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: September 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: 59,649,406
shares of common stock outstanding, as of November 1, 1996.
19
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 - 17
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
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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 Nine Months Ended
(In millions, except per share data) September 30, September 30,
1996 1995 1996 1995
Revenues
Net premiums written $504.2 $507.3 $1,449.3 $1,441.9
Change in unearned premiums,
net of prepaid reinsurance premiums 31.5 32.9 41.8 50.9
Net premiums earned 472.7 474.4 1,407.5 1,391.0
Net investment income 63.0 53.7 171.6 157.7
Net realized gains (losses) on investments (1.6) 10.4 45.9 15.0
Other income, net 5.2 1.8 9.9 6.2
Total revenues 539.3 540.3 1,634.9 1,569.9
Expenses
Losses and loss adjustment expenses 332.7 322.3 1,020.6 962.5
Policy acquisition and other operating expenses 145.1 152.2 443.2 442.6
Policyholders' dividends 3.7 2.6 8.7 7.0
Total expenses 481.5 477.1 1,472.5 1,412.1
Income before federal income taxes and minority interest 57.8 63.2 162.4 157.8
Federal income tax expense 12.3 16.0 32.4 35.0
Income before minority interest 45.5 47.2 130.0 122.8
Minority interest (4.7) (4.1) (11.0) (10.6)
Net income $40.8 $43.1 $119.0 $112.2
Per share data
Net income $0.68 $0.70 $1.98 $1.83
Dividends declared to shareholders $0.04 $0.04 $0.12 $0.12
Weighted average shares outstanding 59.7 61.2 60.0 61.5
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) September 30, December 31,
1996 1995
Assets
Investments
Debt securities available-for-sale, at fair value $3,489.9 $3,356.5
(Amortized cost of $3,442.8 and $3,237.6)
Equity securities available-for-sale, at fair value 369.9 438.1
(Cost of $273.5 and $340.8)
Other investments, at fair value (Cost of $26.5 and $20.1) 30.2 25.0
Total investments 3,890.0 3,819.6
Cash and cash equivalents 96.7 125.5
Accrued investment income 62.5 64.5
Premiums receivable (less allowance for
doubtful accounts of $5.0 and $4.6) 435.2 400.3
Finance installment receivables 25.7 30.2
Reinsurance recoverable on paid and unpaid balances 768.0 807.4
Prepaid reinsurance premiums 44.5 43.8
Deferred policy acquisition expenses 169.4 157.5
Deferred federal income taxes 113.0 81.2
Other assets 168.6 211.8
$5,773.6 $5,741.8
Liabilities and Shareholders' Equity
Liabilities
Reserve for losses and loss adjustment expenses $2,860.3 $2,896.0
Unearned premiums 839.8 797.3
Reinsurance premiums payable 51.6 42.0
Commercial paper 21.6 27.7
Other liabilities 330.0 340.6
Total liabilities 4,103.3 4,103.6
Minority interest 125.2 128.9
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 1,416.7 1,304.9
Unrealized appreciation on investments, net of
deferred federal income taxes and minority interest 88.8 133.9
Treasury stock, at cost (2.3 million and 1.1 million shares) (54.3) (23.4)
Total shareholders' equity 1,545.1 1,509.3
$5,773.6 $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)
Nine Months Ended
(In millions) September 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 119.0 112.2
Dividends declared to shareholders (7.2) (7.4)
Balance at end of period 1,416.7 1,279.4
Unrealized appreciation (depreciation) on investments, net
Balance at beginning of period 133.9 (36.3)
(Depreciation) appreciation during the period (73.9) 215.1
Benefit (provision) for deferred federal income taxes 25.9 (75.3)
Minority interest, net of taxes 2.9 (11.7)
Balance at end of period 88.8 91.8
Treasury stock
Balance at beginning of period (23.4) (2.5)
Shares purchased at cost (31.0) (12.1)
Shares reissued 0.1 -
Balance at end of period (54.3) (14.6)
Total shareholders' equity $1,545.1 $1,450.5
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)
Nine Months Ended
(In millions) September 30,
1996 1995
Cash was (used for) provided by:
Operating Activities
Net income $ 119.0 $ 112.2
Adjustments to reconcile net income to
net cash (used for) provided by operating activities:
Minority interest 11.0 10.6
Net realized gains on investments (45.9) (15.0)
Deferred federal income tax (benefit) provision (5.9) 6.5
Change in assets and liabilities:
Deferred policy acquisition expenses (11.9) (7.1)
Premiums and notes receivable, net of reinsurance payable (25.7) (57.0)
Unearned premiums, net of prepaid reinsurance premiums 41.8 50.9
Reserve for losses and loss adjustment expenses,
net of reinsurance recoverable 3.7 53.6
Other, net (3.0) (18.8)
Net cash provided by operating activities 83.1 135.9
Investing Activities
Proceeds from sale of available-for-sale debt securities 1,037.0 805.0
Proceeds from available-for-sale debt securities maturing or called 223.0 262.0
Proceeds from held-to-maturity debt securities maturing or called - 22.2
Proceeds from sale of available-for-sale equity securities
and other investments 185.5 64.8
Purchases of available-for-sale debt securities (1,479.0) (1,357.5)
Purchases of held-to-maturity debt securities - (6.2)
Purchases of available-for-sale equity securities and other investments (71.2) (146.0)
Decrease in net receivable from securities transactions not settled 52.5 57.6
Capital expenditures (4.3) (4.0)
Net cash used for investing activities (56.5) (302.1)
Financing Activities
Dividends paid to shareholders (7.2) (7.4)
Commercial paper redeemed, net (6.2) (6.7)
Subsidiary treasury stock purchased, at cost (11.1) (1.0)
Treasury stock purchased, at cost (31.0) (12.1)
Treasury stock reissued 0.1 -
Net cash used for financing activities (55.4) (27.2)
Net decrease in cash and cash equivalents (28.8) (193.4)
Cash and cash equivalents at beginning of period 125.5 368.3
Cash and cash equivalents at end of period $ 96.7 $ 174.9
Supplemental disclosure of cash flow information
Cash paid during the year:
Federal income taxes $ 39.3 $ 30.9
Interest 1.1 1.1
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 weighted average of
shares outstanding. The weighted average number of
shares of common stock and equivalents was 59.7 million
and 61.2 million for the three month periods ended
September 30, 1996 and 1995, respectively. The weighted
average number of shares of common stock and equivalents
was 60.0 million and 61.5 million for the nine month
periods ended September 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 nine months ended September 30, 1996, the
Company purchased 1.2 million shares for a total of 2.1
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 September 30, 1996 and 1995
Net Income
The Company's consolidated net income decreased $2.3
million, to $40.8 million, or $0.68 per share in the
third quarter of 1996, compared to net income of $43.1
million, or $0.70 per share for the same period in 1995.
The decrease in net income is primarily attributable to a
$12.0 million decrease in realized gains, primarily
related to the sale of equity securities during the third
quarter of 1995. Excluding realized gains and losses,
net of taxes and minority interest, net income increased
$5.0 million, to $41.8 million in the third quarter of
1996. This increase was primarily due to a $5.7 million
arbitrated settlement from a voluntary pool and $4.0
million reapportionment of an involuntary pool. Net
investment income increased $9.3 million, or 17.3% to
$63.0 million, reflecting a change in estimated equity in
earnings from a limited partnership of $6.7 million. This
was offset by a $10.4 million increase in losses and loss
adjustment expenses ("LAE") to $332.7 million in the
third quarter of 1996, resulting from a $12.6 million
decrease from $25.6 million in favorable claims
experience on the prior accident years at Hanover. The
Company expects reduced favorable development at Hanover
to continue to impact future earnings. Federal income tax
expense decreased $3.7 million in the third quarter of
1996 and the effective tax rate decreased from 25.3% in
the third quarter of 1995, to 21.3% in the same period of
1996. Minority interest in Citizens net income was $4.7
million in the third quarter of 1996, compared to $4.1
million during the third quarter of 1995.
Underwriting results
Consolidated net premiums earned decreased $1.7 million,
to $472.7 million in the third quarter of 1996. Personal
segment net premiums earned increased $5.4 million, to
$290.4 million. This increase is primarily attributable
to price increases in the homeowners line at Hanover and
price increases in the personal automobile and homeowners
lines at Citizens. Commercial segment net premiums earned
decreased $7.1 million, to $182.3 million. This decrease
is primarily attributable to price decreases in the
workers' compensation line at both Hanover and Citizens
and to the withdrawal from a major voluntary pool by
Hanover at December 1, 1995.
The consolidated underwriting loss increased $4.2
million, to a loss of $6.9 million in the third quarter
of 1996. The increase in the underwriting loss is
primarily attributable to a decrease in favorable claims
experience on prior accident years at Hanover. This
resulted in a $10.4 million, or 3.2% increase in losses
and LAE to $332.7 million in the third quarter of 1996.
Policy acquisition and other underwriting expenses
decreased $9.0 million, or 5.9%, to $143.2 million.
Hanover's policy acquisition and other underwriting
expenses decreased $7.7 million, to $87.1 million. This
decrease primarily reflects decreases in commissions and
assessment expenses associated with the reapportionment
of an involuntary pool, and the decrease in net earned
premium at Hanover. Citizens' policy acquisition and
other underwriting expenses decreased $1.3 million, to
$56.1 million, reflecting reductions in employee related
expenses and commissions, partially offset by the
increases in earned premium and expenses associated with
an ongoing policy administration technology project.
Investment results
Net investment income before taxes increased $9.3
million, to $63.0 million in 1996, compared to $53.7
million in the comparable quarter of 1995. This increase
was primarily as a result of a change in estimated equity
in earnings from a limited partnership of $6.7 million.
Average yields on debt securities increased from 6.3% in
the third quarter of 1995 to 6.4% in the comparable 1996
quarter. Net investment income after taxes increased $7.0
million, to $48.8 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 losses of $1.6 million during
the third quarter of 1996 compared to realized gains of
$10.4 million in the third quarter of 1995.
Segment Results
Personal Segment
The personal segment represented 61.4% and 60.1% of total
net premiums earned in the third quarter of 1996 and
1995, respectively.
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Hanover Citizens Consolidated
For the Quarters Ended
September 30, (In millions) 1996 1995 1996 1995 1996 1995
Net premiums earned $ 149.4 $ 148.9 $ 141.0 $ 136.1 $ 290.4 $ 285.0
Losses and loss adjustment expenses 107.6 94.5 96.5 105.6 204.1 200.1
Policy acquisition and other underwriting
expenses 46.8 48.7 37.6 36.0 84.4 84.7
-------------------- --------------------- --------------------
Underwriting (loss) profit $ (5.0) $ 5.7 $ 6.9 $ (5.5) $ 1.9 $ 0.2
==================== ===================== ====================
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Revenues
Personal segment net premiums earned increased $5.4
million, to $290.4 million during the third quarter of
1996, compared to $285.0 million in the third quarter of
1995. Hanover's personal segment net premiums earned
remained relatively flat at $149.4 million during the
third quarter of 1996. Increases in earned premium
resulting from rate increases and increases in policies
in force in the homeowners line were offset by rate
decreases in the personal automobile line and a lower
participation in an involuntary pool. Hanover's premium
growth in the personal automobile line has been impacted
by a combined 16% rate decrease in Massachusetts during
the past two years. Massachusetts currently accounts for
approximately 36% of Hanover's personal automobile
writings. Citizens' personal segment net premiums earned
increased $4.9 million, or 3.6%, to $141.0 million in the
third quarter of 1996. This increase is primarily
attributable to price increases in the personal
automobile and homeowners lines. This increase is
partially offset by a 2.5% decrease in policies in force
in the personal automobile line since December 31, 1995,
attributable to continued strong competition in Michigan.
Underwriting results
The personal segment underwriting profit increased $1.7
million, to a profit of $1.9 million in the third quarter
of 1996. Hanover's underwriting profit decreased $10.7
million to a loss of $5.0 million, while Citizens'
underwriting loss increased $12.4 million to a profit of
$6.9 million.
The decrease in Hanover's underwriting profit resulted
primarily from a $13.1 million or 13.9% increase in
losses and loss adjustment expenses to $107.6 million in
the third quarter of 1996. This increase is primarily
attributable to a $7.3 million increase in the personal
automobile line due to an increase in claims severity.
Homeowners' losses and LAE increased $4.9 million,
primarily attributable to increased loss frequency and
severity and a $2.2 million increase in catastrophe
losses to $3.8 million.
Citizens' underwriting results improved by $12.4 million,
primarily attributable to a decrease in catastrophe
losses. Catastrophe losses provided a $2.3 million
benefit during the third quarter of 1996, resulting from
a favorable re-estimation of catastrophe losses which
occurred in the first half of 1996. Citizens incurred
catastrophe losses of $6.9 million in the third quarter
of 1995.
Policy acquisition and other underwriting expenses at
Hanover decreased $1.9 million , to $46.8 million,
primarily due to decreased commission and assessment
expenses reflecting the reapportionment of a involuntary
pool and an increase in deferrable costs attributable to
premiums assumed in a reinsurance contract. The
reapportionment resulted in a decrease in Hanover's
participation in an involuntary pool that currently has
operating losses. Citizens' policy acquisition and other
underwriting expenses increased $1.6 million, to $37.6
million in the third quarter of 1996. The increase is
primarily attributable to the increase in net earned
premium and expenses associated with an ongoing policy
administration technology project, partially offset by
decreases in employee related expenses and commissions.
Commercial Segment
The commercial segment represented 38.6% and 39.9% of
total net premiums earned in the third quarter of 1996
and 1995, respectively.
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Hanover Citizens Consolidated
For the Quarters Ended
September 30, (In millions) 1996 1995 1996 1995 1996 1995
Net premiums earned $ 112.5 $ 116.0 $ 69.8 $ 73.4 $ 182.3 $ 189.4
Losses and loss adjustment expenses 83.5 82.5 45.1 39.7 128.6 122.2
Policy acquisition and other underwriting
expenses 40.3 46.1 18.5 21.4 58.8 67.5
Policyholders' dividends 1.7 1.1 2.0 1.5 3.7 2.6
-------------------- --------------------- --------------------
Underwriting (loss) profit $ (13.0) $ (13.7) $ 4.2 $ 10.8 $ (8.8) $ (2.9)
==================== ===================== ====================
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Revenues
Commercial segment net premiums earned decreased $7.1
million, to $182.3 million in the third quarter of 1996.
Hanover's commercial segment net premiums earned
decreased $3.5 million, to $112.5 million. This decrease
is primarily attributable to a $4.3 million, or 15.7%
decrease in earned premium in the workers' compensation
line primarily resulting from rate decreases of 15.8%
since January 1, 1995, in this line. Hanover's
withdrawal from a large voluntary pool on December 1,
1995 also contributed to the decrease in net premiums
earned. This was partially offset by a $2.1 million, or
8.4%, increase in earned premium, to $27.2 million in the
commercial automobile line due to a 2.9% increase in
policies in force. Citizens' commercial segment net
premiums earned decreased $3.6 million, or 4.9%, to $69.8
million in the third quarter of 1996. This decrease was
primarily attributable to rate decreases in the workers'
compensation line at Citizens as a result of continuing
competition in this line in Michigan. Rates in the
workers' compensation line at Citizens 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 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 $5.9
million, to a loss of $8.8 million in the third quarter
of 1996. Hanover's underwriting loss improved $0.7
million, or 5.1%, to a loss of $13.0 million, while
Citizens' underwriting profit decreased $6.6 million, to
$4.2 million in the third quarter of 1996.
Hanover's commercial segment losses and LAE increased
$1.0 million, or 1.2%, to $83.5 million in the third
quarter of 1996. This increase is primarily attributable
to a $7.5 million increase, to $16.9 million, in losses
and LAE in the workers' compensation line, reflecting a
decrease in favorable claims experience on prior accident
years. A $3.4 million increase in the commercial
automobile line resulting from increased severity also
contributed to the increase in losses and LAE in this
segment. This was offset by decreased losses in the
voluntary pools resulting from Hanover's withdrawal from
a large voluntary pool on December 1, 1995.
Citizens' underwriting profit decreased $6.6 million, to
$4.2 million as a result of increased loss frequency in
the commercial multiple peril and workers compensation
lines. Catastrophe losses decreased $2.3 million to a
benefit of $1.5 million. This benefit resulted from a
favorable re-estimation of catastrophe losses which
occurred in the first half of 1996. Losses and LAE in
the commercial multiple peril line increased $2.9
million, or 31.5%, to $12.1 million and losses and LAE
in the workers' compensation line increased $1.5
million, or 10.2%, to $16.2 million.
Policy acquisition and other underwriting expenses in the
commercial segment decreased $8.7 million, or 12.9%, to
$58.8 million in the third quarter of 1996. Hanover's
policy acquisition and other underwriting expenses
decreased $5.8 million, or 12.6%, to $40.3 million,
primarily attributable to a decrease in commissions and
assessment expenses resulting from a reapportionment of
an involuntary pool and the decrease in net earned
premium. Citizens' policy acquisition and other
underwriting expenses decreased $2.9 million, or 13.6%,
to $18.5 million, resulting from decreases in net earned
premium and decreases in employee related expenses and
commissions.
Nine months ended September 30, 1996 and 1995
Net Income
The Company's consolidated net income for the nine months
ended September 30, 1996 increased $6.8 million, to
$119.0 million, or $1.98 per share, compared to net
income of $112.2 million, or $1.83 per share for the same
period in 1995. The increase in net income is primarily
attributable to a $30.9 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 $12.1 million,
to $90.9 million for the nine months ended September 30,
1996. Net income in the nine month period of 1996 was
significantly impacted by catastrophes and other severe
weather related losses. This resulted in a $58.1 million
increase in losses and loss adjustment expenses to
$1,020.6 million in the nine months ended September 30,
1996. Catastrophe losses in the nine months ended
September 30, 1996 were $58.5 million, compared to $29.1
million in the comparable 1995 period. The increase in
losses and LAE were partially offset by an increase in
net investment income of $13.9 million, or 8.8%, to
$171.6 million. This increase was partially a result of a
change in estimated equity in earnings from a limited
partnership of $6.7 million. Net investment income in the
nine month period ended September 30, 1995 was
unfavorably impacted by a $2.4 million charge related to
the pre-refunding of municipal bonds. Net income during
the nine month period ended September 30, 1996 was also
favorably impacted by a $5.7 million arbitrated
settlement from a voluntary pool during the third quarter
of 1996. Federal income tax expense decreased $2.6
million in the nine months ended September 30, 1996, and
the effective tax rate decreased from 22.2% in the nine
months ended September 30, 1995, to 20.0%, for the same
period in 1996. Minority interest in Citizens net income
was $11.0 million in the nine month period ended
September 30, 1996, compared to $10.6 million during the
nine month period ended September 30, 1995.
Underwriting results
Consolidated net premiums earned for the nine months
ended September 30, 1996 increased $16.5 million, or
1.2%, to $1,407.5 million. Personal segment net premiums
earned increased $26.7 million, or 3.2%, to $855.5
million. This increase is primarily attributable to price
increases in the homeowners line at Hanover and price
increases in the personal automobile and homeowners lines
at Citizens. A 1.6% increase in policies in force in the
homeowners line at Hanover and modest increases in
policies in force in the personal automobile line at
Hanover partially offset by rate decreases in this line,
also contributed to the increase in net premiums earned.
Commercial segment net premiums earned decreased $10.2
million, to $552.0 million. This decrease is primarily
attributable to price decreases in the workers'
compensation line at Hanover and Citizens and to the
withdrawal from a large voluntary pool on December 1,
1995 at Hanover, as well as continued competitive market
conditions in this segment.
The consolidated underwriting loss for the nine months
ended September 30, 1996 increased $37.5 million, to a
loss of $58.6 million. The increase in the underwriting
loss is primarily attributable to increases in
catastrophe losses and severe weather related losses.
This resulted in a $58.1 million, or 6.0% increase in
losses and LAE to $1,020.6 million in the nine months
ended September 30, 1996. Policy acquisition and other
underwriting expenses decreased $5.8 million, or 1.3%, to
$436.8 million. Hanover's policy acquisition and other
underwriting expenses decreased $3.1 million primarily
attributable to an overall decrease in net earned premium
at Hanover and decreases in commissions and assessment
expenses from the reapportionment of an involuntary pool.
This was partially offset by a $3.6 million increase in
expenses associated with an ongoing policy administration
technology project that is intended to redesign
information systems used to serve customers, underwriting
and claims. The $2.7 million decrease in policy
acquisition and other underwriting expenses at Citizens
is primarily attributable to decreases in employee
related expenses, partially offset by an increase in net
earned premium and expenses associated with the policy
administration technology project.
Investment results
Net investment income before taxes increased $13.9
million, or 8.8%, to $171.6 million during the first nine
months of 1996 compared to $157.7 million in the
comparable period of 1995. This increase was partially as
a result of a change in estimated equity in earnings from
a limited partnership of $6.7 million. 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 remained
constant at 6.3% for both nine month periods. Net
investment income after taxes increased $11.6 million, to
$138.9 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 $45.9 million during the nine
months ended September 30, 1996, compared to realized
gains of $15.0 million in 1995.
Segment Results
Personal Segment
The personal segment represented 60.8% and 59.6% of total
net premiums earned in the nine months ended September
30, 1996 and 1995, respectively.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Hanover Citizens Consolidated
For the Nine Months Ended
September 30, (In millions) 1996 1995 1996 1995 1996 1995
Net premiums earned $ 442.2 $ 429.7 $ 413.3 $ 399.1 $ 855.5 $ 828.8
Losses and loss adjustment expenses 321.2 279.1 308.1 304.4 629.3 583.5
Policy acquisition and other underwriting
expenses 146.1 136.8 110.2 108.8 256.3 245.6
-------------------- --------------------- --------------------
Underwriting (loss) profit $ (25.1) $ 13.8 $ (5.0) $ (14.1) $ (30.1) $ (0.3)
==================== ===================== ====================
</TABLE>
Revenues
Personal segment net premiums earned for the nine months
ended September 30, 1996 increased $26.7 million, or
3.2%, to $855.5 million, compared to $828.8 million in
the same period of 1995. Hanover's personal segment net
premiums earned increased $12.5 million, or 2.9%, to
$442.2 million during the nine months ended September 30,
1996. This increase is primarily attributable to price
increases in the homeowners line and a 1.6% increase in
policies in force in the homeowners line along with a
modest increase in policies in force in the personal
automobile line. Citizens' personal segment net premiums
earned increased $14.2 million, or 3.6%, to $413.3
million in the nine months ended September 30, 1996.
This increase is primarily attributable to price
increases in the personal automobile and homeowners
lines. Citizens' increase is partially offset by a 2.5%
decrease in policies in force in the personal automobile
line since December 31, 1995, attributable to continued
strong competition in Michigan.
Underwriting results
The personal segment underwriting loss for the nine
months ended September 30, 1996 increased $29.8 million,
to a loss of $30.1 million. Hanover's underwriting
results deteriorated $38.9 million to a loss of $25.1
million, while Citizens' underwriting loss improved $9.1
million to a loss of $5.0 million.
Hanover's personal segment losses and LAE increased $42.1
million, or 15.1%, to $321.2 million in the nine months
ended September 30, 1996. This increase is primarily
attributable to a $23.9 million increase in losses and
LAE in the homeowners line, resulting from increased
catastrophes and severe weather. Losses and LAE in the
personal automobile line increased $14.3 million, or
6.8%, to $223.2 million reflecting primarily increased
loss frequency. Catastrophe losses in the personal
segment increased $15.6 million, to $25.9 million in the
nine months ended September 30, 1996 from $10.3 million
during the comparable 1995 period.
Citizens' underwriting loss decreased primarily as a
result of the increase in net premiums earned in the
personal automobile line and homeowners line of $8.6
million and $4.5 million, respectively. Favorable claims
experience on current and prior years resulted in a $17.7
million decrease in losses and LAE in the personal
automobile line. This decrease was offset by a $20.9
million increase in losses and LAE in the homeowners
line as a result of increases in catastrophes of $8.5
million in this line.
Policy acquisition and other underwriting expenses in the
personal segment increased $10.7 million, or 4.4%, to
$256.3 million in the nine months ended September 30,
1996. This increase is primarily attributable to an
increase of $9.3 million, or 6.8%, to $146.1 million at
Hanover for the nine months ended September 30, 1996.
This increase is due to increases in net earned premium,
a $3.3 million increase in group business expenses and a
$2.2 million increase in expenses associated with the
policy administration technology project. Policy
acquisition and other underwriting expenses in the
personal segment at Citizens increased $1.4 million, to
$110.2 million for the nine months ended September 30,
1996. This increase is primarily attributable to
increases in net earned premium and expenses associated
with an ongoing policy administration technology project,
partially offset by decreases in employee related
expenses.
Commercial Segment
The commercial segment represented 39.2% and 40.4% of
total net premiums earned in the nine months ended
September 30, 1996 and 1995, respectively.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Hanover Citizens Consolidated
For the Nine Months Ended
September 30, (In millions) 1996 1995 1996 1995 1996 1995
Net premiums earned $ 338.9 $ 353.6 $ 213.1 $ 208.6 $ 552.0 $ 562.2
Losses and loss adjustment expenses 238.3 252.0 153.0 127.0 391.3 379.0
Policy acquisition and other underwriting
expenses 128.4 140.8 52.1 56.2 180.5 197.0
Policyholders' dividends 3.1 2.8 5.6 4.2 8.7 7.0
-------------------- --------------------- --------------------
Underwriting (loss) profit $ (30.9) $ (42.0) $ 2.4 $ 21.2 $ (28.5) $ (20.8)
==================== ===================== ====================
</TABLE>
Revenues
Commercial segment net premiums earned for the nine
months ended September 30, 1996 decreased $10.2 million,
or 1.8%, to $552.0 million. Hanover's commercial segment
net premiums earned decreased $14.7 million, or 4.2%, to
$338.9 million. This decrease is primarily attributable
to Hanover's withdrawal from a large voluntary pool on
December 1, 1995, and to rate decreases of 15.8% since
January 1, 1995, in the workers compensation line.
Citizens' commercial segment net premiums earned
increased $4.5 million, or 2.2%, to $213.1 million in the
nine months ended September 30, 1996. The increase is
primarily attributable to a 9.5% increase in policies in
force in the commercial multiple peril line since
December 31, 1995. This growth continues to be offset by
rate reductions in the workers compensation line as a
result of continuing competition in this line. Rates in
the workers' compensation line at Citizens 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 nine
months ended September 30, 1996 increased $7.7 million,
or 37.0% to a loss of $28.5 million. Hanover's
underwriting loss improved $11.1 million, or 26.4%, to a
loss of $30.9 million and Citizens' underwriting profit
decreased $18.8 million, to a profit of $2.4 million in
the nine months ended September 30, 1996.
Hanover's commercial segment losses and LAE decreased
$13.7 million, or 5.4%, to $238.3 million in the nine
months ended September 30, 1996. This improvement is
primarily attributable to a decrease of $8.7 million in
the commercial automobile line as a result of favorable
claims experience on the current and prior years and an
$23.1 million decrease in losses in LAE resulting from
the withdrawal of a large voluntary pool. However, losses
and LAE in the workers' compensation line increased $7.9
million, to $40.7 million, primarily due to an increase
in claims severity and a decrease in favorable claims
experience on prior accident years. Commercial multiple
peril losses and LAE increased $4.3 million, to $114.9
million due to unfavorable claims experience on prior
accident years and an increase in catastrophes from $5.8
million in 1995 to $11.3 million in 1996.
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 $15.4 million, or
53.1%, to $44.4 million in the nine months ended
September 30, 1996. Catastrophe losses were $1.5 million
in this segment during the nine months ended September
30, 1996 compared to $0.8 million in the comparable
period of 1995.
Policy acquisition and other underwriting expenses in the
commercial segment decreased $16.5 million, or 8.4%, to
$180.5 million in the nine months ended September 30,
1996. Hanover's policy acquisition expenses and other
underwriting expenses decreased $12.4 million, or 8.8%,
to $128.4 million, primarily attributable to the decrease
in net earned premium and a decrease in commissions and
assessment expenses resulting from the reapportionment of
an involuntary pool. This was partially offset by a $1.4
million increase associated with the policy
administration technology project. Citizens' policy
acquisition and other underwriting expenses in the
commercial segment decreased $4.1 million, or 7.3%, to
$52.1 million, primarily attributable to decreases in
employee related expenses, partially offset by the effect
of increases in net earned premium.
Reserve for Losses and Loss Adjustment Expenses
The Company maintains reserves to provide for its
estimated ultimate liability for losses and loss
adjustment expenses with respect to reported and
unreported claims incurred as of the end of each
accounting period. These reserves are estimates,
involving actuarial projections at a given point in time,
of what management expects the ultimate settlement and
administration of claims will cost based on facts and
circumstances then known, predictions of future events,
estimates of future trends in claim severity and judicial
theories of liability and other factors. The inherent
uncertainty of estimating insurance reserves is greater
for certain types of property and casualty insurance
lines, particularly workers' compensation and other
liability lines, where a longer period of time may elapse
before a definitive determination of ultimate liability
may be made, and where the technological, judicial and
political climates involving these types of claims are
changing.
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 nine months ended September 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 1,100.9 1,042.8
Decrease in provision for insured events of prior years (80.3) (80.4)
---------------------
Total incurred losses and LAE 1,020.6 962.4
---------------------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current year 516.0 428.0
Losses and LAE attributable to insured events of prior years 504.7 491.0
---------------------
Total payments 1,020.7 919.0
---------------------
Change in reinsurance recoverable on unpaid losses (35.6) 7.9
---------------------
Reserve for losses and LAE, end of period $ 2,860.3 $2,873.0
=====================
</TABLE>
As part of an ongoing process, the reserves have been
re-estimated for all prior accident years and were
decreased by $80.3 million and $80.4 million for the nine
month periods ended September 30, 1996 and 1995,
respectively. Citizens' favorable development during the
nine month period increased $9.6 million, to $26.0
million, primarily attributable to reduced medical costs
in the personal automobile line. Favorable development
at Hanover during the nine month period decreased $9.7
million, to $54.3, primarily attributable to unfavorable
development in the commercial multiple peril line.
During the third quarter of 1996, Hanover's favorable
development decreased $12.6 million, to $13.0 million,
primarily attributable to decreased favorable development
in the workers compensation and commercial multiple peril
lines. Although Hanover is experiencing decreases in
favorable development in the workers compensation and
commercial multiple peril lines, Hanover continues to
experience increased favorable development in the
personal automobile and commercial automobile lines.
The Company expects reduced favorable development at
Hanover to continue to impact future earnings.
The Company regularly reviews its reserving techniques,
its overall reserving position and its reinsurance. Based
on (i) review of historical data, legislative enactments,
judicial decisions, legal developments in impositions of
damages, changes in political attitudes and trends in
general economic conditions, (ii) review of per claim
information, (iii) historical loss experience of the
Company and the industry, (iv) the relatively short-term
nature of most policies, and (v) periodic estimates of
required reserves by an independent actuarial consulting
firm, management believes that adequate provision has
been made for loss reserves. However, establishment of
appropriate reserves is an inherently uncertain process
and there can be no certainty that current established
reserves will prove adequate in light of subsequent
actual experience. A significant change to the estimated
reserves could have a material impact on the results of
operations.
Investment Portfolio
The Company's investment portfolio increased $70.4
million, to $3,890.0 million during the nine months ended
September 30, 1996, from $3,819.6 million at December 31,
1995. Citizens' investment portfolio increased $77.5
million to $1,568.3 million and Hanover's investment
portfolio decreased $7.1 million to $2,321.7 million.
Debt securities increased $133.4 million, to $3,489.9
million, from $3,356.5 million, and represented 89.7% and
87.9% of the carrying value of all investments at
September 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 $68.2
million decrease in equity securities to $369.9 million
in the nine months ended September 30, 1996. Tax-exempt
securities increased $96.4 million, to $2,243.1 million,
from $2,146.7 million during the nine months ended
September 30, 1996. Tax-exempt securities represented
64.3% of total debt securities at September 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 September 30, 1996 was $147.2 million compared to
$221.1 million at December 31, 1995. Unrealized
depreciation in the nine month period was $71.8 million
on debt securities and $2.1 million on equities and other
investments.
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. The Company periodically adjusts its
investment policy to respond to changes in short-term and
long-term cash requirements.
Net cash provided by operating activities for the nine
months ended September 30, 1996 was $83.1 million,
compared to $135.9 million provided in the comparable
prior year period. This decrease is primarily
attributable to the increase in underwriting losses
during the first nine months of 1996 which resulted in an
increase in claims payments.
Net cash used for investing activities was $56.5 million
for the nine months ended September 30, 1996 compared to
cash used of $302.1 million in the comparable prior year
period. Cash used for investing activities has declined
due to the decrease in cash flow from operations, and to
a reduction in the Company's balance of cash and cash
equivalents.
Net cash used for financing activities for the nine
months ended September 30, 1996 was $55.4 million,
compared to $27.2 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 $1,545.1 million at September
30, 1996, or $25.92 per share, compared to $1,509.3
million at December 31, 1995, or $24.82 per share.
Shareholders' equity reflects net income for the nine
month period and the impact of a decrease of $48.0
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 September 30, 1996,
these lines totaled $40.0 million and are subject to
annual renewal. There were no borrowings under these
lines of credit during the nine months ended September
30, 1996. In addition, the holding company's financial
structure provides the flexibility to obtain funds
externally through debt or equity financing, if needed.
Forward-Looking Statements
The Company wishes to caution readers that the following
important factors, among others, in some cases have
affected and in the future could affect, the Company's
actual results and could cause the Company's actual
results for 1996 and beyond to differ materially from
those expressed in any forward-looking statements made
by, or on behalf of, the Company. When used in the MD&A
discussion, the words "believes," "anticipated,"
"expects" and similar expressions are intended to
identify forward looking statements. See "Important
Factors Regarding Forward-Looking Statements " filed
herewith as Exhibit 99-1 and incorporated herein by
reference.
Factors that may cause actual results to differ
materially from those contemplated or projected,
forecast, estimated or budgeted in such forward looking
statements include among others, the following
possibilities: (i) adverse catastrophe experience and
severe weather; (ii) adverse loss development for events
the Company insured in prior years; (iii) heightened
competition, including the intensification of price
competition, the entry of new competitors, and the
introduction of new products by new and existing
competitors; (iv) adverse state and federal legislation,
including decreases in rates, limitations on premium
levels, and increases in minimum capital and reserve
requirements; (v) changes in interest rates causing a
reduction of investment income and in the market value of
interest rate sensitive investments; (vi) failure to
obtain new customers, retain existing customers or
reductions in policies in force by existing customers;
(vii) higher service, administrative, or general expense
due to the need for additional advertising, marketing,
administrative or management information systems
expenditures; (viii) loss or retirement of key
executives; (ix) adverse changes in the ratings obtained
by independent rating agencies such as Moody's, Standard
and Poors and A.M. Best.
PART II - OTHER INFORMATION
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
EX - 99-1 Important Factors Regarding Forward-Looking Statements
(b) Reports on Form 8-K On September 6, 1996, a report on
Form 8-K was filed reporting under Item 5, Other Events,
the announcement that Theodore J.Rupley resigned from his
positions as vice president of the Company and president of
The Hanover Insurance Company ("Hanover").
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 November 12, 1996 /s/ John F. O'Brien
John F. O'Brien
President and Chief
Executive Officer
Dated November 12, 1996 /s/ Edward J. Parry III
Edward J. Parry III
Vice President, Treasurer
and Principal Accounting Officer
Exhibit 99.1
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
The Company wishes to caution readers that the following
important factors, among others, in some cases have affected the
Company's results and in the future could cause actual results
and needs of the Company to vary materially from forward-looking
statements made from time to time by the Company on the basis of
management's then-current expectations. The businesses in which
the Company is engaged are in rapidly changing and competitive
markets and involve a high degree of risk, and accuracy with
respect to forward-looking projections is difficult.
Geographic Concentration in the Property and Casualty
-----------------------------------------------------------
Insurance Business
------------------
Substantially all of the Company's net premiums written and
earnings are generated in Michigan and the Northeast
(Connecticut, Massachusetts, New York, New Jersey, New Hampshire,
Rhode Island, Vermont and Maine). The revenues and profitability
of the Company are therefore subject to prevailing economic,
regulatory, demographic and other conditions, including adverse
weather, in Michigan and the Northeast.
Cyclicality in the Property and Casualty Insurance Industry
-----------------------------------------------------------
Historically, the property and casualty insurance industry has
been highly cyclical. The property and casualty industry's
profitability can be affected significantly by price competition,
volatile and unpredictable developments such as extreme weather
conditions and natural disasters, legal developments affecting
insurer liability and the size of jury awards, fluctuations in
interest rates and other factors that affect investment returns
and other general economic conditions and trends that may affect
the adequacy of reserves.
Over the past several years, the property and casualty
insurance industry as a whole has been in a soft market.
Competition for premiums in the property and casualty insurance
markets may continue to have an adverse impact on the Company's
rates and profitability.
Catastrophes and Severe Weather Losses in the Property and
-----------------------------------------------------------
Casualty Insurance Industry
---------------------------
Property and casualty insurers are subject to claims arising
out of catastrophes and other severe weather related losses,
which may have a significant impact on their results of
operations and financial condition. The Company may experience
catastrophes and severe weather losses in the future which could
have a material adverse impact on the Company. Catastrophes and
severe weather losses can be caused by various events including
hurricanes, earthquakes, tornadoes, wind, hail, fires, severe
winter weather and explosions, and the frequency and severity of
catastrophes are inherently unpredictable. The extent of losses
from catastrophes and severe weather is a function of two
factors: the total amount of insured exposure in the area
affected by the event and the severity of the event. Although
catastrophes and severe weather can cause losses in a variety of
property and casualty lines, homeowners and commercial property
insurance have in the past generated the vast majority of the
Company's catastrophe-related claims. The Company purchases
catastrophe reinsurance as protection against catastrophe losses.
The Company believes, based upon its review of its reinsurers'
financial statements and reputations in the reinsurance
marketplace, that the financial condition of its reinsurers is
sound. However, there can be no assurance that reinsurance will
be adequate to protect the Company against such losses or that
such reinsurance will continue to be available to the Company in
the future at commercially reasonable rates.
Uncertainty Regarding Adequacy of Property and Casualty Loss
---------------------------------------------------------------
Reserves
---------
The Company maintains reserves to cover its estimated ultimate
liability for losses and loss adjustment expenses ("LAE") with
respect to reported and unreported claims incurred as of the end
of each accounting period. These reserves are estimates,
involving actuarial projections at a given time, of what the
Company expects the ultimate settlement and administration of
claims will cost based on facts and circumstances then known,
predictions of future events, estimates of future trends in
claims severity and judicial theories of liability, legislative
activity and other factors. The inherent uncertainties of
estimating reserves are greater for certain types of property and
casualty insurance lines, particularly workers' compensation,
where a longer period of time may elapse before a definitive
determination of ultimate liability may be made, and
environmental liability, where the technological, judicial and
political climates involving these types of claims are changing.
The Company regularly reviews reserving techniques, reinsurance
and overall reserve adequacy. Based upon (i) review of historical
data, legislative enactments, judicial decisions, legal
developments in imposition of damages, changes in political
attitudes and trends in general economic conditions; (ii) review
of per claim information; (iii) historical loss experience of the
Company and the industry; and (iv) the relatively short-term
nature of most of its property and casualty insurance policies,
management believes that adequate provision has been made for
reserves. However, establishment of appropriate reserves is an
inherently uncertain process involving estimates of future losses
and there can be no certainty that currently established reserves
will prove adequate in light of subsequent actual experience. The
Company's reserves are annually certified as required by
insurance regulatory authorities.
Regulatory, Surplus, Capital, Rating Agency and Related Matters
---------------------------------------------------------------
Insurance companies are subject to supervision and regulation
by the state insurance authority in each state in which they
transact business. Such supervision and regulation relate to
numerous aspects of an insurance company's business and financial
condition, including limitations on the authorization of lines of
business, underwriting limitations, the setting of premium rates,
the establishment of standards of solvency, the licensing of
insurers and agents, concentration of investments, levels of
reserves, the payment of dividends, transactions with affiliates,
changes of control and the approval of policy forms. Such
regulation is concerned primarily with the protection of
policyholders.
State regulatory oversight and various proposals at the federal
level (including the proposed adoption of a federal regulatory
framework for insurance companies) may in the future adversely
affect the Company's ability to sustain adequate returns in
certain lines of business. In recent years, the state insurance
regulatory framework has come under increased federal scrutiny,
and certain state legislatures have considered or enacted laws
that alter and, in many cases, increase state authority to
regulate insurance companies and insurance holding company
systems. Further, the National Association of Insurance
Commissioners ("NAIC") and state insurance regulators are
reexamining existing laws and regulations, and as a condition to
accreditation have required the adoption of certain model laws
which specifically focus on insurance company investments, issues
relating to the solvency of insurance companies, risk-based
capital ("RBC") guidelines, interpretations of existing laws, the
development of new laws, and the definition of extraordinary
dividends.
The capacity for an insurance company's growth in premiums is
in part a function of its statutory surplus. Maintaining
appropriate levels of statutory surplus, as measured by state
insurance regulators, is considered important by state insurance
regulatory authorities and the private agencies that rate
insurers' claims-paying abilities and financial strength. Failure
to maintain certain levels of statutory surplus could result in
increased regulatory scrutiny, action by state regulatory
authorities or a downgrade by the private agencies referred to
below.
The NAIC has created a new system for assessing the adequacy of
statutory capital for property and casualty insurers. The new
system, known as risk-based capital, is in addition to the
states' fixed dollar minimum capital and other requirements. The
new system is based on risk-based formulas (separately defined
for life and health insurers and property and casualty insurers)
that apply prescribed factors to the various risk elements in an
insurer's business to report a minimum capital requirement
proportional to the amount of risk assumed by the insurer.
State Guaranty Funds, Shared Markets Mechanisms and Pooling
---------------------------------------------------------------
Arrangements
-------------
All fifty states of the United States have insurance guaranty
fund laws requiring all life and health and property and casualty
insurance companies doing business within the state to
participate in guaranty associations, which are organized to pay
contractual obligations under insurance policies issued by
impaired or insolvent insurance companies. These associations
levy assessments (up to prescribed limits) on all member insurers
in a particular state on the basis of the proportionate share of
the premiums written by member insurers in the lines of business
in which the impaired or insolvent insurer is engaged. Mandatory
assessments by state guaranty funds are used to cover losses to
policyholders of insolvent or rehabilitated companies and can be
partially recovered through a reduction in future premium taxes
in many states. These assessments may increase in the future
depending upon the rate of insolvencies of insurance companies.
In addition, as a condition to the ability to conduct business
in various states, the Company is required to participate in
mandatory property and casualty shared market mechanisms or
pooling arrangements, which provide various insurance coverages
to individuals or other entities that otherwise are unable to
purchase such coverage voluntarily provided by private insurers.
The Company cannot predict whether its participation in these
shared market mechanisms or pooling arrangements will provide
underwriting profits or losses to the Company.
Competition
------------
The Property and Casualty Insurance industry in general is
highly competitive. Many of the Company's competitors are larger
and have greater financial, technical and operating resources
than those of the Company.
Retention of Key Executives
----------------------------
The future success of the Company will be affected by its
continued ability to attract and retain qualified executives. The
Company's success is dependent in large part on John F. O'Brien,
the loss of whom could adversely affect the Company's business.
The Company does not have an employment agreement with Mr.
O'Brien.
<TABLE>
Exhibit 11
ALLMERICA PROPERTY & CASUALTY COMPANIES, INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
For the Periods Ended September 30, 1996 and 1995
(Unaudited)
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
Primary:
Average shares outstanding 59.6 61.2 59.9 61.5
Net effect of dilutive stock options
based on the treasury stock
method using average market
price 0.1 - 0.1
TOTALS 59.7 61.2 60.0 61.5
Net income $ 40.8 $ 43.1 $ 119.0 $ 112.2
Per share amount $ 0.68 $ 0.70 $ 1.98 $ 1.83
Fully diluted:
Average shares outstanding 59.6 61.2 59.9 61.5
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 61.2 60.0 61.5
Net income $ 40.8 $ 43.1 $ 119.0 $ 112.2
Per share amount $ 0.68 $ 0.70 $ 1.98 $ 1.83
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 3490
<DEBT-CARRYING-VALUE> 3443
<DEBT-MARKET-VALUE> 3490
<EQUITIES> 370
<MORTGAGE> 0
<REAL-ESTATE> 4
<TOTAL-INVEST> 3890
<CASH> 97
<RECOVER-REINSURE> 40
<DEFERRED-ACQUISITION> 169
<TOTAL-ASSETS> 5774
<POLICY-LOSSES> 2860
<UNEARNED-PREMIUMS> 840
<POLICY-OTHER> 52
<POLICY-HOLDER-FUNDS> 13
<NOTES-PAYABLE> 22
0
0
<COMMON> 62
<OTHER-SE> 1483
<TOTAL-LIABILITY-AND-EQUITY> 5774
1408
<INVESTMENT-INCOME> 172
<INVESTMENT-GAINS> 46
<OTHER-INCOME> 10
<BENEFITS> 1021
<UNDERWRITING-AMORTIZATION> 313
<UNDERWRITING-OTHER> 139
<INCOME-PRETAX> 162
<INCOME-TAX> 32
<INCOME-CONTINUING> 130
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 119
<EPS-PRIMARY> 1.98
<EPS-DILUTED> 1.98
<RESERVE-OPEN> 2896
<PROVISION-CURRENT> 1101
<PROVISION-PRIOR> (80)
<PAYMENTS-CURRENT> 516
<PAYMENTS-PRIOR> 505
<RESERVE-CLOSE> 2860
<CUMULATIVE-DEFICIENCY> (36)
</TABLE>
