HORACE MANN EDUCATORS CORP /DE/ - 10-K Annual Report

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

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to

Commission file number 1-10890

HORACE MANN EDUCATORS CORPORATION
(Exact name of registrant as specified in its charter)

Delaware 37-0911756
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1 Horace Mann Plaza, Springfield, Illinois 62715-0001
(Address of principal executive offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: 217-789-2500

Securities Registered Pursuant to Section 12(b) of the Act:

Name of each exchange on
Title of each class which registered
------------------- ------------------------

Common Stock, par value $0.001 per share New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
-----

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

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 1, 2000, was approximately $596 million.

As of March 1, 2000, 41,548,157 shares of Common Stock, par value $0.001 per
share, were outstanding, net of 18,258,896 shares of treasury stock.

DOCUMENTS INCORPORATED BY REFERENCE

Proxy Statement for the 2000 Annual Meeting of Shareholders, exclusive of
disclosures made pursuant to Regulation S-K, (S) 402 (i), (k) and (l),
incorporated by reference into Part III of Form 10-K.

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HORACE MANN EDUCATORS CORPORATION

FORM 10-K

YEAR ENDED DECEMBER 31, 1999

INDEX

Item
Number Page
- ------ ----

PART I

1. Business................................................................ 1
2. Properties.............................................................. 29
3. Legal Proceedings....................................................... 29
4. Submission of Matters to a Vote of Security Holders..................... 29

PART II

5. Market for Registrant's Common Equity and Related Stockholder Matters... 30
6. Selected Financial Data................................................. 31
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 31
7A. Quantitative and Qualitative Disclosures About Market Risk.............. 31
8. Consolidated Financial Statements and Supplementary Data................ 31
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................................. 31

PART III

10. Directors and Executive Officers of the Registrant...................... 31
11. Executive Compensation.................................................. 31
12. Security Ownership of Certain Beneficial Owners and Management.......... 31
13. Certain Relationships and Related Transactions.......................... 31

PART IV

14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........ 32
SIGNATURES.............................................................. 37
Index to Financial Information..........................................F-1

PART I

ITEM 1. Business

Forward-looking Information

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

Overview

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

The Company markets its products primarily to educators and other employees
of public schools and their families. The Company's 1.1 million customers
typically have moderate annual incomes, with many belonging to two-income
households. Their financial planning tends to focus on security, savings and
primary insurance needs. Horace Mann is the only national multiline insurance
company focused on the niche educator market.

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

The Company's insurance premiums written and contract deposits for the year
ended December 31, 1999 were $821.2 million and operating income (net income
before the after tax impact of realized investment gains and losses, litigation
settlement and the provision for prior years' taxes) was $70.7 million. The
Company's total assets were $4.3 billion at December 31, 1999. The property and
casualty segment accounted for 60% of the Company's insurance premiums written
and contract deposits for the year ended December 31, 1999, while accounting for
56% of operating income for the period. The annuity and life insurance segments
together accounted for 40% of insurance premiums written and contract deposits
for the year ended December 31, 1999 (25% and 15%, respectively), and provided
59% (38% and 21%, respectively) of operating income for the period.

1

The primary products of the Company's property and casualty segment are
private passenger automobile and homeowners insurance. In each of the last 10
years, the Company's combined loss and expense ratio for its property and
casualty product lines outperformed the total property and casualty industry
combined loss and expense ratio, as reported by A.M. Best Company ("A.M. Best"),
an independent insurance rating agency. During this period, the Company's
combined loss and expense ratio was better than the total property and casualty
insurance industry combined loss and expense ratio by an average of
approximately 12 percentage points per year. During the same period of time,
the Company's combined loss and expense ratio was better than the personal lines
insurance industry segment combined loss and expense ratio by an average of
approximately 10 percentage points per year.

One of the reasons why the Company's property and casualty lines have
performed better than the industry is the Company's property and casualty
expense ratio, which has been consistently better than the industry ratio since
1983. During the last 10 years, the Company's property and casualty expense
ratio has been better than the property and casualty industry personal lines
average expense ratio as reported by A.M. Best by an average of 4.8 percentage
points per year. The Company's property and casualty expense ratio for the year
ended December 31, 1999 was 19.8%.

The Company is the 14th largest provider of 403(b) tax-qualified variable
annuities and one of the 20 largest participants in the fixed and variable
403(b) tax-qualified annuity market according to a 1999 A.M. Best report.
Approximately 70% of the Company's new annuity contract deposits in 1999 were
for 403(b) tax-qualified annuities; approximately 80% of accumulated annuity
value on deposit is 403(b) tax-qualified. At December 31, 1999, the accumulated
value of all of the Company's annuity contracts (tax and non-tax qualified) was
$2.5 billion, representing 125,000 contracts in force. For the 1999 year, 92%
of the accumulated cash value of the Company's fixed annuity business remained
on deposit. All annuities issued since 1982 and approximately 75% of all
outstanding fixed annuity accumulated cash values are subject in most cases to
substantial early withdrawal penalties, typically ranging from 5% to 13% of the
amount withdrawn. Withdrawals of outstanding variable annuities are limited to
amounts less than or equal to the then current market value of such annuities.
Generally, a penalty is imposed under the Internal Revenue Code on amounts
withdrawn from tax-qualified annuities prior to age 59 1/2. Total accumulated
annuity funds on deposit at December 31, 1999 consisted of 45% variable
annuities and 55% fixed annuities.

The investment portfolio of the Company, including variable annuity assets
under management of $1.1 billion, had an aggregate market value of $3.8 billion
at December 31, 1999. Investments other than variable annuity assets consist
principally of investment grade publicly traded fixed income securities. At
December 31, 1999, investments in non-investment grade securities represented
6.9% of total investments excluding variable annuity assets. There are no
significant investments in mortgage loans, real estate, foreign securities or
privately placed securities.

2

History

The Company's business was founded in Springfield, Illinois in 1945 by two
Illinois teachers to sell automobile insurance to other teachers within the
State of Illinois. The Company expanded its business to other states and
broadened its product line to include group and individual life insurance in
1949, 403(b) tax-qualified retirement annuities in 1961 and homeowners insurance
in 1965.

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

Following the 1991 initial public offering, GGvA owned approximately 44% of
the outstanding shares of the common stock. Pursuant to an agreement with GGvA,
in May 1995 HMEC purchased approximately one-half of the shares of its common
stock owned by GGvA and in July 1995 completed a secondary public offering of
most of the remaining shares of its common stock owned by GGvA.

3

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following statement of operations and balance sheet data have been
derived from the consolidated financial statements of the Company. The
consolidated financial statements of the Company for each of the periods in the
five year period ended December 31, 1999 have been audited by KPMG LLP. The
following selected historical consolidated financial data should be read in
conjunction with the consolidated financial statements of HMEC and its
subsidiaries and Management's Discussion and Analysis of Financial Condition and
Results of Operations.

Year Ended December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- --------- --------- ---------
(Dollars in millions, except per share data)

Statement of Operations Data:
Insurance premiums written and contract deposits....... $ 821.2 $ 827.8 $ 771.3 $ 704.8 $ 654.0
Insurance premiums and contract charges earned......... 595.1 577.8 542.7 502.7 485.4
Net investment income.................................. 188.3 191.7 198.9 198.6 198.4
Net investment income, after tax....................... 126.7 128.3 132.6 132.4 132.2
Realized investment gains (losses)..................... (8.0) 9.9 5.3 2.5 8.6
Total revenues......................................... 775.4 779.4 746.9 703.8 692.4
Amortization of intangible assets(1)................... 0.2 6.9 10.7 11.2 11.7
Interest expense....................................... 9.7 9.5 9.4 10.5 11.6
Income from continuing operations before income taxes.. 93.4 116.8 119.6 100.6 103.6
Income from continuing operations(2)................... 44.5 85.3 87.1 73.8 75.2
Discontinued operations(3)............................. - - (3.5) (9.2) (1.2)
Net income(2).......................................... 44.5 85.3 83.6 64.6 74.0
Operating income(4).................................... 70.7 78.9 83.6 73.1 70.9
Ratio of earnings to fixed charges(5).................. 10.6x 13.3x 13.7x 10.6x 9.9x

Per Share Data(6):
Basic:
Operating income(4).................................. $ 1.71 $ 1.82 $ 1.82 $ 1.56 $ 1.42
Realized investment gains (losses), after tax........ (0.13) 0.15 0.08 0.03 0.11
Litigation settlement, after tax..................... (0.02) - - - -
Provision for prior years' taxes..................... (0.48) - - - -
Income from continuing operations.................... 1.08 1.97 1.90 1.57 1.50
Discontinued operations(3)........................... - - (0.08) (0.19) (0.02)
Net income........................................... 1.08 1.97 1.82 1.38 1.48
Diluted:
Operating income(4).................................. $ 1.70 $ 1.80 $ 1.80 $ 1.54 $ 1.33
Realized investment gains (losses), after tax........ (0.13) 0.15 0.07 0.03 0.10
Litigation settlement, after tax..................... (0.02) - - - -
Provision for prior years' taxes..................... (0.48) - - - -
Income from continuing operations.................... 1.07 1.95 1.87 1.55 1.41
Discontinued operations(3)........................... - - (0.07) (0.19) (0.02)
Net income........................................... 1.07 1.95 1.80 1.36 1.39
Shares of Common Stock-weighted average:
Basic................................................ 41.2 43.2 45.8 47.0 50.1
Diluted.............................................. 41.7 43.8 46.5 47.6 56.3
Shares of Common Stock - ending outstanding............ 41.0 42.1 44.3 47.3 46.8
Cash dividends......................................... $ 0.3825 $ 0.3325 $ 0.2825 $ 0.22 $ 0.18

Balance Sheet Data, at Year End:
Total investments...................................... $2,630.2 $2,840.8 $2,769.0 $2,784.3 $2,798.5
Total assets........................................... 4,253.8 4,395.5 4,131.9 3,861.0 3,662.3
Total policy liabilities............................... 2,341.3 2,308.0 2,278.6 2,310.0 2,276.0
Short-term debt........................................ 49.0 50.0 42.0 34.0 75.0
Long-term debt......................................... 99.7 99.6 99.6 99.6 100.0
Total shareholders' equity............................. 400.1 496.6 506.0 484.4 470.2
Book value per share(7)................................ $ 9.75 $ 11.80 $ 11.43 $ 10.25 $ 10.05

(continued on next page)

4

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA - (continued)

Year Ended December 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(Dollars in millions, except per share data)

Segment Information:
Insurance premiums written and contract deposits
Property and casualty................................. $ 495.1 $ 487.8 $ 458.0 $ 427.1 $ 405.8
Annuity............................................... 205.7 223.3 199.2 166.9 142.9
Life.................................................. 120.4 116.7 114.1 110.8 105.3
Total............................................... 821.2 827.8 771.3 704.8 654.0
Operating income(4)
Property and casualty................................. $ 39.5 $ 53.2 $ 61.4 $ 54.0 $ 56.4
Annuity............................................... 27.3 23.1 19.3 16.3 14.8
Life.................................................. 14.6 12.4 12.9 12.1 10.4
Corporate and other, including interest expense....... (10.7) (9.8) (10.0) (9.3) (10.7)
Total............................................... 70.7 78.9 83.6 73.1 70.9

Statutory Operating Data(8):
Property and casualty:
Loss and loss adjustment expense ratio................ 76.3% 74.4% 71.7% 74.1% 73.5%
Expense ratio......................................... 19.8% 19.3% 19.4% 19.4% 19.8%
Combined loss and expense ratio(9).................... 96.1% 93.6% 91.1% 93.5% 93.3%
Industry average combined loss
and expense ratio(9)(10)............................ 107.5% 105.6% 101.6% 105.8% 106.5%
Personal lines industry segment average combined
loss and expense ratio(9)(10)....................... 106.0% 102.7% 99.8% 104.9% 103.5%
Annuity accumulated value on deposit.................... $2,487.3 $2,475.5 $2,314.2 $2,075.5 $1,866.0
Life insurance in force................................. $ 12,300 $ 11,799 $ 11,188 $ 10,645 $ 10,235
Adjusted capital and surplus of insurance subsidiaries
(includes investment reserves)(11).................... $ 405.7 $ 379.8 $ 372.3 $ 404.6 $ 389.8

___________________________
(1) Amortization of intangible assets is comprised of amortization of goodwill
and amortization of acquired value of insurance in force and is the result
of purchase accounting adjustments related to the 1989 acquisition of the
Company and the 1994 acquisition of Allegiance.
(2) 1999 includes a non-recurring charge of $20.0 million, or $0.48 per share,
to record an additional federal income tax provision representing the
Company's maximum exposure for disputed prior years' taxes.
(3) In December 1996, the Company announced its strategic decision to withdraw
from the group medical insurance business and during 1997 the Company
accelerated the withdrawal. Group medical results net of taxes are reported
separately as discontinued operations and 1997 and 1996 include additional
after tax charges of $3.5 million, or $0.07 per diluted share, and $3.9
million, or $0.08 per diluted share, respectively, for estimated losses
during the phase-out period.
(4) Income from continuing operations before the after tax impact of realized
investment gains and losses, litigation settlement, provision for prior
years' taxes, cost of the additional rights relating to the 1995 share
repurchase and discontinued operations.
(5) For the purpose of determining the ratio of earnings to fixed charges,
"earnings" consist of income from continuing operations before income taxes
and interest expense (including amortization of debt issuance cost), and
"fixed charges" consist of interest expense (including amortization of debt
issuance cost).
(6) Basic earnings per share is computed based on the weighted average number
of shares outstanding. Diluted earnings per share is computed based on the
weighted average number of shares and common stock equivalents outstanding.
The Company's common stock equivalents relate to outstanding common stock
options, Director Stock Plan units and Employee Stock Plan units, warrants
prior to their repurchase in 1999 and, prior to their early retirement in
February 1996, the convertible notes were considered potentially dilutive
securities for purposes of calculating diluted earnings per share.
(7) Due to the adoption by the Company on January 1, 1994 of Financial
Accounting Standard No. 115 ("FAS 115"), total shareholders' equity
included a decrease, net of taxes, of $40.0 million at December 31, 1999
and an increase, net of taxes, of $57.3 million, $62.2 million, $29.7
million and $76.2 million at December 31, 1998, 1997, 1996 and 1995,
respectively. Excluding the FAS 115 market value accounting for
investments, book value per share was $10.73, $10.44, $10.03, $9.62 and
$8.42 at December 31, 1999, 1998, 1997, 1996 and 1995, respectively.
(8) Statutory data has been derived from the financial statements of the
Company prepared in accordance with statutory accounting practices and
filed with insurance regulatory authorities.
(9) Property and casualty combined loss and expense ratio includes policyholder
dividends.
(10) Source: Best's Aggregates and Averages (1996 through 1999 Eds.). The
industry averages for the year ended December 31, 1999 are from Review
Preview, A Special Supplement to Best's Review and BestWeek,
Property/Casualty Edition, January 2000, published by A.M. Best.
(11) Investment reserves were the Asset Valuation Reserves.

5

General

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

Insurance Premiums Written and Contract Deposits
(Dollars in millions)

Year Ended December 31,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------

Property and casualty........ $495.1 60.3% $487.8 58.9% $458.0 59.4%
Annuity...................... 205.7 25.0 223.3 27.0 199.2 25.8
Life......................... 120.4 14.7 116.7 14.1 114.1 14.8
------ ----- ------ ----- ------ -----

Total....................... $821.2 100.0% $827.8 100.0% $771.3 100.0%
====== ===== ====== ===== ====== =====

Corporate Strategy and Marketing

The Company's target market consists of educators and other employees of
public schools and their families. Horace Mann is the only national multiline
insurance company focused on the niche educator market. It is estimated that
there are approximately 3 million elementary and secondary public school
teachers and administrators in the United States. The Company also sells its
products to other education-related customers, including private school
teachers, education support personnel, and their families, and customer
referrals.

The U.S. Department of Education estimates that the number of public school
teachers is growing 1% annually. Recent federal programs which reduce class
size and add additional teachers may increase this growth rate. Annual turnover
of 8% in the educator market, combined with the 1% growth rate cited above,
results in a 9% annual increase in the Company's niche market. In addition to
increases in the number of teachers that result from growth in the general
population and in the number of school age children, turnover among the teacher
population increases the size of the Company's target market. New teachers and
educational support personnel are solicited by the Company's agents and the
Company attempts to retain customers who have retired or left the teaching
profession. The Company's 1.1 million customers typically have moderate annual
incomes, with many belonging to two-income households. Their financial planning
tends to focus on security, savings and primary insurance needs.

Exclusive Agency Force

A cornerstone of the Company's marketing strategy is its exclusive sales
force of full-time agents who are employees of the Company trained to sell
multiline products. As of December 31, 1999, the Company employed 1,105 full-
time agents, including 708 agents having more than two years of experience with
the Company. Many of the Company's agents were previously teachers or other
members of the education profession who both understand their customers' needs
and maintain relationships with current and former educators. The Company's
agents market and write the full range of the Company's products with all agents
licensed in both property and casualty and life products and approximately 80%
of experienced agents licensed by the National Association of Securities
Dealers, Inc. ("NASD") to sell variable annuities. They are under contract to
market and write only those products authorized by the Company. The agency
force is managed through 63 agency offices in 47 states.

6

The Company's service commitment to its policyholders begins with personal
contact at the point of sale between the Company's agents and potential
policyholders. In addition, the Company's agents often have direct access to
school premises, placing them in an advantageous position to write and service
individual insurance business for educators. In surveys, the Company's
customers have stated that important reasons for choosing and staying with
Horace Mann are the personal service and broad array of products the Company's
agents deliver and education association sponsorships. Management believes that
Horace Mann's name recognition and policyholder loyalties lead to new customers
and cross selling of additional insurance products. At December 31, 1999, 32%
of the Company's 1.1 million customers had more than one Horace Mann product.

The Company's agents pre-underwrite policy applicants. The Company
structures its agent training and its agent compensation to provide incentives
for agents to adhere to the Company's underwriting standards and practices and
business growth plans. Agents' compensation increases by writing more
profitable business, not just additional business. Agents' compensation after
an initial two-year period is comprised entirely of commissions and incentive
bonuses based on profitability of insurance written, retention of customers and
sales. In 1999, incentive bonuses represented 24% of compensation for agents
having more than two years of experience with more than 90% of the bonuses based
on profitability. The profitability related portion of agent compensation is
based on individual and agency loss ratios in the case of property and casualty
policies, where permitted by law, and persistency in the case of life policies.
Management believes that this compensation structure, which rewards the
individual agent's selection of profitable business, helps to produce profitable
business.

Alternate Distribution Program

The Company has established an alternate distribution marketing program to
develop new sales channels that supplement and complement the exclusive agency
force. As of December 31, 1999, the Company had established relationships with
over 100 educator credit unions serving nearly 700,000 members in 35 states. At
some of those credit unions, a salaried representative of the Company is
available to meet with prospective customers, while other of those credit unions
refer their members to the Company and its agents for their insurance needs.

Geographic Composition of Business

The Company's business is geographically diversified. Based on direct
insurance premiums earned and contract deposits for all product lines for the
year ended December 31, 1999, the top five states and their portion of total
premium were North Carolina, 7.9%; Texas, 6.4%; Illinois, 5.2%; Massachusetts,
5.2%; and Minnesota, 4.9%.

7

HMEC's property and casualty subsidiaries write business in 48 states and
the District of Columbia. The following table sets forth the Company's top ten
property and casualty states based on total direct premiums in 1999:

Property and Casualty Segment Top Ten States
(Dollars in millions)

Property and Casualty
Segment
--------------------------
Direct Percent
State Premiums(1) of Total
- ----- ----------- --------

North Carolina.................................... $ 36.3 7.4%
Texas............................................. 34.8 7.1
Massachusetts..................................... 34.3 7.0
California........................................ 33.3 6.7
Minnesota......................................... 30.8 6.2
Florida........................................... 28.1 5.7
Pennsylvania...................................... 23.2 4.7
Michigan.......................................... 21.3 4.3
South Carolina.................................... 20.8 4.2
Georgia........................................... 16.4 3.3
------ -----
Total of top ten states.......................... 279.3 56.6
All other areas................................... 214.5 43.4
------ -----
Total direct premiums............................ $493.8 100.0%
====== =====

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

HMEC's principal life insurance subsidiary writes business in 48 states and
the District of Columbia. The following table sets forth the Company's top ten
combined life and annuity states based on total direct premiums and contract
deposits in 1999:

Combined Life and Annuity Segments Top Ten States
(Dollars in millions)

Direct Premiums and Percent
State Contract Deposits(1) of Total
- ----- -------------------- --------

North Carolina.................................... $ 29.0 8.8%
Illinois.......................................... 28.8 8.8
Virginia.......................................... 19.7 6.0
Tennessee......................................... 18.3 5.6
Texas............................................. 17.6 5.3
Indiana........................................... 15.7 4.8
Pennsylvania...................................... 10.9 3.3
Maine............................................. 10.5 3.2
Wisconsin......................................... 10.4 3.2
Louisiana......................................... 10.0 3.0
------ -----
Total of top ten states.......................... 170.9 52.0
All other areas................................... 157.9 48.0
------ -----
Total direct premiums............................ $328.8 100.0%
====== =====

__________________
(1) Determined under statutory accounting practices.

8

National, State and Local Education Associations

The Company estimates that less than half of its policyholders are members
of the National Education Association ("NEA"), the nation's largest
confederation of state and local teachers' associations. NEA has approximately
2.4 million members.

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

From 1984 to September 1993 and beginning again in September 1996, on a
national level NEA purchased from the Company educator excess professional
liability insurance for all of its members. NEA has committed to purchase this
insurance from the Company through August 2002. Premium from this product
represents less than 1% of all insurance premiums written and contract deposits
of the Company. Between September 1993 and September 1996, the Company did not
write this policy.

It is the practice of NEA and affiliated state and local education
associations to "sponsor" various insurance products and services, including
those of the Company and its competitors. "Sponsorship" is generally determined
independently by each of these organizations. Being "sponsored" generally means
that NEA and such state and local associations evaluate a product, authorize the
use of their names in connection with the marketing of the product and, in some
instances, recommend that their membership consider buying the product. From
time to time during the past 30 years, NEA has sponsored various Company
products and currently sponsors the Company's homeowners policy, which was co-
sponsored by 39 NEA-affiliated state associations as of December 31, 1999.
Since 1988, the Company's homeowners policy was the only product of the Company
that was sponsored by NEA (exclusive of the educator excess professional
liability insurance policy purchased by NEA as described above). NEA-affiliated
education associations in 40 states sponsor products of the Company other than
homeowners. NEA-affiliated education associations in 45 states sponsor one or
more of the Company's products. In many cases, associations that sponsor one of
the Company's products also sponsor competing products. The Company does not
pay NEA or any affiliated associations any consideration in exchange for
sponsorship of Company products. The Company does pay for advertising that
appears in NEA and state education association publications.

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

9

In addition to its longstanding relationships with NEA and affiliated state
and local education associations, the Company has established its brand name
through its annual scholarship program for dependents of public school
employees, its annual educator surveys, sponsorship of the National Teacher Hall
of Fame, sponsorship of the educator and student resource website
www.reacheverychild.com and availability of educator information on the
Company's website www.horacemann.com as well as local agent contacts with school
districts. The Company tailors its products to the educator market, including
certain educator specific features and hybrid products, which distinguishes the
Company's products from competitors.

Property and Casualty

The property and casualty segment represented 60% of the Company's total
insurance premiums and contract deposits and 56% of the Company's operating
income in 1999.

The primary property and casualty product offered by the Company is private
passenger automobile insurance, which in 1999 represented 46% of the Company's
total insurance premiums written and contract deposits and 76% of property and
casualty net written premiums. As of December 31, 1999, the Company had
approximately 592,000 voluntary automobile policies in force with annual
premiums of approximately $408 million. The Company's automobile business is
primarily preferred risk, defined as a household whose drivers have no accidents
and no more than one violation. The Company has instituted a program in a
limited number of states to provide non-preferred risk coverage to the educator
market, with a third-party vendor underwriting such insurance and the Company
receiving a commission on its sale.

In 1999, homeowners insurance represented 14% of the Company's total
insurance premiums written and contract deposits and 23% of property and
casualty premiums. The Company writes primarily residential homes. As of
December 31, 1999, the Company had approximately 280,000 homeowners policies in
force with annual premiums of approximately $113 million.

The educator excess professional liability insurance represented the
remaining 1% of the Company's 1999 property and casualty premiums. See
"Business - Corporate Strategy and Marketing - National, State and Local
Education Associations."

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

10

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

Selected Historical Financial Information For Property and Casualty Segment

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

Property and Casualty Segment
Selected Historical Financial Information
(Dollars in millions)

Year Ended December 31,
------------------------
1999 1998 1997
------ ------ ------

Statement of Operations Data:
Insurance premiums written........................ $495.1 $487.8 $458.0
Insurance premiums earned......................... 491.1 476.4 447.2
Net investment income............................. 37.0 38.9 41.7
Operating income before income taxes.............. 54.6 66.5 78.7
Operating income.................................. 39.5 53.2 61.4
Net investment income, after tax.................. 28.3 29.0 30.4
Catastrophe costs, after tax...................... 12.7 18.5 4.0

Statutory Operating Statistics:
Loss and loss adjustment expense ratio............ 76.3% 74.4% 71.7%
Expense ratio..................................... 19.8% 19.3% 19.4%
Combined loss and expense ratio
(including policyholder dividends)............... 96.1% 93.6% 91.1%
Combined loss and expense ratio before
catastrophes (including policyholder dividends).. 92.2% 87.7% 89.7%

GAAP Operating Statistics:
Loss and loss adjustment expense ratio............ 76.3% 74.4% 71.7%
Expense ratio..................................... 19.7% 19.3% 19.6%
Combined loss and expense ratio
(including policyholder dividends)............... 96.0% 93.7% 91.3%
Combined loss and expense ratio before
catastrophes (including policyholder dividends).. 92.1% 87.8% 89.9%

Automobile and Homeowners (Voluntary):
Insurance premiums written........................ $470.7 $459.0 $431.0
Insurance premiums earned......................... 465.0 449.9 421.5
Policies in force (in thousands).................. 872 859 837

Property and Casualty Ratios

In each of the last 10 years, the Company's combined loss and expense ratio
for its property and casualty product lines outperformed the total property and
casualty industry combined loss and expense ratio, as reported by A.M. Best.
During this period, the Company's combined loss and expense ratio was better
than the total property and casualty insurance industry combined loss and
expense ratio by an average of approximately 12 percentage points per year.
During the same period of time, the Company's combined loss and expense ratio
was better than the personal lines insurance industry segment combined loss and
expense ratio by an average of approximately 10 percentage points per year.

11

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

Property and Casualty Combined Loss and Expense Ratio(1)

Property and
The Personal Lines Casualty
Company(2) Industry Segment(3) Industry(3)
--------- ------------------- ------------

Year Ended December 31,
1999......................... 96.1% 106.0% 107.5%
1998......................... 93.6 102.7 105.6
1997......................... 91.1 99.8 101.6
1996......................... 93.5 104.9 105.8
1995......................... 93.3 103.5 106.5
1994......................... 93.7 104.5 108.5
1993......................... 93.3 103.9 106.9
1992......................... 97.1 112.5 115.8
1991......................... 98.4 107.1 108.8
1990......................... 101.8 109.8 109.6

__________________
(1) Combined loss and expense ratio includes policyholder dividends and is
determined according to statutory accounting practices.
(2) The Company did not have any California property and casualty business
during each of the years from 1990 through 1993.
(3) Source: Best's Aggregates and Averages (1991 through 1999 Eds.). 1999 is an
estimate from Review Preview, A Special Supplement to Best's Review and
BestWeek, Property/Casualty Edition, January 2000, published by A.M. Best.

Catastrophe costs before federal income tax benefits for the Company and the
property and casualty industry for the ten years ended December 31, 1999 were as
follows:

Catastrophe Costs
(Dollars in millions)

Property and
The Casualty
Company(1) Industry(2)
---------- -----------

Year Ended December 31,
1999...................................... $19.6 $ 8,200.0
1998...................................... 28.4 9,175.0
1997...................................... 6.2 2,560.0
1996...................................... 20.9 7,375.0
1995...................................... 13.9 7,425.0
1994...................................... 16.2 17,030.0
1993...................................... 8.3 5,705.0
1992...................................... 13.3 22,870.0
1991...................................... 9.9 4,698.0
1990...................................... 7.0 2,560.0

__________________________
(1) Net of reinsurance and before federal income tax benefits. Includes
allocated loss adjustment expenses and reinsurance reinstatement premiums.
The Company's individually significant catastrophe losses net of reinsurance
were as follows:

1999 - $5.4 million, Hurricane Floyd; $3.1 million, May tornadoes
primarily in Oklahoma.
1998 - $7.9 million, May Minnesota hailstorm; $2.9 million, May Upper
Midwest hailstorm; $2.0 million, June Midwest wind/hail; $1.6
million, Hurricane Georges.
1997 - $1.4 million, July wind/hail/tornadoes; $1.1 million, Denver,
Colorado hailstorm.
1996 - $8.2 million, Hurricane Fran.
1995 - $2.9 million, Texas wind/hail/tornadoes; $2.2 million Hurricane
Opal.
1994 - $6.0 million, Northridge, California earthquake.
1993 - $2.2 million, East Coast blizzard.
1992 - $1.9 million, Hurricane Andrew.
1991 - $1.0 million, Hurricane Bob.
1990 - $2.8 million, Denver, Colorado hailstorm.

(2) Source: 1999 from Insurance Services Office, Inc. news release dated
January 18, 2000. 1990 through 1998 from Insurance Trends, Property -
Casualty Edition, First Quarter 1999, published by Conning & Company. These
amounts are before reinsurance and federal income tax benefits and exclude
all loss adjustment expenses.

During the last 10 years, the Company's property and casualty expense ratio
has been better than the property and casualty industry personal lines average
expense ratio as reported by A.M. Best by an average of 4.8 percentage points
per year. The Company's property and casualty expense ratio for the year ended
December 31, 1999 was 19.8%.

12

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

Property and Casualty Expense Ratio(1)

Property and
The Personal Lines Casualty
Company(2) Industry Segment(3) Industry(3)
--------- ------------------- -----------

Year Ended December 31,
1999......................... 19.8% 26.2% 28.1%
1998......................... 19.3 25.0 27.7
1997......................... 19.4 24.3 27.1
1996......................... 19.4 23.4 26.4
1995......................... 19.8 23.7 26.3
1994......................... 19.8 23.5 26.0
1993......................... 19.6 23.9 26.2
1992......................... 19.6 24.4 26.6
1991......................... 19.8 24.7 26.4
1990......................... 19.1 24.3 26.0

______________________
(1) Determined according to statutory accounting practices.
(2) The Company did not have any California property and casualty business
during each of the years from 1990 through 1993.
(3) Source: Best's Aggregates and Averages (1991 through 1999 Eds.). The 1999
personal lines result is an estimate from A.M. Best. The 1999 total
industry result is an estimate from Review Preview, A Special Supplement to
Best's Review and BestWeek, Property/Casualty Edition, January 2000,
published by A.M. Best.

Property and Casualty Reserves

In each of the last ten years the Company's property and casualty reserves
have developed cumulative redundancies. Reserves for claims and claims expenses
are carried at the full value of estimated liabilities and are not discounted
for interest expected to be earned on reserves. 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.

The Company establishes property and casualty claim reserves to cover its
estimated ultimate liability for claims and claims adjustment expense with
respect to reported claims and claims incurred but not yet reported as of the
end of each accounting period. In accordance with applicable insurance laws and
regulations and generally accepted accounting principles ("GAAP"), no reserves
are established until a loss occurs, including a loss from a catastrophe.
Underwriting results of the property and casualty operations are significantly
influenced by estimates of property and casualty claims and claims expense
reserves. These reserves are an accumulation of the estimated amounts necessary
to settle all outstanding claims, including claims which are incurred but not
reported, as of the date of the financial statements.

The reserve estimates are 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 effects of
inflation are implicitly considered in the reserving process. The establishment
of reserves, including reserves for catastrophes, is an inherently uncertain
process and the ultimate cost of losses may vary materially from the recorded
reserve amounts. The Company regularly updates its reserve estimates as new
facts become known and further events occur which may impact the resolution of
unsettled claims. Changes in prior year reserve estimates, which may be
material, are reflected in the results of operations in the period such changes
are determined to be appropriate.

13

Due to the inherent uncertainty in estimating reserves for claims and claims
expenses, there can be no assurance that ultimate liabilities will not exceed
amounts reserved, with a resulting adverse effect on the Company. Management
believes that the Company's overall reserve levels at December 31, 1999 are
adequate to meet its future obligations.

The following table is a summary reconciliation of the beginning and ending
property and casualty insurance claims and claims expense reserves, displayed
individually for each of the last three years. The table presents reserves on a
net (after reinsurance) basis. The total net property and casualty insurance
claims and claims expense amounts are reflected in the Consolidated Statements
of Operations listed on page F-1 of this report. The end of the year gross
reserve (before reinsurance) balances are reflected in the Consolidated Balance
Sheets also listed on page F-1 of this report.

Reconciliation of Property and Casualty Claims and Claims Expenses Reserves
(Dollars In millions)

Year Ended December 31,
-------------------------------------
1999 1998 1997
------ ------ ------

Gross reserves, beginning of year...................................... $298.9 $310.6 $340.4
Less reinsurance recoverables......................................... 55.9 41.3 34.1
------ ------ ------
Net reserves, beginning of year........................................ 243.0 269.3 306.3
------ ------ ------
Incurred claims and claims expense:
Claims occurring in the current year.................................. 379.5 379.6 365.9
Increase (decrease) in estimated reserves for claims
occurring in prior years(1):
Policies written by the Company..................................... (7.6) (23.3) (40.0)
Business assumed from state reinsurance facilities.................. 3.0 (1.6) (5.1)
------ ------ ------
Total decrease..................................................... (4.6) (24.9) (45.1)
------ ------ ------
Total claims and claims expense incurred............................ 374.9 354.7 320.8
------ ------ ------
Claims and claims expense payments for claims occurring during:
Current year.......................................................... 240.0 239.0 209.2
Prior years........................................................... 142.5 142.0 148.6
------ ------ ------
Total claims and claims expense payments............................ 382.5 381.0 357.8
------ ------ ------
Net reserves, end of period............................................ 235.4 243.0 269.3
Plus reinsurance recoverables......................................... 64.4 55.9 41.3
------ ------ ------
Gross reserves, end of period(2)....................................... $299.8 $298.9 $310.6
====== ====== ======

____________________
(1) Shows the amounts by which the Company decreased or 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. Favorable reserve development generally occurs as a
result of subsequent adjustment of reserves to reflect additional
information.
(2) Unpaid claims and claims expense as reported in the consolidated balance
sheets also include life, annuity, and group accident and health reserves of
$9.8 million, $8.5 million and $11.7 million at December 31, 1999, 1998 and
1997, respectively, in addition to property and casualty reserves.

The provision for claims and claims expenses for insured events in prior
years decreased by $4.6 million, $24.9 million and $45.1 million for the years
ended December 31, 1999, 1998 and 1997, respectively. This favorable claim
development resulted primarily from improving trends in the frequency and
severity of voluntary automobile claims. Future reserve releases, if any, will
depend on the continuation of favorable claim trends.

The year-end 1999 gross reserves of $299.8 million for property and casualty
insurance claims and claims expense, as determined under GAAP, were $64.4
million more than the reserve balance of $235.4 million recorded on the basis of
statutory accounting practices for reports provided to state regulatory
authorities. The difference is the reinsurance recoverable from third parties
totaling $64.4 million that reduces reserves for statutory reporting and is
recorded as an asset for GAAP reporting.

14

Fluctuations from year to year in the level of catastrophe losses impact a
property and casualty insurance company's loss and loss adjustment expenses
incurred and paid. For comparison purposes, the following table provides
amounts for the Company excluding catastrophe losses:

Impact of Catastrophe Losses(1)
(Dollars in millions)

Year Ended December 31,
-----------------------------
1999 1998 1997
------- ------ ------

Claims and claims expense incurred... $374.9 $354.7 $320.8
Amount attributable to catastrophes.. 19.4 28.0 6.2
------ ------ ------
Excluding catastrophes............. $355.5 $326.7 $314.6
====== ====== ======

Claims and claims expense payments... $382.5 $381.0 $357.8
Amount attributable to catastrophes.. 17.4 25.2 5.7
------ ------ ------
Excluding catastrophes............. $365.1 $355.8 $352.1
====== ====== ======

___________________________
(1) Net of reinsurance and before federal income tax benefits. Includes
allocated loss adjustment expenses.

Analysis of Claims and Claims Expense Reserves

The claim reserve development table below illustrates the change over time
of the net reserves established for property and casualty insurance claims and
claims expense at the end of various calendar years. The first section shows the
reserves as originally reported at the end of the stated year. The second
section, reading down, shows the cumulative amounts paid as of the end of
successive years with respect to that reserve liability. The third section,
reading down, shows retroactive reestimates of the original recorded reserve as
of the end of each successive year which is the result of the Company's learning
additional facts that pertain to the unsettled claims. The last section compares
the latest reestimated reserve to the reserve originally established, and
indicates whether or not the original reserve was adequate or inadequate to
cover the estimated costs of unsettled claims. The table also presents the gross
reestimated liability as of the end of the latest reestimation period, with
separate disclosure of the related reestimated reinsurance recoverable. The
claim reserve development table is cumulative and, therefore, ending balances
should not be added since the amount at the end of each calendar year includes
activity for both the current and prior years.

15

In evaluating the information in the table below, it should be noted that
each amount includes the effects of all changes in amounts of prior periods.
For example, if a claim determined in 1998 to be $150 thousand was first
reserved in 1989 at $100 thousand, the $50 thousand deficiency (actual claim
minus original estimate) would be included in the cumulative deficiency in each
of the years 1989 - 1997 shown below. This table presents development data by
calendar year and does not relate the data to the year in which the accident
actually occurred. Conditions and trends that have affected the development of
these reserves in the past will not necessarily recur in the future. It may not
be appropriate to use this cumulative history in the projection of future
performance.

Property and Casualty
Claims and Claims Expense Reserve Development
(Dollars in millions)

December 31,
-------------------------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ ------ ------ ------ ------ -------- ------

Gross reserves for
property and casualty
claims and claims
expenses,
beginning of year......... $320.9 $319.4 $331.5 $358.2 $373.5 $389.1 $369.7 $340.4 $310.6 $298.9 $299.8
Deduct: Reinsurance
recoverables.............. 46.9 20.9 14.8 17.7 21.6 19.5 23.8 34.1 41.3 55.9 64.4
------ ------ ------ ------ ------ ------ ------ ------ ------ -------- ------
Net reserves for property
and casualty
claims and claims
expenses,
beginning of year......... 274.0 298.5 316.7 340.5 351.9 369.6 345.9 306.3 269.3 243.0 235.4
Increase in reserves due
to purchase of
Allegiance Insurance
Company:
Gross reserves for
property
and casualty claims and
claims expenses......... - - - - 30.6 - - - - - -
Deduct: Reinsurance
recoverables............ - - - - 0.6 - - - - - -
------ ------ ------ ------ ------ ------ ------ ------ ------ -------- ------
Net reserves for
property and
casualty claims and
claims
expenses................ - - - - 30.0 - - - - - -
Paid cumulative as of:
One year later............ 115.0 111.3 116.1 117.6 133.4 140.8 139.3 148.6 142.0 142.5
Two years later........... 163.9 167.4 170.0 169.6 190.5 194.5 195.3 202.1 191.4
Three years later......... 192.6 197.1 197.2 197.8 218.4 224.2 223.0 225.1
Four years later.......... 208.2 212.9 212.1 213.6 234.1 237.9 233.8
Five years later.......... 216.4 220.7 220.5 222.6 241.0 243.1
Six years later........... 219.3 225.3 224.8 226.0 243.7
Seven years later......... 221.7 228.2 227.1 227.5
Eight years later......... 223.2 229.5 227.9
Nine years later.......... 224.1 229.9
Ten years later........... 224.3
Reserves reestimated as of:
End of year............... 274.0 298.5 316.7 340.5 381.9 369.6 345.9 306.3 269.3 243.0 235.4
One year later............ 265.9 279.9 297.3 306.1 327.6 314.0 283.4 261.2 244.4 238.4
Two years later........... 254.5 266.7 272.1 267.7 281.9 269.2 249.6 250.2 239.3
Three years later......... 239.4 246.7 246.8 246.4 258.1 251.4 245.8 247.8
Four years later.......... 233.2 236.5 235.2 233.3 249.3 248.9 243.8
Five years later.......... 227.8 232.4 229.8 229.7 247.4 247.0
Six years later........... 225.4 230.8 230.1 230.0 246.6
Seven years later......... 224.9 231.1 230.1 229.8
Eight years later......... 225.2 231.7 230.0
Nine years later.......... 225.7 231.8
Ten years later........... 225.9
Reserve redundancy -
Initial net reserves in
excess of reestimated
reserves:
Amount................... $ 48.1 $ 66.7 $ 86.7 $110.7 $135.3 $122.6 $102.1 $ 58.5 $ 30.0 $ 4.6
Percent.................. 17.6% 22.3% 27.4% 32.5% 35.4% 33.2% 29.5% 19.1% 11.1% 1.9%

Gross reestimated
liability - latest........ $285.3 $281.9 $292.8
Reestimated reinsurance
recoverables -
latest.................... 37.5 42.6 54.4
------ ------ ------
Net reestimated liability -
latest.................. 247.8 239.3 238.4
Gross cumulative excess.... $ 55.1 $ 28.7 $ 6.1
======= ====== ========

As the table above illustrates, the Company's net reserve for property and
casualty insurance claims and claims expense at the end of 1998 developed
favorably in 1999 by $4.6 million, comparable to favorable development of the
gross reserves of $6.1 million.

16

Property and Casualty Reinsurance

All reinsurance is obtained through contracts which generally are renewed
each calendar year; however, the catastrophe, liability and property reinsurance
program effective January 1, 1999, excluding reinsurance for the educator excess
professional liability policy, is a three year contract with rate guarantees.
Although reinsurance does not legally discharge the Company from primary
liability for the full amount of its policies, it does make the assuming
reinsurer liable to the extent of the reinsurance ceded. Historically, the
Company's losses from uncollectible reinsurance recoverables have been
insignificant due to the Company's emphasis on the credit worthiness of its
reinsurers. Past due reinsurance recoverables as of December 31, 1999 were also
insignificant.

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

The Company maintains an excess and catastrophe treaty reinsurance program.
The Company reinsures 95% of catastrophe losses above a retention of $7.5
million per occurrence up to $80 million per occurrence in 1999 and 2000. In
addition, the Company reinsures 75% of catastrophe losses in Florida above a
retention of $6.1 million. These programs are augmented by a $100 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 property
catastrophes exceed the catastrophe reinsurance program coverage limit. Before
tax benefits, the equity put provides a source of capital for up to $154 million
of catastrophe losses above the reinsurance coverage limit. For liability
coverages, in both 1999 and 2000, including the educator excess professional
liability policy, the Company reinsures each loss above a retention of $500,000
up to $20 million. The Company also reinsures each property loss, including
catastrophe losses that in the aggregate are less than the retention levels
above, above a retention of $500,000 up to $2.5 million in 1999 and 2000.

17

The following table identifies the Company's most significant reinsurers
under the traditional catastrophe reinsurance program, their percentage
participation in the Company's aggregate reinsured coverage and their rating by
Standard & Poor's Corporation ("S&P" or "Standard & Poor's") and A.M. Best. No
other single reinsurer's percentage participation in 2000 or 1999 exceeds 5%.

Property Catastrophe Reinsurance Participants In Excess of 5%

Participation
S&P A.M. Best -------------
Rating Rating Reinsurer Parent 2000 1999
--------- ------ --------- ------- ---- ----

AA A+ AXA Reinsurance Company AXA Group 11% 11%
AA A+ St. Paul Fire and Marine
Insurance Company The St. Paul Companies, Inc. 11% 11%
AA A++ Erie Insurance Exchange 9% 9%
AAA A++ American Re-insurance Company Muenchener Rueckversicherungs-
Gesellschaft AG (Munich Re)
of Germany 6% 6%
AA A+ NAC Reinsurance NAC Re Corporation 6% 6%
Corporation
A A Continental Casualty Loews Corporation 6% 6%
Company*
A+ A Lloyd's of London 5% 5%
Syndicates**
AA+ A+ Hannover Ruckversicherungs AG HDI Haftpflicht-verband
der Deutschen Industrie VaG 5% 5%

_________________________________
* Includes 1 percentage point from CNA Reinsurance Company Ltd. of London,
England.
** For 2000 and 1999, the 5% participation by Lloyd's of London in the
Company's catastrophe reinsurance program is disbursed among 4 syndicates.

For 2000, all of the Company's property catastrophe reinsurers were rated "A-
(Excellent)" or above by A.M. Best or "A" or above by S&P.

Annuities

Educators in the Company's target market, as public school employees,
benefit from the provisions of Section 403(b) of the Internal Revenue Code. This
section of the Code allows public school employees to reduce their pretax income
by making periodic contributions to an individual qualified retirement plan. The
Company has offered tax-qualified annuities to its marketplace, designed to
allow contractholders to benefit from these tax provisions, since 1961, the year
Congress created this option for educators. The Company is the 14th largest
provider of 403(b) tax-qualified variable annuities and one of the 20 largest
participants in the fixed and variable 403(b) tax-qualified annuity market
according to a 1999 A.M. Best report. Approximately 70% of the Company's new
annuity contract deposits in 1999 were for 403(b) tax-qualified annuities;
approximately 80% of accumulated annuity value on deposit is 403(b) tax-
qualified. In 1999, annuities represented 25% of the Company's total insurance
premiums written and contract deposits and 38% of the Company's operating
income.

The Company sells fixed and variable tax-qualified annuities primarily under
its combination contract which allows the contractholder to allocate funds to
both fixed and variable alternatives. The features of the Company's combination
fixed/variable annuity contract contribute to business retention.
Contractholders can change at any time their allocation of deposits between a
guaranteed interest rate fixed account and seven mutual fund investment options.

18

Under the fixed account option, both the principal and a rate of return are
guaranteed. The seven mutual fund options are: a common stock fund, a bond
fund, a combination bond and stock fund, and a short-term fund; and beginning in
1997 -- a small cap growth fund, an international equity fund, and a socially
responsible fund. The common stock fund and the combination bond and stock fund
together represent 86% of the Company's variable annuity accumulations at
December 31, 1999. Total accumulated fixed and variable annuity cash value on
deposit at December 31, 1999 was $2,487.3 million.

For the year ended December 31, 1999, 91% of the accumulated cash value of
the Company's annuity business remained on deposit, compared to average
retention of 90% for stock life insurance companies for 1998, as reported by
A.M. Best. All annuities issued since 1982 and approximately 75% of all
outstanding fixed annuity accumulated cash values are subject in most cases to
substantial early withdrawal penalties, typically ranging from 5% to 13% of the
amount withdrawn, compared to an average of 45% of accumulated values subject to
withdrawal penalties for stock life insurance companies for 1998, as reported by
A.M. Best. For the Company, withdrawals of outstanding variable annuities are
limited to amounts less than or equal to the then current market value of such
annuities. Generally, a penalty is imposed under the Internal Revenue Code on
amounts withdrawn from tax-qualified annuities prior to age 59 1/2. Total
accumulated annuity funds on deposit at December 31, 1999 consisted of 45%
variable annuities and 55% fixed annuities. The growth of the annuity segment
in the last five years has come from the variable annuity product.

19

Selected Historical Financial Information For Annuity Segment

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

Annuity Segment
Selected Historical Financial Information
(Dollars in millions, unless otherwise indicated)

Year Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------

Statement of Operations Data:
Contract deposits:
Variable............................................... $ 129.2 $ 138.6 $ 112.2
Fixed.................................................. 76.5 84.7 87.0
Total................................................ 205.7 223.3 199.2
Contract charges earned.................................. 16.7 15.6 12.6
Net investment income.................................... 105.3 107.7 113.1
Net interest margin (without realized gains)............. 38.1 35.7 36.6
Net margin (includes fees and contract charges earned)... 57.6 53.5 51.0
Operating income before income taxes..................... 41.8 35.4 29.8
Operating income......................................... 27.3 23.1 19.3

Operating Statistics:
Fixed annuity:
Accumulated value...................................... $1,355.6 $1,352.7 $1,354.5
Accumulated value persistency.......................... 92.3% 92.8% 91.7%
Variable annuity accumulated value....................... $1,131.7 $1,122.8 $ 959.7
Number of contracts in force............................. 125,352 120,253 112,162
Average accumulated cash value (in dollars).............. $ 19,843 $ 20,586 $ 20,633
Average annual deposit by contractholders (in dollars)... $ 2,327 $ 2,416 $ 2,485
Maturity schedule for all annuity contracts:
Matured................................................ $ 211.9 $ 205.6 $ 195.7
5 years or less........................................ 339.4 436.0 424.4
After 5 years through 10 years......................... 536.3 550.3 489.6
After 10 years through 20 years........................ 882.6 831.1 793.9
After 20 years......................................... 517.1 452.5 410.6
Total accumulated cash value......................... $2,487.3 $2,475.5 $2,314.2
Annuity contracts terminated due to surrender,
death, maturity or other:
Number of contracts.................................. 8,353 6,987 6,945
Amount............................................... $ 269.2 $ 224.8 $ 168.2
Accumulated fixed annuity value grouped
by applicable surrender charge:
0%................................................... $ 315.9 $ 319.8 $ 326.3
5% and greater but less than 10%..................... 841.4 825.3 808.9
10% and greater...................................... 108.4 120.6 137.5
Supplementary contracts with life contingencies
not subject to discretionary withdrawal............ 89.9 87.0 81.8
Total accumulated fixed annuity value............ $1,355.6 $1,352.7 $1,354.5

Life

The Company entered the individual life insurance business in 1949 with
traditional term and whole life insurance products. In 1984, the Company
introduced "Experience Life," a flexible, adjustable premium life insurance
contract which allows the customer to combine elements of term life insurance,
interest-sensitive whole life insurance and an interest-bearing account. At
December 31, 1999 the Company had in force approximately 98,000 Experience Life
policies representing approximately $6.7 billion of life insurance in force with
annual insurance premiums and contract deposits of approximately $73.5 million.
The Company's traditional term, whole life and group life business in force
consists of approximately 168,000 policies, representing approximately $5.6
billion of life insurance in force with annual insurance premiums and contract
deposits of approximately $34.8 million as of December 31, 1999. In 1997, the
Company introduced a new series of five limited duration term life insurance
products. In 1998, the Company introduced a new series of whole life products
designed to serve the needs of customers who also want limited life insurance
coverage (as low as $5,000 death benefits) but

20

who want the features of a whole life policy. The Company does not charge any
penalty for withdrawal of life insurance cash values. In 1999, the life segment
represented 15% of the Company's total insurance premiums written and contract
deposits, including approximately 1.4 percentage points attributable to the
Company's group life and group disability income business, and 21% of the
Company's operating income.

During 1999, the average face amount of ordinary life insurance policies
issued by the Company was $101,773 and the average face amount of all ordinary
life insurance policies it had in force at December 31, 1999 was $54,520.

The maximum individual life insurance risk retained by the Company is
$200,000 on any individual life and $100,000 is retained on each group life
policy. The excess of the amounts retained are reinsured with life reinsurers
that are all rated "A (Excellent)" or above by A.M. Best.

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

Selected Historical Financial Information For Life Segment

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

Life Segment
Selected Historical Financial Information
(Dollars in millions, unless otherwise indicated)

Year Ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------

Statement of Operations Data:
Insurance premiums and contract deposits.............. $ 120.4 $ 116.7 $ 114.1
Insurance premiums and contract charges earned........ 87.3 85.8 82.9
Net investment income................................. 47.0 45.4 43.7
Operating income before income taxes.................. 22.3 19.0 19.9
Operating income...................................... 14.6 12.4 12.9

Operating Statistics:
Life insurance in force:
Ordinary life....................................... $ 10,749 $ 10,573 $ 10,241
Group life.......................................... 1,551 1,226 947
Total............................................. 12,300 11,799 11,188
Number of policies in force:
Ordinary life....................................... 198,898 201,689 200,811
Group life.......................................... 66,953 57,010 51,895
Total............................................. 265,851 258,699 252,706
Average face amount in force (in dollars):
Ordinary life....................................... $ 54,520 $ 52,422 $ 50,998
Group life.......................................... 23,166 21,505 18,248
Total............................................. 46,267 45,609 44,273
Persistency rate (ordinary life insurance in force)... 91.7% 92.8% 93.0%
Lapse ratio (ordinary life insurance in force)........ 8.3% 7.2% 7.0%
Ordinary life insurance terminated due to death,
surrender, lapse or other:
Face amount of insurance surrendered or lapsed.... $ 998.9 $ 888.2 $ 771.4
Number of policies.............................. 13,092 9,396 9,571
Amount of death claims............................ $ 26.4 $ 26.5 $ 22.0
Number of death claims.......................... 1,326 1,300 1,274

21

Investments

The Company's investments are selected to balance the objectives of
minimizing interest rate exposure, providing a high current yield and protecting
principal. These objectives are implemented through a portfolio that emphasizes
investment grade, publicly traded fixed income securities. When impairment of
the value of an investment is considered other than temporary, the decrease in
value is recorded as an adjustment to the valuation reserve and a new cost basis
is established. At December 31, 1999, investments in non-investment grade
securities represented 6.9% of total investments. At December 31, 1999, fixed
income securities represented 95.3% of investments. Of the fixed income
investment portfolio, 93.2% was investment grade and 99.8% was publicly traded.
The average quality of the total fixed income portfolio was AA-/A+ at December
31, 1999, and the average option adjusted duration of total investments was 4.1
years. There are no significant investments in mortgage loans, real estate,
foreign securities or privately placed securities.

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

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

22

The following table sets forth the carrying and market values of the
Company's investment portfolio as of December 31, 1999:

Investment Portfolio
(Dollars in millions)

Percentage Carrying Value
of Total -----------------------------------
Carrying Life and Property and Amortized
Value Total Annuity Casualty Cost
---------- --------- -------- ------------ ---------

Publicly Traded Fixed Maturity Securities
and Cash Equivalents:
U.S. government and agency obligations(1):
Mortgage-backed securities................ 18.9% $ 498.1 $ 439.0 $ 59.1 $ 506.1
Other..................................... 5.0 131.4 120.9 10.5 136.4
Investment grade corporate and public
utility bonds............................. 36.5 958.9 871.2 87.7 990.0
Municipal bonds............................. 11.5 302.0 36.5 265.5 307.0
Other mortgage-backed securities............ 15.5 408.0 378.2 29.8 418.6
Non-investment grade corporate and public
utility bonds(2).......................... 6.9 181.0 116.9 64.1 189.5
Foreign government bonds.................... 0.8 22.0 22.0 - 21.9
Short-term investments(3)................... 1.7 45.1 26.4 18.7 45.1
----- -------- -------- ------ --------
Total publicly traded securities....... 96.8 2,546.5 2,011.1 535.4 2,614.6
----- -------- -------- ------ --------
Other Investments:
Private placements, investment grade(4)..... 0.2 5.8 5.7 0.1 5.8
Private placements,
non-investment grade (2)(4)............... - 0.1 0.1 - 0.1
Mortgage loans and real estate(5)........... 0.7 17.6 17.6 - 17.6
Policy loans and other...................... 2.3 60.2 58.7 1.5 59.4
----- -------- -------- ------ --------
Total other investments................ 3.2 83.7 82.1 1.6 82.9
----- -------- -------- ------ --------
Total investments(6)................... 100.0% $2,630.2 $2,093.2 $537.0 $2,697.5
===== ======== ======== ====== ========

_____________
(1) Includes $221.7 million market value of investments guaranteed by the full
faith and credit of the United States government and $407.8 million market
value of federally sponsored agency securities.
(2) A non-investment grade rating is assigned to a security when it is acquired,
primarily on the basis of the Standard & Poor's Corporation ("Standard &
Poor's" or "S&P") rating for such security, or if there is no S&P rating,
the Moody's Investors Service, Inc. ("Moody's") rating for such security, or
if there is no S&P or Moody's rating, the National Association of Insurance
Commissioners (the "NAIC") rating for such security.
(3) Short-term investments mature within one year of being acquired and are
carried at cost, which approximates market value. Short-term investments
include $45.0 million in a money market fund rated "AAA" (S&P or its
equivalent) and $0.1 million in certificates of deposit.
(4) Market values for private placements are estimated by the Company with the
assistance of its investment advisors.
(5) Mortgage loans are carried at amortized cost or unpaid principal balance
less valuation reserves and real estate acquired in the settlement of debt
is carried at the lower of cost or market. Carrying value is net of a $1.8
million valuation reserve for anticipated losses.
(6) Approximately 14% of the Company's investment portfolio, having a carrying
value of $369.8 million as of December 31, 1999, consisted of securities
with some form of credit support, such as insurance. All of these securities
have the highest investment grade rating.

Fixed Maturity Securities

The following table sets forth the composition of the Company's fixed
maturity securities portfolio by rating as of December 31, 1999:

Rating of Fixed Maturity Securities(1)
(Dollars in millions)
Percent
of Total
Carrying Carrying Amortized
Value Value Cost
-------- -------- ---------

AAA............................................ 46.3% $1,159.9 $1,185.5
AA............................................. 7.7 192.1 193.4
A.............................................. 20.2 507.0 516.0
BBB............................................ 18.8 471.9 495.4
BB............................................. 2.0 50.7 56.4
B.............................................. 4.7 117.4 119.7
CCC or lower................................... - 1.3 1.4
Not rated(2)................................... 0.3 7.0 7.6
----- -------- --------
Total 100.0% $2,507.3 $2,575.4
===== ======== ========

______________
(1) Ratings are as assigned primarily by S&P when available, with remaining
ratings as assigned on an equivalent basis by Moody's. Ratings for publicly
traded securities are determined when the securities are acquired and are
updated monthly to reflect any changes in ratings.
(2) This category includes $1.1 million of publicly traded securities not
currently rated by S&P, Moody's or the NAIC and $5.9 million of private
placement securities not rated by either S&P or Moody's. The NAIC has rated
98.1% of these private placement securities as investment grade.

23

At December 31, 1999, 38.0% of the Company's fixed maturity securities
portfolio was scheduled to mature within the next 5 years. Mortgage-backed
securities, including mortgage-backed securities of United States governmental
agencies, represented 34.4% of the total investment portfolio at December 31,
1999. These securities typically have average lives shorter than their stated
maturities due to unscheduled prepayments on the underlying mortgages. Mortgages
are prepaid for a variety of reasons, including sales of existing homes,
interest rate changes over time that encourage homeowners to refinance their
mortgages and defaults by homeowners on mortgages that are then paid by
guarantors.

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

Cash Flow

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

The ability of the insurance subsidiaries to pay cash dividends to HMEC is
subject to state insurance department regulations which generally permit
dividends to be paid for any 12 month period in amounts equal to the greater of
(i) net gain from operations in the case of a life insurance company or net
income in the case of all other insurance companies for the preceding calendar
year or (ii) 10% of surplus as of the preceding December 31st. Any dividend in
excess of these levels requires the prior approval of the Director or
Commissioner of the state insurance department of the state in which the
dividend paying insurance subsidiary is domiciled. The aggregate amount of
dividends that may be paid in 2000 from all of HMEC's insurance subsidiaries
without prior regulatory approval is approximately $75 million.

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

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

24

Competition

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

For annuity business, the marketplace has begun to see a competitive impact
from new entrants such as mutual funds and banks into the tax deferred annuity
products market. Among the major national providers of annuities to educators,
Variable Annuity Life Insurance Company, a subsidiary of American General
Corporation, and Nationwide have been among the Company's major tax-qualified
annuity competitors. In January 2000, Nationwide announced it will exit its
individual business, including the Kindergarten - 12 tax-qualified annuity
market.

The Company competes with a number of national providers of automobile and
homeowners insurance, such as State Farm, Allstate and Nationwide, and several
regional companies. The Company also competes for automobile business with
certain direct marketing companies, such as 21st Century, American International
Group (AIG) and GEICO.

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

Insurance Financial Ratings

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

Each of HMEC's principal insurance subsidiaries is rated "AA- (Very
Strong)" for financial strength by Standard & Poor's. S&P publications define
financial strength ratings as follows. A Standard & Poor's Insurer Financial
Strength Rating is a current opinion of the financial security characteristics
of an insurance organization with respect to its ability to pay under its
insurance policies and contracts in accordance with their terms. This opinion is
not specific to any particular insurance policy or contract, nor does it address
the suitability of a particular insurance policy or contract for a specific
purpose or purchaser. Furthermore, the opinion does not take into account
deductibles, surrender or cancellation penalties, the timeliness of payment, or
the likelihood of the use of a defense such as fraud to deny claims. Financial
strength ratings do not refer to an insurer's ability to meet nonpolicy
obligations (i.e., debt contracts). The financial strength ratings are based on
current information furnished by the insurance company or obtained by S&P from
other sources it considers reliable. S&P does not perform an audit in connection
with any rating and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended, or withdrawn as a result of changes in,
or unavailability of, such information or based

25

on other circumstances. Financial strength ratings are divided into two broad
classifications. An insurer rated "BBB" or higher is regarded as having
financial security characteristics that outweigh any vulnerabilities, and is
highly likely to have the ability to meet financial commitments. An insurer
rated "BB" or lower is regarded as having vulnerable characteristics that may
outweigh its strengths. "BB" indicates the least degree of vulnerability within
the range; "CC" the highest. Financial strength ratings are assigned at the
request of the insurers and based on extensive quantitative and qualitative
analysis including consideration of ownership and support factors, if
applicable. The rating process includes meetings with insurers' management. Plus
(+) and minus (-) signs show relative standing within a category; they do not
suggest likely upgrades or downgrades. Insurers rated "AAA" offer extremely
strong financial security characteristics. Insurers rated "AA" offer very strong
financial security. The financial securities characteristics of an insurer rated
"AA" differ only slightly from those of companies rated "AAA".

HMIC, TIC and Allegiance are rated "A+ (Superior)" and HMLIC is rated "A
(Excellent)" by A.M. Best. Ratings for the industry range from "A++ (Superior)"
to "F (In Liquidation)", and some companies are not rated. Publications of A.M.
Best indicate that the "A++ and A+ (Superior)" ratings are assigned to those
companies that in A.M. Best's opinion have, on balance, superior financial
strengths, operating performance and market profile when compared to the
standards established by A.M. Best and have a very strong ability to meet their
ongoing obligations to policyholders. The "A and A- (Excellent)" ratings are
assigned to those companies that in A.M. Best's opinion have, on balance,
excellent financial strengths, operating performance and market profile when
compared to the standards established by A.M. Best and have a strong ability to
meet their ongoing obligations to policyholders. In evaluating a company's
financial strength, operating performance and market profile, A.M. Best reviews
the company's leverage/capitalization, capital structure/holding company,
quality and appropriateness of reinsurance program, adequacy of loss/policy
reserves, quality and diversification of assets, liquidity, profitability,
revenue composition, management experience and objectives, market risk,
competitive market position, spread of risk and event risk. The objective of
A.M. Best's rating system is to provide an overall opinion of an insurance
company's ability to meet its obligations to policyholders.

HMLIC is rated "AA" for claims paying ability by Duff & Phelps. Duff &
Phelps' analysis of life insurance company claims paying ability ("CPA")
involves judgment in the assessment of quantitative and qualitative factors. The
CPA rating process emphasizes analysis of the company's current and future
ability to pay, when due, its policy and contract obligations. Critical
considerations are confidence in an insurer's long-term solvency and its ability
to maintain adequate liquidity. In order to be prospective, Duff & Phelps'
appraisal is influenced not only by the current, absolute measures but also by
trends and volatility. The advent of interest rate sensitive products within the
life and annuity industry has heightened the importance of both the
asset/liability management and liquidity components of rating reviews. Duff &
Phelps considers such qualitative factors as product design and pricing and
crediting rate practices, investment policies and management techniques used to
control interest rate risk, as well as quantitative factors such as specific
asset and liability mismatches and sensitivity analysis. Together these give the
basis to determine the adequacy of a company's adjusted surplus relative to
these volatility considerations. A key part of the overall CPA rating process is
an annual meeting with the senior executives who set the future direction of the
company. Regular contact with company representatives throughout the year
supplements this process. The CPA ratings use a scale of "AAA (Highest claims
paying ability -- the risk factors are negligible)" through "DD (Company is
under an order of liquidation)." The CPA rating of "AA" is assigned for very
high claims paying ability. The protection factors are strong; risk is modest,
but may vary slightly over time due to economic and/or underwriting conditions.
A CPA rating only indicates an insurance company's

26

ability to make timely payment of policyholder obligations. It does not refer to
the ability of either the rated company or its affiliates to meet
nonpolicyholder obligations, such as debt repayment or payment of preferred
dividends.

Regulation

General Regulation at State Level

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

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

The NAIC annually calculates financial ratios to assist state insurance
regulators in monitoring the financial condition of insurance companies. A
"usual range" of results for each ratio is used as a benchmark. Separate ratios
are established for property and casualty and life insurance companies.
Departure from the usual range in any of the ratios could lead to inquiries from
individual state regulators, and further investigation or other actions may
result. In 1998, no unusual ratios were reported by the principal insurance
subsidiaries of HMEC.

As part of their regulatory oversight process, state insurance departments
routinely conduct detailed financial examinations (generally not more frequently
than once every three years) of the books, records and accounts of insurance
companies domiciled in their states. Typically, such examinations are conducted
concurrently by two or three states under guidelines promulgated by the NAIC. In
1999, routine financial examinations of HMLIC, HMIC, TIC and Allegiance were
completed for the period ended December 31, 1997. Management believes that HMEC
and its subsidiaries are in compliance in all material respects with all
applicable regulatory requirements.

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

27

Assessments Against Insurers

Under insurance insolvency or guaranty laws in most states in which the
Company operates, insurers doing business therein can be assessed for
policyholder losses related to insolvencies of other insurance companies. The
amount and timing of any future assessments on the Company under these laws
cannot be reasonably estimated and are beyond the control of the Company. Most
of these laws do provide, however, that an assessment may be excused or deferred
if it would threaten an insurer's financial strength, and most assessments paid
by the Company pursuant to these laws may be used as credits for a portion of
the Company's premium taxes. The Company paid $0.1 million, $0.3 million and
$0.6 million in connection with insurer insolvency proceedings for the years
ended December 31, 1999, 1998 and 1997, respectively, of which $0, $0.2 million
and $0.6 million for the same periods, respectively, is recoverable as premium
tax credits in future periods.

Mandatory Insurance Facilities

The Company is required to participate in various mandatory insurance
facilities in amounts related to the amount of the Company's direct writings in
the applicable state. In 1999, the Company reflected a net loss from
participation in such mandatory pools and underwriting associations of $2.2
million before federal income taxes.

California Earthquake Authority

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

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

Regulation at Federal Level

Although the federal government generally does not directly regulate the
insurance business, federal initiatives often impact the insurance business.
Current and proposed federal measures which may significantly affect the
insurance business include employee benefits regulation, controls on the costs
of medical care, medical entitlement programs such as Medicare, changes to the
insurance industry anti-trust exemption, minimum solvency requirements and
allowing national banks to engage in the insurance, annuity and mutual fund
businesses. With the passage of the Financial Services Modernization Act of
1999, it is possible there will be increased pressure for federal regulation of
the insurance industry.

28

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

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

Employees

At December 31, 1999, the Company had approximately 2,800 employees,
including 1,105 full-time agents. The Company has no collective bargaining
agreement with any employees.

ITEM 2. Properties

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

ITEM 3. Legal Proceedings

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

ITEM 4. Submission of Matters to a Vote of Security Holders

None.

29

PART II

ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters

HMEC's common stock began trading on the New York Stock Exchange ("NYSE")
in November 1991 under the symbol of HMN at a price of $9 per share. The
following table sets forth the high and low sales prices of the common stock on
the NYSE Composite Tape and the cash dividends paid per share of common stock
during the periods indicated.

Market Price
------------------ Dividend
Fiscal Period High Low Paid
------------- ------ ------- --------

1999:
Fourth Quarter............... $31 $19 1/8 $0.105
Third Quarter................ 33 24 13/16 0.0925
Second Quarter............... 27 3/16 20 1/4 0.0925
First Quarter................ 29 3/8 21 9/16 0.0925
1998:
Fourth Quarter............... $32 3/8 $26 1/2 $0.0925
Third Quarter................ 35 3/4 26 1/16 0.08
Second Quarter............... 37 3/8 28 1/8 0.08
First Quarter................ 37 5/8 28 0.08

As of March 1, 2000, the approximate number of holders of common stock was
9,000.

In November 1999, the Board authorized the eighth consecutive increase in
the Company's dividend since the Company's initial public offering in 1991 and
increased the quarterly dividend by 13.5% to $0.105 per share. The payment of
dividends in the future is subject to the discretion of the Board of Directors
and will depend upon general business conditions, legal restrictions and other
factors the Board of Directors of HMEC may deem to be relevant.

In May 1999, the Company's Board of Directors authorized the repurchase of
shares of the Company's common stock up to $100 million. This was in addition to
the $100 million stock repurchase programs announced in January 1998 and
February 1997. Since early 1997, the Company repurchased 7,082,700 shares, 15%
of the Company's shares outstanding at December 31, 1996, at an aggregate cost
of $188.5 million. Under the share repurchase program, shares of common stock
may be purchased from time to time through open market and private purchases, as
available. The repurchase of shares is financed through use of cash and, when
necessary, the existing bank line of credit. The Company's share repurchase
program was suspended by the Board of Directors from August 2, 1999 through
February 23, 2000.

During 1999, options were exercised for the issuance of 17,363 shares, less
than 0.1% of the Company's shares outstanding at December 31, 1998.

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

30

ITEM 6. Selected Financial Data

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

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

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

ITEM 7A. 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 the Index to Financial Information on page F-1 herein.

ITEM 8. Consolidated Financial Statements and Supplementary Data

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

ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.

PART III

ITEM 10. Directors and Executive Officers of the Registrant

The information required by Items 401 and 405 of Regulation S-K is
incorporated by reference to the Company's Proxy Statement for the 2000 Annual
Meeting of Shareholders.

ITEM 11. Executive Compensation

The information required by Item 402 of Regulation S-K is incorporated by
reference to the Company's Proxy Statement for the 2000 Annual Meeting of
Shareholders.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

The information required by Item 403 of Regulation S-K is incorporated by
reference to the Company's Proxy Statement for the 2000 Annual Meeting of
Shareholders.

ITEM 13. Certain Relationships and Related Transactions

The information required by Item 404 of Regulation S-K is incorporated by
reference to the Company's Proxy Statement for the 2000 Annual Meeting of
Shareholders.

31

PART IV

ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

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

Consolidated Balance Sheets as of December 31, 1999, 1998 and 1997.

Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997.

Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 1999, 1998 and 1997.

Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997.

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

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

Schedule II - Condensed Financial Information of Registrant.

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

Schedule IV - Reinsurance.

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

Exhibit
No. Description
- ---- -----------

(3) Articles of incorporation and bylaws:

3.1 Restated Certificate of Incorporation of HMEC, filed with the
Delaware Secretary of State on October 6, 1989, incorporated by
reference to Exhibit 3.1 to HMEC's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996, filed with the Securities and
Exchange Commission (the "SEC") on November 14, 1996.

3.1(a) Certificate of Amendment to Restated Certificate of Incorporation of
HMEC, filed with the Delaware Secretary of State on October 18, 1991,
incorporated by reference to Exhibit 3.2 to HMEC's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996, filed with the
SEC on November 14, 1996.

32

Exhibit
No. Description
- ---- -----------

3.1(b) Certificate of Amendment to Restated Certificate of Incorporation
of HMEC, filed with the Delaware Secretary of State on August 23,
1995, incorporated by reference to Exhibit 3.3 to HMEC's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, filed
with the SEC on November 14, 1996.

3.1(c) Certificate of Amendment to Restated Certificate of Incorporation
of HMEC, filed with the Delaware Secretary of State on September
23, 1996, incorporated by reference to Exhibit 3.4 to HMEC's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, filed with the SEC on November 14, 1996.

3.1(d) Certificate of Amendment to Restated Certificate of Incorporation
of HMEC, filed with the Delaware Secretary of State on June 5,
1998, incorporated by reference to Exhibit 3.1 to HMEC's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998, filed with
the SEC on August 13, 1998.

3.2 Form of Certificate for shares of Common Stock, $0.001 par value
per share, of HMEC, incorporated by reference to Exhibit 4.5 to
HMEC's Registration Statement on Form S-3 (Registration No. 33-
53118) filed with the SEC on October 9, 1992.

3.3 Bylaws of HMEC, incorporated by reference to Exhibit 4.6 to HMEC's
Registration Statement on Form S-3 (Registration No. 33-80059)
filed with the SEC on December 6, 1995.

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

4.1 Indenture dated as of January 17, 1996, between HMEC and U.S. Trust
Company of California, N.A. as trustee, with regard to HMEC's
6 5/8% Senior Notes Due 2006, incorporated by reference to Exhibit
4.4 to HMEC's Annual Report on Form 10-K for the year ended
December 31, 1995, filed with the SEC on March 13, 1996.

4.1(a) Form of 6 5/8% Senior Notes Due 2006 (included in Exhibit 4.1).

4.2 Certificate of Designations for HMEC Series A Cumulative Preferred
Stock (included in Exhibit 10.15).

(10) Material contracts:

10.1 Credit Agreement dated as of December 31, 1996 (the "Bank Credit
Facility") among HMEC, certain banks named therein and Bank of
America National Trust and Savings Association, as administrative
agent (the "Agent"), incorporated by reference to Exhibit 10.1 to
HMEC's Annual Report on Form 10-K for the year ended December 31,
1996, filed with the SEC on March 26, 1997.

33

Exhibit
No. Description
- ---- -----------

10.2* Stock Subscription Agreement among HMEC (as successor to HME
Holdings, Inc.), The Fulcrum III Limited Partnership, The Second
Fulcrum III Limited Partnership and each of the Management
Investors, incorporated by reference to Exhibit 10.17 to HMEC's
Annual Report on Form 10-K for the year ended December 31, 1989,
filed with the SEC on April 2, 1990.

10.3* Horace Mann Educators Corporation Deferred Equity Compensation Plan
for Directors, incorporated by reference to Exhibit 10.1 to HMEC's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, filed with the SEC on November 14, 1996.

10.4* Horace Mann Educators Corporation Deferred Compensation Plan for
Employees, incorporated by reference to Exhibit 10.4 to HMEC's
Annual Report on Form 10-K for the year ended December 31, 1997,
filed with the SEC on March 30, 1998.

10.5* Amended and restated Horace Mann Educators Corporation 1991 Stock
Incentive Plan.

10.5(a)* Specimen Employee Stock Option Agreement under the Horace Mann
Educators Corporation 1991 Stock Incentive Plan.

10.5(b)* Specimen Director Stock Option Agreement under the Horace Mann
Educators Corporation 1991 Stock Incentive Plan.

10.6* Severance Agreements between HMEC and certain officers of HMEC,
incorporated by reference to Exhibit 10.9 to HMEC's Annual Report on
Form 10-K for the year ended December 31, 1993, filed with the SEC
on March 31, 1994.

10.6(a)* Revised Schedule to Severance Agreements between HMEC and certain
officers of HMEC, incorporated by reference to Exhibit 10.1(a) to
HMEC's Quarterly Report on Form 10-Q for the quarter ended June 30,
1999, filed with the SEC on August 13, 1999.

10.7* Specimen Continuation of Employment Agreement between HMEC and
certain officers, incorporated by reference to Exhibit 10.21(a) to
HMEC's Quarterly Report on Form 10-Q for the quarter ended September
30, 1994, filed with the SEC on November 14, 1994.

10.7(a)* Schedule of Continuation of Employment Agreements between HMEC and
certain officers, incorporated by reference to Exhibit 10.21(b) to
HMEC's Quarterly Report on Form 10-Q for the quarter ended September
30, 1994, filed with the SEC on November 14, 1994.

10.8* Horace Mann Incentive Compensation Program, incorporated by
reference to Exhibit 10.7 to HMEC's Annual Report on Form 10-K for
the year ended December 31, 1996, filed with the SEC on March 26,
1997.

34

Exhibit
No. Description
- ---- -----------

10.9* Horace Mann Supplemental Employee Retirement Plan, 1997
Restatement, incorporated by reference to Exhibit 10.1 to HMEC's
Quarterly Report on Form 10-Q for the quarter ended September
30,1997, filed with the SEC on November 14, 1997.

10.10* Horace Mann Executive Supplemental Employee Retirement Plan, 1997
Restatement, incorporated by reference to Exhibit 10.2 to HMEC's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997,
filed with the SEC on August 14, 1997.

10.11* Amended and Restated Employment Agreement entered by and between
HMEC and Paul J. Kardos as of October 6, 1998, incorporated by
reference to Exhibit 10.2 to HMEC's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998, filed with the SEC on
November 13, 1998.

10.11(a)* Amendment Agreement to the Amended and Restated Employment
Agreement entered by and between HMEC and Paul J. Kardos as of
October 6, 1998 dated as of February 1, 2000.

10.12* Employment Agreement entered by and between HMEC and Louis G.
Lower II as of December 31, 1999.

10.13* Separation Agreement entered by and between HMEC and Larry K.
Becker as of March 21, 2000.

10.14* Letter of Employment entered by and between HMEC and Peter H.
Heckman effective April 10, 2000.

10.15 Catastrophe Equity Securities Issuance Option Agreement
(Catastrophe Equity Securities Issuance Option and Reinsurance
Option Agreement) entered by and between HMEC and Centre
Reinsurance, dated February 15, 1997 and related letter from
Centre Reinsurance, incorporated by reference to Exhibit 10.12 to
HMEC's Annual Report on Form 10-K for the year ended December 31,
1996, filed with the SEC on March 26, 1997.

10.15(a) Amendment effective February 15, 1997 to Catastrophe Equity
Securities Issuance Option Agreement (Catastrophe Equity
Securities Issuance Option and Reinsurance Option Agreement),
incorporated by reference to Exhibit 10.1(a) to HMEC's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998, filed
with the SEC on May 15, 1998.

10.15(b) Amendment effective February 15, 1997 to Catastrophe Equity
Securities Issuance Option and Reinsurance Option Agreement,
incorporated by reference to Exhibit 10.12(b) to HMEC's Annual
Report on Form 10-K for the year ended December 31, 1998, filed
with the SEC on March 31, 1999.

35

10.15(c) Amendment effective June 1, 1999 to Catastrophe Equity Securities
Issuance Option and Reinsurance Option Agreement, incorporated by
reference to Exhibit 10.1(c) to HMEC's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999, filed with the SEC on
November 12, 1999.

(11) Statement regarding computation of per share earnings.

(12) Statement regarding computation of ratios.

(21) Subsidiaries of HMEC.

(23) Consent of KPMG LLP.

(27) Financial Data Schedule.

(b) No reports on Form 8-K were filed by HMEC during the fourth
quarter of 1999.

(c) See list of exhibits in this Item 14.

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

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

36

SIGNATURES

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

HORACE MANN EDUCATORS CORPORATION

/s/ Louis G. Lower II
- ---------------------------------------
Louis G. Lower II
President and Chief Executive Officer

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

Principal Executive Officer: Directors:

/s/ Paul J. Kardos
-----------------------------------
Paul J. Kardos, Chairman of the
/s/ Louis G. Lower II Board of Directors
- ---------------------------------------
Louis G. Lower II
President,
Chief Executive Officer and a Director
/s/ William W. Abbott
-----------------------------------
William W. Abbott, Director

/s/ Dr. Emita B. Hill
-----------------------------------
Dr. Emita B. Hill, Director

Principal Financial Officer:

/s/ Donald E. Kiernan
/s/ Larry K. Becker -----------------------------------
- --------------------------------------- Donald E. Kiernan, Director
Larry K. Becker
Executive Vice President and
Chief Financial Officer /s/ Jeffrey L. Morby
-----------------------------------
Jeffrey L. Morby, Director

/s/ Shaun F. O'Malley
-----------------------------------
Shaun F. O'Malley, Director

Principal Accounting Officer:
/s/ Charles A. Parker
-----------------------------------
Charles A. Parker, Director

/s/ Roger W. Fisher
- ---------------------------------------
Roger W. Fisher
Senior Vice President and Controller /s/ Ralph S. Saul
-----------------------------------
Ralph S. Saul, Director

/s/ William J. Schoen
-----------------------------------
William J. Schoen, Director

Dated: March 29, 2000.

37

HORACE MANN EDUCATORS CORPORATION

INDEX TO FINANCIAL INFORMATION

Page
----

Management's Discussion and Analysis of
Financial Condition and Results of Operations........................... F-2

Report of Management Responsibility for
Financial Statements.................................................... F-22

Independent Auditors' Report.............................................. F-23

Consolidated Balance Sheets............................................... F-24

Consolidated Statements of Operations..................................... F-25

Consolidated Statements of Changes in
Shareholders' Equity.................................................... F-26

Consolidated Statements of Cash Flows..................................... F-27

Notes to Consolidated Financial Statements................................ F-28

Financial Statement Schedules:
Schedule I - Summary of Investments-Other than
Investments in Related Parties........................................ F-61
Schedule II - Condensed Financial Information of Registrant............. F-62
Schedule III and VI Combined - Supplementary Insurance
Information and Supplemental Information Concerning
Property and Casualty Insurance Operations............................ F-66
Schedule IV - Reinsurance............................................... F-67

F-1

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions)

Forward-looking Information

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

. Changes in the composition of the Company's assets and liabilities through
acquisitions or divestitures.
. Prevailing interest rate levels, including the impact of interest rates on
(i) unrealized gains and losses on the Company's investment portfolio and
the related after-tax effect on the Company's shareholders' equity and
total capital and (ii) the book yield of the Company's investment
portfolio.
. The impact of fluctuations in the capital markets on the Company's ability
to refinance outstanding indebtedness or repurchase shares of the Company's
outstanding common stock.
. The frequency and severity of catastrophes such as hurricanes, earthquakes
and storms, and the ability of the Company to maintain a favorable
catastrophe reinsurance program.
. Future property and casualty loss experience and its impact on estimated
claims and claim adjustment expenses for losses occurring in prior years.
. The Company's ability to develop and expand its agency force and its direct
product distribution systems, as well as the Company's ability to maintain
and secure product sponsorships by local, state and national education
associations.
. The competitive impact of new entrants such as mutual funds and banks into
the tax deferred annuity products markets, and the Company's ability to
profitably expand its property and casualty business in highly competitive
environments.
. Changes in insurance regulations, including (i) those effecting the ability
of the Company's insurance subsidiaries to distribute cash to the holding
company and (ii) those impacting the Company's ability to profitably write
property and casualty insurance policies in one or more states.
. Changes in federal income tax laws and changes resulting from federal tax
audits effecting corporate tax rates or taxable income, and regulations
changing the relative tax advantages of the Company's life and annuity
products to customers.
. The Company's ability to maintain favorable claims-paying ability ratings.
. Adverse changes in policyholder mortality and morbidity rates.
. The resolution of legal proceedings and related matters.

Strategic Review

On August 2, 1999, the Company announced that its Board of Directors had
retained Morgan Stanley Dean Witter and Credit Suisse First Boston to explore
strategic alternatives available to the corporation. On November 17, 1999, the
Board of Directors announced its determination that at that point in time the
Company's shareholder value would be best sustained and enhanced by Horace Mann
Educators Corporation remaining an independent company. At

F-2

that time, the retention agreements between the Company and each of Morgan
Stanley Dean Witter and Credit Suisse First Boston were terminated.

Year Ended December 31, 1999 Compared With Year Ended December 31, 1998

Insurance Premiums and Contract Charges

Insurance Premiums Written and Contract Deposits

Year Ended Growth Over
December 31, Prior Year
-------------- ----------------
1999 1998 Percent Amount
---- ---- ------- ------

Automobile and property
(voluntary).................. $470.7 $459.0 2.5% $ 11.7
Annuity deposits............... 205.7 223.3 -7.9% (17.6)
Life........................... 120.4 116.7 3.2% 3.7
------ ------ ------
Subtotal - core lines...... 796.8 799.0 -0.3% (2.2)
Involuntary and other
property & casualty.......... 24.4 28.8 -15.3% (4.4)
------ ------ ------
Total...................... $821.2 $827.8 -0.8% $ (6.6)
====== ====== ======

Insurance Premiums and Contract Charges Earned
(Excludes annuity and life contract deposits)

Year Ended Growth Over
December 31, Prior Year
-------------- ----------------
1999 1998 Percent Amount
---- ---- ------- ------

Automobile and property
(voluntary).................. $465.0 $449.9 3.4% $15.1
Annuity........................ 16.7 15.6 7.1% 1.1
Life........................... 87.3 85.8 1.7% 1.5
------ ------ -----
Subtotal - core lines...... 569.0 551.3 3.2% 17.7
Involuntary and other
property & casualty.......... 26.1 26.5 -1.5% (0.4)
------ ------ -----
Total...................... $595.1 $577.8 3.0% $17.3
====== ====== =====

The property and casualty and life segments both experienced modest premium
growth for the year. Nonetheless, total insurance premiums written and contract
deposits showed no growth for the year because of a decline in new annuity
deposits. Annuity growth of 12.1% for 1998 benefitted from new tax legislation
which contributed to a high volume of single premium and rollover deposits to
tax-qualified products. In 1999, single premium annuity deposits declined
significantly, (20.7%), compared to 1998.

The Company ended the year with 708 experienced exclusive full-time agents,
growth of 2.3% compared to 12 months earlier. The total agency force of 1,105
agents decreased 2.0% compared to a year ago as a result of fewer hires and
increased terminations over the 12-month period. Modifications have been made to
agent recruiting and the new agents' finance programs that management believes
will have a positive impact on agent growth in future years.

F-3

Total voluntary automobile and homeowners premium written growth was 2.5%
for 1999, resulting from growth in the average premium per policy for both
automobile and homeowners and an increase in the number of homeowners policies
in force. Automobile insurance premium increased 1.0%, or $3.7 million, compared
to 1998, and homeowners premium increased 7.8%, or $8.0 million. Nearly one-half
of the property and casualty increase in premiums resulted from unit growth of
1.5%, bringing year-end policies in force to 872,000. Compared to December 31,
1998, total property and casualty policies in force increased 13,000, the entire
increase attributable to homeowners insurance. The Company's average annual
premium per policy for automobile and homeowners increased approximately 1% and
3%, respectively, compared to a year earlier. While automobile policies in force
ended the year equal to 1998, the 1% increase in average premium per automobile
policy kept pace with loss cost developments.

Based on policies in force, the property and casualty 12-month retention
rate for new and renewal policies was 88%, slightly less than for the 12 months
ended December 31, 1998. The change in property and casualty retention was
primarily caused by greater price competition for automobile insurance.

New annuity deposits decreased 7.9% compared to 1998, with a 5.4% decline
in the fourth quarter. The decline was primarily attributable to a 20.7%
decrease in 1999 in single premium deposits, which in 1998 benefitted from new
tax legislation which contributed to a high volume of single premium and
rollover deposits to tax-qualified products. The change in new annuity deposits
also included an 0.8% increase in scheduled deposits received. New deposits to
variable mutual fund annuities decreased 6.8% and new deposits to fixed
annuities were 9.7% lower than in 1998. Variable annuity accumulated funds on
deposit at December 31, 1999 were $1.1 billion, $8.9 million more than a year
ago, an 0.8% increase. However, variable annuity deposit retention decreased 4
percentage points over the 12 months to 89.4%. Deposits in the three additional
mutual funds introduced by the Company in March 1997 increased to $145 million
at December 31, 1999 from $70 million 12 months earlier. Fixed annuity cash
value retention for the 12 months ended December 31, 1999 was 92.3%, 0.5
percentage points lower than 1998. Over the last 12 months, the number of
annuity contracts outstanding increased 4.2%, or 5,000 contracts.

Life premium growth was 3.2% for the year ended December 31, 1999. This
growth included new business from term life products introduced early in 1997
and a new series of whole life products introduced late in the third quarter of
1998 and reflects an insurance in force lapse ratio of 8.3%. Customer acceptance
of these new products continues to grow, as they accounted for approximately
half of the Company's new life sales in 1999.

Net Investment Income

Investment income of $188.3 million for 1999 decreased 1.8%, or $3.4
million, (1.2% after tax) compared to 1998 due to a decline in the average yield
on the investment portfolio that resulted from a steady decline in interest
rates from early-1997 until early-1999 and because the yield available in the
bond market in 1998 and 1999 was lower than the imbedded yield of the portfolio
during most of this period. There was also minimal growth in the investment
portfolio. The average pretax yield on the investment portfolio was 7.0% (4.7%
after tax) for 1999 compared to a pretax yield of 7.2% (4.8% after tax) for
1998, a decrease of 18 basis points, or 2.5%. Average investments (excluding the
securities lending collateral) increased only slightly over the past 12 months
reflecting modest growth in business, customers' preference for variable as
opposed to fixed annuity contracts and the utilization of capital for the share
repurchase program.

F-4

All of the investment income decrease in the annuity segment was offset by a
reduction in interest credited to fixed annuity deposits. Excluding the impact
of the use of cash in the share repurchase program from both periods, net
investment income would have increased 0.6%, or $1.3 million, compared to $202.2
million in 1998.

Realized Investment Gains and Losses

Net realized investment losses were $8.0 million for the year ended
December 31, 1999, compared to net realized investment gains of $9.9 million in
1998. Most of the net realized gains and losses occurred in the fixed income
portfolios. The net realized investment losses in 1999 were about two-thirds due
to credit decisions and rate of return considerations in the Company's fixed
income investment portfolio and about one-third due to the sale of U.S. Treasury
securities for duration management purposes in a rising interest rate
environment. Realized investment gains in 1998 included calls and tenders in the
Company's bond portfolio as well as credit and rate of return decisions.

Benefits, Claims and Settlement Expenses

Year Ended Growth Over
December 31, Prior Year
-------------- ----------------
1999 1998 Percent Amount
---- ---- ------- ------

Property and casualty............. $374.9 $354.4 5.8% $20.5
Life.............................. 41.3 41.9 -1.4% (0.6)
------ ------ -----
Total........................... $416.2 $396.3 5.0% $19.9
====== ====== =====

Property and casualty
statutory loss ratio:
Before catastrophes........... 72.4% 68.5% 3.9%
After catastrophes............ 76.3% 74.4% 1.9%

Property and casualty claims and settlement costs reflect a high level of
catastrophe losses in both years and an increase in fire and non-catastrophe
weather claims in 1999. Although catastrophe losses in 1999 were lower than in
1998, the second quarter of 1999 was the Company's second-worst ever, trailing
only the record set in the second quarter of 1998, as policyholders in 25 states
incurred damages from 13 separate events. Also, Hurricane Floyd in the third
quarter of 1999, with claims of $5.4 million for the Company, was the worst
storm for the Company and the industry in 1999. The fourth quarter 1999
homeowners loss ratio was 55.9%, 40.5 percentage points lower than in the first
nine months of 1999, reflecting the impact of weather on this line of business,
and 1.8 percentage points greater than the fourth quarter of 1998. Catastrophe
losses were $0.7 million in the fourth quarter of 1999 and $2.7 million in the
fourth quarter of 1998.

In 1999, the increase in the Company's average voluntary automobile
insurance premium per policy kept pace with loss cost developments. This
favorable result reflected a number of operational changes, principally savings
realized to date from new claims evaluation software that was fully installed by
June 1999.

F-5

Property and casualty results included continuation of favorable
development of prior years reserves, although at a lower level than in 1998.
Favorable development of property and casualty claims occurring in prior years,
excluding involuntary business, was $7.6 million in 1999, compared to $23.3
million in 1998. Favorable development of total property and casualty claims
occurring in prior years was $4.6 million in 1999, compared to $24.9 million in
1998.

Life mortality was slightly lower in 1999 than in 1998. The decrease in
life segment benefits primarily resulted from positive experience on a small
closed block of individual accident and health policies.

Interest Credited to Policyholders

Year Ended Growth Over
December 31, Prior Year
-------------- ----------------
1999 1998 Percent Amount
---- ---- ------- ------

Annuity............................ $67.2 $72.0 -6.7% $(4.8)
Life............................... 24.4 22.8 7.0% 1.6
----- ----- -----
Total............................ $91.6 $94.8 -3.4% $(3.2)
===== ===== =====

Interest credited to fixed annuity contracts decreased as the fixed annuity
average annual interest rate credited decreased 0.4 percentage points to 5.0% in
1999, compared to a rate of 5.4% in 1998. In addition, the average accumulated
deposits for the year ended December 31, 1999 increased only slightly compared
to the same period in 1998. Life insurance interest credited increased as a
result of continued growth in the interest-sensitive life insurance reserves.

Operating Expenses

For 1999, operating expenses were equal to 1998, including the deferral of
additional acquisition costs. The Company began deferring additional sales-
related costs in 1999 for all new life and annuity contracts, consistent with
common industry accounting practices. This change increased acquisition costs
deferred by $4.8 million for the year ended December 31, 1999. Excluding the
deferral of additional sales-related costs, operating expenses for 1999
increased $4.8 million, or 4.4%, compared to 1998. In 1999, the Company's
operating expenses included $2.3 million attributable to additional employee
health insurance costs, compared to 1998.

The total corporate expense ratio on a statutory accounting basis was 22.1%
for the year ended December 31, 1999, 0.9 percentage points higher than in 1998.
The property and casualty expense ratio, the 12th lowest of the 100 largest
property and casualty insurance groups for 1998, was 19.8% for the year ended
December 31, 1999, compared to 19.3% in 1998. The increase in these expense
ratios primarily reflects the modest level of premium growth and additional
employee health insurance expense.

Amortization of Policy Acquisition Expenses and Intangible Assets

For 1999, the combined amortization of policy acquisition expenses and
intangible assets of $53.3 million increased by $0.9 million, or 1.7%, compared
to $52.4 million for 1998. Amortization of intangible assets decreased by $6.7
million to $0.2 million for the year ended December 31, 1999, compared to $6.9
million for 1998. Recent experience and trends in the Company's annuity business
produced a $6.2 million reduction in the amortization of the value

F-6

of annuity business acquired in the 1989 acquisition of the Company partially
offset by a $3.4 million increase in the amortization of annuity acquisition
costs deferred after the 1989 acquisition of the Company.

Also in 1999, the amortization of life deferred acquisition costs decreased
$1.5 million to reflect current mortality estimates, resulting in higher
anticipated future gross profits. The amortization of the value of property and
casualty business acquired in the 1989 acquisition of the Company was completed
in 1999.

Income Tax Expense

Excluding the $20.0 million additional provision for prior years' taxes,
the effective income tax rate was 30.9% for the year ended December 31, 1999,
compared to 27.0% for 1998. Income from investments in tax-advantaged
securities reduced the effective income tax rate 4.6 and 3.2 percentage points
for the years ended December 31, 1999 and 1998, respectively. In 1998, non-
recurring tax benefits reduced the effective rate 5.6 percentage points and
contributed $6.5 million, or $0.15 per share, to operating income for the year.

As previously reported, the Company has been contesting proposed additional
federal income taxes relating to a settlement agreement with the Internal
Revenue Service ("IRS") for prior years' taxes. Based on developments in that
process during the last half of 1999, it appears that the Company may be forced
to litigate the issue with the IRS in order to reach a resolution of the issue
acceptable to the Company. Therefore, in the third quarter of 1999, the Company
recorded an additional federal income tax provision of $20 million representing
the maximum exposure of the Company to the IRS with regard to the issue for all
of the past tax years in question. While the ultimate resolution of the issue,
through settlement or litigation, may result in the Company paying less than the
maximum exposure, given the vagaries of litigation and the lack of progress in
reaching an acceptable agreement with the IRS, management believed it prudent to
book the maximum exposure in 1999. None of the $20 million reserve was paid as
of March 29, 2000. This reserve was a charge to net income in 1999 but was
excluded from the determination of reported operating income.

F-7

Operating Income

For the year ended December 31, 1999, operating income (net income before
the after-tax impact of realized investment gains and losses and non-recurring
charges) decreased 10.4%, or $8.2 million, and operating income per share on a
diluted basis of $1.70 decreased 5.6%, or $0.10 per share. Results for 1999
were lower than the prior year due principally to non-recurring tax benefits in
1998 of $6.5 million, or $0.15 per share. Operating income by segment was as
follows:

Year Ended Growth Over
December 31, Prior Year
------------------- ---------------------
1999 1998 Percent Amount
---- ---- ------- ------

Property & casualty
Before catastrophe losses and
non-recurring tax benefits.......... $52.2 $65.2 -19.9% $(13.0)
Catastrophe losses, after tax......... 12.7 18.5 -31.4% (5.8)
Non-recurring tax benefits............ - 6.5 -100.0% (6.5)
----- ----- ------
Total including catastrophe losses
and non-recurring tax benefits.... 39.5 53.2 -25.8% (13.7)
Annuity................................. 27.3 23.1 18.2% 4.2
Life.................................... 14.6 12.4 17.7% 2.2
Corporate and other expense............. 4.4 3.6 0.8
Interest expense........................ 6.3 6.2 0.1
----- ----- ------
Total............................... $70.7 $78.9 -10.4% $ (8.2)
===== ===== ======
Total before catastrophe losses
and non-recurring tax benefits.... $83.4 $90.9 -8.3% $ (7.5)
===== ===== ======

Property and casualty
statutory combined ratio:
Before catastrophe losses........... 92.2% 87.7% 4.5%
After catastrophe losses............ 96.1% 93.6% 2.5%

Property and casualty segment operating income was lower than in 1998 due
primarily to a non-recurring tax benefit in 1998 and a lower level of favorable
development of prior years' reserves than in 1998. Favorable development of
property and casualty claims occurring in prior years (excluding involuntary
business), was $4.9 million after tax in 1999, compared to $15.1 million after
tax in 1998. Favorable development of total property and casualty claims
occurring in prior years was $3.0 million after tax in 1999, compared to $16.2
million after tax in 1998. During 1999, the Company's increase in average
voluntary automobile insurance premium kept pace with loss cost developments.
The homeowners combined ratio of 105.8% was 5.0 percentage points better than in
1998, reflecting the decline in catastrophe losses. However, catastrophe losses
in both years were significant as the second quarter of 1999 represented the
Company's second-worst ever for catastrophe losses, trailing only the record set
in last year's second quarter, with an unusually large number of catastrophes
that were widespread across the country. Hurricane Floyd in the third quarter
of 1999 with claims of $3.5 million after tax for the Company was the worst
storm for the Company and the industry in 1999.

The 18.2% increase in annuity segment operating income was driven by lower
expenses, an increase of 7.7% in the net interest margin and a 9.6% increase in
fees and contract charges earned. The reduction in expenses resulted from the
deferral of additional sales-related costs and a net decrease in the
amortization of the value of acquired insurance in force and deferred

F-8

acquisition costs to reflect recent experience and trends. The net deferral of
additional sales-related costs contributed $1.2 million to operating income for
the year ended December 31, 1999. Variable annuity accumulated deposits were
$1.1 billion at December 31, 1999, $8.9 million, or 0.8%, more than 12 months
earlier. Fixed annuity accumulated cash value of $1.4 billion was comparable to
December 31, 1998.

The increase in life insurance earnings reflected slightly lower mortality
costs and lower expenses. The expense reductions were due to the $1.9 million
after tax net deferral of additional sales-related costs and a decrease in the
amortization of deferred acquisition costs to reflect current mortality
estimates.

The Company's share repurchase program reduced operating income by $9.1
million for the year ended December 31, 1999, reflecting utilization of capital
and the corresponding reduction of net investment income, but resulted in an
increase of $0.03 in earnings per share for the period due to the reduction in
the number of shares outstanding.

Net Income

Net Income Per Share, Diluted

Year Ended Growth Over
December 31, Prior Year
------------------- ----------------------
1999 1998 Percent Amount
------- ---------- -------- ------------

Operating income.................... $ 1.70 $1.80 -5.6% $(0.10)
Realized investment gains (losses).. (0.13) 0.15 (0.28)
Litigation settlement............... (0.02) - (0.02)
Provision for prior years' taxes.... (0.48) - (0.48)
------ ----- ------
Net income.......................... $ 1.07 $1.95 -45.1% $(0.88)
====== ===== ======

Net income, which includes realized investment gains and losses and non-
recurring charges, for the year ended December 31, 1999 decreased by 47.8% and
net income per diluted share decreased by 45.1% compared to 1998. Two non-
recurring charges were recorded in the third quarter of 1999 that reduced 1999
net income: an additional federal income tax provision of $20.0 million, or
$0.48 per share, representing the Company's maximum exposure for disputed prior
years' taxes; and a net cost of $1.0 million (after insurance proceeds), or
$0.02 per share, to settle certain litigation in Alabama related to life
insurance policies. The settlement of litigation in Alabama included the
lawsuit in which a verdict of $12.35 million was rendered against the Company on
June 25, 1999 as well as 39 other suits brought by the same law firm and 6 other
cases represented by another law firm but of a similar nature. Net income also
reflected $5.2 million of after tax realized investment losses for the year,
compared to $6.4 million of after tax realized investment gains in 1998.

Return on shareholders' equity based on operating income for the last 12
months was 16%. Based on net income, return on equity was 10% for the last 12
months.

F-9

Year Ended December 31, 1998 Compared With Year Ended December 31, 1997

Insurance Premiums and Contract Charges

Insurance Premiums Written and Contract Deposits

Year Ended Growth Over
December 31, Prior Year
----------------- ---------------
1998 1997 Percent Amount
---- ---- ------- ------

Automobile and property
(voluntary).............. $459.0 $431.0 6.5% $28.0
Annuity deposits........... 223.3 199.2 12.1% 24.1
Life....................... 116.7 114.1 2.3% 2.6
------ ------ -----
Subtotal - core lines.. 799.0 744.3 7.3% 54.7
Involuntary and other
property & casualty...... 28.8 27.0 6.7% 1.8
------ ------ -----
Total.................. $827.8 $771.3 7.3% $56.5
====== ====== =====

Insurance Premiums and Contract Charges Earned
(Excludes annuity and life contract deposits)

Year Ended Growth Over
December 31, Prior Year
----------------- ---------------
1998 1997 Percent Amount
---- ---- ------- ------

Automobile and property
(voluntary).............. $449.9 $421.5 6.7% $28.4
Annuity.................... 15.6 12.6 23.8% 3.0
Life....................... 85.8 82.9 3.5% 2.9
------ ------ -----
Subtotal - core lines.. 551.3 517.0 6.6% 34.3
Involuntary and other
property & casualty...... 26.5 25.7 3.1% 0.8
------ ------ -----
Total.................. $577.8 $542.7 6.5% $35.1
====== ====== =====

Insurance premiums written and contract deposit growth of 7.3% was
principally driven by growth in the agent force and higher agent productivity in
1998. In total, the Company ended 1998 with a record 1,128 exclusive full-time
agents, an increase of 5.4% compared to 1,070 agents 12 months earlier.
Particularly significant was the 3.7% increase in the number of experienced
agents, reflecting the success of the Company's efforts to improve agent
recruitment, training and retention.

The growth in new annuity deposits of 12.1% included a 23.5% increase in new
deposits to variable mutual fund annuities while new deposits to fixed annuities
decreased 2.6%. 1998 represented the third consecutive year of double-digit
growth in new annuity deposits. Annuity contributions received through payroll
deduction increased approximately 10% for the full year. Total new annuity
deposits including single premiums increased 1.3% in the fourth quarter as
single premium deposits declined reflecting the volatility in the stock market
in the third quarter of 1998, as well as the exceptionally strong 54.6% growth
in single premium deposits achieved in fourth quarter 1997. Variable annuity
accumulated funds on deposit at December 31, 1998 were $1.1 billion, $163
million more than a year ago, a 17.0% increase. The number of annuity contracts
in force increased 7.1%, or 8,000 contracts, compared to last December 31.

F-10

During the first quarter of 1998, the Company introduced new IRA annuities
in response to new tax legislation. While the 403(b) annuity remains a better
alternative for most educators, initial sales of these IRA products generated
3.0 percentage points of the 12.1% growth in new annuity deposits. The new IRA
retirement options created heightened customer interest and an opportunity for
agents to meet with both potential and existing customers. Beginning in March
1997, three additional mutual funds - a small cap fund, an international equity
fund, and a socially responsible fund - were made available to annuity
customers. At December 31, 1998, there were $70 million of customer deposits in
these three new funds, compared to approximately $30 million at December 31,
1997.

Voluntary automobile and homeowners premium written growth was 6.5% for
1998. Automobile insurance premium increased 5.5%, or $18.7 million, compared
to 1997, and homeowners premium increased 10.0%, or $9.3 million. Approximately
one-third of the property and casualty increase in premiums resulted from unit
growth of 2.6% bringing year-end policies in force to 859,000. Compared to
September 30, 1998, total property and casualty policies in force showed no
growth as the 4,000 increase in homeowners policies was offset by the 4,000
decline in automobile policies resulting from greater price competition for
automobile insurance. The Company's average annual premium per policy for both
automobile and homeowners increased approximately 4% compared to 1997.
Including the impact of increased deductibles and reduced coverage in coastal
areas, the Company's average effective premium per policy for homeowners
insurance increased 7% compared to 1997. For the fourth quarter of 1998, the
Company's increase in average premium per automobile policy, while comparable to
the industry, was lower than in the first part of 1998.

Life premium growth was 2.3% for the year ended December 31, 1998
notwithstanding a decline in new deposits to policy side funds which reduced the
growth rate by approximately 1 percentage point. The 1998 growth included new
business from term life products introduced early in 1997 and a new series of
whole life products introduced late in the third quarter of 1998.

Retention of business continues to be strong in each of the Company's
segments. Over the last 12 months based on policies in force, the property and
casualty retention rate for new and renewal policies was 88%, ordinary life
insurance 95% and annuity 94%. The annuity and life retention rates were equal
to 1997, while property and casualty was about 1 percentage point less than
1997. The change in property and casualty retention was primarily caused by
greater price competition for automobile insurance.

Net Investment Income

Investment income of $191.7 million for 1998 decreased 3.6%, or $7.2
million, (3.2% after tax) compared to 1997 due to the decline in interest rates
and a decrease in the investment portfolio. The average pretax yield on the
investment portfolio was 7.2% (4.8% after tax) for 1998 compared to a pretax
yield of 7.4% (4.9% after tax) for 1997, a decrease of 18 basis points, or 2.4%.
Average investments (excluding the securities lending collateral) decreased 1.5%
over the past 12 months reflecting the utilization of capital for the share
repurchase program and customers' preference for variable as opposed to fixed
annuity contracts. Approximately $4 million, about half, of the investment
income decrease was offset by a decline in interest credited to fixed annuity
deposits, moderating the effect on operating earnings. Excluding the effect of
the use of cash in the share repurchase program, net investment income would
have been $200.9 million, a small decrease compared to 1997.

F-11

Realized Investment Gains and Losses

The higher level of realized gains in 1998 resulted from an increase in
fixed maturity security calls and tenders in the current low interest rate
environment.

Benefits, Claims and Settlement Expenses

Year Ended Growth Over
December 31, Prior Year
--------------------------- ----------------
1998 1997 Percent Amount
------------- ------------ -------- ------

Property and casualty..... $354.4 $320.8 10.5% $33.6
Life...................... 41.9 38.6 8.5% 3.3
------ ------ -----
Total................... $396.3 $359.4 10.3% $36.9
====== ====== =====

Property and casualty
statutory loss ratio:
Before catastrophes... 68.5% 70.3% -1.8%
After catastrophes.... 74.4% 71.7% 2.7%

Improvements in non-weather related frequency and severity of claims were
reflected in a lower property and casualty loss ratio before catastrophes
despite a decrease in the favorable development of claims occurring in prior
years of $24.9 million in 1998 compared to $45.1 million in 1997.

Weather-related catastrophe losses in 1998 more than offset these
underwriting improvements. A series of severe storms struck the Northern
Plains, Upper Midwest, Southeast and Northeast during the second quarter of
1998, with Minnesota being the hardest hit state, resulting in a record level of
weather-related catastrophe claims for the property-casualty insurance industry
and for the Company. Catastrophe losses in Minnesota during this period were
the worst in that state's history for the industry as well as the Company and
reduced the Company's 1998 after tax operating earnings by $5.2 million.

The increase in life benefits reflected higher individual life mortality
experience compared to 1997.

Interest Credited to Policyholders

Year Ended Growth Over
December 31, Prior Year
------------------------- -----------------
1998 1997 Percent Amount
------------ ----------- -------- -------

Annuity..................... $72.0 $76.5 -5.9% $(4.5)
Life........................ 22.8 20.7 10.1% 2.1
----- ----- -----
Total..................... $94.8 $97.2 -2.5% $(2.4)
===== ===== =====

Interest credited to fixed annuity contracts decreased as average
accumulated deposits decreased 1.4% over the 12 months ended December 31, 1998.
In addition, the fixed annuity average annual interest rate credited decreased
0.2 percentage points to 5.4% in 1998, compared to a rate of 5.6% in 1997. Life
insurance interest credited increased as a result of continued growth in the
interest-sensitive whole life insurance reserves.

F-12

Policy Acquisition and Operating Expenses

Policy acquisition and operating expenses represent the Company's insurance
underwriting expenses. For 1998, policy acquisition and operating expenses
increased $4.5 million, or 3.0%, compared to 1997. The corporate expense ratio
on a statutory accounting basis was 21.2% for 1998, 0.9 percentage points better
than 1997. The property and casualty expense ratio improved to 19.3% for the
year ended December 31, 1998, compared to 19.4% for 1997.

At the beginning of 1998, the Company adopted the accounting treatment
required by the American Institute of Certified Public Accountants' Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." Adoption of this statement decreased the Company's
1998 operating expenses by $2.4 million before income taxes as costs incurred to
develop internal-use software were capitalized and depreciated over their
expected useful lives.

Amortization of Intangible Assets

Amortization of intangible assets decreased by $3.8 million to $6.9 million
for the year ended December 31, 1998, compared to $10.7 million for 1997. This
decrease resulted from lower amortization of the value of annuity business
acquired in the 1989 acquisition of the Company. The value of annuity business
acquired is amortized in relation to the present value of the estimated future
gross profit amounts expected to be realized over the life of the book of
contracts. The estimates of expected gross profit are evaluated annually, and
the amortization is adjusted when actual experience or other evidence suggests
that earlier estimates should be revised. Significant appreciation and the
retention of the Company's annuity business in recent years have favorably
impacted projected future gross profits for this business. Accordingly, the
amortization has been decreased as the estimated expected future gross profits
of the business have increased.

Income Tax Expense

The effective income tax rate was 27.0% for the year ended December 31, 1998
compared to 27.2% for 1997. Income from investments in tax-advantaged
securities reduced the effective income tax rate approximately 3 percentage
points in both 1998 and 1997. Certain tax benefits that did not recur in future
years, as explained in "Year Ended December 31, 1999 Compared With Year Ended
December 31, 1998 -- Income Tax Expense," reduced the effective rate
approximately 6 percentage points in both 1998 and 1997.

F-13

Operating Income

For the year ended December 31, 1998, excluding the impact of catastrophes,
operating income (income from continuing operations before the after tax impact
of realized investment gains and losses) increased 11.2%. The Company's after-
tax catastrophe losses for the year ended December 31, 1998 set a new record
high -- and followed a year in which its catastrophe losses were at a near-
record low. Current year earnings and investment income were also reduced
compared to 1997 due to the utilization of capital in the Company's share
repurchase programs. Operating income by segment was as follows:

Year Ended Growth Over
December 31, Prior Year
---------------- --------------------
1998 1997 Percent Amount
---- ---- ------- ------

Property & casualty:
Before catastrophe losses and
non-recurring tax benefits.......... $65.2 $58.8 10.9% $ 6.4
Catastrophe losses, after tax......... 18.5 4.0 362.5% 14.5
Non-recurring tax benefits............ 6.5 6.6 -1.5% (0.1)
----- ----- -----
Total including catastrophe losses
and non-recurring tax benefits.... 53.2 61.4 -13.4% (8.2)
Annuity................................. 23.1 19.3 19.7% 3.8
Life.................................... 12.4 12.9 -3.9% (0.5)
Corporate and other expense............. 3.6 3.9 (0.3)
Interest expense........................ 6.2 6.1 0.1
----- ----- -----
Total............................... $78.9 $83.6 -5.6% $(4.7)
===== ===== =====
Total before catastrophe losses
and non-recurring tax benefits.... $90.9 $81.0 12.2% $ 9.9
===== ===== =====

Property and casualty
statutory combined ratio:
Before catastrophes................. 87.7% 89.7% -2.0%
After catastrophes.................. 93.6% 91.1% 2.5%

Property and casualty segment operating income was primarily impacted by the
significant increase in weather-related catastrophe losses in 1998. The
property and casualty combined loss and expense ratio for 1998 reflected an
improvement in underwriting results offset by the higher weather-related claims.
Property and casualty segment operating income was also adversely affected by a
reduction in investment income in the year ended December 31, 1998 as compared
to the same period in 1997 which resulted from an increase in the operating
leverage and corresponding reduction in capital allocated to the Company's
property and casualty operations as well as the lower interest rate environment.
Despite higher catastrophe losses, automobile results for the year produced a
combined ratio of 88.9%, 1.2 percentage points better than 1997. 1998
automobile claim severity was less than in 1997 and rate increases kept pace
with loss costs. Due to unprecedented levels of weather-related losses, the
1998 homeowners combined ratio of 110.8% was 17.4 percentage points higher than
in 1997. Favorable development of property and casualty claims occurring in
prior years (excluding involuntary business), was $15.1 million after tax in
1998, compared to $26.0 million after tax in 1997. Favorable development of
total property and casualty claims occurring in prior years was $16.2 million
after tax in 1998, compared to $29.3 million after tax in 1997.

F-14

Strong growth in variable annuity deposits produced an increase in annuity
earnings compared to 1997. The 1998 interest margin on fixed annuity deposits
was comparable to 1997, while fees collected on variable annuity business grew
by 23.8% compared to 1997 as a result of growth in the variable annuity
business. Variable annuity accumulated deposits were $1.1 billion at December
31, 1998, $163.1 million more than 12 months earlier, a 17.0% increase. Fixed
annuity accumulated cash value of $1.4 billion was equal to December 31, 1997.

Net Income
Net Income Per Share, Diluted

Year Ended Growth Over
December 31, Prior Year
------------------ ----------------
1998 1997 Percent Amount
---- ---- ------- ------

Operating income................... $1.80 $ 1.80 - $ -
Realized investment gains.......... 0.15 0.07 114.3% 0.08
----- ------ -----
Income from continuing operations.. 1.95 1.87 4.3% 0.08
Discontinued operations:
Loss on discontinuation.......... - (0.07) 0.07
----- ------ -----
Net income......................... $1.95 $ 1.80 8.3% $0.15
===== ====== =====

Net income, which includes realized investment gains and discontinued
operations, for the year ended December 31, 1998 increased by 2.0% and net
income per diluted share increased by 8.3% compared to 1997. The Company's share
repurchase program reduced net income by $6.0 million for 1998 but resulted in
an increase of $0.06 in earnings per share for the period due to the reduction
in the number of shares outstanding.

Net income for 1997 included an after tax charge of $3.5 million, or $0.07
per share, for anticipated additional losses during the remainder of the phase-
out period as a result of accelerating the timetable for the Company's
withdrawal from the group medical insurance business and higher-than-expected
claims. By August 31, 1998, all of the group medical business had been
terminated.

Liquidity and Financial Resources

Investments

The Company's investment strategy emphasizes investment grade, publicly
traded fixed income securities. At December 31, 1999, fixed income securities
represented 95.3% of investments. Of the fixed income investment portfolio,
93.2% was investment grade and 99.8% was publicly traded. The average quality
of the total fixed income portfolio was AA-/A+ at December 31, 1999.

The duration of the investment portfolio is managed to provide cash flow to
satisfy policyholder liabilities as they become due. The average option
adjusted duration of total investments was 4.1 years at December 31, 1999 and
4.4 years at December 31, 1998. The Company has included in its annuity
products substantial surrender penalties to reduce the likelihood of unexpected
increases in policy or contract surrenders. All annuities issued since 1982 and
approximately 75% of all outstanding fixed annuity accumulated cash values are
subject in most cases to substantial early withdrawal penalties.

F-15

Cash Flow

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

Operating Activities

As a holding company, HMEC conducts its principal operations in the personal
lines segment of the property and casualty and life insurance industries through
its subsidiaries. HMEC's insurance subsidiaries generate cash flow from premium
and investment income, generally well in excess of their immediate needs for
policy obligations, operating expenses and other cash requirements. Net cash
provided by operating activities was greater than in 1998 primarily as a result
of lower federal income taxes paid in 1999, including a $7.0 million refund of
prior years' taxes. Cash provided by operating activities primarily reflects
net cash generated by the insurance subsidiaries.

Payment of principal and interest on debt, fees related to the catastrophe-
linked equity put option, dividends to shareholders and parent company operating
expenses, as well as the share repurchase program, are dependent upon the
ability of the insurance subsidiaries to pay cash dividends or make other cash
payments to HMEC, including tax payments pursuant to tax sharing agreements.
The insurance subsidiaries are subject to various regulatory restrictions which
limit the amount of annual dividends or other distributions, including loans or
cash advances, available to HMEC without prior approval of the insurance
regulatory authorities. Dividends which may be paid by the insurance
subsidiaries to HMEC during 2000 without prior approval are approximately $75
million. Although regulatory restrictions exist, dividend availability from
subsidiaries has been, and is expected to be, more than adequate for HMEC's
capital needs.

Investing Activities

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

Financing Activities

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

F-16

For the year ended December 31, 1999, receipts from annuity contracts
decreased 7.9% primarily reflecting the reduced level of single premium deposits
received. Annuity contract maturities and withdrawals increased $62.4 million,
or 33.8%, compared to the year ended December 31, 1998 due to higher withdrawals
from the variable annuity option. Variable annuity deposit retention decreased
4 percentage points over the 12 months to 89.4%. Net transfers to variable
annuity assets decreased $89.2 million, or 92.1%, compared to 1998 reflecting a
greater allocation of funds by customers to fixed annuities rather than variable
annuities and the decrease in total annuity contract receipts. Retention of
fixed annuity accumulated cash value was 92.3% for the 12 months ended December
31, 1999.

During the first six months of 1999, the Company repurchased 1,075,300
shares of its common stock, or 3% of the shares outstanding on December 31,
1998, at an aggregate cost of $25.1 million, or an average cost of $23.34 per
share, under its stock repurchase program. No shares were repurchased during
the third and fourth quarters of 1999. Repurchases in 1999 compare to 2,286,800
shares repurchased in 1998 at an aggregate cost of $71.6 million. The
repurchase of shares was financed through cash generated from operations and,
when necessary, the Bank Credit Facility. In May 1999, an additional $100
million share repurchase authorization was announced. As of December 31, 1999,
$111.5 million remained authorized for future share repurchases.

On August 2, 1999, the Company announced that its Board of Directors had
retained Morgan Stanley Dean Witter and Credit Suisse First Boston to explore
strategic alternatives available to the corporation. At that time, the Board of
Directors suspended the Company's share repurchase program. On February 23,
2000, the Board of Directors removed suspension of the Company's previously
authorized program to repurchase its common stock from time to time in the open
market, but also indicated that the levels of stock repurchase in 2000 will
likely be lower than what occurred in either 1997 or 1998. During 2000 and
beyond, the Company intends to allocate excess capital for share repurchase to
the extent that it is not needed to realize anticipated business growth
opportunities.

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. 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 $548.8 million at December 31, 1999,
including $99.7 million of long-term debt and $49.0 million of short-term debt.
Total debt represented 25.3% of capital (excluding unrealized investment losses)
at the end of 1999, at the upper end of the Company's target operating range of
20% to 25%.

F-17

Shareholders' equity was $400.1 million at December 31, 1999, including an
unrealized loss in the Company's investment portfolio of $40.1 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 $805.3 million and $19 5/8, respectively, at December 31,
1999. Book value per share was $9.75 at December 31, 1999, $10.73 excluding
investment market value adjustments. At December 31, 1998, book value per share
was $11.80, $10.44 excluding investment market value adjustments. The decrease
over the 12 months was entirely due to unrealized investment gains and losses,
the non-recurring charge for prior years' taxes and share repurchases.
Excluding these items, book value per share increased 10.8% over the 12-month
period.

In January 1996, the Company issued $100.0 million face amount of 6 5/8%
Senior Notes ("Senior Notes") at a discount of 0.5% which will mature on January
15, 2006. Interest on the Senior Notes is payable semi-annually. The Senior
Notes are redeemable in whole or in part, at any time at the Company's option.
The Senior Notes have an investment grade rating from Standard & Poor's
Corporation ("S&P") (A-), Duff & Phelps Credit Rating Co. ("Duff & Phelps") (A),
and Moody's Investors Service, Inc. ("Moody's") (Baa2) and are traded on the New
York Stock Exchange (HMN 6 5/8).

As of December 31, 1999 and 1998, the Company had short-term debt of $49.0
million and $50.0 million, respectively, outstanding under the Bank Credit
Facility. The Bank Credit Facility allows unsecured borrowings of up to $65.0
million at Interbank Offering Rates plus 0.3% to 0.5% or Bank of America
National Trust and Savings Association reference rates. The rate on the
borrowings under the Bank Credit Facility was Interbank Offering Rate plus 0.3%,
or 6.5%, as of December 31, 1999. The commitment for the Bank Credit Facility
terminates on December 31, 2001.

The Company's ratio of earnings to fixed charges for the year ended December
31, 1999 was 10.6x compared to 13.3x for the same period in 1998, with the
decline primarily attributable to realized investment losses recorded in the
current period compared to realized investment gains recorded in the year ended
December 31, 1998.

Total shareholder dividends were $15.8 million for the year ended December
31, 1999. The Company has targeted a dividend payout ratio of approximately 15%
to 20%. In November 1999, the Board of Directors authorized the eighth increase
to the Company's quarterly dividend in the eight years since the Company's
initial public offering in November 1991. The regular quarterly dividend
increased by 13.5% to $0.105 per share.

The Company reinsures 95% of catastrophe losses above a retention of $7.5
million per occurrence up to $80 million per occurrence. In addition, the
Company reinsures 75% of catastrophe losses in Florida above a retention of $6.1
million. These catastrophe reinsurance programs are augmented by a $100 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,
individually or in the aggregate during a calendar year, exceed the $80 million
coverage limit. The equity put provides a source of capital for up to $154
million of catastrophe losses, before tax benefits, above the reinsurance
coverage limit.

F-18

Market Risk

Market risk is the risk that the Company will incur losses due to adverse
changes in market rates. The Company's primary market risk exposure is the risk
that the Company will incur economic losses due to adverse changes in interest
rates. This risk arises as the Company's profitability is affected by the
spreads between interest yields on investments and rates credited on insurance
liabilities.

The Company manages its market risk by coordinating the projected cash
outflows of assets with the projected cash outflows of liabilities. For all its
assets and liabilities, the Company seeks to maintain reasonable durations,
consistent with the maximization of income without sacrificing investment
quality and providing for liquidity and diversification. The risks associated
with mutual fund investments supporting variable annuity products are assumed by
those contractholders, and not by the Company.

Through active investment management, the Company invests available funds
with the objective of funding future obligations to policyholders, subject to
appropriate risk considerations, and maximizing shareholder value. This
objective is met through investments that 1) have similar characteristics to the
liabilities they support; 2) are diversified among industries, issuers and
geographic locations; and 3) are predominately investment-grade fixed maturity
securities. No derivatives are used to manage the exposure to interest rate
risk in the investment portfolios. At December 31, 1999, 20% of the fixed
investment portfolio represents investments supporting the property and casualty
operations and 80% support the life and annuity business. For a discussion
regarding the Company's investments see "Business-Investments."

The Company's life and annuity operating earnings are affected by the
spreads between interest yields on investments and rates credited or accruing on
life and fixed annuity insurance liabilities. Although substantially all
credited rates on fixed annuities may be changed annually (subject to minimum
guaranteed rates), competitive pricing and other factors, including the impact
on the level of surrender and withdrawals, may limit the Company's ability to
adjust or to maintain crediting rates at levels necessary to avoid narrowing of
spreads under certain market conditions.

Using financial modeling and other techniques, the Company regularly
evaluates the appropriateness of investments relative to the characteristics of
the liabilities that they support. Simulations of cash flows generated from
existing business under various interest rate scenarios measure the potential
gain or loss in fair value of interest-rate sensitive assets and liabilities.
Such estimates are used to closely match the duration of assets to the duration
of liabilities. The overall duration of liabilities of the Company's multiline
insurance operations combines the characteristics of its long duration interest-
sensitive life and annuity liabilities with its short duration non interest-
sensitive property and casualty liabilities. Overall, at December 31, 1999, the
duration of fixed maturity securities was approximately 4.1 years, and the
duration of insurance liabilities was approximately 4.5 years.

The life and annuity operations participate in the cash flow testing
procedures imposed by statutory insurance regulations, the purpose of which is
to insure that such liabilities are adequate to meet the Company's obligations
under a variety of interest rate scenarios. Based on these procedures, the
Company's assets and the investment income expected to be received on such
assets, are adequate to meet the insurance policy obligations and expenses of
the Company's insurance activities in all but the most extreme circumstances.

F-19

The Company periodically evaluates its sensitivity to interest rate risk.
Based on commonly used models, the Company projects the impact of interest rate
changes, assuming a wide range of factors, including duration and prepayment, on
the fair value of assets and liabilities. Fair value is estimated based on the
net present value of cash flows or duration estimates. At December 31, 1999,
assuming an immediate decrease of 100 basis points in interest rates, the net
fair value of the Company's assets and liabilities would increase by
approximately $21 million after tax, 5% of shareholders' equity. A 100 basis
point increase would decrease fair value of assets and liabilities by $2 million
after tax, less than 1% of shareholders' equity. These changes in interest
rates assume a parallel shift in the yield curve.

While the Company believes that these assumed market rate changes are
reasonably possible, actual results may differ, particularly as a result of any
management actions that would be taken to mitigate such hypothetical losses in
fair value of shareholders' equity. Based on the Company's overall exposure to
interest rate risk, the Company believes that these changes in interest rates
would not materially affect the consolidated near-term financial position,
results of operations or cash flows of the Company.

Year 2000

All of the Company's automated systems are year 2000 compliant and rollover
to year 2000 was successfully completed. The Company continues to monitor and
retest computer system processing for upcoming quarter-end and year-end
processing accuracy.

Costs for this compliance project represented the allocation of existing
internal information technology resources to address year 2000 compliance and
were not incremental costs to the Company. The total cost of the compliance
project has been funded through operating cash flows. The Company has expensed
all costs associated with these system changes and through December 31, 1999 has
expensed $6.5 million before tax benefits, including a cost of $1.0 million for
the year ended December 31, 1999.

Recent Accounting Changes

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," which is required to be adopted in
2000. This statement will not have a material impact on the Company because it
does not have significant holdings of derivatives or hedges, as defined within
the context of SFAS No. 133.

Effects of Inflation and Changes in Interest Rates

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

F-20

reflect the higher yields available in the market. The risk of interest rate
fluctuation is managed through asset/liability management techniques, including
cash flow analysis.

Effects of Recession

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

F-21

REPORT OF MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS

Horace Mann Educators Corporation

The consolidated balance sheets of Horace Mann Educators Corporation and
subsidiaries as of December 31, 1999, 1998 and 1997, and the related
consolidated statements of operations, cash flows and shareholders' equity for
the years ended December 31, 1999, 1998 and 1997 have been prepared by
management, which is responsible for their integrity and reliability. The
statements have been prepared in accordance with generally accepted accounting
principles and include some amounts that are based upon management's best
estimates and judgements. The financial information contained elsewhere in this
annual report on Form 10-K is consistent with that contained in the financial
statements.

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

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

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

/s/ Paul J. Kardos
Paul J. Kardos
Chairman of the Board,
President and Chief
Executive Officer

/s/ Larry K. Becker
Larry K. Becker
Executive Vice President and
Chief Financial Officer

Springfield, Illinois
January 25, 2000

F-22

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Horace Mann Educators Corporation:

We have audited the accompanying consolidated balance sheets of Horace Mann
Educators Corporation and subsidiaries (the Company) as of December 31, 1999,
1998 and 1997 and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1999. In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedules, as listed in the accompanying index. These consolidated financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Horace Mann
Educators Corporation and subsidiaries as of December 31, 1999, 1998 and 1997,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.

/s/ KPMG LLP
KPMG LLP

Chicago, Illinois
January 25, 2000

F-23

HORACE MANN EDUCATORS CORPORATION

CONSOLIDATED BALANCE SHEETS
As of December 31, 1999, 1998 and 1997

(Dollars in thousands)

1999 1998 1997
---------- ---------- ----------

ASSETS
Investments
Fixed maturities, available for sale, at market
(amortized cost 1999, $2,575,403; 1998,
$2,552,537; 1997, $2,535,538)........................ $2,507,280 $2,651,379 $2,638,794
Short-term and other investments...................... 122,929 102,049 130,252
Short-term investments, loaned securities collateral.. - 87,392 -
---------- ---------- ----------
Total investments................................ 2,630,209 2,840,820 2,769,046
Cash................................................... 22,848 12,044 353
Accrued investment income and premiums receivable...... 92,755 102,661 103,951
Value of acquired insurance in force and goodwill...... 102,068 101,055 107,976
Deferred policy acquisition costs...................... 130,192 101,658 85,883
Other assets........................................... 144,061 114,503 104,943
Variable annuity assets................................ 1,131,713 1,122,739 959,760
---------- ---------- ----------
Total assets..................................... $4,253,846 $4,395,480 $4,131,912
========== ========== ==========

LIABILITIES, REDEEMABLE SECURITIES AND SHAREHOLDERS' EQUITY

Policy liabilities
Fixed annuity contract liabilities................... $1,238,379 $1,239,234 $1,245,459
Interest-sensitive life contract liabilities......... 443,309 402,490 364,205
Unpaid claims and claim expenses..................... 309,604 307,387 322,335
Future policy benefits............................... 179,157 179,693 179,562
Unearned premiums.................................... 170,845 179,194 166,996
---------- ---------- ----------
Total policy liabilities......................... 2,341,294 2,307,998 2,278,557
Other policyholder funds............................... 126,530 124,820 122,107
Other liabilities...................................... 110,698 197,292 126,847
Short-term debt........................................ 49,000 50,000 42,000
Long-term debt......................................... 99,677 99,637 99,599
Variable annuity liabilities........................... 1,126,505 1,118,890 956,253
---------- ---------- ----------
Total liabilities................................ 3,853,704 3,898,637 3,625,363
---------- ---------- ----------
Warrants, subject to redemption........................ - 220 577
---------- ---------- ----------
Preferred stock, $0.001 par value, authorized
1,000,000 shares; none issued........................ - - -
Common stock, $0.001 par value, authorized
75,000,000 shares; issued, 1999, 59,292,053;
1998, 59,274,690; 1997, 59,161,008................... 59 59 59
Additional paid-in capital............................. 333,892 336,686 340,564
Retained earnings...................................... 449,023 420,274 349,274
Accumulated other comprehensive income (loss)
(net unrealized gains (losses) on fixed
maturities and equity securities).................... (40,016) 57,327 62,167
Treasury stock, at cost, 1999, 18,258,896 shares;
1998, 17,183,596 shares; 1997, 14,896,796 shares..... (342,816) (317,723) (246,092)
---------- ---------- ----------
Total shareholders' equity....................... 400,142 496,623 505,972
---------- ---------- ----------
Total liabilities, redeemable securities
and shareholders' equity....................... $4,253,846 $4,395,480 $4,131,912
========== ========== ==========

See accompanying notes to consolidated financial statements.

F-24

HORACE MANN EDUCATORS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

Year Ended December 31,
---------------------------------------
1999 1998 1997
------------ ----------- ------------

Insurance premiums written and contract deposits.... $ 821,209 $ 827,787 $ 771,319
=========== =========== ===========

Revenues
Insurance premiums and contract charges earned.... $ 595,128 $ 577,812 $ 542,712
Net investment income............................. 188,267 191,723 198,928
Realized investment gains (losses)................ (7,969) 9,908 5,340
----------- ----------- -----------
Total revenues................................ 775,426 779,443 746,980
----------- ----------- -----------
Benefits, losses and expenses
Benefits, claims and settlement expenses.......... 416,186 396,328 359,441
Interest credited................................. 91,629 94,776 97,231
Policy acquisition expenses amortized............. 53,041 45,477 44,198
Operating expenses................................ 109,694 109,673 106,398
Amortization of intangible assets................. 215 6,921 10,662
Interest expense.................................. 9,722 9,487 9,412
Litigation settlement............................. 1,585 - -
----------- ----------- -----------
Total benefits, losses and expenses........... 682,072 662,662 627,342
----------- ----------- -----------
Income from continuing operations before
income taxes and discontinued operations.......... 93,354 116,781 119,638
Income tax expense.................................. 28,849 31,469 32,581
Provision for prior years' taxes.................... 20,000 - -
----------- ----------- -----------
Income from continuing operations................... 44,505 85,312 87,057
Discontinued operations (See note 2):
Loss on discontinuation, representing additional
provision of $5,355 for operating losses
during phase-out period, net of applicable
income tax benefits of $1,874................... - - (3,481)
----------- ----------- -----------
Net income.......................................... $ 44,505 $ 85,312 $ 83,576
=========== =========== ===========

Earnings (loss) per share
Basic
Income from continuing operations............... $ 1.08 $ 1.97 $ 1.90
Discontinued operations:
Loss on discontinuation....................... - - (0.08)
----------- ----------- -----------
Net income...................................... $ 1.08 $ 1.97 $ 1.82
=========== =========== ===========
Diluted
Income from continuing operations............... $ 1.07 $ 1.95 $ 1.87
Discontinued operations:
Loss on discontinuation....................... - - (0.07)
----------- ----------- -----------
Net income...................................... $ 1.07 $ 1.95 $ 1.80
=========== =========== ===========
Weighted average number of shares
and equivalent shares
Basic......................................... 41,245,633 43,238,656 45,825,410
Diluted....................................... 41,708,439 43,838,434 46,524,532

See accompanying notes to consolidated financial statements.

F-25

HORACE MANN EDUCATORS CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(Dollars in thousands, except per share data)

Year Ended December 31,
------------------------------------
1999 1998 1997
---------- ---------- ------------

Common stock
Beginning balance................................................. $ 59 $ 59 $ 58
Options exercised, 1999, 17,363 shares; 1998,
113,682 shares; 1997, 731,924 shares............................. - - 1
Conversion of Director Stock Plan units,
1997, 2,288 shares............................................... - - -
--------- --------- -----------
Ending balance.................................................... 59 59 59
--------- --------- -----------

Additional paid-in capital
Beginning balance................................................. 336,686 340,564 330,234
Options exercised and conversion of
Director Stock Plan units........................................ 362 2,200 11,580
Catastrophe-linked equity put option premium...................... (950) (1,475) (1,250)
Purchase of 8,450 warrants in 1999 and
13,650 warrants in 1998.......................................... (2,206) (4,603) -
--------- --------- -----------
Ending balance.................................................... 333,892 336,686 340,564
--------- --------- -----------

Retained earnings
Beginning balance................................................. 420,274 349,274 278,669
Net income........................................................ 44,505 85,312 83,576
Cash dividends, 1999, $0.3825 per share; 1998,
$0.3325 per share; 1997, $0.2825 per share....................... (15,756) (14,312) (12,971)
--------- --------- -----------
Ending balance.................................................... 449,023 420,274 349,274
--------- --------- -----------

Accumulated other comprehensive income (loss)
(net unrealized gains (losses) on fixed
maturities and equity securities)
Beginning balance................................................ 57,327 62,167 29,736
Increase (decrease) for the period............................... (97,343) (4,840) 32,431
--------- --------- -----------
Ending balance................................................... (40,016) 57,327 62,167
--------- --------- -----------

Treasury stock, at cost
Beginning balance, 1999, 17,183,596 shares; 1998,
14,896,796 shares; 1997, 11,176,196 shares....................... (317,723) (246,092) (154,302)
Purchase of 1,075,300 shares in 1999; 2,286,800
shares in 1998 and 3,720,600 shares in 1997
(See note 5)..................................................... (25,093) (71,631) (91,790)
--------- --------- -----------
Ending balance 1999, 18,258,896 shares; 1998,
17,183,596 shares; 1997, 14,896,796 shares....................... (342,816) (317,723) (246,092)
--------- --------- -----------

Shareholders' equity at end of period.............................. $ 400,142 $ 496,623 $ 505,972
========= ========= ===========

Comprehensive income (loss)
Net income........................................................ $ 44,505 $ 85,312 $ 83,576
Other comprehensive income (loss) (change in net
unrealized gains (losses) on fixed maturities
and equity securities)........................................... (97,343) (4,840) 32,431
--------- --------- -----------
Total........................................................... $ (52,838) $ 80,472 $ 116,007
========= ========= ===========

See accompanying notes to consolidated financial statements.

F-26

HORACE MANN EDUCATORS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

Year Ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- -----------

Cash flows from operating activities
Premiums collected.............................................. $ 623,762 $ 618,419 $ 608,650
Policyholder benefits paid...................................... (453,353) (459,595) (466,150)
Policy acquisition and other operating expenses paid............ (179,951) (176,054) (173,462)
Federal income taxes paid....................................... (16,600) (36,441) (51,889)
Investment income collected..................................... 186,824 195,599 199,306
Interest expense paid........................................... (9,523) (9,309) (9,276)
Other........................................................... (3,013) (3,853) (2,743)
-------- --------- -----------
Net cash provided by operating activities................. 148,146 128,766 104,436
--------- --------- -----------

Cash flows from investing activities
Fixed maturities
Purchases.................................................... (698,847) (842,375) (1,044,199)
Sales........................................................ 388,644 487,945 874,243
Maturities................................................... 286,758 351,112 241,958
Net cash (used for) received from short-term and
other investments.............................................. (18,524) 26,296 (5,882)
--------- --------- -----------
Net cash (used in) provided by investing activities....... (41,969) 22,978 66,120
--------- --------- -----------

Cash flows used in financing activities
Purchase of treasury stock...................................... (25,093) (71,631) (91,790)
Dividends paid to shareholders.................................. (15,756) (14,312) (12,971)
Principal (payments) borrowings on Bank Credit Facility......... (1,000) 8,000 8,000
Repurchase of common stock warrants............................. (2,426) (4,959) -
Exercise of stock options....................................... 362 2,200 11,581
Catastrophe-linked equity put option premium.................... (950) (1,475) (1,250)
Annuity contracts, variable and fixed
Deposits..................................................... 205,684 223,324 199,190
Maturities and withdrawals................................... (247,212) (184,800) (176,117)
Net transfer to variable annuity assets...................... (7,676) (96,905) (121,782)
Net (decrease) increase in interest-sensitive
life account balances.......................................... (1,306) 505 1,232
--------- --------- -----------
Net cash used in financing activities..................... (95,373) (140,053) (183,907)
--------- --------- -----------

Net increase (decrease) in cash.................................... 10,804 11,691 (13,351)

Cash at beginning of period........................................ 12,044 353 13,704
--------- --------- ----------

Cash at end of period.............................................. $ 22,848 $ 12,044 $ 353
========= ========= ==========

See accompanying notes to consolidated financial statements.

F-27

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 1 - Summary of Significant Accounting Policies

Basis of Presentation

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

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

The subsidiaries of HMEC sell and underwrite tax-qualified retirement
annuities and private passenger automobile, homeowners, and life insurance
products, primarily to educators and other employees of public schools and their
families. In 1996, the Company discontinued its group medical business. The
Company's principal operating subsidiaries are Horace Mann Life Insurance
Company, Horace Mann Insurance Company, Teachers Insurance Company and
Allegiance Insurance Company.

Investments

The Company invests primarily in fixed maturity investments. These
securities are classified as available for sale and carried at market value.
The net adjustment for unrealized gains and losses on securities available for
sale, carried at market, is recorded as a separate component of shareholders'
equity, net of applicable deferred tax asset or liability and the related impact
on deferred policy acquisition costs and value of acquired insurance in force
associated with interest-sensitive life and annuity contracts.

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

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

F-28

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 1 - Summary of Significant Accounting Policies-(Continued)

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

Deferred Policy Acquisition Costs

Deferred policy acquisition costs net of accumulated amortization were
$130,192, $101,658 and $85,883 as of December 31, 1999, 1998 and 1997,
respectively.

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

Deferred policy acquisition costs for interest-sensitive life and investment
contracts are adjusted for the impact on estimated future gross profits as if
net unrealized investment gains and losses had been realized at the balance
sheet date. The impact of this adjustment is included in net unrealized gains
and losses within shareholders' equity.

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

The Company periodically reviews the assumptions and estimates used in
capitalizing policy acquisition costs. The Company began deferring additional
sales-related costs in 1999 for all new life and annuity contracts, consistent
with common industry accounting practices. The impact of this change was an
increase to net income of $3,108 for 1999.

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

F-29

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 1 - Summary of Significant Accounting Policies-(Continued)

Property and Equipment

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

December 31,
-----------------------------
1999 1998 1997
------- ------- -------

Property and equipment.................... $60,907 $55,028 $48,548
Less: accumulated depreciation............ 30,543 26,541 23,395
------- ------- -------
Total................................... $30,364 $28,487 $25,153
======= ======= =======

At the beginning of 1998, the Company adopted the accounting treatment
required by the American Institute of Certified Public Accountants' Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." Adoption of this statement decreased the Company's
1999 and 1998 operating expenses by $1,568 and $2,400, respectively, before
income taxes as costs incurred to develop internal-use software are capitalized
and depreciated over their expected useful lives.

Value of Acquired Insurance In Force and Goodwill

When the Company was acquired in 1989, intangible assets were recorded in
the application of purchase accounting to recognize the value of acquired
insurance in force and goodwill. In addition, goodwill was recorded in 1994
related to the purchase of Allegiance Insurance Company.

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

December 31,
------------------------------
1999 1998 1997
-------- -------- --------

Value of acquired insurance in force
Property and casualty.................. $ - $ 719 $ 1,751
Life................................... 14,409 16,529 18,804
Annuity................................ 37,027 31,557 33,553
-------- -------- --------
Subtotal............................. 51,436 48,805 54,108
Goodwill................................. 50,632 52,250 53,868
-------- -------- --------
Total................................ $102,068 $101,055 $107,976
======== ======== ========

The value of acquired insurance in force is being amortized over the
following periods utilizing the indicated methods for life and annuity,
respectively, as follows: 20 years, in proportion to coverage provided; 20
years, in proportion to estimated gross profits. Goodwill is amortized over 40
years on a straight-line basis.

F-30

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 1 - Summary of Significant Accounting Policies-(Continued)

The value of acquired insurance in force for investment contracts (those
issued prior to August 29, 1989) is adjusted for the impact on estimated future
gross profits as if net unrealized investment gains and losses had been realized
at the balance sheet date. The impact of this adjustment is included in net
unrealized gains and losses within shareholders' equity.

Significant appreciation and the resultant growth in annuity assets and the
retention of the Company's annuity business in recent years have favorably
impacted projected future gross profits for the business. Therefore, previously
scheduled annual amortization of the December 31, 1999 balance was revised as
reflected in the table below. Such amounts are evaluated annually and
amortization schedules updated as indicated.

Scheduled amortization of the December 31, 1999 balances of value of
acquired insurance in force by segment and goodwill over the next five years is
as follows:

Year Ended December 31,
--------------------------------------
2000 2001 2002 2003 2004
------ ------ ------ ------ ------

Scheduled amortization of:
Value of acquired insurance in force
Life.................................. $1,975 $1,839 $1,726 $1,625 $1,537
Annuity............................... 4,576 4,557 4,214 4,000 3,669
------ ------ ------ ------ ------
Subtotal............................ 6,551 6,396 5,940 5,625 5,206
Goodwill................................ 1,618 1,618 1,618 1,618 1,618
------ ------ ------ ------ ------
Total............................... $8,169 $8,014 $7,558 $7,243 $6,824
====== ====== ====== ====== ======

The accumulated amortization of intangibles as of December 31, 1999, 1998
and 1997 was $131,832, $131,617 and $124,696, respectively.

Variable Annuity Assets and Liabilities

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

December 31,
-----------------------------------
1999 1998 1997
---------- ---------- --------

Horace Mann Growth Fund................... $ 566,932 $ 605,803 $532,086
Horace Mann Balanced Fund................. 404,712 427,368 386,247
Horace Mann Small Cap Growth Fund......... 60,042 28,629 16,321
Horace Mann Socially Responsible Fund..... 59,129 35,368 9,117
Horace Mann International Equity Fund..... 26,040 10,290 5,137
Horace Mann Income Fund................... 13,237 13,952 9,651
Horace Mann Short-Term Fund............... 1,621 1,329 1,201
---------- ---------- --------
Total variable annuity assets........... $1,131,713 $1,122,739 $959,760
========== ========== ========

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

F-31

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 1 - Summary of Significant Accounting Policies-(Continued)

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

Liabilities for future benefits on life and annuity policies are established
in amounts adequate to meet the estimated future obligations on policies in
force. Liabilities for future policy benefits on certain life insurance
policies are computed using the net level premium method and are based upon
assumptions as to future investment yield, mortality and withdrawals. As a
result of the application of purchase accounting, future policy benefits for
direct individual life insurance policies issued through August 29, 1989 were
revalued using interest rates of 9% graded to 8% over 10 years. For policies
issued from August 30, 1989 through December 31, 1992, future policy benefits
are computed using an interest rate of 6.5%. An interest rate of 5.5% is used
to compute future policy benefits for policies issued after December 31, 1992.
Mortality and withdrawal assumptions for all policies have been based on various
actuarial tables which are consistent with the Company's own experience.
Liabilities for future benefits on annuity contracts and certain long-duration
life insurance contracts are carried at accumulated policyholder values without
reduction for potential surrender or withdrawal charges. The liability also
includes provisions for the unearned portion of certain policy charges.

Unpaid Claims and Claim Expenses

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

The process by which liabilities are established for insured events requires
reliance upon estimates based on experience and available data. As information
develops which varies from experience, provides additional data or, in some
cases, augments data which previously were not considered sufficient for use in
determining liabilities, adjustments may be required. The effects of these
adjustments are charged or credited to income for the period in which the
adjustments are made. No unusual adjustments were made in the determination of
the liabilities during the periods covered by these financial statements. 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. Management believes that, based on data currently
available, it has reasonably estimated the Company's ultimate losses.

F-32

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 1 - Summary of Significant Accounting Policies-(Continued)

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

Year Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------

Gross reserves, beginning of year................... $298,929 $310,632 $340,411
Less reinsurance recoverables..................... 55,890 41,324 34,062
-------- -------- --------
Net reserves, beginning of year..................... 243,039 269,308 306,349
-------- -------- --------

Incurred claims and claims expense :
Claims occurring in the current year.............. 379,455 379,603 365,986
Increase (decrease) in estimated reserves for
claims occurring in prior years(1):
Policies written by the Company............... (7,583) (23,317) (40,052)
Business assumed from state
reinsurance facilities...................... 3,000 (1,600) (5,100)
-------- -------- --------
Total decrease............................ (4,583) (24,917) (45,152)
-------- -------- --------
Total claims and claims expense incurred...... 374,872 354,686 320,834
-------- -------- --------
Claims and claims expense payments
for claims occurring during:
Current year.................................... 240,045 238,986 209,294
Prior years..................................... 142,473 141,969 148,581
-------- -------- --------
Total claims and claims expense payments...... 382,518 380,955 357,875
-------- -------- --------
Net reserves, end of period......................... 235,393 243,039 269,308
Plus reinsurance recoverables..................... 64,410 55,890 41,324
-------- -------- --------
Gross reserves, end of period(2).................... $299,803 $298,929 $310,632
======== ======== ========

_______________
(1) Shows the amounts by which the Company decreased or 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. Favorable reserve development generally occurs as a
result of subsequent adjustment of reserves to reflect additional
information.
(2) Unpaid claims and claims expense as reported in the consolidated balance
sheets also include life, annuity, and group accident and health reserves of
$9,801, $8,458 and $11,703 at December 31, 1999, 1998 and 1997,
respectively, in addition to property and casualty reserves.

Fluctuations from year to year in the level of catastrophe claims impact a
property and casualty insurance company's claims and claims adjustment expenses
incurred and paid. For comparison purposes, the following table provides
amounts for the Company excluding catastrophe losses.

Year Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------

Claims and claims expense incurred.................. $374,872 $354,686 $320,834
Amount attributable to catastrophes................. 19,371 28,019 6,164
-------- -------- --------
Excluding catastrophes............................ $355,501 $326,667 $314,670
======== ======== ========

Claims and claims expense payments.................. $382,518 $380,955 $357,875
Amount attributable to catastrophes................. 17,400 25,200 5,700
-------- -------- --------
Excluding catastrophes............................ $365,118 $355,755 $352,175
======== ======== ========

F-33

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 1 - Summary of Significant Accounting Policies-(Continued)

Insurance Premiums and Contract Charges Earned

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

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

Stock Based Compensation

The Company grants stock options 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. The Company accounts for
stock option grants in accordance with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and accordingly,
recognizes no compensation expense for the stock option grants.

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 and net
income per share would have been reduced to the pro forma amounts indicated
below:

Year Ended December 31,
-----------------------------
1999 1998 1997
------- ------- -------

Net income As reported.......... $44,505 $85,312 $83,576
Pro forma(1)......... $42,907 $84,485 $83,283

Basic net income per share As reported.......... $ 1.08 $ 1.97 $ 1.82
Pro forma............ $ 1.04 $ 1.95 $ 1.82

Diluted net income per share As reported.......... $ 1.07 $ 1.95 $ 1.80
Pro forma............ $ 1.03 $ 1.93 $ 1.79

______________
(1) The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions for 1999, 1998 and 1997, respectively: risk-free interest rates
of 5.9%, 5.6% and 5.5%; dividend yield of 1.9%, 1.3% and 1.0%; expected
lives of 10 years; and volatility of 50.3%, 26.2% and 15.8%.

F-34

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 1 - Summary of Significant Accounting Policies-(Continued)

Income Taxes

The Company uses the liability method for calculating deferred federal
income taxes. Income tax provisions are generally based on income reported for
financial statement purposes. The provisions for federal income taxes for the
years ended December 31, 1999, 1998 and 1997 include amounts currently payable
and deferred income taxes resulting from the cumulative differences in the
Company's assets and liabilities, determined on a tax return and financial
statement basis.

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

Earnings Per Share

Basic earnings per share is computed based on the weighted average number of
shares outstanding. Diluted earnings per share is based on the weighted average
number of shares and common stock equivalents outstanding. The common stock
equivalents relate to outstanding common stock options, Director Stock Plan
units and Employee Stock Plan units and in 1998 and 1997 also warrants.

F-35

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 1 - Summary of Significant Accounting Policies-(Continued)

The computations of income from continuing operations on both basic and
diluted bases, including reconciliations of the numerators and denominators,
were as follows:

Year Ended December 31,
---------------------------------
1999 1998 1997
------- ------- -------

Basic - assumes no dilution:
Income from continuing operations for the period......... $44,505 $85,312 $87,057
------- ------- -------
Weighted average number of common
shares outstanding during the period................... 41,246 43,239 45,825
------- ------- -------

Income from continuing operations per share - basic...... $ 1.08 $ 1.97 $ 1.90
======= ======= =======

Diluted - assumes full dilution:
Income from continuing operations for the period......... $44,505 $85,312 $87,057
------- ------- -------
Weighted average number of common shares
outstanding during the period.......................... 41,246 43,239 45,825
Weighted average number of common equivalent
shares to reflect the dilutive effect of common
stock equivalent securities:
Stock options........................................ 387 451 416
Common stock units related to Deferred
Equity Compensation Plan for Directors............. 69 49 33
Common stock units related to Deferred
Compensation Plan for Employees.................... 6 1 -
Warrants............................................. - 98 251
------- ------- -------
Total common and common equivalent shares adjusted
to calculate diluted earnings per share................ 41,708 43,838 46,525
------- ------- -------

Income from continuing operations per share - diluted.... $ 1.07 $ 1.95 $ 1.87
======= ======= =======

Options to purchase 262,950 shares of common stock at $25.63 to $34.53 per
share were granted during 1997, 1998 and 1999 but were not included in the
computation of 1999 diluted earnings per share because the options' exercise
price was greater than the average market price of the common shares during
1999. The options, which expire in 2007, 2008 and 2009, were still outstanding
at December 31, 1999.

Comprehensive Income (Loss)

Comprehensive income (loss) represents the change in shareholders' equity
during a reporting period from transactions and other events and circumstances
from non-shareholder sources. For the Company, comprehensive income (loss) is
equal to net income plus the change in net unrealized gains and losses on fixed
maturities and equity securities for the period as shown in the Statement of
Changes in Shareholders' Equity.

F-36

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 1 - Summary of Significant Accounting Policies-(Continued)

The components of comprehensive income (loss) were as follows:

Year Ended December 31,
---------------------------------
1999 1998 1997
--------- ------- --------

Net income............................................... $ 44,505 $85,312 $ 83,576
--------- ------- --------
Other comprehensive income (loss):
Unrealized holding gains (losses) on fixed maturities
and equity securities arising during period.......... (158,423) 3,855 55,299
Less: reclassification adjustment for gains (losses)
included in net income............................... (8,664) 11,301 5,405
--------- ------- --------
Other comprehensive income (loss), before tax.......... (149,759) (7,446) 49,894
Income tax expense (benefit)........................... (52,416) (2,606) 17,463
--------- ------- --------
Total................................................ (97,343) (4,840) 32,431
--------- ------- --------
Total comprehensive income (loss).................. $ (52,838) $80,472 $116,007
========= ======= ========

Statements of Cash Flows

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

Reclassification

The Company has reclassified the presentation of certain prior period
information to conform with the 1999 presentation.

NOTE 2 - Discontinued Operations

In December 1996, the Company announced its strategic decision to withdraw
from the group medical insurance business over the following two years. During
the third quarter of 1997, the Company accelerated the timetable for its
withdrawal from the group medical insurance business and had terminated 95% of
that business by December 31, 1997. The remaining business was terminated as of
August 31, 1998. As a result of the acceleration and higher-than-expected
claims, net income for the year ended December 31, 1997 included a charge of
$3,481 for anticipated additional losses during the remainder of the phase-out
period, net of related income tax benefits of $1,874. The Company's results of
operations for the year ended December 31, 1996 included an accrual of $3,883
for anticipated losses during the phase-out period net of related income tax
recoverable of $2,091. At December 31, 1999, there were no assets or
liabilities attributable to the discontinued operations.

F-37

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 3 - Investments

Net Investment Income

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

Year Ended December 31,
------------------------------
1999 1998 1997
-------- -------- ---------

Fixed maturities.................................................... $182,561 $185,271 $191,777
Short-term and other investments.................................... 9,212 10,700 10,967
-------- -------- --------
Total investment income.......................................... 191,773 195,971 202,744
Less investment expenses............................................ 3,506 4,248 3,816
-------- -------- --------
Net investment income............................................ $188,267 $191,723 $198,928
======== ======== ========

Realized Investment Gains (Losses)

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

Year Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------

Fixed maturities.................................................... $ (9,777) $ 10,537 $ 5,411
Short-term and other investments.................................... 1,808 (629) (71)
-------- -------- --------
Realized investment gains (losses)............................... $ (7,969) $ 9,908 $ 5,340
======== ======== ========

F-38

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 3 - Investments-(Continued)

Fixed Maturity Securities

The amortized cost, unrealized investment gains and losses, and market
values of investments in debt securities as of December 31, 1999, 1998 and 1997
were as follows:

Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------

As of December 31, 1999
U.S. government and agency obligations
Mortgage-backed securities............ $ 506,132 $ 3,587 $11,604 $ 498,115
Other................................. 136,400 330 5,304 131,426
Municipal bonds......................... 307,045 3,348 8,343 302,050
Foreign government bonds................ 21,875 439 327 21,987
Corporate bonds......................... 1,184,792 9,362 49,046 1,145,108
Other mortgage-backed securities........ 419,159 1,302 11,867 408,594
---------- -------- ------- ----------
Totals.............................. $2,575,403 $ 18,368 $86,491 $2,507,280
========== ======== ======= ==========

As of December 31, 1998
U.S. government and agency obligations
Mortgage-backed securities............ $ 489,752 $ 17,741 $ 24 $ 507,469
Other................................. 192,166 7,106 248 199,024
Municipal bonds......................... 301,751 17,430 40 319,141
Foreign government bonds................ 21,829 2,827 706 23,950
Corporate bonds......................... 1,180,452 59,118 12,047 1,227,523
Other mortgage-backed securities........ 366,587 9,042 1,357 374,272
---------- -------- ------- ----------
Totals.............................. $2,552,537 $113,264 $14,422 $2,651,379
========== ======== ======= ==========

As of December 31, 1997
U.S. government and agency obligations
Mortgage-backed securities............ $ 521,485 $ 18,061 $ 343 $ 539,203
Other................................. 222,797 5,249 44 228,002
Municipal bonds......................... 228,094 13,777 106 241,765
Foreign government bonds................ 26,397 1,714 442 27,669
Corporate bonds......................... 1,243,948 62,333 3,376 1,302,905
Other mortgage-backed securities........ 292,817 6,624 191 299,250
---------- -------- ------- ----------
Totals.............................. $2,535,538 $107,758 $ 4,502 $2,638,794
========== ======== ======= ==========

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

F-39

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 3 - Investments-(Continued)

Maturity/Sales Of Investments

The market value and amortized cost of fixed maturity securities at December
31, 1999, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.

Percent of
Total Market Market Amortized
Value Value Cost
------- ------- --------

Due in 1 year or less................................ 7.0% $ 175,546 $ 175,500
Due after 1 year through 5 years..................... 31.0 777,538 781,547
Due after 5 years through 10 years................... 31.5 788,829 812,070
Due after 10 years through 20 years.................. 15.9 399,394 409,796
Due after 20 years................................... 14.6 365,973 396,490
----- ---------- ----------
Total............................................... 100.0% $2,507,280 $2,575,403
===== ========== ==========

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

Year Ended December 31,
-------------------------------------
1999 1998 1997
-------- -------- ----------

Proceeds............................................. $675,402 $839,057 $1,116,201
Gross gains realized................................. 3,941 18,081 13,444
Gross losses realized................................ (13,718) (7,544) (8,033)

Unrealized Gains (Losses) on Fixed Maturities

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

Year Ended December 31,
-------------------------------------
1999 1998 1997
--------- -------- --------

Unrealized gains (losses) on fixed maturities
Beginning of period................................. $ 98,842 $103,256 $ 49,435
End of period....................................... (68,123) 98,842 103,256
--------- -------- --------
Increase (decrease) for the period................ (166,965) (4,414) 53,821
Income taxes (benefit)................................ (58,438) (1,545) 18,837
--------- -------- --------
Increase (decrease) in net unrealized gains (losses)
on fixed maturities before the valuation impact
on deferred policy acquisition costs and value
of acquired insurance in force...................... $(108,527) $ (2,869) $ 34,984
========= ======== ========

F-40

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 3 - Investments-(Continued)

Securities Lending

The Company loans fixed income securities to third parties, primarily major
brokerage firms. However, there were no securities on loan at December 31,
1999. As of December 31, 1998 and 1997, fixed maturities with a fair value of
$87,392 and $60,388, respectively, were on loan. The Company separately
maintains a minimum of 100% of the value of the loaned securities as collateral
for each loan. Effective beginning in 1998, SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,"
required the securities lending collateral to be classified as investments with
a corresponding liability included in Other Liabilities in the Company's
consolidated balance sheet. Restatement of prior period financial statements to
show consistent presentation in earlier years was not permitted.

Investment in Entities Exceeding 10% of Shareholders' Equity

At December 31, 1999, the Company's investment portfolio included $42,087 of
fixed maturity securities issued by Ford Motor Company and its affiliates
representing 10.5% of shareholders' equity at that date and other than
obligations of the United States Government and government agencies and
authorities there were no other investments which exceeded 10% of total
shareholders' equity. At December 31, 1998 and 1997, there were no investments
which exceeded 10% of total shareholders' equity in entities other than
obligations of the United States Government and government agencies and
authorities.

Deposits

At December 31, 1999, securities with a carrying value of $13,512 were on
deposit with governmental agencies as required by law in various states in which
the insurance subsidiaries of HMEC conduct business.

F-41

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 4 - Debt and Warrants

Indebtedness and scheduled maturities at December 31, 1999, 1998 and 1997
consisted of the following:

Effective December 31,
Interest Final -------------------------------
Rates Maturity 1999 1998 1997
-------- -------- -------- -------- --------

Short-term debt:
Bank Credit Facility......................... Variable 2001 $ 49,000 $ 50,000 $ 42,000
Long-term debt:
6 5/8% Senior Notes, Face amount
less unaccrued discount of $323, $363 and
$401, respectively......................... 6.7% 2006 99,677 99,637 99,599
-------- -------- --------
Total.................................... $148,677 $149,637 $141,599
======== ======== ========

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

On January 17, 1996, the Company issued $100,000 face amount of Senior Notes
at an effective yield of 6.7%, which will mature on January 15, 2006. The net
proceeds from the sale of the Senior Notes were used to finance the redemption
of the Company's 4%/6 1/2% Convertible Notes. Interest on the Senior Notes is
payable semi-annually at a rate of 6 5/8%. The Senior Notes are redeemable in
whole or in part, at any time, at the Company's option, at a redemption price
equal to the greater of (i) 100% of their principal amount and (ii) the sum of
the present values of the remaining scheduled payments of principal and interest
thereon discounted, on a semi-annual basis, at the Treasury yield (as defined in
the indenture) plus 15 basis points, together with accrued interest to the date
of redemption.

Bank Credit Facility

The Bank Credit Facility provides for unsecured borrowings of up to $65,000.
Interest accrues at varying spreads relative to corporate or eurodollar base
rates and is payable monthly or quarterly depending on the applicable base rate
(Interbank Offering Rate plus 0.325% at December 31, 1999). The unused portion
of the Bank Credit Facility is subject to a variable commitment fee which was
0.125% on an annual basis at December 31, 1999. The commitment for the Bank
Credit Facility terminates on December 31, 2001. The Company's obligations
under the Bank Credit Facility are unsecured.

F-42

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 4 - Debt and Warrants-(Continued)

Warrants

No warrants were outstanding at December 31, 1999. During 1999, the Company
repurchased all remaining warrants, representing 107,537 shares of the Company's
common stock, for $2,427. During 1998, the Company repurchased 61.8% of its
then outstanding warrants, representing 173,713 shares of the Company's common
stock, for $4,959. At December 31, 1998 and 1997, warrants to purchase 107,537
shares and 281,250 shares, respectively, of the Company's common stock at $2.70
per share were outstanding.

Covenants

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

NOTE 5 - Shareholders' Equity and Stock Options

Share Repurchase Program

During the first six months of 1999, the Company repurchased 1,075,300
shares of its common stock, or 3% of the outstanding shares on December 31,
1998, at an aggregate cost of $25,092, or an average cost of $23.34 per share,
under its stock repurchase program. No shares were repurchased during the third
and fourth quarters of 1999. Since early 1997, 7,082,700 shares, or 15% of the
shares outstanding on December 31, 1996, have been repurchased at an aggregate
cost of $188,513, equal to an average cost of $26.62 per share. Including
shares repurchased in 1995, the Company has repurchased 32% of the shares
outstanding on December 31, 1994. Shares of common stock may be purchased from
time to time through open market and private purchases, as available. The
repurchase of shares was financed through use of cash and, when necessary, the
Bank Credit Facility. In May 1999, an additional $100,000 share repurchase
authorization was announced. As of December 31, 1999, $111,487 remained
authorized for future share repurchases.

Authorization of Preferred Stock

In 1996, the shareholders of HMEC approved authorization of 1,000,000 shares
of $0.001 par value preferred stock. The Board of Directors is authorized to
(i) direct the issuance of the preferred stock in one or more series, (ii) fix
the dividend rate, conversion or exchange rights, redemption price and
liquidation preference, of any series of the preferred stock, (iii) fix the
number of shares for any series and (iv) increase or decrease the number of
shares of any series. No shares of preferred stock were outstanding at December
31, 1999, 1998 and 1997.

F-43

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 5 - Shareholders' Equity and Stock Options-(Continued)

Beginning in 1997, the Company's catastrophe reinsurance program is
augmented by a $100,000 equity and reinsurance agreement. The 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. Before
tax benefits, the equity put provides a source of capital for up to $154 million
of catastrophe losses above the reinsurance coverage limit. Fees related to
this equity put option were charged directly to additional paid-in capital.

In connection with the equity put described in the preceding paragraph, the
Board of Directors has designated a series of preferred stock to be available
for use in the put. The Series so designated is Series A Cumulative Convertible
Preferred Stock (the "Series A Stock") and 100,000 shares have been assigned to
this series. None are currently issued or outstanding. The Series A Stock is
dividend paying, at a floating rate which varies with movements in the London
Interbank Offered Rate and with changes in the risk rating of the Series A Stock
as determined by Standard & Poor's Corporation. The Series A Stock does not
require any sinking fund or similar mechanism regarding payment of such
dividends. Beginning on the fourth anniversary of the issuance of Series A
Stock, the holders thereof have the right to demand conversion of the Series A
Stock into common stock of the Company at a conversion rate based on then
prevailing market prices for the common stock; however, upon receipt of a
conversion demand, the Company has the right to redeem the Series A Stock prior
to such conversion. The Series A Stock has liquidation rights which place the
Series A Stock ahead of the common stock in priority. The Series A Stock has no
voting rights other than the requirement that the Series A Stock approve any
changes in the Series A Stock, the creation of any other class of stock on a par
with or superior to the Series A Stock and certain extraordinary transactions
such as certain mergers involving the Company.

Director Stock Plan

In 1996, the shareholders of HMEC approved the Deferred Equity Compensation
Plan ("Director Stock Plan") for directors of the Company and reserved 600,000
shares for issuance pursuant to the Director Stock Plan. Shares of the
Company's common stock issued under the Director Stock Plan may be either
authorized and unissued shares or shares that have been reacquired by the
Company. As of December 31, 1999, 1998 and 1997, 68,822 units, 48,689 units and
32,685 units, respectively, were outstanding under this plan representing an
equal number of common shares to be issued in the future.

F-44

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 5 - Shareholders' Equity and Stock Options-(Continued)

Employee Stock Plan

In 1997, the Board of Directors of HMEC approved the Deferred Compensation
Plan for Employees ("Employee Stock Plan"). Shares of the Company's common
stock issued under the Employee Stock Plan may be either authorized and unissued
shares or shares that have been reacquired by the Company. As of December 31,
1999 and 1998, 5,613 and 2,489 units, respectively, were outstanding under this
plan representing an equal number of common shares to be issued in the future,
and no units were outstanding as of December 31, 1997.

Stock Options

In 1991, the shareholders approved the 1991 Stock Incentive Plan (the "1991
Plan") and reserved 4 million shares of common stock for issuance under the 1991
Plan. Under the 1991 Plan, options to purchase shares of HMEC common stock may
be granted to executive officers, other employees and directors. The options
are exercisable in installments generally beginning in the first year from the
date of grant and expiring 10 years from the date of grant.

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

Options
Weighted Average Range of --------------------------------------
Option Price Option Prices Vested and Available
per Share per Share Outstanding Exercisable for Grant
---------------- ------------- ----------- ------------ ----------

At December 31, 1996........ $11.29 $ 9.00-$15.15 1,806,106 1,781,106 1,658,000
--------- --------- ---------
Granted................... $22.87 $22.42-$27.46 224,400 56,100 (224,400)
Vested.................... $11.12-$12.03 - 15,000 -
Exercised................. $12.28 $ 9.00-$22.42 (731,924) (731,924) -
--------- --------- ---------

At December 31, 1997........ $12.73 $ 9.00-$27.46 1,298,582 1,120,282 1,433,600
--------- --------- ---------
Granted................... $33.70 $29.21-$34.53 233,950 65,462 (233,950)
Vested.................... $11.12-$27.46 - 65,350 -
Exercised................. $12.79 $ 9.00-$33.87 (113,682) (113,682) -
Canceled.................. $15.15 $15.15 (30,000) (30,000) 30,000
--------- --------- ---------

At December 31, 1998........ $16.21 $ 9.00-$34.53 1,388,850 1,107,412 1,229,650
--------- --------- ---------
Granted................... $21.42 $19.53-$25.63 484,600 68,689 (484,600)
Vested.................... $22.42-$34.53 - 115,142 -
Exercised................. $18.50 $15.15-$23.31 (17,363) (17,363) -
Canceled.................. $29.07 $22.42-$33.87 (4,012) (4,012) 4,012
--------- --------- ---------

At December 31, 1999........ $17.52 $ 9.00-$34.53 1,852,075 1,269,868 749,062
========= ========= =========

F-45

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 5 - Shareholders' Equity and Stock Options-(Continued)

As of December 31, 1999, the weighted average life of vested and exercisable
options was 3.8 years and the weighted average price of such options was $14.70
per option. The weighted average prices of vested and exercisable options as of
December 31, 1998 and 1997 were $12.84 and $11.05, respectively.

NOTE 6 - Income Taxes

The federal income tax liabilities and recoverables included in other
liabilities and other assets, respectively, in the consolidated balance sheets
as of December 31, 1999, 1998 and 1997 were as follows:

December 31,
------------------------------
1999 1998 1997
--------- --------- --------

Current liability (asset)..................................... $ 19,006 $(2,971) $(7,615)
Deferred liability (asset).................................... (20,435) 21,549 35,530

Deferred tax assets and liabilities are recognized for all future tax
consequences attributable to "temporary differences" between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. The "temporary differences" that give rise to the
deferred tax balances at December 31, 1999, 1998 and 1997 were as follows:

December 31,
---------------------------
1999 1998 1997
-------- ------- -------

Deferred tax assets
Unrealized losses on securities............................. $ 21,547 $ - $ -
Discounting of unpaid claims and
claims expense tax reserves............................... 7,166 8,277 3,087
Life insurance future policy benefit reserve revaluation.... 17,195 21,346 19,282
Unearned premium reserve reduction.......................... 11,395 12,037 11,248
Postretirement benefits other than pension.................. 9,775 9,102 8,406
Other, net.................................................. 6,200 3,181 600
-------- ------- -------
Total gross deferred tax assets......................... 73,278 53,943 42,623
-------- ------- -------
Deferred tax liabilities
Unrealized gains on securities.............................. - 30,867 33,473
Amortization of intangible assets........................... 17,573 18,197 19,831
Deferred policy acquisition costs........................... 35,270 26,428 24,849
-------- ------- -------
Total gross deferred tax liabilities.................... 52,843 75,492 78,153
-------- ------- -------
Net deferred tax liability (asset).................... $(20,435) $21,549 $35,530
======== ======= =======

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

F-46

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 6 - Income Taxes-(Continued)

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

Year Ended December 31,
---------------------------
1999 1998 1997
------- -------- -------

Current................................................. $35,237 $ 42,844 $21,707
Deferred................................................ 13,612 (11,375) 10,874
------- -------- -------
Total tax expense before discontinued operations...... $48,849 $ 31,469 $32,581
======= ======== =======

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

Year Ended December 31,
---------------------------
1999 1998 1997
------- ------- -------

Expected federal tax on income
from continuing operations............................ $32,674 $40,874 $41,873
Add (deduct) tax effects of:
Tax-exempt interest................................... (4,293) (3,706) (3,310)
Goodwill.............................................. 566 566 566
Acquisition related benefits and other, net........... (98) (6,265) (6,548)
------- ------- -------
Income tax expense provided on income
from continuing operations before provision
for prior years' taxes................................ 28,849 31,469 32,581
Provision for prior years' taxes........................ 20,000 - -
------- ------- -------
Income tax expense provided on income
from continuing operations............................ $48,849 $31,469 $32,581
======= ======= =======

As previously reported, the Company has been contesting proposed additional
federal income taxes relating to a settlement agreement with the Internal
Revenue Service ("IRS") for prior years' taxes. Based on developments in that
process during the last half of 1999, it appears that the Company may be forced
to litigate the issue with the IRS in order to reach a resolution of the issue
acceptable to the Company. Therefore, in the third quarter of 1999, the Company
recorded an additional federal income tax provision of $20 million representing
the maximum exposure of the Company to the IRS with regard to the issue for all
of the past tax years in question. While the ultimate resolution of the issue,
through settlement or litigation, may result in the Company paying less than the
maximum exposure, given the vagaries of litigation and the lack of progress in
reaching an acceptable agreement with the IRS, management believed it prudent to
book the maximum exposure in 1999. None of the $20 million reserve was paid as
of December 31, 1999. This reserve was a charge to net income in 1999.

F-47

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 7 - Fair Value of Financial Instruments

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

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

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

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

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

F-48

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 7 - Fair Value of Financial Instruments-(Continued)

The carrying amounts and fair values of financial instruments at December
31, 1999, 1998 and 1997 consisted of the following:

December 31,
----------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ----------------------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
---------- ---------- ---------- ---------- ---------- ----------

Financial Assets
Investments
Fixed maturities................... $2,507,280 $2,507,280 $2,651,379 $2,651,379 $2,638,794 $2,638,794
Short-term and other investments... 122,929 125,316 102,049 105,859 130,252 133,844
Short-term investments,
loaned securities collateral..... - - 87,392 87,392 - -
---------- ---------- ---------- ---------- ---------- ----------
Total investments.............. 2,630,209 2,632,596 2,840,820 2,844,630 2,769,046 2,772,638
Cash................................. 22,848 22,848 12,044 12,044 353 353

Financial Liabilities
Policyholder account balances on
interest-sensitive life contracts.. 94,141 92,048 91,719 89,576 91,322 84,034
Annuity contract liabilities......... 1,238,379 1,052,732 1,239,234 1,142,859 1,245,459 1,112,479
Other policyholder funds............. 126,530 126,530 124,820 124,820 122,107 122,107
Short-term debt...................... 49,000 49,000 50,000 50,000 42,000 42,000
Long-term debt....................... 99,677 89,613 99,637 101,525 99,599 99,580

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

F-49

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 8 - Statutory Surplus and Subsidiary Dividend Restrictions

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

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

December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------

Statutory capital and surplus of insurance subsidiaries...... $ 387,081 $ 363,130 $ 355,357
Increase (decrease) due to:
Deferred policy acquisition costs........................... 130,192 101,658 85,883
Difference in policyholder reserves......................... (7,514) (2,498) 334
Goodwill.................................................... 50,632 52,250 53,868
Value of acquired insurance in force........................ 51,436 48,805 54,108
Liability for postretirement benefits, other than pensions.. (27,257) (26,021) (24,574)
Investment market value
adjustments on fixed maturities............................ (68,123) 98,842 103,256
Difference in investment reserves........................... 27,726 33,733 27,994
Federal income tax liability................................ (158) (15,611) (24,839)
Liability for discontinued operations, net of tax benefits.. - - (2,031)
Non-admitted assets and other, net.......................... 6,552 5,054 3,301
Shareholders' equity of parent company and
non-insurance subsidiaries................................. (1,748) (13,082) 14,914
Parent company short-term and long-term debt................ (148,677) (149,637) (141,599)
--------- --------- ---------
Shareholders' equity as reported herein.................... $ 400,142 $ 496,623 $ 505,972
========= ========= =========

Year Ended December 31,
---------------------------------
1999 1998 1997
--------- --------- ---------

Statutory net income of insurance subsidiaries............... $ 75,722 $ 67,865 $ 82,771
Net loss of non-insurance companies.......................... (3,710) (380) (1,307)
Interest expense............................................. (9,722) (9,487) (9,412)
Tax benefit of interest expense and other
parent company current tax adjustments...................... (6,928) 2,893 7,565
--------- --------- ---------
Combined net income.......................................... 55,362 60,891 79,617
Increase (decrease) due to:
Deferred policy acquisition costs........................... 14,612 18,408 15,952
Policyholder benefits....................................... 7,681 1,852 2,527
Federal income tax expense (benefit)........................ (3,090) 5,256 (6,888)
Provision for prior years' taxes............................ (20,000) - -
Amortization of intangible assets........................... (215) (6,921) (10,662)
Investment reserves......................................... (7,931) 6,061 1,316
Loss on group medical business, net of tax benefits......... (376) 1,738 1,849
Other adjustments, net...................................... (1,538) (1,973) (135)
--------- --------- ---------
Net income as reported herein.............................. $ 44,505 $ 85,312 $ 83,576
========= ========= =========

F-50

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 8 - Statutory Surplus and Subsidiary Dividend Restrictions-(Continued)

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

The insurance subsidiaries are subject to various regulatory restrictions
which limit the amount of annual dividends or other distributions, including
loans or cash advances, available to HMEC without prior approval of the
insurance regulatory authorities. The aggregate amount of dividends that may be
paid by the insurance subsidiaries to HMEC during 2000 without prior approval is
approximately $75 million.

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

NOTE 9 - Pension Plans and Other Postretirement Benefits

All employees of the Company are covered by a defined contribution plan and
are eligible to participate in the Supplemental Retirement Savings (401(k))
Plan. Certain employees also participate in a supplemental defined contribution
plan. Employees hired on or before December 31, 1998 are also covered under a
defined benefit plan, with certain employees covered under a supplemental
defined benefit plan.

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

F-51

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 9 - Pension Plans and Other Postretirement Benefits-(Continued)

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

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

Total pension and supplemental savings expense was $9,593, $9,471 and $8,885
for the years ended December 31, 1999, 1998 and 1997, respectively.

Defined Contribution Plan

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

Year Ended December 31,
-------------------------
1999 1998 1997
------- ------- -------

Contributions to employees accounts.. $ 5,814 $ 5,919 $ 5,645
Total assets at the end of the year.. 85,519 77,820 70,762

F-52

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 9 - Pension Plans and Other Postretirement Benefits-(Continued)

Defined Benefit Plan and Supplemental Retirement Plans

The following table summarizes both the funding status of the defined
benefit and supplemental retirement pension plans at the end of each year and
identifies the assumptions used to determine the projected benefit obligation
and the components of net pension cost for the defined benefit plan and
supplemental retirement plans for the following periods:

Supplemental
Defined Benefit Plan Retirement Plans
------------------------------- ----------------------------
December 31, December 31,
------------------------------- ----------------------------
1999 1998 1997 1999 1998 1997
--------- --------- --------- -------- -------- --------

Change in benefit obligation:
Benefit obligation at beginning of year......... $49,446 $43,354 $39,365 $ 6,190 $ 5,606 $ 5,258
Service cost.................................... 1,816 1,563 1,724 353 341 263
Interest cost................................... 3,351 3,081 2,938 616 382 363
Actuarial (gain) loss........................... (3,291) 5,058 1,925 1,913 (65) (216)
Benefits paid................................... (4,040) (3,610) (2,598) (297) (74) (62)
------- ------- ------- ------- ------- -------
Benefit obligation at end of year............... $47,282 $49,446 $43,354 $ 8,775 $ 6,190 $ 5,606
======= ======= ======= ======= ======= =======

Change in plan assets:
Fair value of plan assets at beginning of year.. $50,576 $46,097 $42,262 $ - $ - $ -
Actual return on plan assets.................... 6,430 8,089 6,433 - - -
Employer contributions.......................... - - - 297 74 62
Benefits paid................................... (4,040) (3,610) (2,598) (297) (74) (62)
------- ------- ------- ------- ------- -------
Fair value of plan assets at end of year........ $52,966 $50,576 $46,097 $ - $ - $ -
======= ======= ======= ======= ======= =======

Funded status..................................... $ 5,684 $ 1,130 $ 2,743 $(8,775) $(6,190) $(5,606)
Unrecognized net actuarial (gain) loss............ (3,941) 1,426 488 493 (1,255) (1,418)
Unrecognized prior service (asset) cost........... (3,815) (4,424) (5,035) 2,268 2,582 2,895
------- ------- ------- ------- ------- -------
Accrued benefit cost included
in the consolidated balance sheets.............. (2,072) (1,868) (1,804) (6,014) (4,863) (4,129)
Additional liability to recognize unfunded
accumulated benefit obligation.................. - - - (2,228) (1,107) (1,219)
------- ------- ------- ------- ------- -------
Accrued benefit cost.............................. $(2,072) $(1,868) $(1,804) $(8,242) $(5,970) $(5,348)
======= ======= ======= ======= ======= =======

Amounts recognized in the statement of
financial position consist of:
Accrued benefit cost.......................... $(2,072) $(1,868) $(1,804) $(6,014) $(4,863) $(4,129)
Minimum liability............................. - - - (2,228) (1,107) (1,219)
Intangible asset.............................. - - - 2,228 1,107 1,219
------- ------- ------- ------- ------- -------
Net amount recognized....................... $(2,072) $(1,868) $(1,804) $(6,014) $(4,863) $(4,129)
======= ======= ======= ======= ======= =======

F-53

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 9 - Pension Plans and Other Postretirement Benefits-(Continued)

Supplemental
Defined Benefit Plan Retirement Plans
---------------------------- -----------------------------
Year Ended December 31, Year Ended December 31,
---------------------------- -----------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- --------- ---------- ------

Components of net periodic benefit cost:
Service cost............................ $ 1,816 $ 1,563 $ 1,724 $ 353 $ 341 $ 263
Interest cost........................... 3,351 3,081 2,938 616 382 363
Expected return on plan assets.......... (4,353) (3,969) (3,638) - - -
Amortization of prior service cost...... (610) (611) (610) 313 313 313
Recognized net actuarial loss (gain).... - - - 166 (228) (139)
------- ------- ------- ------ ----- -----
Net periodic benefit cost................. $ 204 $ 64 $ 414 $1,448 $ 808 $ 800
======= ======= ======= ====== ===== =====
Weighted-average assumptions
as of December 31:
Discount rate......................... 8.00% 6.75% 7.25% 8.00% 6.75% 7.25%
Expected return on plan assets........ 8.75% 8.75% 8.75% * * *
Rate of salary increase............... 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%

____________
* Not applicable.

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

Postretirement Benefits Other than Pensions

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

F-54

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 9 - Pension Plans and Other Postretirement Benefits-(Continued)

The following table presents the funded status of postretirement benefits
other than pensions of active and retired employees (including employees on
disability more than 2 years) as of December 31, 1999, 1998 and 1997 reconciled
with amounts recognized in the Company's statement of financial position:

December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------

Change in accumulated postretirement benefit obligation:
Accumulated postretirement benefit
obligation at beginning of year......................... $ 34,257 $ 29,584 $ 25,153
Changes during fiscal year
Service cost............................................ 628 552 845
Interest cost........................................... 2,158 2,043 1,995
Benefits paid........................................... (1,768) (1,231) (1,265)
Actuarial (gain) loss
Change due to a change in assumptions.................. (5,615) 3,144 446
Change due to demographic changes...................... - 165 219
Valuation model enhancements........................... - - 2,191
-------- -------- --------
Total actuarial (gain) loss........................... (5,615) 3,309 2,856
-------- -------- --------
Accumulated postretirement benefit
obligation at end of year............................... $ 29,660 $ 34,257 $ 29,584
======== ======== ========

Unfunded status........................................... $(29,660) $(34,257) $(29,584)
Unrecognized net loss from past
experience different from that assumed................... 2,403 8,236 5,010
-------- -------- --------
Accrued postretirement benefit cost..................... $(27,257) $(26,021) $(24,574)
======== ======== ========

Year Ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------

Components of net periodic benefit cost:
Service cost............................................. $ 628 $ 552 $ 845
Interest cost............................................ 2,158 2,043 1,995
Amortization of prior (gains) losses..................... 218 83 122
-------- -------- --------
Net periodic benefit cost............................... $ 3,004 $ 2,678 $ 2,962
======== ======== ========

Sensitivity Analysis

A one percentage point change in the assumed health care cost trend rate for
each year would change the accumulated postretirement benefit obligation as
follows:

December 31,
------------------------------
1999 1998 1997
-------- -------- --------

Accumulated postretirement benefit obligation
Effect of a one percentage point increase............... $ 864 $ 1,379 $ 2,038
Effect of a one percentage point decrease............... (743) (1,351) (1,907)

Service and interest cost components of the net
periodic postretirement benefit expense
Effect of a one percentage point increase............. $ 75 $ 203 $ 198
Effect of a one percentage point decrease............. (60) (177) (185)

F-55

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 9 - Pension Plans and Other Postretirement Benefits-(Continued)

The assumed net weighted annual average medical rates of increase in the per
capita cost of covered benefits for participants in the plan who retired prior
to January 1, 1994 were 6.1%, 6.3% and 6.8% as of December 31, 1999, 1998 and
1997, respectively. The net medical trend rates are 7.0% in 2000 grading down
to 5.0% in 2004 and thereafter. For those participants retiring after December
31, 1993, benefits are provided at a level amount of $10.00 per month per year
of employment. The weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 8.00%, 6.75% and 7.25% at
December 31, 1999, 1998 and 1997, respectively.

NOTE 10 - Reinsurance

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

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

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

December 31,
-------------------------
1999 1998 1997
------- ------- -------

Reinsurance Recoverables on Unpaid Claims
Life and health.......................... $ 4,485 $ 3,890 $ 3,326
Property and casualty
State insurance facilities............. 45,222 35,988 25,968
Other insurance companies.............. 19,188 19,902 15,356
------- ------- -------
Total................................ $68,895 $59,780 $44,650
======= ======= =======

F-56

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 10 - 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 effect of reinsurance on
premiums written, premiums earned, and benefits, claims and settlement expenses
were as follows:

Ceded to Assumed
Gross Other from State
Amount Companies Facilities Net
-------- --------- ---------- --------

Year ended December 31, 1999
Premiums written............ $825,328 $23,891 $19,772 $821,209
Premiums earned............. 599,949 25,308 20,487 595,128
Benefits, claims and
settlement expenses....... 435,605 39,183 19,764 416,186

Year ended December 31, 1998
Premiums written............ 832,231 27,174 22,730 827,787
Premiums earned............. 583,637 26,024 20,199 577,812
Benefits, claims and
settlement expenses....... 420,788 41,284 16,824 396,328

Year ended December 31, 1997
Premiums written............ 775,964 23,535 18,890 771,319
Premiums earned............. 542,605 22,572 22,679 542,712
Benefits, claims and
settlement expenses....... 371,220 34,365 22,586 359,441

There were no losses from uncollectible reinsurance recoverables in the
three years ended December 31, 1999. Past due reinsurance recoverables as of
December 31, 1999 were not material.

NOTE 11 - Contingencies

Lawsuits and Legal Proceedings

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

Assessments for Insolvencies of Unaffiliated Insurance Companies

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

F-57

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 12 - Supplementary Data on Cash Flows

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

Year Ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------

Cash flows from operating activities
Net income......................................... $ 44,505 $ 85,312 $ 83,576
Adjustments to reconcile net income to net
cash provided by operating activities:
Realized investment (gains) losses............. 7,969 (9,908) (5,340)
Depreciation and amortization.................. (1,013) 5,342 10,605
Increase in insurance liabilities.............. 76,401 74,900 61,837
(Increase) decrease in premium receivables..... 11,357 (2,296) 4,083
Increase in deferred policy acquisition costs.. (14,615) (18,408) (15,932)
Increase in reinsurance recoverable............ (3,078) (1,997) (2,744)
Increase (decrease) in federal
income tax liabilities....................... 32,409 (6,731) (24,735)
Increase (decrease) in accrued loss
on discontinued operations................... - (2,689) (2,833)
Other.......................................... (5,789) 5,241 (4,081)
-------- -------- --------
Total adjustments............................ 103,641 43,454 20,860
-------- -------- --------
Net cash provided by operating activities.. $148,146 $128,766 $104,436
======== ======== ========

NOTE 13 - Segment Information

The Company's operations include the following operating segments which have
been determined on the basis of insurance products sold: property and casualty,
annuity and life insurance. The property and casualty insurance segment
includes primarily personal lines automobile and homeowners products. The
annuity segment includes primarily fixed and variable tax-qualified annuity
products. The life insurance segment includes primarily interest-sensitive life
and traditional life products.

The accounting policies of the segments are the same as those described in
Note 1 - Summary of Significant Accounting Policies. The Company accounts for
intersegment transactions, primarily the allocation of agent and overhead costs
from the Corporate and Other segment to the property and casualty, annuity and
life segments, on a cost basis. Operating income is equal to income from
continuing operations before realized investment gains and losses, after tax,
the 1999 provision for prior years' taxes and the 1999 litigation settlement
cost, after tax.

F-58

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 13 - Segment Information-(Continued)

Summarized financial information for these segments is as follows:

Year Ended December 31,
---------------------------------------
1999 1998 1997
----------- ----------- -------------

Insurance premiums and contract charges earned
Property and casualty...................................... $ 491,060 $ 476,458 $ 447,252
Annuity.................................................... 16,706 15,556 12,597
Life....................................................... 87,618 85,798 82,863
Intersegment eliminations.................................. (256) - -
---------- ---------- ----------
Total.................................................. $ 595,128 $ 577,812 $ 542,712
========== ========== ==========

Net investment income
Property and casualty...................................... $ 37,012 $ 38,900 $ 41,702
Annuity.................................................... 105,224 107,698 113,135
Life....................................................... 47,005 45,453 43,707
Corporate and other........................................ 319 761 1,487
Intersegment eliminations.................................. (1,293) (1,089) (1,103)
---------- ---------- ----------
Total.................................................. $ 188,267 $ 191,723 $ 198,928
========== ========== ==========

Net income
Operating income
Property and casualty.................................... $ 39,537 $ 53,282 $ 61,319
Annuity.................................................. 27,320 23,048 19,301
Life..................................................... 14,570 12,345 12,934
Corporate and other, including interest expense.......... (10,712) (9,803) (9,968)
---------- ---------- ----------
Total operating income................................. 70,715 78,872 83,586
Realized investment gains (losses), after tax.............. (5,180) 6,440 3,471
Litigation settlement, after tax........................... (1,030) - -
Provision for prior years' taxes........................... (20,000) - -
---------- ---------- ----------
Income from continuing operations.......................... 44,505 85,312 87,057
Discontinued operations:
Loss on discontinuation.................................. - - (3,481)
---------- ---------- ----------
Total.................................................. $ 44,505 $ 85,312 $ 83,576
========== ========== ==========

Amortization of intangible assets
Value of acquired insurance in force
Property and casualty.................................... $ 719 $ 1,032 $ 1,032
Annuity.................................................. (4,242) 1,996 5,563
Life..................................................... 2,120 2,275 2,449
---------- ---------- ----------
Subtotal............................................... (1,403) 5,303 9,044
Goodwill................................................... 1,618 1,618 1,618
---------- ---------- ----------
Total.................................................. $ 215 $ 6,921 $ 10,662
========== ========== ==========

December 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------

Assets
Property and casualty...................................... $ 681,432 $ 737,260 $ 742,487
Annuity.................................................... 2,611,766 2,730,092 2,531,309
Life....................................................... 840,594 863,864 777,488
Corporate and other........................................ 153,493 95,579 125,624
Intersegment eliminations.................................. (33,439) (31,315) (44,996)
---------- ---------- ----------
Total.................................................. $4,253,846 $4,395,480 $4,131,912
========== ========== ==========

F-59

HORACE MANN EDUCATORS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997

(Dollars in thousands, except per share data)

NOTE 14 - Unaudited Interim Information

Summary quarterly financial data is presented below.

Three Months Ended
---------------------------------------------------
December 31, September 30, June 30, March 31,
------------ ------------- -------- ---------

1999
- ----
Insurance premiums written and contract deposits... $207,195 $208,305 $207,644 $198,065
Total revenues..................................... 199,780 195,433 190,182 190,031
Litigation settlement, after tax................... (22) (1,008) - -
Provision for prior years' taxes................... - (20,000) - -
Income (loss) from continuing operations........... 22,490 (5,458) 10,422 17,051
Net income (loss).................................. 22,490 (5,458) 10,422 17,051
Per share information
Basic
Realized investment gains (losses), after tax.. $ 0.02 $ (0.01) $ (0.09) $ (0.05)
Litigation settlement, after tax............... - (0.02) - -
Provision for prior years' taxes............... - (0.48) - -
Income (loss) from continuing operations....... 0.55 (0.13) 0.25 0.41
Net income (loss).............................. 0.55 (0.13) 0.25 0.41
Diluted
Realized investment gains (losses), after tax.. $ 0.01 $ - $ (0.09) $ (0.05)
Litigation settlement, after tax............... - (0.02) - -
Provision for prior years' taxes............... - (0.48) - -
Income (loss) from continuing operations....... 0.54 (0.12) 0.25 0.40
Net income (loss).............................. 0.54 (0.12) 0.25 0.40

1998
- ----
Insurance premiums written and contract deposits... $211,082 $209,686 $210,065 $196,954
Total revenues..................................... 192,292 196,564 194,489 196,098
Income from continuing operations.................. 22,271 24,934 15,648 22,459
Net income......................................... 22,271 24,934 15,648 22,459
Per share information
Basic
Realized investment gains (losses), after tax.. $ (0.05) $ 0.06 $ 0.04 $ 0.10
Income from continuing operations.............. 0.52 0.58 0.36 0.51
Net income..................................... 0.52 0.58 0.36 0.51
Diluted
Realized investment gains (losses), after tax.. $ (0.05) $ 0.06 $ 0.05 $ 0.09
Income from continuing operations.............. 0.52 0.57 0.36 0.50
Net income..................................... 0.52 0.57 0.36 0.50

1997
- ----
Insurance premiums written and contract deposits... $207,485 $188,911 $195,053 $179,870
Total revenues..................................... 192,386 185,934 186,597 182,063
Income from continuing operations.................. 25,284 21,477 20,896 19,400
Discontinued operations, after tax................. - (3,481) - -
Net income......................................... 25,284 17,996 20,896 19,400
Per share information
Basic
Realized investment gains, after tax........... $ 0.03 $ 0.03 $ 0.01 $ 0.01
Income from continuing operations.............. 0.56 0.48 0.45 0.41
Net income..................................... 0.56 0.40 0.45 0.41
Diluted
Realized investment gains, after tax........... 0.03 0.02 0.01 0.01
Income from continuing operations.............. 0.56 0.46 0.45 0.40
Net income..................................... 0.56 0.39 0.45 0.40

F-60

SCHEDULE I

HORACE MANN EDUCATORS CORPORATION

SUMMARY OF INVESTMENTS-OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1999

(Dollars in thousands)

Amount
shown in
Market Balance
Type of Investments Cost(1) Value Sheet
------------------- ---------- ---------- ----------

Fixed maturities:
U.S. Government and U.S. Government agencies
and authorities................................... $ 642,532 $ 629,541 $ 629,541
States, municipalities and political subdivisions.. 307,045 302,050 302,050
Foreign government bonds........................... 21,875 21,987 21,987
Public utilities................................... 11,904 11,848 11,848
Other corporate bonds.............................. 1,592,047 1,541,854 1,541,854
---------- ---------- ----------

Total fixed maturity securities.................. 2,575,403 $2,507,280 2,507,280
---------- ========== ----------

Mortgage loans and real estate...................... 17,550 xxx 17,550
Short-term investments.............................. 45,082 xxx 45,082
Policy loans and other.............................. 59,471 xxx 60,297
---------- ----------

Total investments................................ $2,697,506 xxx $2,630,209
========== ==========

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

See accompanying Independent Auditors' Report.

F-61

SCHEDULE II

HORACE MANN EDUCATORS CORPORATION
(Parent Company Only)

CONDENSED FINANCIAL INFORMATION

BALANCE SHEETS
As of December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share data)

1999 1998 1997
--------- --------- ---------

ASSETS

Investments and cash........................................... $ 21,734 $ 5,580 $ 19,271
Investment in subsidiaries..................................... 478,748 589,964 574,009
Other assets................................................... 51,417 53,989 57,911
--------- --------- ---------

Total assets............................................... $ 551,899 $ 649,533 $ 651,191
========= ========= =========

LIABILITIES, REDEEMABLE SECURITIES AND SHAREHOLDERS' EQUITY

Short-term debt................................................ $ 49,000 $ 50,000 $ 42,000
Long-term debt................................................. 99,677 99,637 99,599
Other liabilities.............................................. 3,080 3,053 3,043
--------- --------- ---------

Total liabilities.......................................... 151,757 152,690 144,642
--------- --------- ---------

Warrants, subject to redemption................................ - 220 577
--------- --------- ---------

Preferred stock, $0.001 par value, authorized
1,000,000 shares; none issued................................ - - -
Common stock, $0.001 par value, authorized 75,000,000
shares; issued, 1999, 59,292,053; 1998, 59,274,690;
1997, 59,161,008............................................. 59 59 59
Additional paid-in capital..................................... 333,892 336,686 340,564
Retained earnings.............................................. 449,023 420,274 349,274
Accumulated other comprehensive income (loss) (net unrealized
gains (losses) on fixed maturities and equity securities).... (40,016) 57,327 62,167
Treasury stock, at cost, 1999, 18,258,896 shares; 1998,
17,183,596 shares; 1997, 14,896,796 shares................... (342,816) (317,723) (246,092)
--------- --------- ---------
Total shareholders' equity................................. 400,142 496,623 505,972
--------- --------- ---------

Total liabilities, redeemable securities
and shareholders' equity................................. $ 551,899 $ 649,533 $ 651,191
========= ========= =========

See accompanying note to condensed financial statements.

See accompanying Independent Auditors' Report.

F-62

SCHEDULE II

HORACE MANN EDUCATORS CORPORATION
(Parent Company Only)

CONDENSED FINANCIAL INFORMATION

STATEMENTS OF OPERATIONS

(Dollars in thousands)

Year Ended December 31,
-----------------------------
1999 1998 1997
--------- -------- --------

Revenues
Net investment income....................................... $ 318 $ 759 $ 1,487
Realized investment gains................................... 481 1,123 154
-------- ------- -------

Total revenues.......................................... 799 1,882 1,641
-------- ------- -------

Expenses
Interest.................................................... 9,722 9,487 9,412
Amortization of goodwill.................................... 1,618 1,618 1,618
Other....................................................... 1,479 713 541
-------- ------- -------

Total expenses.......................................... 12,819 11,818 11,571
-------- ------- -------

Income (loss) from continuing operations before income taxes
and equity in net earnings of subsidiaries.................. (12,020) (9,936) (9,930)
Income tax expense (benefit).................................. (3,686) (2,766) (2,845)
-------- ------- -------
Income (loss) from continuing operations before equity
in net earnings of subsidiaries............................. (8,334) (7,170) (7,085)
Equity in net earnings of subsidiaries........................ 52,839 92,482 94,142
-------- ------- -------
Income from continuing operations............................. 44,505 85,312 87,057
Discontinued operations:
Loss on discontinuation, representing additional provision
of $5,355 for operating losses during phase-out period,
net of applicable income tax benefits of $1,874........... - - (3,481)
-------- ------- -------
Net income.................................................... $ 44,505 $85,312 $83,576
======== ======= =======

See accompanying note to condensed financial statements.

See accompanying Independent Auditors' Report.

F-63

SCHEDULE II

HORACE MANN EDUCATORS CORPORATION
(Parent Company Only)

CONDENSED FINANCIAL INFORMATION

STATEMENTS OF CASH FLOWS

(Dollars in thousands)

Year Ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------

Cash flows from operating activities
Interest expense paid.................................... $ (9,523) $ (9,309) $ (9,276)
Federal income taxes recovered........................... 6,901 5,672 1,391
Cash dividends received from subsidiaries................ 63,500 62,100 107,300
Other, net............................................... 421 9,588 (7,208)
-------- -------- --------
Net cash provided by operating activities............ 61,299 68,051 92,207
-------- -------- --------

Cash flows from investing activities
Net (increase) decrease in investments................... (12,306) 18,039 (10,102)
-------- -------- --------
Net cash (used in) provided by investing activities.. (12,306) 18,039 (10,102)
-------- -------- --------

Cash flows used in financing activities
Purchase of treasury stock............................... (25,093) (71,631) (91,790)
Dividends paid to shareholders........................... (15,756) (14,312) (12,971)
Principal (payments) borrowings on Bank Credit Facility.. (1,000) 8,000 8,000
Repurchase of common stock warrants...................... (2,426) (4,959) -
Exercise of stock options................................ 362 2,200 11,581
Catastrophe-linked equity put option premium............. (950) (1,475) (1,250)
-------- -------- --------
Net cash used in financing activities................ (44,863) (82,177) (86,430)
-------- -------- --------

Net increase (decrease) in cash............................ 4,130 3,913 (4,325)
Cash at beginning of period................................ 3,913 0 4,325
-------- -------- --------

Cash at end of period...................................... $ 8,043 $ 3,913 $ 0
======== ======== ========

See accompanying note to condensed financial statements.

See accompanying Independent Auditors' Report.

F-64

SCHEDULE II

HORACE MANN EDUCATORS CORPORATION
(Parent Company Only)

CONDENSED FINANCIAL INFORMATION

NOTE TO CONDENSED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997

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

See accompanying Independent Auditors' Report.

F-65

SCHEDULE III & VI (COMBINED)

HORACE MANN EDUCATORS CORPORATION

SUPPLEMENTARY INSURANCE INFORMATION

(Dollars in thousands)

Discount, Other
Deferred Future policy if any, policy Premium
policy benefits, deducted in claims and revenue/ Net
acquisition claims and previous Unearned benefits premium investment
Segment costs claims expenses column premiums payable earned income
------- ----------- --------------- ----------- -------- ---------- -------- ----------

Year Ended December 31, 1999
Property and casualty.............. $ 16,705 $ 299,803 $ 0 $162,793 $ - $491,060 $ 37,012
Annuity............................ 41,558 1,240,757 xxx - 114,611 16,706 105,224
Life............................... 71,929 629,889 xxx 8,052 11,919 87,618 47,005
Other, including
consolidating eliminations........ N/A N/A xxx N/A N/A (256) (974)
--------- ---------- -------- -------- -------- --------

Total........................... $130,192 $2,170,449 xxx $170,845 $126,530 $595,128 $188,267
========= ========== ======== ======== ======== ========

Year Ended December 31, 1998
Property and casualty.............. $ 16,048 $ 298,929 $ 0 $172,474 $ - $476,458 $ 38,900
Annuity............................ 25,818 1,240,987 xxx - 111,754 15,556 107,698
Life............................... 59,792 588,888 xxx 6,720 13,066 85,798 45,453
Other, including
consolidating eliminations........ N/A N/A xxx N/A N/A N/A (328)
--------- ---------- -------- -------- -------- --------
Total........................... $101,658 $2,128,804 xxx $179,194 $124,820 $577,812 $191,723
========= ========== ======== ======== ======== ========

Year Ended December 31, 1997
Property and casualty.............. $ 15,230 $ 310,632 $ 0 $161,205 $ 305 $447,252 $ 41,702
Annuity............................ 19,699 1,246,948 xxx - 107,538 12,597 113,135
Life............................... 50,954 553,981 xxx 5,791 14,264 82,863 43,707
Other, including
consolidating eliminations........ N/A N/A xxx N/A N/A N/A 384
--------- ---------- -------- -------- -------- --------
Total........................... $ 85,883 $2,111,561 xxx $166,996 $122,107 $542,712 $198,928
========= ========== ======== ======== ======== ========

Claims and claims
Benefits, adjustment expense Amortization Paid
claims incurred related to of deferred claims
and -------------------- policy Other and claims
settlement Current Prior acquisition operating adjustment Premiums
Segment expenses year years costs expenses expense written
------- ---------- ------- ------- ----------- --------- ---------- --------

Year Ended December 31, 1999
Property and casualty............... $374,872 $379,455 $ (4,583) $44,227 $ 54,453 $382,518 $495,075
Annuity............................. 67,078 xxx xxx 5,820 7,208 xxx xxx
Life................................ 65,865 xxx xxx 3,286 43,178 xxx xxx
Other, including
consolidating eliminations......... N/A xxx xxx (292) 16,377 xxx xxx
-------- ------- --------

Total............................ $507,815 xxx xxx $53,041 $121,216 xxx xxx
======== ======= ========

Year Ended December 31, 1998
Property and casualty.............. $354,381 $379,603 $(24,917) $42,779 $ 51,699 $380,955 $487,727
Annuity............................ 71,996 xxx xxx (700) 16,558 xxx xxx
Life............................... 64,727 xxx xxx 3,398 44,167 xxx xxx
Other, including
consolidating eliminations........ N/A xxx xxx N/A 13,657 xxx xxx
-------- ------- --------
Total........................... $491,104 xxx xxx $45,477 $126,081 xxx xxx
======== ======= ========

Year Ended December 31, 1997
Property and casualty.............. $320,834 $365,986 $(45,152) $40,515 $ 49,012 $357,875 $458,088
Annuity............................ 76,486 xxx xxx 100 19,373 xxx xxx
Life............................... 59,352 xxx xxx 3,583 43,685 xxx xxx
Other, including
consolidating eliminations........ N/A xxx xxx N/A 14,402 xxx xxx
-------- ------- --------
Total........................... $456,672 xxx xxx $44,198 $126,472 xxx xxx
======== ======= ========

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

See accompanying Independent Auditors' Report.

F-66

SCHEDULE IV

HORACE MANN EDUCATORS CORPORATION

REINSURANCE

(Dollars in thousands)

Column A Column B Column C Column D Column E Column F
Ceded to Assumed Percentage
Gross Other from State of Amount
Amount Companies Facilities Net Assumed to Net
------ --------- ---------- -------- --------------

Year ended December 31, 1999
Life insurance in force........ $12,300,704 $783,527 - $11,517,177 -
Premiums
Property and casualty......... $ 493,804 $ 23,231 $20,487 $ 491,060 4.2%
Annuity....................... 16,706 - - 16,706 -
Life.......................... 89,695 2,077 - 87,618 -
Other, including
consolidating eliminations.. (256) - - (256) -
----------- -------- -------- -----------
Total premiums............. $ 599,949 $ 25,308 $20,487 $ 595,128 3.4%
=========== ======== ======== ===========

Year ended December 31, 1998
Life insurance in force........ $11,798,613 $643,910 - $11,154,703 -
Premiums
Property and casualty......... $ 480,447 $ 24,188 $20,199 $ 476,458 4.2%
Annuity....................... 15,556 - - 15,556 -
Life.......................... 87,634 1,836 - 85,798 -
----------- -------- -------- -----------
Total premiums............. $ 583,637 $ 26,024 $20,199 $ 577,812 3.5%
=========== ======== ======== ===========

Year ended December 31, 1997
Life insurance in force........ $11,187,925 $310,833 - $10,877,092 -
Premiums
Property and casualty......... $ 445,468 $ 20,895 $22,679 $ 447,252 5.1%
Annuity....................... 12,597 - - 12,597 -
Life.......................... 84,540 1,677 - 82,863 -
----------- -------- -------- -----------
Total premiums............. $ 542,605 $ 22,572 $22,679 $ 542,712 4.2%
=========== ======== ======== ===========

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

See accompanying Independent Auditors' Report

F-67

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

HORACE MANN EDUCATORS CORPORATION

EXHIBITS

To

FORM 10-K

For the Year Ended December 31, 1999

VOLUME 1 OF 1

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

The following items are filed as Exhibits to Horace Mann Educators
Corporation's Annual Report on Form 10-K for the year ended December 31, 1999.
Management contracts and compensatory plans are indicated by an asterisk(*).

EXHIBIT INDEX

Sequential
Exhibit Page
No. Description Number
- ------ ----------- ----------

(3) Articles of incorporation and bylaws:

3.1 Restated Certificate of Incorporation of HMEC, filed with the
Delaware Secretary of State on October 6, 1989, incorporated by
reference to Exhibit 3.1 to HMEC's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996, filed with the
Securities and Exchange Commission (the "SEC") on November 14,
1996.

3.1(a) Certificate of Amendment to Restated Certificate of
Incorporation of HMEC, filed with the Delaware Secretary of State
on October 18, 1991, incorporated by reference to Exhibit 3.2 to
HMEC's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, filed with the SEC on November 14, 1996.

3.1(b) Certificate of Amendment to Restated Certificate of
Incorporation of HMEC, filed with the Delaware Secretary of State
on August 23, 1995, incorporated by reference to Exhibit 3.3 to
HMEC's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, filed with the SEC on November 14, 1996.

3.1(c) Certificate of Amendment to Restated Certificate of
Incorporation of HMEC, filed with the Delaware Secretary of State
on September 23, 1996, incorporated by reference to Exhibit 3.4
to HMEC's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, filed with the SEC on November 14, 1996.

3.1(d) Certificate of Amendment to Restated Certificate of
Incorporation of HMEC, filed with the Delaware Secretary of State
on June 5, 1998, incorporated by reference to Exhibit 3.1 to
HMEC's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998, filed with the SEC on August 13, 1998.

3.2 Form of Certificate for shares of Common Stock, $0.001 par value
per share, of HMEC, incorporated by reference to Exhibit 4.5 to
HMEC's Registration Statement on Form S-3 (Registration No.
33-53118) filed with the SEC on October 9, 1992.

3.3 Bylaws of HMEC, incorporated by reference to Exhibit 4.6 to
HMEC's Registration Statement on Form S-3 (Registration No.
33-80059) filed with the SEC on December 6, 1995.

1

Sequential
Exhibit Page
No. Description Number
- ------ ----------- ----------

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

4.1 Indenture dated as of January 17, 1996, between HMEC and U.S.
Trust Company of California, N.A. as trustee, with regard to
HMEC's 6 5/8% Senior Notes Due 2006, incorporated by reference to
Exhibit 4.4 to HMEC's Annual Report on Form 10-K for the year
ended December 31, 1995, filed with the SEC on March 13, 1996.

4.1(a) Form of 6 5/8% Senior Notes Due 2006 (included in Exhibit 4.1).

4.2 Certificate of Designations for HMEC Series A Cumulative
Preferred Stock (included in Exhibit 10.15).

(10) Material contracts:

10.1 Credit Agreement dated as of December 31, 1996 (the "Bank Credit
Facility") among HMEC, certain banks named therein and Bank of
America National Trust and Savings Association, as administrative
agent (the "Agent"), incorporated by reference to Exhibit 10.1 to
HMEC's Annual Report on Form 10-K for the year ended December 31,
1996, filed with the SEC on March 26, 1997.

10.2* Stock Subscription Agreement among HMEC (as successor to HME
Holdings, Inc.), The Fulcrum III Limited Partnership, The Second
Fulcrum III Limited Partnership and each of the Management
Investors, incorporated by reference to Exhibit 10.17 to HMEC's
Annual Report on Form 10-K for the year ended December 31, 1989,
filed with the SEC on April 2, 1990.

10.3* Horace Mann Educators Corporation Deferred Equity Compensation
Plan for Directors, incorporated by reference to Exhibit 10.1 to
HMEC's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, filed with the SEC on November 14, 1996.

10.4* Horace Mann Educators Corporation Deferred Compensation Plan for
Employees, incorporated by reference to Exhibit 10.4 to HMEC's
Annual Report on Form 10-K for the year ended December 31, 1997,
filed with the SEC on March 30, 1998.

10.5* Amended and restated Horace Mann Educators Corporation 1991
Stock Incentive Plan.

10.5(a)* Specimen Employee Stock Option Agreement under the Horace
Mann Educators Corporation 1991 Stock Incentive Plan.

10.5(b)* Specimen Director Stock Option Agreement under the Horace
Mann Educators Corporation 1991 Stock Incentive Plan.

10.6* Severance Agreements between HMEC and certain officers of HMEC,
incorporated by reference to Exhibit 10.9 to HMEC's Annual Report
on Form 10-K for the year ended December 31, 1993, filed with the
SEC on March 31, 1994.

2

Sequential
Exhibit Page
No. Description Number
- ------ ----------- ----------

10.6(a)* Revised Schedule to Severance Agreements between HMEC and
certain officers of HMEC, incorporated by reference to Exhibit
10.1(a) to HMEC's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999, filed with the SEC on August 13, 1999.

10.7* Specimen Continuation of Employment Agreement between HMEC and
certain officers, incorporated by reference to Exhibit 10.21(a)
to HMEC's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994, filed with the SEC on November 14, 1994.

10.7(a)* Schedule of Continuation of Employment Agreements between
HMEC and certain officers, incorporated by reference to Exhibit
10.21(b) to HMEC's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1994, filed with the SEC on November 14,
1994.

10.8* Horace Mann Incentive Compensation Program, incorporated by
reference to Exhibit 10.7 to HMEC's Annual Report on Form 10-K
for the year ended December 31, 1996, filed with the SEC on March
26, 1997.

10.9* Horace Mann Supplemental Employee Retirement Plan, 1997
Restatement, incorporated by reference to Exhibit 10.1 to HMEC's
Quarterly Report on Form 10-Q for the quarter ended September
30,1997, filed with the SEC on November 14, 1997.

10.10* Horace Mann Executive Supplemental Employee Retirement Plan,
1997 Restatement, incorporated by reference to Exhibit 10.2 to
HMEC's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997, filed with the SEC on August 14, 1997.

10.11* Amended and Restated Employment Agreement entered by and
between HMEC and Paul J. Kardos as of October 6, 1998,
incorporated by reference to Exhibit 10.2 to HMEC's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998,
filed with the SEC on November 13, 1998.

10.11(a)* Amendment Agreement to the Amended and Restated Employment
Agreement entered by and between HMEC and Paul J. Kardos as of
October 6, 1998 dated as of February 1, 2000.

10.12* Employment Agreement entered by and between HMEC and Louis G.
Lower II as of December 31, 1999.

10.13* Separation Agreement entered by and between HMEC and Larry K.
Becker as of March 21, 2000.

10.14* Letter of Employment entered by and between HMEC and Peter H.
Heckman effective April 10, 2000.

3

Sequential
Exhibit Page
No. Description Number
- ------ ----------- ----------

10.15 Catastrophe Equity Securities Issuance Option Agreement
(Catastrophe Equity Securities Issuance Option and Reinsurance
Option Agreement) entered by and between HMEC and Centre
Reinsurance, dated February 15, 1997 and related letter from
Centre Reinsurance, incorporated by reference to Exhibit 10.12 to
HMEC's Annual Report on Form 10-K for the year ended December 31,
1996, filed with the SEC on March 26, 1997.

10.15(a) Amendment effective February 15, 1997 to Catastrophe Equity
Securities Issuance Option Agreement (Catastrophe Equity
Securities Issuance Option and Reinsurance Option Agreement),
incorporated by reference to Exhibit 10.1(a) to HMEC's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998, filed
with the SEC on May 15, 1998.

10.15(b) Amendment effective February 15, 1997 to Catastrophe Equity
Securities Issuance Option and Reinsurance Option Agreement,
incorporated by reference to Exhibit 10.12(b) to HMEC's Annual
Report on Form 10-K for the year ended December 31, 1998, filed
with the SEC on March 31, 1999.

10.15(c) Amendment effective June 1, 1999 to Catastrophe Equity
Securities Issuance Option and Reinsurance Option Agreement,
incorporated by reference to Exhibit 10.1(c) to HMEC's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999,
filed with the SEC on November 12, 1999.

(11) Statement regarding computation of per share earnings.

(12) Statement regarding computation of ratios.

(21) Subsidiaries of HMEC.

(23) Consent of KPMG LLP.

(27) Financial Data Schedule.

4