notes have an investment grade rating from Standard & Poor’s Corporation (“S&P”) (BBB), Moody’s Investors Service, Inc. (“Moody’s”) (Baa3), Fitch Ratings, Ltd. (“Fitch”) (BBB+), and A.M. Best Company, Inc. (“A.M. Best”) (bbb-). Also see “Financial Ratings”. The Senior Convertible Notes are traded in the open market (HMN 1.425).

As of September 30, 2004, the Company had outstanding $28.6 million aggregate principal amount of 6 5/8% Senior Notes (“Senior Notes”) issued at a discount of 0.5% which will mature on January 15, 2006. Interest on the Senior Notes is payable semi-annually. The Senior Notes are redeemable in whole or in part, at any time, at the Company’s option. The Senior Notes have an investment grade rating from S&P (BBB), Moody’s (Baa3), Fitch (BBB+) and A.M. Best (bbb-). The Senior Notes are traded on the New York Stock Exchange (HMN 6 5/8).

As of September 30, 2004, the Company had outstanding $25.0 million under its Bank Credit Agreement at an interest rate of eurodollar base rate plus 1.0%, or 2.6%. The Bank Credit Agreement, as amended on June 1, 2004, provides for unsecured borrowings of up to $35.0 million (the “Bank Credit Facility”). The Bank Credit Facility expires on May 31, 2005. Interest accrues at varying spreads relative to Fed Funds, prime rate or eurodollar base rates and is payable monthly or quarterly depending on the applicable base rate. The unused portion of the Bank Credit Facility is subject to a variable commitment fee, which was 0.25% on an annual basis at June 30, 2004.

To provide additional capital management flexibility, the Company filed a “universal shelf” registration on Form S-3 with the SEC in December 2003. The registration statement, which registers the offer and sale by the Company from time to time of up to $300 million of various securities, which may include debt securities, preferred stock, common stock and/or depositary shares, was declared effective on December 30, 2003. No securities associated with the registration statement have been issued as of the date of this Report on Form 10-Q.

The Company’s ratio of earnings to fixed charges for the nine months ended September 30, 2004 was 8.3x, which reflected $63.2 million of catastrophe costs, compared to 0.4x for the same period in 2003, which reflected $44.3 million of adverse development of prior years’ property and casualty reserves recognized during the period.

Total shareholder dividends were $13.5 million for the nine months ended September 30, 2004. In March, June and September 2004, the Board of Directors announced regular quarterly dividends of $0.105 per share.

Information regarding the interest-sensitive life reinsurance program for the Company’s life segment is located in the Company’s 2003 Annual Report on Form 10-K in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Financial Resources — Capital Resources”.

Property and Casualty Reinsurance

The Company maintains an excess and catastrophe treaty reinsurance program. The Company reinsured 95% of catastrophe losses above a retention of $8.5 million per occurrence up to $80.0 million per occurrence through December 31, 2003. Effective January 1, 2004, the retention on this coverage increased to $10.0 million. The catastrophe treaty coverage consists of four layers, each of which provides for one mandatory reinstatement. The four layers are $5.0 million excess of $10.0 million, $10.0 million excess of $15.0 million, $15.0 million excess of $25.0 million and $40.0 million excess of $40.0 million. In addition, the Company’s predominant insurance subsidiary for property and casualty business written in Florida reinsures 90% of hurricane losses in that state above an estimated retention of $15.6 million up to $73.2 million with the Florida Hurricane Catastrophe Fund (“FHCF”), based on the FHCF’s financial resources. These catastrophe reinsurance programs are augmented by a $75.0 million equity put and reinsurance agreement. This equity put provides an option to sell shares of the Company’s

convertible preferred stock with a floating rate dividend at a pre-negotiated price in the event losses from catastrophes exceed the catastrophe reinsurance program coverage limit.

During the third quarter of 2004, the Company experienced significant losses from three hurricanes, Charley, Frances and Ivan, which are expected to result in substantial catastrophe treaty reinsurance recoveries. As a result of anticipated reinsurance claims from the first three hurricanes, the first two layers of the catastrophe treaty were exhausted. Effective October 1, 2004, the Company purchased a separate reinsurance treaty covering the last three months of 2004 which provides 75% coverage of catastrophe losses in the amount of $10.0 million excess of $5.0 million retention.

The Company’s catastrophe treaty reinsurance program available for the fourth quarter of 2004 provides coverage for various percentages of catastrophe losses above $5.0 million retention up to $80.0 million per occurrence. The coverage is placed in four layers. The four layers are $10.0 million excess of $5.0 million, placed at 75%; $15.0 million excess of $25.0 million, placed at 95%; and $40.0 million excess of $40.0 million, placed at 95%. In addition, the Company’s predominant insurance subsidiary for property and casualty business written in Florida reinsures 90% of hurricane losses in that state above a retention of $15.6 million up to the remaining limit of $25.7 million for the current policy term (through May 31, 2005) with the FHCF.

Additional information regarding the equity put and reinsurance agreement as well as reinsurance coverage for liability and property coverages is located in the Company’s 2003 Annual Report on Form 10-K in “Business — Property and Casualty Segment — Property and Casualty Reinsurance”.

Financial Ratings

The Company’s principal insurance subsidiaries are rated by Standard & Poor’s Corporation (“S&P”), Moody’s Investors Service, Inc. (“Moody’s”), Fitch Ratings, Ltd. (“Fitch”) and A.M. Best Company, Inc. (“A.M. Best”). These rating agencies have also assigned ratings to the Company’s long-term debt securities.

Assigned ratings as of November 1, 2004, which were unchanged from the disclosure in the Company’s 2003 Annual Report on Form 10-K, were as follows (the insurance financial strength ratings for the Company’s property and casualty insurance subsidiaries and the Company’s principal life insurance subsidiary are the same, except where indicated):


	Insurance Financial Strength Ratings (Outlook)		Debt Ratings (Outlook)
As of November 1, 2004
S&P ⁽¹⁾	A	(negative)	BBB	(negative)
Moody’s ⁽¹⁾	P&C: A3	(negative)	Baa3	(negative)
	Life: A3	(stable)
Fitch	A+	(negative)	BBB+	(negative)
A.M. Best	A-	(stable)	bbb-	(stable)

⁽¹⁾	This agency has not yet rated Horace Mann Lloyds.

Market Value Risk

Market value risk, the Company’s primary market risk exposure, is the risk that the Company’s invested assets will decrease in value. This decrease in value may be due to a change in (1) the yields realized on the Company’s assets and prevailing market yields for similar assets, (2) an unfavorable change in the liquidity of the investment, (3) an unfavorable change in the financial prospects of the issuer of the investment, or (4) a downgrade in the credit rating of the issuer of the investment. See also “Results of Operations — Realized Investment Gains and Losses”.

Significant changes in interest rates expose the Company to the risk of experiencing losses or earning a reduced level of income based on the difference between the interest rates earned on the Company’s investments and the credited interest rates on the Company’s insurance liabilities.

The Company manages its market value risk by coordinating the projected cash outflows of assets with the projected cash outflows of liabilities. For all its assets and liabilities, the Company seeks to maintain reasonable durations, consistent with the maximization of income without sacrificing investment quality, while providing for liquidity and diversification. The investment risk associated with variable annuity deposits and the underlying mutual funds is assumed by those contractholders, and not by the Company. Certain fees that the Company earns from variable annuity deposits are based on the market value of the funds deposited.

A more detailed description of the Company’s exposure to market value risks and the management of those risks is presented in the Company’s Annual Report on Form 10-K for 2003 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Value Risk”.

Information Systems Risk

The Company administers its insurance business with information systems that are dated and complex, and require extensive manual input, calculation and control procedures. These systems are more prone to error than more advanced technology systems. To address these issues, in recent years the Company has enhanced its existing systems and technology infrastructure and has begun installing new systems, including a new general ledger and financial reporting system which was implemented in the second quarter of 2003 and a new property and casualty claims administration system whose implementation was completed in April 2004. In the meantime, enhanced checks and control procedures have been established to review the output of existing information systems, including periodic internal and external third party reviews. Nevertheless, there are risks that inaccuracies in the processing of data may occur which might not be identified by those procedures and checks on a timely basis.

Business Continuity Risk

Given the events of September 11, 2001, the continuing threat of terrorism and the current geopolitical climate, the Company has undertaken a reassessment of its business continuity plans. While current contingency plans are felt to be adequate to restore some of the more critical business processes and the Company is aggressively working to strengthen its continuity plans, in the current environment there is believed to exist a higher than acceptable level of risk that the Company’s ability to recover and resume most or all of its key business operations on a timely basis would be compromised.

Recent Accounting Changes

FASB Staff Position Regarding EITF Issue No. 03-1

In September 2004, the Financial Accounting Standards Board issued a FASB Staff Position (“FSP”) to delay the effective date for the measurement and recognition guidance contained in paragraphs 10 through 20 of the Emerging Issues Task Force (“EITF”) Consensus regarding EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. The delay resulting from FSP No. EITF Issue 03-1-1, “Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, ‘The Meaning of Other-Than-Temporary Impairments and Its Application to Certain Investments’ ”, will be superseded concurrent with the final issuance of FSP EITF Issue 03-1-a. This FSP did not have a material impact on the Company’s operating results or financial position.

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

The information required by Item 305 of Regulation S-K is contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this Quarterly Report on Form 10-Q.

Item 4:

Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2004 pursuant to Exchange Act Rule 13a-15 and 15d-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) that is required to be included in the Company’s periodic Securities and Exchange Commission filings. No significant deficiencies or material weaknesses in the Company’s disclosure controls and procedures were identified in the evaluation and therefore, no corrective actions were taken. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

PART II: OTHER INFORMATION

Item 4:

Submission of Matters to a Vote of Security Holders

None.

Item 5:

Other Information

In compliance with Section 202 of the Sarbanes-Oxley Act of 2002, the Audit Committee of the Board of Directors of Horace Mann Educators Corporation has preapproved the continuing provision of certain non-audit services by KPMG LLP, Horace Mann Educators Corporation’s independent auditor. Through August 31, 2004, such services related primarily to tax consultation. As of the date of this Quarterly Report on Form 10-Q, KPMG LLP is not providing the Company with any non-audit services.

Item 6:

Exhibits


Exhibit No.			Description

(a	)	The following items are filed as Exhibits.

		(11)	Statement re computation of per share earnings.

		(15)	KPMG LLP letter regarding unaudited interim financial information.

		(31)	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

			31.1	Certification by Louis G. Lower II, Chief Executive Officer of HMEC.

			31.2	Certification by Peter H. Heckman, Chief Financial Officer of HMEC.

		(32)	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

			32.1	Certification by Louis G. Lower II, Chief Executive Officer of HMEC.

			32.2	Certification by Peter H. Heckman, Chief Financial Officer of HMEC.

		(99.1)	Glossary of Selected Terms.

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 8, 2004				/s/ Louis G. Lower II
				Louis G. Lower II
				President and Chief Executive Officer

Date November 8, 2004				/s/ Peter H. Heckman
				Peter H. Heckman
				Executive Vice President and Chief Financial Officer

Date November 8, 2004				/s/ Bret A. Conklin
				Bret A. Conklin
				Senior Vice President and Controller

HORACE MANN EDUCATORS CORPORATION

EXHIBITS

FORM 10-Q

For the Quarter Ended September 30, 2004

VOLUME 1 OF 1

The following items are filed as Exhibits to Horace Mann Educators Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.

EXHIBIT INDEX


Exhibit No.	Description

(11)	Statement re computation of per share earnings.

(15)	KPMG LLP letter regarding unaudited interim financial information.

(31)	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.1	Certification by Louis G. Lower II, Chief Executive Officer of HMEC.

	31.2	Certification by Peter H. Heckman, Chief Financial Officer of HMEC.

(32)	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.1	Certification by Louis G. Lower II, Chief Executive Officer of HMEC.

	32.2	Certification by Peter H. Heckman, Chief Financial Officer of HMEC.

(99.1)	Glossary of Selected Terms