FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to
0-20668
(Commission file number)
ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3164595
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
440 Lincoln Street, Worcester, Massachusetts 01653
(Address of principal executive offices)
(Zip Code)
(508) 855-1000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since
last report)
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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: 59,643,406
shares of common stock outstanding, as of August 1, 1996.
18
Total Number of Pages
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION 8 - 16
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
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(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
(In millions) June 30, June 30,
1996 1995 1996 1995
Revenues
Net premiums written $ 469.4 $ 453.8 $ 945.1 $ 934.6
Change in unearned premiums,
net of prepaid reinsurance premiums (0.3) (7.0) 10.3 18.0
Net premiums earned 469.7 460.8 934.8 916.6
Net investment income 56.3 51.0 108.6 104.0
Net realized gains on investments 2.0 4.6 47.5 4.6
Other income, net 4.3 0.4 4.7 4.4
Total revenues 532.3 516.8 1,095.6 1,029.6
Expenses
Losses and loss adjustment expenses 341.7 318.4 687.9 640.2
Policy acquisition and other operating expenses 151.6 144.7 298.1 290.4
Policyholders' dividends 1.9 2.8 5.0 4.4
Total expenses 495.2 465.9 991.0 935.0
Income before federal income taxes and minority interest 37.1 50.9 104.6 94.6
Federal income tax expense 6.4 10.1 20.1 19.0
Income before minority interest 30.7 40.8 84.5 75.6
Minority interest (2.1) (4.4) (6.3) (6.5)
Net income $ 28.6 $ 36.4 $ 78.2 $ 69.1
Per share data
Net income $ 0.48 $ 0.59 $ 1.30 $ 1.12
Dividends declared to shareholders $ 0.04 $ 0.04 $ 0.08 $ 0.08
Weighted average shares outstanding 59.7 61.4 60.1 61.6
The accompanying notes are an integral part of these financial statements.
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ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
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(Unaudited)
(In millions, except per share data) June 30, December 31,
1996 1995
Assets
Investments
Debt securities available-for-sale, at fair value $ 3,369.1 $ 3,356.5
(Amortized cost of $3,342.5 and $3,237.6)
Equity securities available-for-sale, at fair value 346.5 438.1
(Cost of $259.8 and $340.8)
Other investments, at fair value (Cost of $19.9 and $20.1) 26.9 25.0
Total investments 3,742.5 3,819.6
Cash and cash equivalents 94.1 125.5
Accrued investment income 65.6 64.5
Premiums receivable (less allowance for
doubtful accounts of $4.6 and $4.6) 408.8 400.3
Finance installment receivables 27.2 30.2
Reinsurance recoverable on paid and unpaid balances 776.9 807.4
Prepaid reinsurance premiums 45.1 43.8
Deferred policy acquisition expenses 162.9 157.5
Deferred federal income taxes 121.9 81.2
Other assets 198.6 211.8
$ 5,643.6 $ 5,741.8
Liabilities and Shareholders' Equity
Liabilities
Reserve for losses and loss adjustment expenses $ 2,865.1 $ 2,896.0
Unearned premiums 808.9 797.3
Reinsurance premiums payable 51.0 42.0
Commercial paper 22.6 27.7
Other liabilities 285.9 340.6
Total liabilities 4,033.5 4,103.6
Minority interest 119.8 128.9
Shareholders' Equity
Preferred stock, par value $1.00 per share;
authorized 20.0 million shares; issued none - -
Common stock, par value $1.00 per share;
authorized 90.0 million shares; issued 61.9 million shares 61.9 61.9
Additional paid-in capital 32.0 32.0
Retained earnings 1,378.3 1,304.9
Unrealized appreciation on investments, net of
deferred federal income taxes and minority interest 72.5 133.9
Treasury stock, at cost (2.3 million and 1.1 million shares) (54.4) (23.4)
Total shareholders' equity 1,490.3 1,509.3
$ 5,643.6 $ 5,741.8
The accompanying notes are an integral part of these financial statements.
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ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
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(Unaudited)
Six Months Ended
(In millions) June 30,
1996 1995
Common stock
Balance at beginning and end of period $ 61.9 $ 61.9
Additional paid-in capital
Balance at beginning and end of period 32.0 32.0
Retained earnings
Balance at beginning of period 1,304.9 1,174.6
Net income 78.2 69.1
Dividends declared to shareholders (4.8) (4.9)
Balance at end of period 1,378.3 1,238.8
Unrealized appreciation (depreciation) on investments, net
Balance at beginning of period 133.9 (36.3)
(Depreciation) appreciation during the period (100.5) (175.5)
Benefit (provision) for deferred federal income taxes 35.4 (61.4)
Minority interest, net of taxes 3.7 (9.7)
Balance at end of period 72.5 68.1
Treasury stock
Balance at beginning of period (23.4) (2.5)
Shares purchased at cost (31.0) (11.1)
Balance at end of period (54.4) (13.6)
Total shareholders' equity $ 1,490.3 $ 1,387.2
The accompanying notes are an integral part of these financial statements.
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ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Unaudited)
Six Months Ended
(In millions) June 30,
1996 1995
Cash was (used for) provided by:
Operating Activities
Net income $ 78.2 $ 69.1
Adjustments to reconcile net income to
net cash (used for) provided by operating activities:
Minority interest 6.3 6.5
Net realized gains on investments (47.5) (4.6)
Deferred federal income tax provision (5.4) 4.4
Change in assets and liabilities:
Deferred policy acquisition expenses (5.4) (0.9)
Premiums and notes receivable, net of reinsurance payable - (44.5)
Unearned premiums, net of prepaid reinsurance premiums 10.3 18.1
Reserve for losses and loss adjustment expenses,
net of reinsurance recoverable (0.4) 48.7
Other, net (35.1) (24.8)
Net cash (used for) provided by operating activities 1.0 72.0
Investing Activities
Proceeds from sale of available-for-sale debt securities 897.1 483.6
Proceeds from available-for-sale debt securities maturing or called 64.7 44.9
Proceeds from held-to-maturity debt securities maturing or called - 13.0
Proceeds from sale of available-for-sale equity securities
and other investments 177.6 50.1
Purchases of available-for-sale debt securities (1,075.5) (728.9)
Purchases of available-for-sale equity securities and other investments (47.9) (108.8)
Decrease in net receivable from securities transactions not settled 6.1 26.5
Capital expenditures (2.7) (2.6)
Net cash provided by (used for) investing activities 19.4 (222.2)
Financing Activities
Dividends paid to shareholders (4.8) (4.9)
Commercial paper redeemed, net (5.2) (8.2)
Subsidiary treasury stock purchased, at cost (10.8) -
Treasury stock purchased, at cost (31.0) (11.1)
Net cash used for financing activities (51.8) (24.2)
Net decrease in cash and cash equivalents (31.4) (174.4)
Cash and cash equivalents at beginning of period 125.5 368.3
Cash and cash equivalents at end of period $ 94.1 $ 193.9
Supplemental disclosure of cash flow information
Cash paid during the year:
Federal income taxes $ 25.0 $ 16.5
Interest $ 0.7 $ 0.9
The accompanying notes are an integral part of these financial statements.
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ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Earnings Per Share
Earnings per share are based on a monthly weighted average of shares
outstanding. The weighted average number of shares outstanding
applicable to common stock was 59.7 million and 61.4 million for the
three month periods ended June 30, 1996 and 1995, respectively. The
weighted average number of shares outstanding applicable to common stock
was 60.1 million and 61.6 million for the six month periods ended June
30, 1996 and 1995, respectively. On December 27, 1994, the Board of
Directors of Allmerica Property & Casualty Companies, Inc. (the
"Company") authorized the repurchase of up to three million shares, or
nearly five percent of its outstanding common stock. During the six
months ended June 30, 1996, the Company purchased 1.2 million shares for
a total of 2.2 million shares since the implementation of the repurchase
program.
MANAGEMENT'S REPRESENTATION
In the opinion of management, the financial statements reflect all
adjustments of a normal recurring nature necessary for a fair
presentation of the interim periods. Certain reclassifications have been
made to the 1995 consolidated financial statements in order to conform
to the 1996 presentation. Interim results are not necessarily
indicative of results expected for the entire year. These financial
statements should be read in conjunction with the Company's 1995 Annual
Report to Shareholders, as filed on Form 10-K to the Securities and
Exchange Commission.
PART I - FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
The results of operations for Allmerica Property & Casualty Companies,
Inc. and subsidiaries (the "Company") include the accounts of Allmerica
Property & Casualty Companies, Inc. ("Allmerica P&C"), a non-insurance
holding company; The Hanover Insurance Company ("Hanover"), a property
and casualty insurance company wholly owned by Allmerica P&C; Citizens
Corporation, a non-insurance holding company for Citizens Insurance
Company of America (collectively, "Citizens"); and certain other
insurance and non-insurance subsidiaries. Hanover owns 82.5% of the
outstanding common stock of Citizens Corporation.
Results of Operations
Consolidated Overview
Three months ended June 30, 1996 and 1995
Net Income
The Company's consolidated net income decreased $7.8 million, to $28.6
million, or $0.48 per share in the second quarter of 1996, compared to
net income of $36.4 million, or $0.59 per share for the same period in
1995. Excluding realized gains and losses, net of taxes and minority
interest, net income decreased $6.3 million, to $27.3 million in the
second quarter of 1996. The decrease in net income is primarily
attributable to a $23.3 million increase in losses and loss adjustment
expenses ("LAE") to $341.7 million in the second quarter of 1996 as a
result of increased catastrophes, primarily at Citizens. Catastrophe
losses in the second quarter of 1996 were $24.3 million, compared to
$14.3 million in the second quarter of 1995. Net investment income
increased $5.3 million, or 10.4%, to $56.3 million. This increase
resulted primarily from an increase in debt securities and higher
average yields on these securities. The second quarter of 1995 was also
impacted by a $2.4 million charge related to the pre-refunding of
municipal bonds. Federal income tax expense decreased $3.7 million in
the second quarter of 1996 and the effective tax rate decreased from
19.8% in the second quarter of 1995, to 17.3% in the same period of
1996. Minority interest in Citizens net income was $2.1 million in the
second quarter of 1996, compared to $4.4 million during the second
quarter of 1995.
Underwriting results
Consolidated net premiums earned increased $8.9 million, or 1.9%, to
$469.7 million in the second quarter of 1996. Personal segment net
premiums earned increased $9.6 million, or 3.5%, to $284.9 million. This
increase is primarily attributable to modest increases in policies in
force in the personal automobile and homeowners lines at Hanover. Price
increases in the homeowners line at Hanover and price increases in the
personal automobile and homeowners lines at Citizens also contributed to
the increase in net premiums earned. Commercial segment net premiums
earned decreased $0.7 million, to $184.8 million. This decrease is
primarily attributable to the withdrawal from a major voluntary pool by
Hanover at December 1, 1995, price decreases in all major lines at
Hanover and price decreases in the workers' compensation line at
Citizens.
The consolidated underwriting loss increased $15.9 million, to a loss of
$21.0 million in the second quarter of 1996. The increase in the
underwriting loss is primarily attributable to the increase in
catastrophe losses and severe weather during the second quarter of 1996,
primarily at Citizens. This resulted in a $23.3 million, or 7.3%
increase in losses and LAE to $341.7 million in the second quarter of
1996. Policy acquisition and other underwriting expenses increased $2.4
million, or 1.7%, to $147.1 million. Increases in policy acquisition and
other underwriting expenses reflect the growth in net earned premium and
increases in group business expenses at Hanover. The quarter results
were also impacted by increased expenses associated with an ongoing
policy administration technology project that is intended to redesign
information systems used to serve customers, underwriting and claims.
Investment results
Net investment income before taxes increased $5.3 million, to $56.3
million in 1996 compared to $51.0 million in the comparable quarter of
1995. This increase primarily reflects an increase in average invested
assets and a higher level of debt securities in the portfolio. Net
investment income in 1995 was adversely impacted by a $2.4 million
charge related to the pre-refunding of municipal bond securities.
Average yields on debt securities increased from 6.2% in the second
quarter of 1995 to 6.4% in the comparable 1996 quarter. Net investment
income after taxes increased $4.3 million, to $46.2 million. During the
first quarter of 1996, the Company revised its investment strategy,
resulting in the sale of a substantial portion of its equity portfolio
and the purchase of tax-exempt securities. This is consistent with the
Company's strategy of maximizing after-tax net investment income. The
Company had realized gains of $2.0 million during the second quarter of
1996 compared to realized gains of $4.6 million in the second quarter of
1995.
Segment Results
Personal Segment
The personal segment represented 60.7% and 59.7% of total net premiums
earned in the second quarter of 1996 and 1995, respectively.
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Hanover Citizens Consolidated
For the Quarters Ended 1996 1995 1996 1995 1996 1995
June 30 (In millions)
Net premiums earned $ 147.7 $ 141.6 $ 137.2 $ 133.7 $ 284.9 $ 275.3
Losses and loss adjustment expenses 97.3 92.5 104.2 94.2 201.5 186.7
Policy acquisition and other underwriting expenses 50.3 42.7 36.2 36.5 86.5 79.2
Underwriting (loss) profit $ 0.1 $ 6.4 $ (3.2) $ 3.0 $ (3.1) $ 9.4
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Revenues
Personal segment net premiums earned increased $9.6 million, or 3.5%,
to $284.9 million during the second quarter of 1996, compared to $275.3
million in the second quarter of 1995. Hanover's personal segment net
premiums earned increased $6.1 million, or 4.3%, to $147.7 million
during the second quarter of 1996. This increase is attributable to
modest increases in policies in force in the personal automobile and
homeowners lines, primarily as a result of growth in group business and
in expansion states, and price increases in the homeowners line.
Citizens' personal segment net premiums earned increased $3.5 million,
or 2.6%, to $137.2 million in the second quarter of 1996. This increase
is primarily attributable to price increases in the personal automobile
and homeowners lines.
Underwriting results
The personal segment underwriting profit decreased $12.5 million, to a
loss of $3.1 million in the second quarter of 1996. Hanover's
underwriting profit decreased $6.3 million, while Citizens' decreased
$6.2 million to a loss of $3.2 million.
The decrease in Hanover's underwriting profit resulted primarily from a
$7.6 million or 17.8% increase in policy acquisition and other
underwriting expenses to $50.3 million in the second quarter of 1996.
This increase is primarily attributable to increases in net earned
premium, a $1.5 million increase in group business expenses and a $1.7
million increase in expenses associated with the policy administration
technology project.
Citizens' decrease in underwriting profit is primarily attributable to a
$13.6 million increase in catastrophe losses during the second quarter
of 1996. This resulted in a $10.0 million or 10.6%, increase in losses
and LAE to $104.2 million. This was partially offset by favorable
claims activity in both the current and prior accident years in the
personal automobile line attributable to improvements in severity.
Citizens did not incur any catastrophe losses in the second quarter of
1995.
Policy acquisition and other underwriting expenses at Citizens decreased
$0.3 million, to $36.2 million in the second quarter of 1996. The
decrease is primarily attributable to decreases in employee related
expenses and contingent commissions, partially offset by the effect of
increases in net earned premium.
Commercial Segment
The commercial segment represented 39.3% and 40.3% of total net premiums
earned in the second quarter of 1996 and 1995, respectively.
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Hanover Citizens Consolidated
For the Quarters Ended 1996 1995 1996 1995 1996 1995
June 30 (In millions)
Net premiums earned $ 110.9 $ 116.0 $ 73.9 $ 69.5 $ 184.8 $ 185.5
Losses and loss adjustment expenses 80.4 85.5 59.8 46.2 140.2 131.7
Policy acquisition and other underwriting expenses 44.4 48.8 16.2 16.7 60.6 65.5
Policyholders' dividends 0.1 1.2 1.8 1.6 1.9 2.8
Underwriting (loss) profit $ (14.0) $ (19.5) $ (3.9) $ 5.0 $ (17.9) $ (14.5)
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Revenues
Commercial segment net premiums earned decreased $0.7 million, to
$184.8 million in the second quarter of 1996. Hanover's commercial
segment net premiums earned decreased $5.1 million, or 4.4%, to $110.9
million. This decrease is primarily attributable to Hanover's withdrawal
from a large voluntary pool on December 1, 1995 and to competitive
market conditions in this segment. Rate decreases in all commercial
lines and decreases in policies in force in the commercial multiple
peril line also contributed to the decrease in net earned premium at
Hanover. Citizens' commercial segment net premiums earned increased
$4.4 million, or 6.3%, to $73.9 million in the second quarter of 1996.
This increase is primarily attributable to a 5.8% increase in policies
in force in the commercial multiple peril line since December 31, 1995.
This increase was partially offset by rate decreases in the workers'
compensation line as a result of continuing competition in this line in
Michigan. Rates in the workers' compensation line were decreased 8.5%,
7.0% and 6.4% effective May 1, 1995, December 1, 1995, and June 1, 1996,
respectively.
Continued competitive conditions in the workers' compensation line at
both Hanover and Citizens may result in future price decreases that will
impact growth in this line. In addition, Hanover's premium growth in the
commercial segment may be impacted by continued competitive pricing in
1996 as a result of soft market conditions combined with Hanover's
effort to maintain its current underwriting standards.
Underwriting results
The commercial segment underwriting loss increased $3.4 million, or
23.4%, to a loss of $17.9 million in the second quarter of 1996.
Hanover's underwriting loss improved $5.5 million, or 28.2%, to a loss
of $14.0 million, while Citizens' underwriting profit decreased $8.9
million, to a loss of $3.9 million in the second quarter of 1996.
Hanover's commercial segment losses and LAE decreased $5.1 million, or
6.0%, to $80.4 million in the second quarter of 1996. This improvement
is primarily attributable to a decrease of $8.3 million, resulting from
the withdrawal of a major voluntary pool and a $5.3 million decrease in
the commercial automobile line as a result of favorable claims
experience on the current and prior years. This was partially offset by
a $11.2 million increase in losses and LAE in the workers' compensation
line reflecting increased claim frequency and severity.
Citizens' underwriting loss resulted primarily from increased loss
frequency in the commercial multiple peril line and a $2.3 million
increase in catastrophe losses in this line. Losses and LAE in the
commercial multiple peril line increased $ 6.0 million, or 44.4%, to
$19.5 million. There were no catastrophe losses in the commercial
segment in the second quarter of 1995.
Policy acquisition and other underwriting expenses in the commercial
segment decreased $4.9 million, or 7.5%, to $60.6 million in the second
quarter of 1996. Hanover's policy acquisition and other underwriting
expenses decreased $4.4 million, or 9.0%, to $44.4 million, primarily
attributable to a $6.5 million decrease in expenses associated with a
change in estimate in deferred expenses during the second quarter of
1996, and the effect of decreases in net earned premium. Hanover
revised its estimate of deferred acquisition costs during the quarter to
reflect changes in variable underwriting expenses. This was partially
offset by a $1.2 million increase associated with the policy
administration technology project. Citizens' policy acquisition and
other underwriting expenses decreased $0.5 million, or 3.0%, to $16.2
million, resulting from decreases in employee related expenses and
contingent commissions, partially offset by the effect of increases in
net earned premium.
.
Six months ended June 30, 1996 and 1995
Net Income
The Company's consolidated net income for the six months ended June 30,
1996 increased $9.1 million, to $78.2 million, or $1.30 per share,
compared to net income of $69.1 million, or $1.12 per share for the same
period in 1995. The increase in net income is primarily attributable to
a $42.9 million increase in realized gains, primarily related to the
sale of equity securities. This increase reflects the Company's decision
during the first quarter of 1996 to increase the proportion of debt
securities in the portfolio. Excluding realized gains and losses, net
of taxes and minority interest, net income decreased $17.1 million, to
$49.1 million for the six months ended June 30, 1996. Net income in the
six month period of 1996 was significantly impacted by catastrophes and
other severe weather related losses. This resulted in a $47.7 million
increase in losses and loss adjustment expenses to $687.9 million in
the six months ended June 30, 1996. Catastrophe losses in the six months
ended June 30, 1996 were $54.3 million, compared to $16.3 million in the
comparable 1995 period. This was partially offset by favorable claims
experience on current and prior accident years, primarily at Citizens,
primarily in the personal automobile and workers' compensation lines.
Net investment income increased $4.6 million, or 4.4%, to $108.6
million. This increase reflects an increase in debt securities resulting
from the Company's strategy to reduce the level of equity securities in
the portfolio, which was implemented during the first quarter of 1996.
The six month results were also impacted by a $2.4 million charge
related to the pre-refunding of municipal bonds. Federal income tax
expense increased $1.1 million in the six months ended June 30, 1996,
but the effective tax rate decreased from 20.1% in the six months ended
June 30, 1995, to 19.2%, for the same period in 1996. Minority interest
in Citizens net income was $6.3 million in the six month period ended
June 30, 1996, compared to $6.5 million during the six month period
ended June 30, 1995.
Underwriting results
Consolidated net premiums earned for the six months ended June 30, 1996
increased $18.2 million, or 2.0%, to $934.8 million. Personal segment
net premiums earned increased $21.3 million, or 3.9%, to $565.1 million.
This increase is primarily attributable to modest increases in policies
in force in the personal automobile and homeowners lines at Hanover.
Price increases in the homeowners line at Hanover and price increases in
the personal automobile and homeowners lines at Citizens also
contributed to the increase in net premiums earned. Commercial segment
net premiums earned decreased $3.1 million, to $369.7 million. This
decrease is primarily attributable to the withdrawal from a large
voluntary pool on December 1, 1995 at Hanover, and to competitive market
conditions in this segment. Price decreases in all commercial lines at
Hanover and in the workers' compensation line at Citizens and decreases
in policies in force in the commercial multiple peril line at Hanover
also contributed to the decrease in net earned premium.
The consolidated underwriting loss for the six months ended June 30,
1996 increased $33.3 million, to a loss of $51.7 million. The increase
in the underwriting loss is primarily attributable to the increase in
catastrophe losses and severe weather related losses. This resulted in
a $47.7 million, or 7.5% increase in losses and LAE to $687.9 million in
the six months ended June 30, 1996. Policy acquisition and other
underwriting expenses increased $3.2 million, or 1.1%, to $293.6
million. Increases in policy acquisition and other underwriting expenses
at Hanover reflect the growth in net earned premium, increases in group
business expenses and expenses associated with the policy administration
technology project. This was partially offset by a $1.4 million
decrease in policy acquisition and other underwriting expenses at
Citizens, primarily attributable to decreases in employee related
expenses and contingent commissions.
Investment results
Net investment income before taxes increased $4.6 million, or 4.4%, to
108.6 million during the first six months of 1996 compared to $104.0
million in the comparable period of 1995. This increase primarily
reflects an increase in average invested assets and a higher level of
debt securities in the portfolio. Net investment income in 1995 was
adversely impacted by a $2.4 million charge related to the pre-refunding
of municipal bond securities. Average yields on debt securities
decreased from 6.3% in the six months ended June 30, 1995 to 6.2% in
1996. Net investment income after taxes increased $4.6 million, to $90.1
million, primarily attributable to the increase in tax-exempt debt
securities. During the first quarter of 1996, the Company revised its
investment strategy, resulting in the sale of a substantial portion of
its equity portfolio and the purchase of tax-exempt securities. This is
consistent with the Company's strategy of maximizing after-tax net
investment income. As a result of the sale of equity securities, the
Company had realized gains of $47.5 million during the six months ended
June 30, 1996, compared to realized gains of $4.6 million in 1995.
Segment Results
Personal Segment
The personal segment represented 60.5% and 59.3% of total net premiums
earned in the six months ended June 30, 1996 and 1995, respectively.
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Hanover Citizens Consolidated
For the Six Months Ended 1996 1995 1996 1995 1996 1995
June 30 (In millions)
Net premiums earned $ 292.8 $ 280.8 $ 272.3 $ 263.0 $ 565.1 $ 543.8
Losses and loss adjustment expenses 213.6 184.6 211.6 198.8 425.2 383.4
Policy acquisition and other underwriting expenses 99.3 88.1 72.6 72.8 171.9 160.9
Underwriting (loss) profit $ (20.1) $ 8.1 $ (11.9) $ (8.6) $ (32.0) $ (0.5)
</TABLE>
Revenues
Personal segment net premiums earned for the six months ended June 30,
1996 increased $21.3 million, or 3.9%, to $565.1 million, compared to
$543.8 million in the same period of 1995. Hanover's personal segment
net premiums earned increased $12.0 million, or 4.3%, to $292.8 million
during the six months ended June 30, 1996. This increase is primarily
attributable to modest increases in policies in force in the personal
automobile and homeowners lines and price increases in the homeowners
line. Citizens' personal segment net premiums earned increased $9.3
million, or 3.5%, to $272.3 million in the six months ended June 30,
1996. This increase is primarily attributable to price increases in the
personal automobile and homeowners lines.
Underwriting results
The personal segment underwriting loss for the six months ended June 30,
1996 increased $31.5 million, to a loss of $32.0 million. Hanover's
underwriting loss increased $28.2 million, while Citizens' increased
$3.3 million. Hanover's personal segment losses and LAE increased $29.0
million, or 15.7%, to $213.6 million in the six months ended June 30,
1996. This increase is primarily attributable to a $19.0 million
increase in losses and LAE in the homeowners line, resulting from
increased catastrophes during the period. Catastrophe losses in the
personal segment increased $13.4 million, to $22.1 million in the six
months ended June 30, 1996 from $8.7 million during the comparable 1995
period.
Citizens' underwriting loss increased primarily as a result of a $17.7
million increase in catastrophe losses. This resulted in a $24.9 million
increase in losses and LAE in the homeowners line. Favorable claims
experience on current and prior years resulted in a $12.7 million
decrease in losses and LAE in the personal automobile line. There were
no catastrophe losses in the personal segment during the six month
period ended June 30, 1995.
Policy acquisition and other underwriting expenses in the personal
segment increased $11.0 million, or 6.8%, to $171.9 million in the six
months ended June 30, 1996. This increase is primarily attributable to
an increase of $11.2 million, or 12.7%, to $99.3 million at Hanover for
the six months ended June 30, 1996. This increase is due to the effect
of increases in net earned premium, a $3.0 million increase in group
business expenses, a $2.0 million increase in commissions and a $1.8
million increase in expenses associated with the policy administration
technology project. Policy acquisition and other underwriting expenses
in the personal segment at Citizens decreased $0.2 million, to $72.6
million for the six months ended June 30, 1996. This decrease is
primarily attributable to decreases in employee related expenses and
contingent commissions, partially offset by the effect of increases in
net earned premium.
Commercial Segment
The commercial segment represented 39.5% and 40.7% of total net premiums
earned in the six months ended June 30, 1996 and 1995, respectively.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Hanover Citizens Consolidated
For the Six Months Ended 1996 1995 1996 1995 1996 1995
June 30 (In millions)
Net premiums earned $ 226.4 $ 237.6 $ 143.3 $ 135.2 $ 369.7 $ 372.8
Losses and loss adjustment expenses 154.8 169.5 107.9 87.3 262.7 256.8
Policy acquisition and other underwriting expenses 88.1 94.7 33.6 34.8 121.7 129.5
Policyholders' dividends 1.4 1.7 3.6 2.7 5.0 4.4
Underwriting (loss) profit $ (17.9) $ (28.3) $ (1.8) $ 10.4 $ (19.7) $ (17.9)
</TABLE>
Revenues
Commercial segment net premiums earned for the six months ended June 30,
1996 decreased $3.1 million, or 1.0%, to $369.7 million. Hanover's
commercial segment net premiums earned decreased $11.2 million, or 4.7%,
to $226.4 million. This decrease is primarily attributable to Hanover's
withdrawal from a large voluntary pool on December 1, 1995. Rate
decreases in all commercial lines and decreases in policies in force in
the commercial multiple peril line also contributed to the decrease in
net earned premium at Hanover. Citizens' commercial segment net premiums
earned increased $8.1 million, or 6.0%, to $143.3 million in the six
months ended June 30, 1996. The increase is primarily attributable to a
5.8% increase in policies in force in the commercial multiple peril line
since December 31, 1995. Rates in the workers' compensation line were
decreased 8.5%, 7.0% and 6.4% effective May 1, 1995, December 1, 1995,
and June 1, 1996, respectively.
Underwriting results
The commercial segment underwriting loss for the six months ended June
30, 1996 increased $1.8 million, or 10.1% to a loss of $19.7 million.
Hanover's underwriting loss improved $10.4 million, or 36.7%, to a loss
of $17.9 million and Citizens' underwriting profit decreased $12.2
million, to a loss of $1.8 million in the six months ended June 30,
1996.
Hanover's commercial segment losses and LAE decreased $14.7 million, or
8.7%, to $154.8 million in the six months ended June 30, 1996. This
improvement is primarily attributable to a decrease of $12.1 million in
the commercial automobile line as a result of favorable claims
experience on the current and prior years and an $8.9 million decrease
in losses in LAE resulting from the withdrawal of a large voluntary
pool. However, losses and LAE in the commercial multiple peril lines
increased $5.9 million, to $80.7 million, primarily due to an increase
in catastrophes from $5.0 million in 1995 to $7.9 million in 1996, and
to increased severity in this line.
Citizens' underwriting profit decreased primarily due to increased
claims activity in the commercial multiple peril line, resulting from
severe weather and catastrophe losses which adversely impacted this
line. Commercial multiple peril losses and LAE increased $12.5
million, or 63.1%, to $32.3 million in the six months ended June 30,
1996. Catastrophe losses were $3.0 million in this segment during the
six months ended June 30, 1996. There were no catastrophe losses in this
segment for the comparable period of 1995.
Policy acquisition and other underwriting expenses in the commercial
segment decreased $7.8 million, or 6.0%, to $121.7 million in the six
months ended June 30, 1996. Hanover's policy acquisition expenses and
other underwriting expenses decreased $6.6 million, or 7.0%, to $88.1
million, primarily attributable to a $5.2 million decrease in expenses
associated with a change in estimate in deferred expenses during the
second quarter of 1996, and by the effect of decreases in net earned
premium. Hanover revised its estimate of deferred acquisition costs
during the quarter to reflect changes in variable underwriting expenses.
This was partially offset by a $1.2 million increase associated with the
policy administration technology project. Citizens' policy acquisition
and other underwriting expenses in the commercial segment decreased
$1.2 million, or 3.4%, to $33.6 million, primarily attributable to
decreases in employee related expenses and contingent commissions,
partially offset by the effect of increases in net earned premium.
Reserve for Losses and Loss Adjustment Expenses
The Company regularly updates its reserve estimates as new information
becomes available and further events occur which may impact the
resolution of unsettled claims. Changes in prior reserve estimates are
reflected in results of operations in the year such changes are
determined to be needed and recorded. The table below provides a
reconciliation of the beginning and ending reserve for unpaid losses and
LAE as follows:
<TABLE>
<S> <C> <C>
For the six months ended June 30, (In millions) 1996 1995
Reserve for losses and LAE, beginning of period $ 2,896.0 $ 2,821.7
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of the current year 743.6 685.6
Decrease in provision for insured events of prior years (55.7) (45.4)
Total incurred losses and LAE 687.9 640.2
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current year 300.9 236.5
Losses and LAE attributable to insured events of prior years 386.1 365.2
Total payments 687.0 601.7
Change in reinsurance recoverable on unpaid losses (31.8) (3.7)
Reserve for losses and LAE, end of period $ 2,865.1 $ 2,856.5
</TABLE>
As part of an ongoing process, the reserves have been re-estimated for
all prior accident years and were decreased by $55.7 million and $45.4
million for the six month periods ended June 30, 1996 and 1995,
respectively. The increase in favorable development on prior years' loss
reserves of $10.3 million results primarily from a $7.3 million increase
in favorable development at Citizens to $14.3 million. The increase in
favorable reserve development at Citizens in 1996, primarily reflects
reduced medical costs in the personal automobile line. Hanover's
favorable development remained relatively stable at $41.4 million during
the six months ended June 30, 1996. Hanover continues to experience
favorable development in the personal automobile, workers' compensation
and commercial automobile lines. However, the commercial multiple peril
line continues to develop unfavorably.
Investment Portfolio
The Company's investment portfolio decreased $77.1 million, to $3,742.5
million during the six months ended June 30, 1996, from $3,819.6 million
at December 31, 1995. Debt securities increased $12.6 million, to
$3,369.1 million, from $3,356.5 million, and represented 90.0% and 87.9%
of the carrying value of all investments at June 30, 1996 and December
31, 1995, respectively. This increase is consistent with the Company's
strategy of increasing the level of debt securities in the portfolio.
This was accomplished by reducing the level of equities in the
portfolio, which resulted in a $91.6 million decrease in equity
securities to $346.5 million in the six months ended June 30, 1996. Tax-
exempt securities increased $64.3 million, to $2,211.0 million, from
$2,146.7 million during the six months ended June 30, 1996. Tax-exempt
securities represented 65.6% of total debt securities at June 30, 1996
compared to 64.0% at December 31, 1995. This increase reflects the
Company's efforts to maximize after-tax investment income.
Net unrealized appreciation in the investment portfolio at June 30, 1996
was $120.3 million compared to $221.1 million at December 31, 1995.
Unrealized depreciation in the six month period was $92.3 million and
$8.5 million on debt securities and equities and other investments,
respectively.
Liquidity and Capital Resources
Liquidity describes the ability of a company to generate sufficient cash
flows to meet the cash requirements of business operations. As a
holding company, Allmerica P&C's primary source of cash for the payment
of dividends to its shareholders is dividends from its insurance
subsidiaries. However, dividend payments to Allmerica P&C by its
insurance subsidiaries are subject to limitations imposed by state
regulators, such as the requirement that cash dividends be paid out of
unreserved and unrestricted earned surplus and restrictions on the
payment of "extraordinary" dividends, as defined.
Sources of cash for the Company's insurance subsidiaries are from
premiums collected, investment income and maturing investments. Primary
cash outflows are paid losses and loss adjustment expenses, policy
acquisition expenses, other underwriting expenses and investment
purchases. Cash outflows related to claim losses and loss adjustment
expenses can be variable because of uncertainties surrounding settlement
dates for liabilities for unpaid losses and because of the potential for
large losses either individually or in the aggregate. Accordingly, the
Company's strategy is to monitor available cash and short-term
investment balances in relation to projected cash needs by matching
maturities of investments with expected payments of current and
long-term liabilities. The Company periodically adjusts its investment
policy to respond to changes in short-term and long-term cash
requirements.
Net cash used for operating activities for the six months ended June 30,
1996 was $1.4 million, compared to $72.0 million provided in the
comparable prior year period. This decrease is primarily attributable to
the increase in underwriting losses during the first six months of 1996
which resulted in an increase in claims payments.
Net cash provided by investing activities was $19.4 million for the six
months ended June 30, 1996 compared to cash used of $222.2 million in
the comparable prior year period. Cash used for investing activities has
declined due to the decrease in cash flow from operations.
Net cash used for financing activities for the six months ended June 30,
1996 was $49.4 million, compared to $24.2 million in the comparable
prior year period. This change primarily reflects share repurchases of
1.2 million shares of the Company's common stock compared to 0.6 million
in the comparable period of 1995. The Company implemented a stock
repurchase program of up to three million shares in December 1994.
Shareholders' equity was $1,490.3 million at June 30, 1996, or $24.99
per share, compared to $1,509.3 million at December 31, 1995, or $24.82
per share. Shareholders' equity reflects net income for the six month
period and the impact of a decrease of $61.4 million due to a decrease
in the fair values of available-for-sale debt and equity securities.
Changes in shareholders' equity related to the unrealized values of
underlying portfolio investments will continue to be volatile as market
prices of debt securities fluctuate with changes in the interest rate
environment.
The Company expects to continue to pay dividends in the foreseeable
future. However, payment of future dividends is subject to the Board of
Directors' approval and is dependent upon earnings and the financial
condition of the Company.
Based on current trends, the Company expects to continue to generate
sufficient positive operating cash to meet all short-term and long-term
cash requirements. The Company maintains a high degree of liquidity
within the investment portfolio in fixed maturities, common stock and
short-term investments. The Company also has unsecured lines of credit
with certain banks to support its commercial paper borrowings. At June
30, 1996, these lines totaled $80.0 million and are subject to annual
renewal. There were no borrowings under these lines of credit during
the six months ended June 30, 1996. In addition, the holding company's
financial structure provides the flexibility to obtain funds externally
through debt or equity financing, if needed.
PART II - OTHER INFORMATION
ITEM 4
Submission of Matters to a Vote of Security Holders
The Registrant's annual shareholders meeting was held on May 21, 1996.
All eleven persons nominated for directors by management were named in
proxies for the meeting, which were solicited pursuant to Regulation 14A
of the Securities Exchange Act of 1934. The following individuals were
elected for one year terms:
VOTES WITHHELD
FOR
Michael P. Angelini 55,759,528 550,494
David A. Barrett 56,262,846 47,176
Gail L. Harrison 56,276,021 34,001
James A Cotter, Jr. 56,256,681 53,341
M. Howard Jacobson 56,177,282 132,740
Dona Scott Laskey 56,256,793 53,229
John F. O'Brien 56,248,521 61,501
Eric A. Simonsen 56,264,021 46,001
Robert G. Stachler 56,195,745 114,277
Herbert M. Varnum 56,254,696 55,326
Richard M. Wall 56,197,555 112,467
Shareholders ratified the appointment of Price Waterhouse LLP as the
Independent Public Accountants of the Company for 1996: for 56,286,253;
against 11,695; withheld 12,074.
ITEM 6
Exhibits and Reports on Form 8-K
(a) Exhibits.
EX - 11 Statement regarding computation
of per share earnings.
EX - 27 Financial Data Schedule
(b) Reports on Form 8-K None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Allmerica Property & Casualty Companies, Inc.
Registrant
Dated August 13, 1996 /s/ John F. O'Brien
John F. O'Brien
President Chief Executive Officer
Dated August 13, 1996 /s/ Eric A. Simonsen
Eric A. Simonsen
Vice President, Chief Financial
Officer and Principal Accounting Officer
<TABLE>
Exhibit 11
ALLMERICA PROPERTY & CASUALTY COMPANIES, INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
For the Periods Ended June 30, 1996 and 1995
(Unaudited)
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
Primary:
Average shares outstanding 59.6 61.4 60.0 61.6
Net effect of dilutive stock options
based on the treasury stock
method using average market
price 0.1 - 0.1 -
TOTALS 59.7 61.4 60.1 61.6
Net income $ 28.6 $ 36.4 $ 78.2 $ 69.1
Per share amount $ 0.48 $ 0.59 $ 1.30 $ 1.12
Fully diluted:
Average shares outstanding 59.6 61.4 60.0 61.6
Net effect of dilutive stock options
based on the treasury stock
method using the higher of
period end or average market
price 0.1 - 0.1 -
TOTALS 59.7 61.4 60.1 61.6
Net income $ 28.6 $ 36.4 $ 78.2 $ 69.1
Per share amount $ 0.48 $ 0.59 $ 1.30 $ 1.12
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 3369
<DEBT-CARRYING-VALUE> 3343
<DEBT-MARKET-VALUE> 3369
<EQUITIES> 347
<MORTGAGE> 0
<REAL-ESTATE> 4
<TOTAL-INVEST> 3743
<CASH> 94
<RECOVER-REINSURE> 45
<DEFERRED-ACQUISITION> 163
<TOTAL-ASSETS> 5644
<POLICY-LOSSES> 2865
<UNEARNED-PREMIUMS> 809
<POLICY-OTHER> 51
<POLICY-HOLDER-FUNDS> 13
<NOTES-PAYABLE> 23
0
0
<COMMON> 62
<OTHER-SE> 1428
<TOTAL-LIABILITY-AND-EQUITY> 5644
935
<INVESTMENT-INCOME> 109
<INVESTMENT-GAINS> 48
<OTHER-INCOME> 5
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<UNDERWRITING-AMORTIZATION> 211
<UNDERWRITING-OTHER> 88
<INCOME-PRETAX> 105
<INCOME-TAX> 20
<INCOME-CONTINUING> 85
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 78
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<EPS-DILUTED> 1.30
<RESERVE-OPEN> 2896
<PROVISION-CURRENT> 744
<PROVISION-PRIOR> (56)
<PAYMENTS-CURRENT> 301
<PAYMENTS-PRIOR> 386
<RESERVE-CLOSE> 2865
<CUMULATIVE-DEFICIENCY> (32)
</TABLE>
