ALLMERICA PROPERTY & CASUALTY COMPANIES INC, 10-K/A, 1997-06-12

ALLMERICA PROPERTY & CASUALTY COMPANIES INC
10-K/A, 1997-06-12
LIFE INSURANCE

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FORM 10-K/A

(Amendment No. 1)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1996

[_] 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)

04-3164595
DELAWARE

(IRS EMPLOYER
(STATE OR OTHER JURISDICTION, IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)

440 LINCOLN STREET,
WORCESTER, MASSACHUSETTS 01653
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)

(508) 855-1000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT:

COMMON STOCK, $1.00 PAR VALUE NEW YORK STOCK EXCHANGE
(TITLE OF EACH CLASS OF STOCK) (NAME OF EXCHANGE ON WHICH
REGISTERED)

SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT: NONE

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

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

Based on the closing sales price of May 30, 1997 the aggregate market value of
the voting stock held by nonaffiliates of the registrant was $770,922,566.

The number of shares outstanding of the registrant's common stock, $1.00 par
value, was 59,658,406 shares outstanding as of May 30, 1997.

DOCUMENTS INCORPORATED BY REFERENCE

NONE

Total number of pages, including cover page 1 of 45

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EXPLANATORY NOTE

This Amendment No. 1 to Form 10-K on Form 10-K/A (the "Form 10-K/A") is being
made to clarify certain disclosures in Items 7 and 8 of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996 (the "Form 10-K"). In
addition, Item 14 of the Form 10-K has been restated to indicate the filing of
an updated independent auditors' consent as an exhibit to the Form 10-K/A.

ITEM 7

MANAGEMENT'S DISCUSSION & 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

1996 COMPARED TO 1995

Net Income

The Company's consolidated net income increased $6.3 million, to $146.4
million, or $2.44 per share in 1996, compared to net income of $140.1 million,
or $2.28 per share in 1995. The increase in net income is primarily
attributable to a $33.5 million increase in realized gains, primarily related
to the sale of equity securities, reflecting 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 $13.5 million, to $117.6 million. This decrease
resulted from catastrophes and other severe weather related losses which
contributed to a $82.2 million increase in losses and loss adjustment expenses
to $1,371.9 million. Catastrophe losses increased $27.3 million, to $62.9
million in 1996 from $35.6 million during the previous year. The increase in
losses and LAE was partially offset by an increase in net investment income of
$25.8 million, or 12.3%, to $235.4 million, attributable to an increase in
higher-yielding debt securities in the portfolio and earnings from a limited
partnership. Net income during 1996 was also favorably impacted by a $5.7
million arbitrated settlement from a voluntary pool during the third quarter.
Federal income tax expense decreased $15.7 million, to $36.4 million during
1996, and the effective tax rate decreased from 25.3% in 1995, to 18.4%, in
1996. Net realized investment gains, net of federal income taxes, were $31.3
million and $9.5 million in 1996 and 1995, respectively. Minority interest in
Citizens' net income was $14.9 million in 1996, compared to $14.1 million
during 1995.

Underwriting results

Consolidated net premiums earned increased $35.1 million, or 1.9%, to
$1,898.3 million in 1996. Personal segment net premiums earned increased $48.6
million, or 4.4%, to $1,161.9 million, reflecting the accounting effects of
restructuring a reinsurance contract at Hanover, increasing both losses and
net premiums earned by approximately $19.0 million. In addition, a 2.0%
increase in policies in force in Hanover's homeowners line as well as moderate
price increases in this line contributed to the increase in net premiums
earned. The growth in Citizens' personal segment is due to increases in net
premiums earned in Ohio and Indiana resulting from expansion in these states
as well as price increases in the personal automobile and homeowners lines.
Commercial segment net premiums earned decreased $13.5 million, to $736.4
million. This decrease is primarily attributable to rate 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 1996 increased $62.6 million, to a
loss of $88.2 million. The increase in the underwriting loss is primarily
attributable to the increases in catastrophes and severe weather related
losses. These factors contributed to an $82.2 million, or 6.4% increase in
losses and LAE to $1,371.9 million in 1996.

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Policy acquisition expenses increased $13.5 million, or 3.3%, to $422.6
million and other underwriting expenses increased $2.0 million, or 1.1% to
$192.0 million in 1996. Hanover's policy acquisition expenses increased $9.0
million, or 3.6%, to $258.5 million, primarily attributable to higher
acquisition costs assessed by voluntary and involuntary pools, as well as the
overall increase in net earned premium at Hanover. Other underwriting expenses
at Hanover increased $2.2 million as a result of an increase of approximately
$7.0 million in expenses associated with an ongoing policy administration
technology project that is intended to redesign information systems used to
serve customers, underwriting and claims. This was partially offset by a
decrease in assessment expenses from the withdrawal of a large voluntary pool.
Policy acquisition expenses at Citizens increased $4.5 million, or 2.8%, to
$164.1 million, reflecting growth in net premiums earned. Citizens' other
underwriting expenses decreased $0.2 million to $66.3 million in 1996,
resulting from reductions in employee related expenses and commissions,
partially offset by expenses associated with the aforementioned policy
administration technology project. Management anticipates an increase in its
expense levels due to further planned investments in technology consolidation
and enhancement.

Investment results

Net investment income before taxes increased $25.8 million, or 12.3%, to
$235.4 million during 1996, compared to $209.6 million in 1995. The increase in
1996 is primarily the result of an increase in average invested assets, $10.0
million of income from limited partnerships, and the Company's portfolio shift
to higher yielding debt securities, including longer duration and non-investment
grade securities. Refer to the discussion in the Investment Portfolio section on
page 12 for additional information about investment and non-investment grade
debt securities. The average pre-tax yield on debt securities was 6.4% and 6.1%
for 1996 and 1995, respectively. Average invested assets increased $385.8
million, or 11.0%, to $3,891.0 million.

Net realized gains on investments before taxes were $48.1 million and $14.6
million in 1996 and 1995, respectively. Net realized investment gains in 1996
primarily resulted from sales of appreciated equity securities due to the
Company's strategy of shifting to a higher level of debt securities.

Federal Income Taxes

The provision for federal income taxes was $36.4 million in 1996 compared to
$52.1 million in 1995. The decrease in 1996 represents a decrease in the
effective tax rate from 25.3% in 1995 to 18.4% in 1996. This is attributable
to deteriorating underwriting results and an increase in the proportion of
pre-tax income attributable to tax-exempt interest. Federal income tax in 1995
was adversely impacted by reserves provided for revisions in estimated prior
year tax liabilities, including $7.2 million provided during the fourth
quarter of 1995.

1995 COMPARED TO 1994

Net Income

The Company's consolidated net income increased $40.9 million to $140.1
million in 1995, compared to $99.2 million in 1994. Excluding realized gains
and losses and the effect of accounting changes, all net of taxes and minority
interest, net income increased $32.4 million to $131.1 million in 1995. The
increase in net income resulted primarily from favorable current year claims
experience attributable to a return to more normal weather conditions in the
Northeast and in Michigan. Catastrophe losses decreased $10.5 million, to
$35.6 million in 1995, from $46.1 million during the previous year. The
improved underwriting results were partially offset by a $48.2 million
increase in federal income taxes. The effective tax rate increased to 25.3% in
1995 from 3.5 % in 1994. This increase is attributable to improved
underwriting results, a decrease in the proportion of pre-tax income
attributable to tax-exempt interest, and to reserves provided for revisions in
estimated prior year tax liabilities. Net realized investment gains, net of
federal income taxes, were $9.5 million and $2.3 million in 1995 and 1994,
respectively. Minority interest in Citizens net income was $14.1 million and
$7.9 million in 1995 and 1994, respectively. Net income for 1994 includes a
cumulative effect charge of $2.0 million, net of federal income taxes, from
the adoption of Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits."

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Underwriting Results

Consolidated net premiums earned increased $71.9 million, or 4.0%, to
$1,863.2 million in 1995. Personal segment net premiums earned increased $69.0
million, or 6.6%, to $1,113.3 million, in 1995, reflecting price increases in
the personal automobile and homeowners lines and a modest increase in policies
in force in the homeowners line. Commercial segment net premiums earned
increased $2.9 million, or 0.4%, to $749.9 million in 1995.

The consolidated underwriting loss improved $74.8 million, from a loss of
$100.4 million in 1994, to a loss of $25.6 million in 1995. This improvement
reflects a return to more normal weather conditions in the first half of 1995
and improved claims experience at both Hanover and Citizens. Losses and LAE
decreased $17.0 million, or 1.3%, to $1,289.7 million in 1995, primarily
attributable to improved claims experience in both the personal and commercial
segments, especially the homeowners and workers' compensation lines. Policy
acquisition expenses, which consist primarily of commissions, premium taxes
and other policy issuance costs, increased $18.8 million, or 4.8%, to $409.1
million in 1995, resulting primarily from the growth in net earned premiums.
Other underwriting expenses decreased $4.7 million, or 2.4%, to $190.0 million
in 1995. The 1994 results reflect expansion costs into Ohio and Indiana at
Citizens, and higher agents' profit sharing expenses at Hanover.

Investment Results

Net investment income before tax increased $7.2 million, or 3.6%, to $209.6
million in 1995. This increase is attributable to an increase in average
invested assets, partially offset by a decrease in the portfolio's average
pre-tax yield from 6.2% in 1994, to 6.0% in 1995. This decrease resulted
primarily from lower yields available on new investments relative to the
yields on maturing investments. Net investment income after tax remained
relatively unchanged at $170.7 million in 1995, versus $170.5 million in 1994.
The effective tax rate on investment income increased from 15.8% to 18.6%
during 1995. Net realized gains on investments increased $11.1 million to
$14.6 million in 1995 due to increased gains on the sale of equity securities.

Federal Income Taxes

The provision for federal income taxes was $52.1 million in 1995 compared to
$3.9 million in 1994. The increase in 1995 represents an increase in the
effective tax rate from 3.5% in 1994 to 25.3% in 1995. This is attributable to
improved underwriting results, a decrease in the proportion of pre-tax income
attributable to tax-exempt interest, and to reserves provided for revisions in
estimated prior year tax liabilities, including $7.2 million provided during
the fourth quarter of 1995.

SEGMENT RESULTS

PERSONAL SEGMENT

The personal segment represented 61.2%, 59.8% and 58.3% of total net
premiums earned in 1996, 1995 and 1994 respectively.
<TABLE>
<CAPTION>
HANOVER CITIZENS CONSOLIDATED
--------------------- ---------------------- ----------------------------
FOR THE YEARS ENDEDDECEMBER 31,
--------------------------------------------------------------------------
1996 1995 1994 1996 1995 1994 1996 1995 1994
------ ------ ------ ------ ------ ------ -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net premiums earned..... $607.3 $577.1 $548.2 $554.6 $536.2 $496.1 $1,161.9 $1,113.3 $1,044.3
Losses and loss
adjustment expenses.... 452.0 368.6 366.0 404.1 413.6 391.0 856.1 782.2 757.0
Policy acquisition ex-
penses................. 150.8 135.2 125.9 112.5 108.1 99.5 263.3 243.3 225.4
Other underwriting ex-
penses................. 51.7 49.7 50.0 39.3 41.1 37.9 91.0 90.8 87.9
------ ------ ------ ------ ------ ------ -------- -------- --------
Underwriting (loss)
profit................. $(47.2) $ 23.6 $ 6.3 $ (1.3) $(26.6) $(32.3) $ (48.5) $ (3.0) $ (26.0)
====== ====== ====== ====== ====== ====== ======== ======== ========
</TABLE>

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1996 COMPARED TO 1995

Revenues

Personal segment net premiums earned increased $48.6 million, or 4.4%, to
$1,161.9 million in 1996, compared to $1,113.3 million in 1995. Hanover's
personal segment net premiums earned increased $30.2 million, or 5.2%, to
$607.3 million during 1996. This increase is primarily attributable to an
increase in the personal automobile line associated with the accounting
effects of restructuring a reinsurance contract, increasing net premiums
earned by $19.0 million. A 2.0% increase in policies in force in Hanover's
homeowners line as well as moderate price increases in this line also
contributed to the increase in net premiums earned. These increases were
partially offset by a mandated 4.5% decrease in Massachusetts personal
automobile rates which became effective January 1, 1996. Effective January 1,
1997, Massachusetts personal automobile rates were decreased an additional
6.2% as mandated by the Massachusetts Insurance Commissioner. In addition, in
response to increasing price competition in Massachusetts, Hanover, in
February 1997, requested the Massachusetts Division of Insurance to approve a
plan to offer a safe driver's discount of 10% on automobile insurance
premiums. Management believes these rate decreases may unfavorably impact
premium growth in Massachusetts. Approximately 39% of Hanover's personal
automobile business is currently written in Massachusetts.

Citizens' personal segment net premiums earned increased $18.4 million, or
3.4%, to $554.6 million in 1996. This growth is attributable to price
increases in the personal automobile and homeowners lines. The growth is
partially offset by a 3.0% decrease in policies in force in the personal
automobile line, attributable to the Company's selective reduction of writings
in Michigan when rates were viewed as inadequate and to continued strong
competition in Michigan. While management has taken steps to increase
penetration in affinity groups and has initiated other marketing programs,
heightened competition may continue to result in reduced growth in the
personal segment.

Underwriting results

The personal segment underwriting loss in 1996 increased $45.5 million, to a
loss of $48.5 million. Hanover's underwriting results deteriorated $70.8
million to a loss of $47.2 million, while Citizens' underwriting loss improved
$25.3 million to a loss of $1.3 million.

Hanover's personal segment losses and LAE increased $83.4 million, or 22.6%,
to $452.0 million in 1996. This increase is partially attributable to a $28.8
million increase in losses and LAE in the homeowners line, resulting from
increased catastrophes and severe weather. Catastrophe losses in Hanover's
personal segment increased $17.2 million, to $30.6 million in 1996 from $13.4
million in 1995. Losses and LAE in the personal automobile line increased
$49.6 million, or 17.8%, to $328.0 million, primarily reflecting the
accounting effects of restructuring a reinsurance contract, increasing losses
by $19.0 million, in addition to a moderate increase in claims frequency and a
$4.7 million reduction in favorable reserve development.

The improvement in Citizens' underwriting results reflects favorable claims
activity in both current and prior accident years in the personal automobile
line attributable to continued improvements in severity. This was partially
offset by an increase in catastrophe losses of $6.2 million to $13.4 million,
primarily in the homeowners line.

Policy acquisition expenses in the personal segment increased $20.0 million,
or 8.2%, to $263.3 million and other underwriting expenses increased $0.2
million to $91.0 million in 1996. This increase in policy acquisition expenses
is primarily attributable to an increase of $15.6 million, or 11.5%, to $150.8
million at Hanover resulting from a reapportionment of certain acquisition
expenses to the personal segment from the commercial segment, as well as an
increase in net premium earned. The $2.0 million increase in Hanover's other
underwriting expenses resulted from an increase of approximately $4.0 million
in expenses associated with the policy administration technology project,
offset by a decrease in assessment expenses associated with the
reapportionment of an involuntary pool. Policy acquisition expenses in the
personal segment at Citizens increased $4.4 million, or 4.1%, to $112.5
million in 1996, reflecting growth in net premiums earned. The $1.8 million

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decline in Citizens' other underwriting expenses is primarily attributable to
reductions in employee related expenses and commissions, partially offset by
expenses associated with a policy administration technology project.
Management anticipates an increase in its expense levels due to further
planned investments in technology.

1995 COMPARED TO 1994

Revenues

Personal segment net premiums earned increased $69.0 million, or 6.6%, to
$1,113.3 million in 1995. Hanover's net premiums earned increased $28.9
million, or 5.3%, to $577.1 million in 1995. The increase is primarily
attributable to a 2.0% and 1.3% increase in policies in force in the personal
automobile and homeowners lines, respectively, and a 2.5% rate increase in the
homeowners line. Hanover's premium growth in the personal segment in 1995 was
partially offset by a mandated 6.5% decrease in Massachusetts automobile
insurance rates, which was effective January 1, 1995.

Citizens' personal segment net premiums earned increased $40.1 million, or
8.1%, to $536.2 million in 1995. This increase reflects price increases in the
personal automobile and homeowners lines, and was partially offset by a 5.8%
decrease in personal automobile policies in force. This decrease is
attributable to the Company's selective reduction of writings in Michigan when
rates were viewed as inadequate and to increased competition in affinity group
franchise sales as a result of the January 1995 order by the Michigan
Insurance Commissioner which has permitted competitors to offer similar
products.

Underwriting Results

The personal segment underwriting loss decreased $23.0 million, from $26.0
million in 1994, to $3.0 million in 1995. Hanover's underwriting results
improved $17.3 million, from a profit of $6.3 million in 1994, to a profit of
$23.6 million in 1995. Citizens' underwriting loss improved $5.7 million, or
17.6%, from $32.3 million in 1994, to $26.6 million in 1995.

The improvement in Hanover's underwriting results is primarily attributable
to favorable claims experience on current years claims in the homeowners line
resulting from a decrease in catastrophe losses from $27.2 million in 1994 to
$13.4 million during 1995, and to a return to more normal weather conditions
during the first half of 1995. This resulted in a decrease in losses and LAE
in the homeowners line of $17.8 million, or 17.9%, from $99.2 million in 1994,
to $81.4 million in 1995.

The change in Citizens' underwriting results reflects a return to more
normal weather conditions in Michigan as well as favorable claims activity in
both current and prior accident years in the personal automobile line
attributable to improvements in severity. Citizens' underwriting results
improved despite a $3.4 million increase in catastrophe losses in the personal
segment, primarily in the homeowners line. Catastrophe losses were $7.2
million and $3.8 million in Citizens' personal segment in 1995 and 1994,
respectively.

The increase in policy acquisition expenses in the personal segment of $17.9
million, or 7.9%, to $243.3 million in 1995, reflects the growth in net earned
premiums at both Hanover and Citizens. Other underwriting expenses at Hanover
remained relatively unchanged at $49.7 million in 1995, compared to $50.0
million in 1994. Other underwriting expenses at Citizens increased by $3.2
million, or 8.4%, to $41.1 million in 1995, reflecting the growth in net
premiums earned in 1995.

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COMMERCIAL SEGMENT

The commercial segment represented 38.8%, 40.2% and 41.7% of total net
premiums earned in 1996, 1995 and 1994, respectively.

<TABLE>
<CAPTION>
HANOVER CITIZENS CONSOLIDATED
---------------------- -------------------- ----------------------
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1996 1995 1994 1996 1995 1994 1996 1995 1994
------ ------ ------ ------ ------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net premiums earned..... $455.5 $468.3 $480.4 $280.9 $281.6 $266.6 $736.4 $749.9 $747.0
Losses and loss adjust-
ment expenses.......... 315.5 342.8 361.2 200.3 164.7 188.5 515.8 507.5 549.7
Policy acquisition ex-
penses................. 107.7 114.3 117.6 51.6 51.5 47.3 159.3 165.8 164.9
Other underwriting ex-
penses (1)............. 74.0 73.8 77.6 27.0 25.4 29.2 101.0 99.2 106.8
------ ------ ------ ------ ------ ------ ------ ------ ------
Underwriting (loss)
profit................. $(41.7) $(62.6) $(76.0) $ 2.0 $ 40.0 $ 1.6 $(39.7) $(22.6) $(74.4)
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
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(1) Includes policyholders' dividends

1996 COMPARED TO 1995

Revenues

Commercial segment net premiums earned in 1996 decreased $13.5 million, or
1.8%, to $736.4 million. Hanover's commercial segment net premiums earned
decreased $12.8 million, or 2.7%, to $455.5 million. This decrease is
primarily attributable to Hanover's withdrawal from a large voluntary pool on
December 1, 1995, and to aggregate rate decreases of 14.6% since January 1,
1995, in the workers' compensation line. Citizens' commercial segment net
premiums earned decreased $0.7 million, or 0.2%, to $280.9 million in 1996.
This decrease primarily reflects rate reductions and a 1.4% decrease in
policies in force in the workers' compensation line due to 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. This decrease is partially offset by
an increase in policies in force in the commercial multiple peril and
commercial automobile lines of 13.2% and 3.7%, respectively. Management
believes competitive conditions in the workers' compensation line may impact
future growth in net premiums earned.

Underwriting results

The commercial segment underwriting loss for 1996 increased $17.1 million,
or 75.7% to a loss of $39.7 million. Hanover's underwriting loss improved
$20.9 million, or 33.4%, to a loss of $41.7 million and Citizens' underwriting
profit decreased $38.0 million, to a profit of $2.0 million in 1996.

Hanover's commercial segment losses and LAE decreased $27.3 million, or
8.0%, to $315.5 million in 1996. This improvement is primarily attributable to
a $41.5 million decrease in losses and LAE resulting from the withdrawal from
a large voluntary pool. However, this decrease was partially offset by
increased losses in the workers' compensation line of $17.9 million, primarily
due to a $19.8 million decrease in favorable reserve development during 1996.

Citizens' underwriting profit decreased primarily due to an increase in loss
severity and frequency in the commercial multiple peril line. Commercial
multiple peril losses and LAE increased $16.9 million, or 42.4%, to $56.8
million in 1996, partially offset by a $5.1 million, or 9.4% increase to $59.1
million in net premiums earned. Workers' compensation net premiums earned
decreased $17.6 million, or 11.9%, to $130.7 million in 1996 while losses and
LAE increased $9.6 million, or 15.0%, to $73.4 million in this line, primarily
due to reduced favorable development of prior year reserves. Catastrophe
losses in this segment were $1.9 million in 1996 compared to $0.8 million
during 1995.

Policy acquisition expenses in the commercial segment decreased $6.5
million, or 3.9%, to $159.3 million in 1996 and other underwriting expenses
increased $1.8 million, or 1.8%, to $101.0 million. Hanover's policy

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acquisition expenses decreased $6.6 million, or 5.8%, to $107.7 million,
primarily attributable to a reapportionment of certain acquisition expenses
from the commercial segment to the personal segment, as well as the decrease
in net earned premium. Other underwriting expenses at Hanover increased $0.2
million, to $74.0 million as a result of an increase of approximately $3.0
million in expenses associated with the policy administration technology
project, which were partially offset by a net decrease in assessment expenses
associated with voluntary and involuntary pools. Citizens' policy acquisition
expenses in the commercial segment remained consistent between years,
primarily as a result of flat net earned premiums. Other underwriting expenses
increased $1.6 million, or 6.3%, to $27.0 million in 1996, due to investments
in technology and increased policyholders' dividends, partially offset by
reductions in employee related expenses and commissions. Management
anticipates an increase in its expense levels due to further planned
investment in technology.

1995 COMPARED TO 1994

Revenues

Commercial segment net premiums earned increased $2.9 million, to $749.9
million in 1995. Hanover's commercial segment net premiums earned decreased
$12.1 million, or 2.5%, to $468.3 million in 1995, reflecting decreases in
policies in force in all major commercial lines, particularly a $10.7 million,
or 9.4%, decrease in commercial automobile net premiums earned to $103.1
million, resulting from continued competitive market conditions affecting
Hanover. Workers' compensation net premiums earned at Hanover decreased $6.4
million, or 5.8%, to $104.4 million in 1995, primarily as a result of rate
decreases and an increasing level of large deductible policies.

Citizens' commercial segment net premiums earned increased $15.0 million, or
5.6%, to $281.6 million in 1995. This increase primarily reflects growth of
8.1% in total commercial policies in force. The overall growth includes
increases in policies in force in the commercial automobile and commercial
multiple peril lines of 12.5% and 11.6%, respectively, along with a decrease
in workers' compensation policies in force of 4.6% and rate decreases of 15.5%
in the workers' compensation line in 1995. The decrease in workers'
compensation premiums was more than offset by increased workforce coverage due
to full employment in Michigan. Price increases in the commercial automobile
line also contributed to the increase in net premiums earned.

Underwriting Results

The commercial segment underwriting loss improved $51.8 million to $22.6
million in 1995. Hanover's underwriting loss improved to a loss of $62.6
million, from $76.0 million, and Citizens' underwriting profit increased from
$1.6 million in 1994, to $40.0 million in 1995.

Hanover's commercial segment losses and LAE decreased by $18.4 million, or
5.1%, to $342.8 million in 1995. This improvement is primarily attributable to
decreased losses and LAE in the workers' compensation and commercial
automobile lines. Losses and LAE in the workers' compensation line decreased
$34.7 million, or 47.6%, from $72.9 million in 1994 to $38.2 million in 1995.
This decrease resulted from continued favorable claims experience for both the
current and prior years. Commercial automobile losses and LAE decreased $14.9
million, or 17.0%, from $87.7 million in 1994 to $72.8 million in 1995. This
decrease results from favorable claims experience in this line for both the
current and prior years, and a decrease in premiums earned. Losses and LAE in
Hanover's other commercial lines, which consist primarily of voluntary pools,
general liability and inland marine, increased $28.9 million, or 55.0%, from
$52.5 million in 1994, to $81.4 million in 1995. This segment was also
unfavorably impacted by a $25.9 million loss in an industrial voluntary pool,
including a $12.0 million charge during the fourth quarter of 1995.

The improvement in Citizens' underwriting results in 1995 reflects favorable
claims activity in both current and prior accident years in the workers'
compensation line attributable to improvements in severity and frequency, and
to severe weather and large claims in the first half of 1994 which had an
adverse impact on the commercial multiple peril and commercial automobile
lines.

8
<PAGE>

Policy acquisition expenses in the commercial segment decreased $0.9
million, or 0.5%, to $165.8 million in 1995. Policy acquisition expenses in
the commercial segment at Citizens increased $4.2 million, or 8.9%, from $47.3
million in 1994, to $51.5 million in 1995, reflecting the growth in net
premiums earned. Hanover's policy acquisition expenses decreased $3.3 million,
or 2.8%, from $117.6 million in 1994, to $114.3 million in 1995, reflecting
the decrease in net earned premiums. Other underwriting expenses at Hanover
decreased $3.8 million, or 4.9%, from $77.6 million in 1994, to $73.8 million
in 1995, reflecting the decrease in net premiums written. Other underwriting
expenses at Citizens decreased $3.8 million, or 13.0%, from $29.2 million in
1994, to $25.4 million in 1995. This decrease reflects the unusually high
level of expenses incurred during 1994 resulting from the expansion into Ohio
including the cost of preparing to write multi-state and cross-state
commercial line policies, as well as a reduction in 1995 administrative
expenses resulting from process improvements in the commercial segment.

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>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Reserve for losses and LAE, beginning of
year...................................... $ 2,896.0 $ 2,821.7 $ 2,717.3
Incurred losses and LAE, net of reinsurance
recoverable:
Provision for insured events of current
year.................................... 1,513.3 1,427.3 1,434.8
Decrease in provision for insured events
of prior years.......................... (141.4) (137.6) (128.1)
---------- ---------- ----------
Total incurred losses and LAE.......... 1,371.9 1,289.7 1,306.7
---------- ---------- ----------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured
events of current year.................. 759.6 652.2 650.2
Losses and LAE attributable to insured
events of prior years................... 627.6 614.3 566.9
---------- ---------- ----------
Total payments......................... 1,387.2 1,266.5 1,217.1
---------- ---------- ----------
Change in reinsurance recoverable on unpaid
losses.................................... (136.6) 51.1 14.8
---------- ---------- ----------
Reserve for losses and LAE, end of year.... $ 2,744.1 $ 2,896.0 $ 2,821.7
========== ========== ==========
</TABLE>

LOSS DEVELOPMENT

9
<PAGE>

increased $28.6 million to $33.0 million in 1996, partially offset by less
favorable development in the workers' compensation line. In 1995, the workers'
compensation line had favorable development of $32.7 million, primarily as a
result of Citizens re-estimating reserves to reflect the new claims cost
management programs and the Michigan Supreme Court ruling, which decreases the
maximum to be paid for indemnity cases on all existing and future claims. In
1996, the favorable development in the workers' compensation line of $21.8
million also reflected these developments. Hanover's favorable development,
including voluntary and involuntary pools, decreased $7.7 million in 1996 to
$82.9 million, primarily attributable to a decrease in favorable development
in the workers' compensation line of $19.8. This decrease is primarily
attributable to a re-estimate of reserves with respect to certain types of
workers' compensation policies including large deductibles and excess of loss
policies. In addition, during 1995 Hanover refined its estimation of
unallocated loss adjustment expenses which increased favorable development in
that year. Favorable development in the personal automobile line also
decreased $4.7 million, to $42.4 million in 1996. These decreases were offset
by increases in favorable development of $1.9 million and $5.6 million, to
$12.6 million and $5.7 million, in the commercial automobile and commercial
multiple peril lines, respectively. Favorable development in other lines
increased by $8.8 million, primarily as a result of environmental reserve
strengthening in 1995. Favorable development in Hanover's voluntary and
involuntary pools increased $3.7 million to $4.1 million during 1996. The
Company expects reduced favorable development at Hanover to continue to impact
future earnings.

The increase in favorable development on prior years' reserves of $9.5
million in 1995 results primarily from a $34.6 million increase in favorable
development at Citizens. Favorable development in Citizens' personal
automobile and workers' compensation lines increased $16.6 million and $15.5
million, to favorable development of $4.4 million and $32.7 million,
respectively, due to the aforementioned change in claims cost management and
the Michigan Supreme Court ruling. Hanover's favorable development, not
including the effect of voluntary and involuntary pools, was relatively
unchanged at $90.2 million in 1995 compared to $91.7 million in 1994.
Favorable development in Hanover's workers' compensation line increased $27.7
million to $31.0 million during 1995. This was offset by decreases of $14.6
million and $12.6 million, to $45.5 million and $0.1 million, in the personal
automobile and commercial multiple peril lines, respectively. Favorable
development in Hanover's voluntary and involuntary pools decreased $23.6
million to $0.4 million during 1995.

This favorable development reflects the Company's reserving philosophy
consistently applied over these periods. Conditions and trends that have
affected development of the loss and LAE reserves in the past may not
necessarily occur in the future.

Due to the nature of the business written by the Company, the exposure to
environmental liabilities is relatively small and therefore its reserves are
relatively small compared to other types of liabilities. Loss and LAE reserves
related to environmental damage and toxic tort liability, included in the
reserve for losses and LAE were $50.8 million and $43.2 million, net of
reinsurance of $20.2 million and $8.4 million in 1996 and 1995, respectively.
During 1995, the Company redefined its environmental liabilities in conformity
with new guidelines issued by the NAIC. This had no impact on results of
operations. The Company does not specifically underwrite policies that include
this coverage, but as case law expands policy provisions and insurers'
liability beyond the intended coverage, the Company may be required to defend
such claims. During 1995, Hanover performed an actuarial review of its
environmental reserves. This resulted in Hanover's providing additional
reserves for "IBNR" (incurred but not reported) claims, in addition to
existing reserves for reported claims. Although these claims are not material,
their existence gives rise to uncertainty and is discussed because of the
possibility, however remote, that they may become material. The Company
believes that, notwithstanding the evolution of case law expanding liability
in environmental claims, recorded reserves related to these claims are
adequate. In addition, the Company is not aware of any litigation or pending
claims that may result in additional material liabilities in excess of
recorded reserves. The environmental liability could be revised in the near
term if the estimates used in determining the liability are revised.

Inflation generally increases the cost of losses covered by insurance
contracts. The effect of inflation on the Company varies by product. Property
and casualty insurance premiums are established before the amount of

10
<PAGE>

losses and LAE, and the extent to which inflation may affect such expenses,
are known. Consequently, the Company attempts, in establishing rates, to
anticipate the potential impact of inflation in the projection of ultimate
costs. The impact of inflation has been relatively insignificant in recent
years. However, inflation could contribute to increased losses and LAE in the
future.

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) internal estimates of required reserves,
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.

REINSURANCE

The Company maintains a reinsurance program designed to protect against
large or unusual losses and LAE activity. This includes both excess of loss
reinsurance and catastrophe reinsurance. Catastrophe reinsurance serves to
protect the ceding insurer from significant aggregate losses arising from a
single event such as windstorm, hail, hurricane, tornado, riot or other
extraordinary events. The Company determines the appropriate amount of
reinsurance based on the Company's evaluation of the risks accepted and
analysis prepared by consultants and reinsurers and on market conditions
including the availability and pricing of reinsurance. The Company has
reinsurance for casualty business. Under the 1996 casualty program, the
reinsurers are responsible for 100% of the amount of each loss in excess of
$1.0 million per occurrence up to $30.5 million for general liability and
workers' compensation. Additionally, this reinsurance covers workers'
compensation losses in excess of $30.5 million to $60.5 million per
occurrence. Under the Company's 1996 catastrophe reinsurance program, Hanover
and Citizens retain the first $25.0 million of loss per occurrence, all
amounts in excess of $180.0 million per occurrence and 10% of all aggregate
loss amounts in excess of $25.0 million up to $180.0 million. In addition,
Citizens retains 5% of losses in excess of $10.0 million, up to $25.0 million.
In 1996, Citizens purchased aggregate catastrophe coverage which reinsures 90%
of $5.0 million for aggregated catastrophe losses in excess of $5.0 million
which individually exceed $1.0 million. Under this aggregate catastrophe
coverage, Citizens is expected to recover $4.5 million. In the years ended
December 31, 1996, 1995 and 1994, the Company did not exceed the minimum
catastrophe levels, either individually or in the aggregate, to obtain
recovery under its reinsurance agreements, except as described above.

Effective January 1, 1997, the Company modified its reinsurance program. The
1997 modifications include the purchase of additional casualty reinsurance and
higher retention under the Company's catastrophe reinsurance program. Under
the 1997 casualty reinsurance program, the Company added a layer which
reinsured 100% of each loss in excess of $.5 million up to $1.0 million per
occurrence. Under the 1997 catastrophe reinsurance program, Hanover and
Citizens retain the first $25.0 million of loss per occurrence and all amounts
in excess of $180.0 million per occurrence, 55% of all aggregate loss amounts
in excess of $25.0 million up to $45.0 million, and 10% of all aggregate loss
amounts in excess of $45.0 million up to $180.0 million. In addition, Citizens
retains 5% of losses in excess of $10.0 million, up to $25 million.

The Company cedes to reinsurers a portion of its risk and pays a fee based
upon premiums received on all policies subject to such reinsurance.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result
in losses to the Company. The Company determines the appropriate amount of
reinsurance based on evaluation of the risks accepted and analyses prepared by
consultants and reinsurers and on market conditions (including the
availability and pricing of reinsurance). The Company also believes that the
terms of its reinsurance contracts are consistent with industry practice in
that they contain standard terms with respect to lines of business covered,
limit and retention, arbitration and occurrence. Based on its review of its
reinsurers' financial statements and reputations in the reinsurance
marketplace, the Company believes that its reinsurers are financially sound.

11
<PAGE>

to participate in various residual market mechanisms and pooling arrangements
which provide various insurance coverages to individuals or other entities
that are otherwise unable to purchase such coverage voluntarily provided by
private insurers. These market mechanisms and pooling arrangements include the
Massachusetts Commonwealth Automobile Reinsurers ("CAR"), the Maine Workers'
Compensation Residual Market Pool ("MWCRP") and the Michigan Catastrophic
Claims Association ("MCCA"). At December 31, 1996, the MCCA and CAR were the
only two reinsurers which represented 10% or more of the Company's reinsurance
business. As a servicing carrier in Massachusetts, the Company cedes a
significant portion of its private passenger and commercial automobile
premiums to CAR. Net premiums earned and losses and loss adjustment expenses
ceded to CAR for the years ended December 31, 1996, 1995 and 1994 were $38.0
million and $21.8 million, $49.1 million and $33.7 million, and $50.0 million
and $29.8 million, respectively.

From 1988 through 1992, the Company was a servicing carrier in Maine, and
ceded a significant portion of its workers' compensation premiums to the Maine
Workers' Compensation Residual Market Pool, which is administered by The
National Council on Compensation Insurance ("NCCI"). The Company was involved
in legal proceedings regarding the MWCRP's deficit which through a legislative
settlement issued on June 23, 1995, provided for an initial funding of $220.0
million of which the insurance carriers were responsible for $65.0 million.
Hanover paid its allocation of $4.2 million in December 1995. Some of the
smaller carriers appealed this decision. The Company's right to recover
reinsurance balances for claims properly paid is not at issue in any such
proceedings. The Company expects to collect its reinsurance balance; however,
funding of the cash flow needs of the MWCRP may in the future be affected by
issues related to certain litigation, the outcome of which the Company cannot
predict.

The Company ceded to MCCA premiums earned and losses and loss adjustment
expenses in 1996, 1995 and 1994 of $50.5 million and $(52.9) million, $66.8
million and $62.9 million, and $80.0 million and $24.2 million, respectively.
Because the MCCA is supported by assessments permitted by statute and all
amounts billed by the Company to CAR, MWCRP and MCCA have been paid when due,
the Company believes that it has no significant exposure to uncollectible
reinsurance balances.

The reserve for losses and loss adjustment expenses at December 31, 1996 and
1995 is shown gross of recoverable on unpaid losses of $626.9 million and
$763.5 million, respectively. The significant decrease in the reinsurance
recoverable on unpaid losses is primarily attributable to an overall decrease
in reinsurance activity at both Hanover and Citizens. The decrease at Hanover
is specifically related to a decrease in ceded losses on its servicing carrier
business. The decrease at Citizens in 1996 is due to the MCCA's favorable
development on prior year reserves exceeding the losses and LAE incurred
during the current year. The aggregate losses and LAE ceded have no impact on
the Company's consolidated statements of income. Losses and LAE ceded were
$2.2 million, $229.1 million and $160.4 million in 1996, 1995 and 1994,
respectively. Ceded premiums earned were $232.6 million, $296.2 million and
$291.9 million in 1996, 1995 and 1994, respectively.

INVESTMENT PORTFOLIO

The Company's investment policy is structured with emphasis on maximizing
after tax income while providing liquidity and preserving asset quality. The
portfolio is dominated by fixed income securities. The fixed income portfolio
maintains a laddered maturity structure with a duration of 5.6 years. The
Company continually evaluates credit quality throughout the investment holding
period. Approximately 89.0% of the portfolio was invested in debt securities
at December 31, 1996, compared to 87.9% at December 31, 1995. At December 31,
1996, $3,110.2 million, or 88.2%, of the debt securities held by the Company
were rated by the National Association of Insurance Commissioners ("NAIC") as
investment grade (1 or 2). In 1995, $3,179.5 million, or 94.7% of debt
securities were rated investment grade. At December 31, 1996, 64.1% of debt
securities were tax-exempt investments compared to 64.0% at December 31, 1995.
The Company may continue to make adjustments to its taxable and tax-exempt
positions in the future to seek to maximize after tax income.

The Company's investment portfolio increased $142.8 million, to $3,962.4
million at December 31, 1996 from $3,819.6 million at December 31, 1995.
Hanover's investment portfolio increased $28.4 million, to $2,357.2 million,
and Citizens' investment portfolio increased $114.4 million, to $1,605.2
million. These

12
<PAGE>

increases were primarily attributable to the investment of cash provided by
operations. Debt Securities increased $171.1 million, to $3,527.6 million,
from $3,356.5 million and represented 89.0% and 87.9% of the carrying value of
all investments at December 31, 1996 and 1995, respectively. This increase is
consistent with the Company's strategy of increasing the level of debt
securities in the portfolio which was accomplished, in part, by reducing the
level of equities. Tax-exempt securities increased $114.5 million, to $2,261.2
million, from $2,146.7 million during 1996 and represented 64.1% and 64.0% of
the total debt securities at December 31, 1996 and 1995, respectively. The
Company may make modest extensions in portfolio incremental credit risk and
adjustments to its taxable and tax-exempt positions in the future to seek to
maximize after tax income.

At December 31, 1996, $402.9 million, or 10.2% of the investment portfolio
was invested in equity securities compared to $438.1 million, or 11.5% at
December 31, 1995. Dividend income from equity securities was $9.6 million, or
4.1% of investment income in 1996 as compared to $12.5 million, or 6.0% in
1995.

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 only out of unreserved and unrestricted earned surplus and
restrictions on the payment of "extraordinary" dividends, as defined. Based on
the 1996 statutory financial statements of Hanover, the maximum dividend that
may be paid to Allmerica P&C at January 1, 1997, without prior approval from
the New Hampshire Commissioner of Insurance, is $15.4 million, which considers
dividends declared to Allmerica P&C of $105.0 million during 1996, including
$80.0 million which was declared in December. On January 2, 1997, Hanover
declared an extraordinary dividend in the amount of $120.0 million, payable on
or after January 21, 1997 to Allmerica P&C. The dividend, which was approved
by the New Hampshire Insurance Department on January 9, 1997, is to be paid in
a lump sum or in such installments as Allmerica P&C, in its discretion, may
determine.

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 Company was $110.2
million, $182.1 million and $205.2 million in 1996, 1995 and 1994
respectively. The decrease in net cash provided by operating activities in
1996 is attributable primarily to an increase in underwriting losses during
1996 which resulted in an increase in claims payments. The decrease in net
cash provided by operating activities in 1995 is attributable primarily to the
timing of cash receipts and payments relating to reinsurance and other accrued
expenses.

Net cash used for investing activities for the Company was $87.6 million and
$385.2 million in 1996 and 1995, respectively. In 1994, net cash provided for
investing activities was $47.8 million. Cash used for investing activities
declined in 1996 due to decreases in cash flow from operations, as well as the
decision in 1995 to maintain lower cash balances which resulted in an increase
in investing activity during that year. Cash used for investment activities in
1995 increased primarily from increased purchases of debt and equity
securities to take advantage of the favorable investment environment during
1995.

Net cash used for financing activities for the Company was $51.2 million,
$39.7 million and $16.6 million in 1996, 1995 and 1994, respectively. These
changes primarily reflect incremental increases in share repurchases of 1.2
million shares of the Company's common stock in 1996 compared to 1.0 million
shares in 1995 and 0.05 million shares in 1994. In addition, in 1996 a
subsidiary of the Company repurchased 0.6 million shares of the subsidiary's
common stock compared to 0.2 million shares in 1995.

Shareholders' equity was $1,608.5 million, or $26.99 per share, at December
31, 1996 compared to $1,509.3 million, or $24.82 per share, at December 31,
1995. Shareholders' equity reflects net income for the year, the

13
<PAGE>

repurchase of treasury stock and the impact of a decrease of $6.8 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 December 31, 1996, these lines
totaled $40.0 million and are subject to annual renewal. There were no
borrowings under these lines of credit during 1996. In addition, the holding
company's financial structure provides the flexibility to obtain funds
externally through debt or equity financing, if needed.

RECENT DEVELOPMENTS

On February 19, 1997, Allmerica Financial Corporation ("AFC") and Allmerica
P&C entered into an Agreement and Plan of Merger (the "Merger Agreement")
pursuant to which AFC will acquire all of the outstanding Common Stock, $1.00
par value per share, of Allmerica P&C that it does not already own for
consideration consisting of $33.00 per share of Common Stock, subject to
adjustment, payable in cash and shares of common stock, par value $0.01 per
share, of AFC (the "AFC Common Stock"). In addition, a shareholder of
Allmerica P&C may elect to receive the consideration in cash, without
interest, or in shares of AFC Common Stock, subject to proration as set forth
in the Merger Agreement. The maximum number of shares of AFC Common Stock to
be issued in the Merger is approximately 9.67 million shares. The acquisition
will be accomplished by merging a newly created, wholly-owned subsidiary of
AFC with and into Allmerica P&C (the "Merger") resulting in Allmerica P&C
becoming a wholly-owned subsidiary of AFC. Also, immediately prior to the
Merger, Allmerica P&C's Certificate of Incorporation will be amended to
authorize a new class of Common Stock, one share of which will be exchanged
for each share of Common Stock currently held by SMA Financial Corp,. a
wholly-owned subsidiary of AFC. The consummation of the Merger is subject to
the satisfaction of various conditions, including the approval of regulatory
authorities.

On January 2, 1997, Hanover declared an extraordinary dividend in the amount
of $120.0 million, payable on or after January 21, 1997 to Allmerica P&C. The
dividend which was approved by the New Hampshire Insurance Department on
January 9, 1997, is to be paid in a lump sum or in such installments as
Allmerica P&C, in its discretion, may determine.

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 1997
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, increases in minimum capital and
reserve requirements, benefit mandates, limitations on the ability to manage
care and utilization, and tax

14
<PAGE>

treatment of insurance products; (v) changes in interest rates causing a
reduction of investment income or 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)
increases in medical costs, including increases in utilization, costs of
medical services, pharmaceuticals, durable medical equipment and other covered
items; (x) termination of provider contracts or renegotiation at less cost-
effective rates or terms of payment; (xi) changes in the Company's liquidity
due to changes in asset and liability matching; (xii) restrictions on
insurance underwriting, based on certain criteria; (xiii) adverse changes in
the ratings obtained by independent rating agencies such as Moody's, Standard
& Poor's and A.M. Best.

ITEM 8

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Report of Independent Accountants...................................... 16
Consolidated Statements of Income for the years ended December 31,
1996, 1995 and 1994................................................... 18
Consolidated Balance Sheets as of December 31, 1996 and 1995........... 19
Consolidated Statements of Shareholders' Equity for the years ended De-
cember 31, 1996, 1995
and 1994.............................................................. 20
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995
and 1994.............................................................. 21
Notes to Consolidated Financial Statements............................. 22-41
</TABLE>

The Financial Statement Schedules and Index were previously filed in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1996,
filed March 24, 1997.

15
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
Allmerica Property & Casualty Companies, Inc.

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) present fairly, in all material
respects, the financial position of Allmerica Property & Casualty Companies,
Inc. and its subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

The Company adopted certain new accounting pronouncements in 1994 as
discussed in Note 1 to the consolidated financial statements.

/s/ Price Waterhouse LLP
-------------------------------------
PRICE WATERHOUSE LLP

Boston, Massachusetts
February 3, 1997, except as to Notes 1 and 2,
which are as of February 19, 1997

16
<PAGE>

ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.

MANAGEMENT REPORT ON RESPONSIBILITY
FOR FINANCIAL REPORTING

The management of Allmerica Property & Casualty Companies, Inc. has the
responsibility for preparing the accompanying consolidated financial
statements and for their integrity and objectivity. The statements were
prepared in conformity with generally accepted accounting principles and
include amounts based on management's informed estimates and judgments. We
believe that these statements present fairly the Company's financial position
and results of operations and that the other information contained in the
annual report is accurate and consistent with the financial statements.

Allmerica Property & Casualty Companies, Inc.'s Board of Directors annually
appoints independent accountants to perform an audit of its consolidated
financial statements. The financial statements have been audited by Price
Waterhouse LLP, independent accountants, in accordance with generally accepted
auditing standards. Their audit included consideration of the Company's system
of internal control in order to determine the audit procedures required to
express their opinion on the consolidated financial statements.

Management of Allmerica Property & Casualty Companies, Inc. has established
and maintains a system of internal control that provides reasonable assurance
that assets are safeguarded and that transactions are properly authorized and
recorded. The system of internal control provides for appropriate division of
responsibility and is documented by written policies and procedures that are
communicated to employees with significant roles in the financial reporting
process and updated as necessary. Management continually monitors the system
of internal control for compliance. Allmerica Property & Casualty Companies,
Inc. and its subsidiaries maintain a strong internal audit program that
independently assesses the effectiveness of the internal controls and
recommends possible improvements thereto. Management recognizes the inherent
limitations in all internal control systems and believes that our system of
internal control provides an appropriate balance between the costs and
benefits desired. Management believes that the Company's system of internal
control provides reasonable assurance that errors or irregularities that would
be material to the financial statements are prevented or detected in the
normal course of business.

The Audit Committee of the Board of Directors, composed solely of outside
directors, oversees management's discharge of its financial reporting
responsibilities. The committee meets periodically with management, our
internal auditors and our independent accountants, Price Waterhouse LLP. Both
our internal auditors and Price Waterhouse LLP have direct access to the Audit
Committee.

Management recognizes its responsibility for fostering a strong ethical
climate. This responsibility is reflected in the Company's policies which
address, among other things, potential conflicts of interest; compliance with
all domestic and foreign laws including those relating to financial disclosure
and the confidentiality of proprietary information. Allmerica Property &
Casualty Companies, Inc. maintains a systematic program to assess compliance
with these policies.

/s/ John F. O'Brien /s/ Edward J. Parry, III
- ------------------------------------- -------------------------------------
JOHN F. O'BRIEN EDWARD J. PARRY, III
President and Chief Executive Vice President, Chief Financial
Officer Officer, Treasurer and Principal
Accounting Officer

17
<PAGE>

ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
REVENUES
Net premiums written............... $ 1,914.4 $ 1,885.3 $ 1,822.9
Change in unearned premiums, net of
prepaid reinsurance premiums...... 16.1 22.1 31.6
------------ ------------ ------------
Net premiums earned.............. 1,898.3 1,863.2 1,791.3
Net investment income.............. 235.4 209.6 202.4
Net realized gains on investments.. 48.1 14.6 3.5
Other income....................... 11.9 7.7 7.6
------------ ------------ ------------
Total revenues................. 2,193.7 2,095.1 2,004.8
------------ ------------ ------------
EXPENSES
Losses and loss adjustment
expenses.......................... 1,371.9 1,289.7 1,306.7
Policy acquisition expenses........ 422.6 409.1 390.3
Other operating expenses........... 190.0 179.4 185.9
Policyholders' dividends........... 11.5 10.6 8.8
------------ ------------ ------------
Total expenses................. 1,996.0 1,888.8 1,891.7
------------ ------------ ------------
Income before federal income taxes,
minority interest and cumulative
effect of a change in accounting.... 197.7 206.3 113.1
Federal income tax expense (benefit)
Current............................ 44.4 54.4 24.4
Deferred........................... (8.0) (2.3) (20.5)
------------ ------------ ------------
Total federal income tax
expense....................... 36.4 52.1 3.9
Income before minority interest and
cumulative effect of a change in
accounting.......................... 161.3 154.2 109.2
Minority interest.................... (14.9) (14.1) (8.0)
------------ ------------ ------------
Income before cumulative effect of a
change in accounting................ 146.4 140.1 101.2
Cumulative effect of a change in
accounting.......................... -- -- (2.0)
------------ ------------ ------------
Net income........................... $ 146.4 $ 140.1 $ 99.2
============ ============ ============
PER SHARE DATA
Income before cumulative effect of
a change in accounting............ $ 2.44 $ 2.28 $ 1.64
Cumulative effect of a change in
accounting........................ -- -- (0.03)
------------ ------------ ------------
Net income......................... $ 2.44 $ 2.28 $ 1.61
============ ============ ============
Weighted average shares outstanding.. 59.9 61.4 61.8
============ ============ ============
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

18
<PAGE>

ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
(IN MILLIONS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
ASSETS
Investments:
Debt securities available-for-sale, at fair value
(amortized cost of $3,444.7 and $3,237.6)........... $ 3,527.6 $ 3,356.5
Equity securities available-for-sale, at fair value
(cost of $277.3 and $340.8)......................... 402.9 438.1
Other investments, at fair value (cost of $29.3 and
$20.1).............................................. 31.9 25.0
---------- ----------
Total investments.................................. 3,962.4 3,819.6
Cash and cash equivalents.............................. 96.9 125.5
Accrued investment income.............................. 65.3 64.5
Premiums and notes receivable (less allowance for
doubtful accounts of $4.5 and $4.6)................... 410.2 400.3
Finance installment receivables........................ 29.3 30.2
Reinsurance recoverable on paid and unpaid losses...... 669.2 807.4
Prepaid reinsurance premiums........................... 45.5 43.8
Deferred policy acquisition costs...................... 164.2 157.5
Deferred federal income taxes.......................... 93.2 81.2
Other assets........................................... 167.7 211.8
---------- ----------
Total assets....................................... $ 5,703.9 $ 5,741.8
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Reserve for losses and loss adjustment expenses...... $ 2,744.1 $ 2,896.0
Unearned premiums.................................... 815.1 797.3
Reinsurance premiums payable......................... 31.4 42.0
Commercial paper..................................... 28.0 27.7
Other liabilities.................................... 344.7 340.6
---------- ----------
Total liabilities.................................. 3,963.3 4,103.6
---------- ----------
Minority interest...................................... 132.1 128.9
---------- ----------
Commitments and contingencies (Notes 15 and 16)
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.................................... 1,441.8 1,304.9
Unrealized appreciation on investments, net of
deferred federal income taxes and minority
interest............................................ 127.1 133.9
Treasury stock at cost (2.3 million and 1.1 million
shares)............................................. (54.3) (23.4)
---------- ----------
Total shareholders' equity......................... 1,608.5 1,509.3
---------- ----------
Total liabilities and shareholders' equity......... $ 5,703.9 $ 5,741.8
========== ==========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

19
<PAGE>

ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning and end of year.... $ 61.9 $ 61.9 $ 61.9
---------- ---------- ----------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning and end of year.... 32.0 32.0 32.0
---------- ---------- ----------
RETAINED EARNINGS
Balance at beginning of year............ 1,304.9 1,174.6 1,085.3
Net income.............................. 146.4 140.1 99.2
Dividends declared to shareholders...... (9.5) (9.8) (9.9)
---------- ---------- ----------
Balance at end of year.................. 1,441.8 1,304.9 1,174.6
---------- ---------- ----------
UNREALIZED APPRECIATION (DEPRECIATION) ON
INVESTMENTS, NET OF DEFERRED FEDERAL
INCOME TAXES AND MINORITY INTEREST
Balance at beginning of year............ 133.9 (36.3) 25.6
Cumulative effect of changes in account-
ing:
Net appreciation on available-for sale
debt securities....................... -- -- 149.7
Provision for deferred federal income
taxes and minority interest........... -- -- (59.2)
---------- ---------- ----------
Total................................. -- -- 90.5
---------- ---------- ----------
Effect of transfer of securities from
held-to-maturity to available-for-sale:
Net appreciation on available-for-sale
debt securities....................... -- 6.0 --
Provision for deferred federal income
taxes and minority interest........... -- (2.3) --
---------- ---------- ----------
Total................................. -- 3.7 --
---------- ---------- ----------
Appreciation (depreciation) during the
year:
Net appreciation (depreciation) on
available-for-sale securities......... (10.0) 277.9 (251.0)
(Provision) benefit for deferred
federal income taxes and minority
interest.............................. 3.2 (111.4) 98.6
---------- ---------- ----------
Total................................. (6.8) 166.5 (152.4)
---------- ---------- ----------
Balance at end of year.................. 127.1 133.9 (36.3)
---------- ---------- ----------
TREASURY STOCK
Balance at beginning of year............ (23.4) (2.5) (1.8)
Shares purchased at cost................ (31.0) (20.9) (0.7)
Shares reissued......................... 0.1 -- --
---------- ---------- ----------
Balance at end of year.................. (54.3) (23.4) (2.5)
---------- ---------- ----------
Total shareholders' equity............ $ 1,608.5 $ 1,509.3 $ 1,229.7
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

20
<PAGE>

ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
----------- ----------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................... $ 146.4 $ 140.1 $ 99.2
Adjustments to reconcile net income to
net cash provided by operating
activities:
Minority interest....................... 14.9 14.1 8.0
Cumulative effect of a change in
accounting............................. -- -- 2.0
Net realized gains on investments....... (48.1) (14.6) (3.5)
Deferred federal income tax benefit..... (8.0) (2.3) (20.5)
Change in assets and liabilities:
Deferred policy acquisition expenses... (6.7) (2.5) (13.5)
Premiums and notes receivable, net of
reinsurance payable................... (20.5) (34.3) (21.4)
Unearned premiums, net of prepaid
reinsurance premiums.................. 16.1 22.2 31.6
Reserve for losses and loss adjustment
expenses, net of reinsurance
recoverable........................... (13.7) 27.9 91.9
Other, net............................. 29.8 31.5 31.4
----------- ----------- ---------
Net cash provided by operating
activities.............................. 110.2 182.1 205.2
=========== =========== =========
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of available-for-sale
debt securities......................... 1,252.7 1,131.5 612.5
Proceeds from available-for-sale debt
securities maturing or called........... 383.7 290.5 258.3
Proceeds from held-to-maturity debt
securities maturing or called........... -- 23.2 46.6
Proceeds from sale of available-for-sale
equity securities and other
investments............................. 194.6 117.9 105.8
Purchases of available-for-sale debt
securities.............................. (1,859.9) (1,707.2) (826.3)
Purchases of held-to-maturity debt
securities.............................. -- -- (4.0)
Purchases of available-for-sale equity
securities and other investments........ (84.7) (203.4) (154.5)
Change in net receivable from security
transactions not settled................ 32.4 (31.7) 25.1
Capital expenditures..................... (6.4) (6.0) (15.7)
----------- ----------- ---------
Net cash (used for) provided by investing
activities.............................. (87.6) (385.2) 47.8
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders........... (9.5) (9.8) (9.9)
Commercial paper issued (redeemed), net.. 0.3 (5.1) (6.0)
Subsidiary treasury stock purchased, at
cost.................................... (11.1) (3.9) --
Treasury stock purchased, at cost........ (31.0) (20.9) (0.7)
Treasury stock reissued.................. 0.1 -- --
----------- ----------- ---------
Net cash used for financing activities... (51.2) (39.7) (16.6)
----------- ----------- ---------
Net (decrease) increase in cash and cash
equivalents.............................. (28.6) (242.8) 236.4
Cash and cash equivalents at beginning of
year..................................... 125.5 368.3 131.9
----------- ----------- ---------
Cash and cash equivalents at end of year.. $ 96.9 $ 125.5 $ 368.3
=========== =========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the year:
Federal income taxes..................... $ 36.7 $ 47.4 $ 38.7
Interest................................. 1.3 1.6 1.6
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

21
<PAGE>

ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Basis of Consolidation

The consolidated financial statements of Allmerica Property & Casualty
Companies, Inc. and subsidiaries (collectively, the Company) at December 31,
1996 include the accounts of Allmerica Property & Casualty Companies, Inc.
(Allmerica P&C), a non-insurance holding company; The Hanover Insurance
Company (Hanover); Citizens Corporation (CitCorp), a non-insurance holding
company, and CitCorp's wholly-owned subsidiaries Citizens Insurance Company of
America (Citizens), Citizens Management, Inc., Citizens Insurance Company of
Ohio and Citizens Insurance Company of the Midwest; Massachusetts Bay
Insurance Company (Mass Bay); The Hanover American Insurance Company (Hanover
American); Hanover Lloyd's Insurance Company (Hanover Lloyd's); Hanover Texas
Insurance Management Company, Inc. (Hanover Texas); Allmerica Financial
Alliance Insurance Company ([AFAIC], formerly The Hanover National Insurance
Company [Hanover National]); Allmerica Financial Benefit Insurance Company
(AFBIC); Allmerica Financial Insurance Brokers, Inc.; Amgro, Inc. (Amgro), a
premium finance company, and Amgro's wholly-owned subsidiary Lloyds Credit
Corporation; Allmerica Employees' Insurance Agency (AEIA); and APC Funding
Corporation, a special-purpose financing company. The Company owns 100% of
Hanover, Allmerica Financial Insurance Brokers, Inc., and APC Funding
Corporation. Hanover owns 100% of Mass Bay, Hanover American, Hanover Lloyd's,
Hanover Texas, AFAIC, AFBIC, Amgro, and AEIA and approximately 82.5% of the
outstanding common stock of CitCorp. Minority interest relates to 17.5% of
CitCorp common stock publicly held. First Allmerica Financial Life Insurance
Company (FAFLIC, formerly State Mutual Life Assurance Company of America
[State Mutual]) indirectly owns 35.5 million shares (59.5%) of Allmerica P&C.
Concurrent with FAFLIC's conversion from a mutual life insurance company to a
stock life insurance company, FAFLIC became a wholly-owned subsidiary of
Allmerica Financial Corporation (AFC) on October 16, 1995.

On February 19, 1997, AFC and Allmerica P&C entered into an Agreement and
Plan of Merger pursuant to which AFC will acquire all of the outstanding
Common Stock of Allmerica P&C that it does not already own. Additional
information pertaining to the merger is included in Note 2, Proposed
Transaction.

The accounting and reporting policies of the Company are in accordance with
generally accepted accounting principles and the general practices within the
insurance industry. All significant intercompany transactions and balances
have been eliminated in consolidation.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

B. Premium Revenue

Premiums are recognized as earned using the daily pro rata method over the
term of the policy. Unearned premiums represent the portion of premiums
written that relate to the unexpired terms of the policies in force.

C. Investments

Effective January 1, 1994, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for
Certain Investments in Debt and Equity Securities". SFAS No. 115 requires that
an enterprise classify debt and equity securities into one of three
categories: held-to-maturity, available-for-sale or trading. SFAS No. 115 also
requires that unrealized holding gains and losses for trading securities be
included in earnings, while unrealized gains and losses for available-for-sale
securities be

22
<PAGE>

ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

excluded from earnings and reported as a separate component of shareholders'
equity until realized. The effect of implementing SFAS No. 115, as of January
1, 1994, was an increase in the carrying value of debt securities of $149.7
million and an increase in shareholders' equity of $90.5 million, net of
deferred federal income taxes, which resulted from changing the carrying value
of the debt securities from amortized cost to fair value. The implementation
had no effect on net income.

In November 1995, the Financial Accounting Standards Board issued a Special
Report, A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities, which permitted companies to
reclassify securities, where appropriate, based on the new guidance. As a
result, the Company transferred all of its held-to-maturity category
securities, with amortized cost and fair value of $110.3 million and $116.3
million, respectively, to the available-for-sale category, which resulted in a
net increase in shareholders' equity of $3.7 million.

Fair values for debt and equity securities are primarily based on quoted
market prices. For securities not actively traded, fair values are estimated
using values obtained from independent pricing services.

Realized gains or losses on the sale of investments, which are included in
the determination of net income, are determined on the specific-identification
basis using amortized cost for debt securities and cost for equity securities
and other investments. Investments with other than temporary declines in fair
value are written down to estimated fair value resulting in losses which are
recognized as realized losses.

D. Financial Instruments

In the normal course of business, the Company enters into transactions
involving various types of financial instruments, including investments in
debt and equity securities. These instruments involve credit risk and also may
be subject to risk of loss due to currency and interest rate fluctuations.
Financial instruments that are subject to fair value disclosure requirements
are carried in the financial statements at amounts that approximate fair
value, unless otherwise indicated in the notes to consolidated financial
statements.

E. Cash and Cash Equivalents

Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid short-term investments. The Company considers all short-term
investments with an original maturity of three months or less to be cash
equivalents.

F. Deferred Policy Acquisition Expenses

Deferred policy acquisition expenses consist of commissions, premium taxes,
and other costs that vary with and are primarily related to the production of
new and renewal business. The deferral is subject to ultimate recoverability
and charged to expense over the period in which the related premiums are
earned. Deferred policy acquisition expenses are reviewed to determine that
they do not exceed recoverable amounts after considering anticipated
investment income. The Company evaluates recoverability of premium
deficiencies separately for Hanover and Citizens on a product line basis,
considering expected investment income applied separately for Hanover and
Citizens on a product line basis.

Although realization of deferred policy acquisition costs is not assured,
management believes it is more likely than not that all these costs will be
realized. The amount of deferred policy acquisition costs considered
realizable, however, could be reduced in the near term if the estimates of
investment income discussed above are reduced, and this would impact the
amortization of deferred policy acquisition costs.

23
<PAGE>

ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

G. Reserve for Losses and Loss Adjustment Expenses

The reserve for losses and loss adjustment expenses (LAE) represents the
accumulation of individual case estimates for reported losses and actuarial
estimates for incurred but not reported losses and LAE. Assumed reserves are
recorded as reported by the ceding organization. The reserve for losses and
LAE is intended to cover the ultimate net cost of all losses and LAE incurred
through the balance sheet date. In establishing these reserves, consideration
is given to both current conditions and trends as well as past Company and
industry experience. The reserve is stated gross of reinsurance ceded and net
of anticipated salvage and subrogation recoverable. The reserve estimates are
continually reviewed and updated. The ultimate liability of claims may vary
from the current estimate. The effects of changes in the estimated reserve are
included in the results of operations in the period in which the estimates are
revised.

The Company periodically purchases annuity contracts from various life
insurance companies to settle claims currently. The present value of such
annuities, where the Company remains primarily liable, is recorded in the
accounts of the Company as both an other asset and other liability and
amounted to $51.6 million and $49.7 million at December 31, 1996 and 1995,
respectively.

H. Federal Income Taxes

The Company and its subsidiaries file a consolidated tax return. Current
taxes are allocated among all affiliated companies based on a written tax
sharing agreement. Under this agreement, allocations are made primarily on a
separate return basis with current payment for losses and other tax items
utilized in the consolidated return.

Deferred income taxes are generally recognized when assets and liabilities
have different values for financial statement and tax reporting purposes, and
for other temporary taxable and deductible differences as defined by Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). These differences result primarily from loss reserves, policy
acquisition expenses, unearned premiums and unrealized appreciation or
depreciation on investments.

I. Earnings Per Share

Earnings per share are based on a weighted average of the number of shares
outstanding. On December 27, 1994, the Board of Directors of the Company
authorized the repurchase of up to three million shares, or nearly five
percent of its outstanding common stock. During 1996, 1995 and 1994, the
Company purchased 1.2 million, 1.0 million and 0.05 million shares,
respectively for the purpose of funding current and future stock option awards
and for other purposes.

J. Accounting Change

The cumulative effect of a change in accounting for postemployment benefits
was $2.0 million, net of federal income taxes, or $0.03 per share for the year
ended December 31, 1994.

K. Reclassification

Certain reclassifications have been made to the 1995 and 1994 consolidated
financial statements in order to conform to the 1996 presentation.

2. PROPOSED TRANSACTION

On February 19, 1997, AFC and Allmerica P&C entered into an Agreement and
Plan of Merger (the "Merger Agreement") pursuant to which AFC will acquire all
of the outstanding Common Stock, $1.00 par

24
<PAGE>

ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

value per share, of Allmerica P&C that it does not already own for
consideration consisting of $33.00 per share of Common Stock, subject to
adjustment, payable in cash and shares of common stock, par value $0.01 per
share, of AFC (the "AFC Common Stock"). In addition, a shareholder of
Allmerica P&C may elect to receive the consideration in cash, without
interest, or in shares of AFC Common Stock, subject to proration as set forth
in the Merger Agreement. The maximum number of shares of AFC Common Stock to
be issued in the Merger is approximately 9.67 million shares. The acquisition
will be accomplished by merging a newly created, wholly-owned subsidiary of
AFC with and into Allmerica P&C (the "Merger") resulting in Allmerica P&C
becoming a wholly-owned subsidiary of AFC. Also, immediately prior to the
Merger, Allmerica P&C's Certificate of Incorporation will be amended to
authorize a new class of Common Stock, one share of which will be exchanged
for each share of Common Stock currently held by SMA Financial Corp., a
wholly-owned subsidiary of AFC. The consummation of the Merger is subject to
the satisfaction of various conditions, including the approval of regulatory
authorities.

3. BASIS OF PRESENTATION

The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP), which may vary in certain
respects from statutory accounting practices followed by the Company that are
prescribed or permitted by the New Hampshire Insurance Department and Michigan
Insurance Bureau.

A reconciliation of the Company's statutory net income and surplus to GAAP
net income and shareholders' equity is as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
NET INCOME
Statutory net income.......................... $ 155.3 $ 155.3 $79.9
Non-insurance company net loss.............. (1.3) (0.7) --
Minority interest........................... (14.9) (14.1) (8.0)
Deferred policy acquisition expenses........ 6.7 2.5 13.6
Cumulative effect of a change in accounting
for postemployment benefits................ -- -- (2.0)
Postretirement benefits..................... 4.3 (0.9) (1.4)
Deferred federal income tax benefit......... 8.0 2.3 20.5
Other, net.................................. (11.7) (4.3) (3.4)
-------- -------- --------
GAAP net income............................... $ 146.4 $ 140.1 $99.2
======== ======== ========
SHAREHOLDERS' EQUITY
Statutory surplus............................. $1,201.6 $1,128.4 $ 974.3
Non-insurance company equity................ 86.5 23.3 15.5
Deferred policy acquisition expenses........ 164.2 157.5 155.0
Non-admitted assets and statutory reserves.. 35.4 71.3 41.0
Deferred federal income taxes............... 92.7 81.2 189.1
Postretirement benefit obligation........... (31.6) (36.0) (35.1)
Minority interest........................... (22.8) (33.9) (20.7)
Fair value of available-for-sale debt
securities greater than (less than)
statutory carrying value................... 82.9 118.9 (87.4)
Other, net.................................. (0.4) (1.4) (2.0)
-------- -------- --------
GAAP shareholders' equity..................... $1,608.5 $1,509.3 $1,229.7
======== ======== ========
</TABLE>

25
<PAGE>

ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

4. INVESTMENTS

Summary of Investments

The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of SFAS No. 115. The
amortized cost and fair value of available-for-sale investments are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31 , 1996
--------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST APPRECIATION DEPRECIATION VALUE
--------- ------------ ------------ --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. government obligations... $ 166.9 $ 7.5 $ (0.1) $ 174.3
States and political subdivi-
sions........................ 2,220.8 48.0 (7.7) 2,261.1
Foreign governments........... 10.1 1.7 -- 11.8
Corporate debt securities..... 892.0 34.7 (2.0) 924.7
Mortgage-backed securities.... 154.9 1.3 (0.5) 155.7
-------- ------ ------ --------
Total debt securities....... $3,444.7 $ 93.2 $(10.3) $3,527.6
-------- ------ ------ --------
Equity securities............. $ 277.3 $125.7 $ (0.1) $ 402.9
======== ====== ====== ========
<CAPTION>
DECEMBER 31 , 1995
--------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST APPRECIATION DEPRECIATION VALUE
--------- ------------ ------------ --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. government obligations... $ 229.5 $ 16.4 $ -- $ 245.9
States and political subdivi-
sions........................ 2,099.2 60.6 (3.9) 2,155.9
Foreign governments........... 19.7 1.9 -- 21.6
Corporate debt securities..... 702.0 41.2 (1.5) 741.7
Mortgage-backed securities.... 187.2 4.2 -- 191.4
-------- ------ ------ --------
Total debt securities....... $3,237.6 $124.3 $ (5.4) $3,356.5
-------- ------ ------ --------
Equity securities............. $ 340.8 $ 98.5 $ (1.2) $ 438.1
======== ====== ====== ========
</TABLE>

Debt securities with an amortized cost of $82.8 million were on deposit with
various states or governmental authorities at December 31, 1996.

Unrealized gains and losses on available-for-sale securities are summarized
as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1996
-------------------------------
EQUITY
DEBT SECURITIES
SECURITIES AND OTHER (1) TOTAL
---------- ------------- ------
(IN MILLIONS)
<S> <C> <C> <C>
Net appreciation, beginning of year....... $71.7 $62.2 $133.9
Net (depreciation) appreciation on
available-for-sale securities............ (36.0) 26.0 (10.0)
Provision (benefit) for deferred federal
income taxes and minority interest....... 13.8 (10.6) 3.2
----- ----- ------
Net appreciation, end of year............. $49.5 $77.6 $127.1
===== ===== ======
</TABLE>

26
<PAGE>

ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1995
-------------------------------
EQUITY
DEBT SECURITIES
SECURITIES AND OTHER (1) TOTAL
---------- ------------- ------
(IN MILLIONS)
<S> <C> <C> <C>
Net (depreciation) appreciation, beginning
of year.................................. $(51.9) $15.6 $(36.3)
Effect of transfer of securities between
classifications:
Net appreciation on available-for-sale
debt securities........................ 6.0 -- 6.0
Provision for deferred federal income
taxes and minority interest............ (2.3) -- (2.3)
------ ----- ------
3.7 -- 3.7
------ ----- ------
Net appreciation on available-for-sale
securities............................... 199.8 78.1 277.9
Provision for deferred federal income
taxes and minority interest.............. (79.9) (31.5) (111.4)
------ ----- ------
119.9 46.6 166.5
------ ----- ------
Net appreciation, end of year............. $ 71.7 $62.2 $133.9
====== ===== ======
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1994
-------------------------------
EQUITY
DEBT SECURITIES
SECURITIES AND OTHER (1) TOTAL
---------- ------------- ------
(IN MILLIONS)
<S> <C> <C> <C>
Net appreciation, beginning of year....... $ -- $25.6 $ 25.6
------ ----- ------
Cumulative effect of accounting change:
Net appreciation on available-for-sale
securities............................. 149.7 -- 149.7
Provision for deferred federal income
taxes and minority interest............ (59.2) -- (59.2)
------ ----- ------
90.5 -- 90.5
------ ----- ------
Net depreciation on available-for-sale
securities............................... (237.0) (14.0) (251.0)
Benefit for deferred federal income taxes
and minority interest.................... 94.6 4.0 98.6
------ ----- ------
(142.4) (10.0) (152.4)
------ ----- ------
Net (depreciation) appreciation, end of
year..................................... $(51.9) $15.6 $(36.3)
====== ===== ======
</TABLE>
- --------
(1) Includes net (depreciation) appreciation on other investments, net of
deferred federal income taxes and minority interest of $(1.4) million, $2.3
million and $1.0 million in 1996, 1995 and 1994, respectively.

27
<PAGE>

ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Expected Maturities of Debt Securities

The amortized cost and fair value of debt securities, by contractual
maturity are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------
AMORTIZED FAIR
COST VALUE
--------- --------
(IN MILLIONS)
<S> <C> <C>
Due in one year or less.................................. $ 155.6 $ 156.8
Due after one year through five years.................... 918.0 956.2
Due after five years through ten years................... 852.0 873.1
Due after ten years...................................... 1,519.1 1,541.5
-------- --------
$3,444.7 $3,527.6
======== ========
</TABLE>

Mortgage-backed securities are included above in the category representing
their ultimate maturity. Actual maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.

Net Investment Income

The following is a summary of the sources of net investment income:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1996 1995 1994
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Debt securities...................................... $215.5 $191.8 $193.1
Equity securities.................................... 9.6 12.5 8.6
Other investments.................................... 12.9 2.9 2.2
Cash and cash equivalents............................ 5.8 11.0 5.6
------ ------ ------
Total investment income............................ 243.8 218.2 209.5
Investment expenses.................................. (8.4) (8.6) (7.1)
------ ------ ------
Net investment income................................ $235.4 $209.6 $202.4
====== ====== ======
</TABLE>

Included in income from other investments was income from limited
partnerships of $10.0 million for the year ended 1996. The Company had no
income from limited partnerships for the years ended December 31, 1995 and
1994.

At December 31, 1996, fixed maturities with a carrying value of $1.9 million
were non-income producing for the twelve months ended December 31, 1996. The
Company had a concentration in U.S. treasuries at December 31, 1996 that
exceeded 10% of shareholders' equity at December 31, 1996.

Net Realized Gains and Losses

Realized gains and losses were as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
1996 1995 1994
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Debt securities..................................... $ (4.8) $ (3.9) $ (9.0)
Equity securities................................... 52.5 16.2 12.3
Other investments................................... 0.4 2.3 0.2
------ ------ ------
Net realized investment gains..................... $ 48.1 $ 14.6 $ 3.5
====== ====== ======
</TABLE>

28
<PAGE>

ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Voluntary Sales and Related Gross Gains and Gross Losses on Available-for-
Sale Securities

Proceeds from voluntary sales of debt securities in 1996, 1995 and 1994 were
$1,252.7 million, $1,131.5 million and $612.5 million, respectively. Gross
gains in 1996, 1995 and 1994 of $8.9 million, $13.7 million and $5.8 million
were realized on those sales, respectively. Gross losses in 1996, 1995 and
1994 of $13.6 million, $16.5 million and $14.8 million were realized on those
sales, respectively. Proceeds from voluntary sales of equity securities in
1996, 1995, and 1994 were $191.5 million, $112.7 million, and $105.1 million,
respectively. Gross gains in 1996, 1995 and 1994 were $53.5 million, $22.7
million and $16.6 million, respectively. Gross losses in 1996, 1995 and 1994
were $1.0 million, $6.5 million and $4.3 million, respectively.

5. DEFERRED POLICY ACQUISITION EXPENSES

The following reflects the amounts of policy acquisition expenses deferred
and amortized:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Balance, beginning of year........................ $ 157.5 $ 155.0 $ 141.4
Amortization expense.............................. (422.6) (409.1) (390.3)
Acquisition expenses deferred..................... 429.3 411.6 403.9
------- ------- -------
Balance, end of year.............................. $ 164.2 $ 157.5 $ 155.0
======= ======= =======
</TABLE>

Deferred acquisition costs are reviewed for each product to determine if
they are recoverable. If such costs are determined to be unrecoverable, they
are expensed at the time of determination. The Company evaluates
recoverability of premium deficiencies separately for Hanover and Citizens on
a product line basis, considering expected investment income applied
separately for Hanover and Citizens on a product line basis. Deferred policy
acquisition expenses were reduced by $3.8 million, $3.6 million and $3.7
million in 1996, 1995 and 1994, respectively, due to premium deficiencies.

6. COMMERCIAL PAPER

A comparative summary of commercial paper is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
------ ------
(IN MILLIONS)
<S> <C> <C>
Face amount.................................................. $ 28.2 $ 27.9
Discount..................................................... (0.2) (0.2)
------ ------
$ 28.0 $ 27.7
====== ======
</TABLE>

Commercial paper normally matures within 90 days and had a weighted average
interest rate of 5.5% and 5.8% at December 31, 1996 and 1995, respectively.
Interest expense was $1.3 million, $1.6 million and $1.6 million in 1996, 1995
and 1994, respectively.

The Company has unsecured lines of credit with certain banks. At December
31, 1996, these lines totaled $40.0 million, of which $12 million was
available for borrowing. Under the terms of these agreements, the Company may
borrow funds on a short-term basis at the prevailing prime interest rate. The
Company is required to pay annual commitment fees of 0.07% on the unused
portion of its lines of credit. These lines are subject to annual renewal in
1997.

29
<PAGE>

ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

7. FEDERAL INCOME TAXES

Provision for federal income taxes have been calculated in accordance with
the provision of SFAS No. 109. A summary of the federal expense (benefit) in
the consolidated statements of income is as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1996 1995 1994
------ ------ -------
(IN MILLIONS)
<S> <C> <C> <C>
Current............................................. $ 44.4 $ 54.4 $ 24.4
Deferred............................................ (8.0) (2.3) (20.5)
------ ------ -------
Total............................................. $ 36.4 $ 52.1 $ 3.9
====== ====== =======
</TABLE>

Deferred federal income tax assets and liabilities are comprised of the
following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1995
------ ------
(IN MILLIONS)
<S> <C> <C>
DEFERRED FEDERAL INCOME TAX ASSETS
Discount of reserve for losses and loss adjustment expenses... $128.2 $125.3
Unearned premiums............................................. 53.9 52.7
Alternative minimum tax....................................... 16.3 9.8
Postretirement benefits....................................... 15.4 16.4
Pension benefits.............................................. 9.7 7.3
Other......................................................... 8.8 11.7
------ ------
Total deferred federal income tax assets.................... 232.3 223.2
====== ======
DEFERRED FEDERAL INCOME TAX LIABILITIES
Deferred policy acquisition expenses.......................... 57.5 55.1
Unrealized appreciation on available-for-sale securities...... 73.4 77.4
Other......................................................... 8.2 9.5
------ ------
Total deferred federal income tax liabilities............... 139.1 142.0
------ ------
Net deferred federal income tax asset......................... $ 93.2 $ 81.2
====== ======
</TABLE>

Management believes, based on the Company's recent earnings history and its
future expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.

30
<PAGE>

ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The provision for federal income tax expense differs from the amount of
income tax determined by applying the applicable U.S. statutory federal income
tax rate (35%) to income before federal income taxes. The sources of the
difference and the tax effects of each were as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1996 1995 1994
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Tax provision at statutory rate...................... $ 69.2 $ 72.2 $ 39.6
Tax-exempt interest.................................. (35.3) (32.2) (35.8)
Dividends received................................... (1.6) (2.3) (1.6)
Changes in tax reserve estimates..................... -- 12.8 --
Other, net........................................... 4.1 1.6 1.7
------ ------ ------
Federal income tax expense........................... $ 36.4 $ 52.1 $ 3.9
====== ====== ======
Effective tax rate................................... 18.4% 25.3% 3.5%
====== ====== ======
</TABLE>

The Company's federal income tax returns are routinely audited by the IRS,
and provisions are made in the financial statements in anticipation of the
results of these audits. The IRS has examined the Company's federal income tax
returns through 1991. The Company is currently considering its response to
certain adjustments proposed by the IRS with respect to the Company's federal
income tax returns for the years 1989 through 1991. If upheld, these
adjustments would result in additional payments; however, the Company will
vigorously defend its position with respect to these adjustments. In
management's opinion, adequate tax liabilities have been established for all
years. However, the amount of these tax liabilities could be revised in the
near term if estimates of the Company's ultimate liability are revised.

8. REINSURANCE

31
<PAGE>

ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Company determines the appropriate amount of reinsurance based on evaluation
of the risks accepted and analyses prepared by consultants and reinsurers and
on market conditions (including the availability and pricing of reinsurance).
The Company also believes that the terms of its reinsurance contracts are
consistent with industry practice in that they contain standard terms with
respect to lines of business covered, limit and retention, arbitration and
occurrence. Based on its review of its reinsurers' financial statements and
reputations in the reinsurance marketplace, the Company believes that its
reinsurers are financially sound.

The Company is subject to concentration of risk with respect to reinsurance
ceded to various residual market mechanisms. As a condition to the ability to
conduct certain business in various states, the Company is required to
participate in various residual market mechanisms and pooling arrangements
which provide various insurance coverages to individuals or other entities
that are otherwise unable to purchase such coverage voluntarily provided by
private insurers. These market mechanisms and pooling arrangements include the
Massachusetts Commonwealth Automobile Reinsurers ("CAR"), the Maine Workers'
Compensation Residual Market Pool ("MWCRP") and the Michigan Catastrophic
Claims Association ("MCCA"). At December 31, 1996, the MCCA and CAR were the
only two reinsurers which represented 10% or more of the Company's reinsurance
business. As a servicing carrier in Massachusetts, the Company cedes a
significant portion of its private passenger and commercial automobile
premiums to CAR. Net premiums earned and losses and loss adjustment expenses
ceded to CAR for the years ended December 31, 1996, 1995 and 1994 were $38.0
million and $21.8 million, $49.1 million and $33.7 million, and $50.0 million
and $29.8 million, respectively.

From 1988 through 1992, the Company was a servicing carrier in Maine, and
ceded a significant portion of its workers' compensation premiums to the Maine
Workers' Compensation Residual Market Pool, which is administered by The
National Council on Compensation Insurance ("NCCI"). The Company is currently
involved in legal proceedings regarding the MWCRP's deficit which through a
legislated settlement issued on June 23, 1995 provided for an initial funding
of $220.0 million, of which the insurance carriers were responsible for $65.0
million. Hanover paid its allocation of $4.2 million in December 1995. Some of
the smaller carriers appealed this decision. The Company's right to recover
reinsurance balances for claims properly paid is not at issue in any such
proceedings. The Company expects to collect its reinsurance balance; however,
funding of the cash flow needs of the MWCRP may in the future be affected by
issues related to certain litigation, the outcome of which the Company cannot
predict.

The Company ceded to MCCA premiums earned and losses and loss adjustment
expenses for the years ended December 31, 1996, 1995 and 1994 of $50.5 million
and $(52.9) million, $66.8 million and $62.9 million, and $80.0 million and
$24.2 million, respectively. Because the MCCA is supported by assessments
permitted by statute, and all amounts billed by the Company to CAR, MWCRP and
MCCA have been paid when due, the Company believes that it has no significant
exposure to uncollectible reinsurance balances.

32
<PAGE>

ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Net written and earned premiums and losses and LAE incurred included
reinsurance activity as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
NET PREMIUMS WRITTEN
Direct................................... $ 2,039.7 $ 2,039.4 $ 1,992.4
Assumed.................................. 108.7 125.0 128.6
Ceded.................................... (234.0) (279.1) (298.1)
---------- ---------- ----------
Net premiums written..................... $ 1,914.4 $ 1,885.3 $ 1,822.9
========== ========== ==========
NET PREMIUMS EARNED
Direct................................... $ 2,018.5 $ 2,021.7 $ 1,967.1
Assumed.................................. 112.4 137.7 116.1
Ceded.................................... (232.6) (296.2) (291.9)
---------- ---------- ----------
Net premiums earned...................... $ 1,898.3 $ 1,863.2 $ 1,791.3
========== ========== ==========
LOSSES AND LAE INCURRED
Direct................................... $ 1,288.3 $ 1,372.7 $ 1,364.4
Assumed.................................. 85.8 146.1 102.7
Ceded.................................... (2.2) (229.1) (160.4)
---------- ---------- ----------
Losses and LAE incurred.................. $ 1,371.9 $ 1,289.7 $ 1,306.7
========== ========== ==========
</TABLE>

Reinsurance recoverable on paid and unpaid losses and ceded prepaid premiums
were as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------
UNPAID PAID PREPAID
LOSSES LOSSES TOTAL PREMIUMS
------ ------ ------ --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
MCCA........................................... $287.7 $ 4.3 $292.0 $ --
NCCI........................................... 63.0 6.0 69.0 --
CAR............................................ 64.9 10.1 75.0 17.4
Other.......................................... 211.3 21.9 233.2 28.1
------ ----- ------ -----
Total........................................ $626.9 $42.3 $669.2 $45.5
====== ===== ====== =====
<CAPTION>
DECEMBER 31, 1995
-----------------------------
UNPAID PAID PREPAID
LOSSES LOSSES TOTAL PREMIUMS
------ ------ ------ --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
MCCA........................................... $353.3 $ 1.7 $355.0 $ --
NCCI........................................... 96.0 6.6 102.6 --
CAR............................................ 62.7 20.7 83.4 18.7
Other.......................................... 251.5 14.9 266.4 25.1
------ ----- ------ -----
Total........................................ $763.5 $43.9 $807.4 $43.8
====== ===== ====== =====
</TABLE>

9. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

33
<PAGE>

ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The table below provides a reconciliation of the beginning and ending
reserve for unpaid losses and LAE for the years ended December 31, as follows:

<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Reserve for losses and LAE, beginning of
year........................................ $2,896.0 $2,821.7 $2,717.3
Incurred losses and LAE, net of reinsurance
recoverable:
Provision for insured events of current
year...................................... 1,513.3 1,427.3 1,434.8
Decrease in provision for insured events of
prior years............................... (141.4) (137.6) (128.1)
-------- -------- --------
Total incurred losses and LAE............ 1,371.9 1,289.7 1,306.7
-------- -------- --------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured
events of current year.................... 759.6 652.2 650.2
Losses and LAE attributable to insured
events of prior years..................... 627.6 614.3 566.9
-------- -------- --------
Total payments........................... 1,387.2 1,266.5 1,217.1
-------- -------- --------
Change in reinsurance recoverable on unpaid
losses...................................... (136.6) 51.1 14.8
-------- -------- --------
Reserve for losses and LAE, end of year...... $2,744.1 $2,896.0 $2,821.7
======== ======== ========
</TABLE>

As part of an ongoing process, the reserves have been re-estimated for all
prior accident years and were decreased by $141.4 million, $137.6 million and
$128.1 million in 1996, 1995, and 1994, respectively. The increase in
favorable development on prior years' reserves of $3.8 million in 1996 results
primarily from an $11.4 million increase in favorable development at Citizens.
The increase in Citizens' favorable development of $11.4 million in 1996
reflects improved severity in the personal automobile line, where favorable
development increased $28.6 million to $33.0 million in 1996, partially offset
by less favorable development in the workers' compensation line. In 1995, the
workers' compensation line had favorable development of $32.7 million,
primarily as a result of Citizens re-estimating reserves to reflect the new
claims cost management programs and the Michigan Supreme Court ruling, which
decreases the maximum to be paid for indemnity cases on all existing and
future claims. In 1996, the favorable development in the workers' compensation
line of $21.8 million also reflected these developments. Hanover's favorable
development, including voluntary and involuntary pools, decreased $7.7 million
in 1996 to $82.9 million, primarily attributable to a decrease in favorable
development in the workers' compensation line of $19.8. This decrease is
primarily attributable to a re-estimate of reserves with respect to certain
types of workers' compensation policies including large deductibles and excess
of loss policies. In addition, during 1995 Hanover refined its estimation of
unallocated loss adjustment expenses which increased favorable development in
that year. Favorable development in the personal automobile line also
decreased $4.7 million, to $42.4 million in 1996. These decreases were offset
by increases in favorable development of $1.9 million and $5.6 million, to
$12.6 million and $5.7 million, in the commercial automobile and commercial
multiple peril lines, respectively. Favorable development in other lines
increased by $8.8 million, primarily as a result of environmental reserve
strengthening in 1995. Favorable development in Hanover's voluntary and
involuntary pools increased $3.7 million to $4.1 million during 1996.

34
<PAGE>

ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

in 1994. Favorable development in Hanover's workers' compensation line
increased $27.7 million to $31.0 million during 1995. This was offset by
decreases of $14.6 million and $12.6 million, to $45.5 million and $0.1
million, in the personal automobile and commercial multiple peril lines,
respectively. Favorable development in Hanover's voluntary and involuntary
pools decreased $23.6 million to $0.4 million during 1995.

10. PENSION PLANS

The Company provides retirement benefits to substantially all of its
employees, under two separate defined benefit pension plans. Through December
31, 1994, retirement benefits were based primarily on employees' years of
service and compensation during the highest five consecutive plan years of
employment. Benefits under this defined benefit formula were frozen for most
employees effective December 31, 1994. In their place, the Company adopted a
defined benefit cash balance formula, under which the Company annually
provides a contribution to each eligible employee as a percentage of that
employee's salary, similar to a defined contribution plan arrangement. The
1996 and 1995 contributions were based on 7% of each eligible employee's
salary. The Company's policy for the plans is to fund at least the minimum
amount required by the Employee Retirement Income Security Act of 1974.

Net pension expense included the following components:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
1996 1995 1994
------ ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost--benefits earned......................... $ 11.0 $ 10.9 $ 6.4
Interest cost on projected benefit obligation......... 8.2 6.7 6.4
Actual return on plan assets.......................... (12.2) (29.3) (0.7)
Net amortization and deferral......................... (0.4) 19.2 (6.7)
------ ------ -----
Net pension expense................................. $ 6.6 $ 7.5 $ 5.4
====== ====== =====
</TABLE>

35
<PAGE>

ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following table summarizes the combined funded status of the two pension
plans and the amounts recognized in the Company's financial statements.

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
------ ------
(IN MILLIONS)
<S> <C> <C>
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS
Vested benefit obligation................................... $118.9 $116.4
Unvested benefit obligation................................. 4.1 2.6
------ ------
Accumulated benefit obligation............................ $123.0 $119.0
====== ======
PENSION LIABILITY INCLUDED IN CONSOLIDATED BALANCE SHEETS
Projected benefit obligation................................ $132.5 $130.5
Plan assets at fair value................................... 122.0 114.5
------ ------
Plan assets less than projected benefit obligation........ (10.5) (16.0)
Unrecognized net loss from past experience.................. 3.0 22.4
Unrecognized prior service benefit.......................... (14.3) (17.8)
Unamortized transition asset................................ (9.1) (9.6)
------ ------
Net pension liability..................................... $(30.9) $(21.0)
====== ======
</TABLE>

Determination of the projected benefit obligations was based on a weighted
average discount rate of 7.0% at December 31, 1996 and 1995. The assumed long-
term rate of return on plan assets was 9% for both years. The actuarial
present value of the projected benefit obligations was determined using
assumed rates of increase in future compensation levels of 5.5% to 6.5%. Plan
assets are invested primarily in various separate accounts and the general
account of FAFLIC. Plan assets also include 159,047 shares of AFC common stock
at both December 31, 1996 and 1995, with a market value of $5.3 million and $4.3
million at December 31, 1996 and 1995, respectively. At December 31, 1996 and
1995, each plan's projected benefit obligation exceeded its plans assets.

The Company's major subsidiaries, The Hanover Insurance Company and Citizens
Insurance Company of America, have 401(k) and incentive compensation plans for
their eligible employees. The Company also had a profit sharing plan which was
discontinued in 1994 and a match feature was added to the continuing 401(k)
plan. The total cost of the incentive compensation plans in 1996, 1995 and
1994 was $3.2 million, $3.0 million and $3.8 million, respectively. The total
cost under the profit sharing and 401(k) plans in 1996, 1995 and 1994 was $4.0
million, $3.7 million and $6.4 million, respectively.

11. POSTRETIREMENT BENEFIT PLANS

In addition to the Company's pension plans, the Company provides
postretirement medical and death benefits to certain full-time employees and
dependents, under plans sponsored by Hanover and Citizens. Generally employees
become eligible at age 55 with at least 15 years of service. Spousal coverage
is generally provided for up to two years after death of retiree. Benefits
include hospital, major medical and a payment at death equal to retirees'
final compensation up to certain limits. Effective January 1, 1996, the
Company revised these benefits so as to establish limits on future benefit
payments, restrict eligibility for current employees and eliminate eligibility
for new employees. The medical plans have varying co-payments and deductibles,
depending on the plan. The life insurance plan is a non-contributory plan.
These plans are unfunded.

The plan changes effective January 1, 1996 resulted in a negative plan
amendment (change in eligibility and medical benefits) of $18.5 million and
curtailment (no future increases in life insurance) of $3.2 million. The
negative plan amendment will be amortized as prior service cost over the
average number of years to full eligibility (approximately 9 years or $2.0
million per year). Of the $3.2 million curtailment gain, $1.2 million

36
<PAGE>

ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

has been deducted from unrecognized loss and $2.0 million has been recorded as
a reduction of net periodic postretirement benefit expense.

The components of net periodic postretirement benefits expenses were as
follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1996 1995 1994
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Service cost........................................... $ 1.5 $ 2.5 $ 2.8
Interest cost.......................................... 1.8 3.0 3.0
Net amortization and deferral.......................... (2.0) (0.5) 0.3
------ ------ -----
Net periodic postretirement benefit expense.......... $ 1.3 $ 5.0 $ 6.1
====== ====== =====
</TABLE>

The plan's status and the amounts recognized in the Company's consolidated
balance sheets were as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
------ ------
(IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees..................................................... $ 14.6 $ 15.1
Other fully eligible plan participants....................... 3.2 7.6
Other active plan participants............................... 10.4 24.7
------ ------
Accumulated postretirement benefit obligation................ 28.2 47.4
Unrecognized prior service cost.............................. 16.4 --
Unrecognized loss............................................ (0.6) (1.5)
------ ------
Accrued postretirement benefit cost.......................... $ 44.0 $ 45.9
====== ======
</TABLE>

For purposes of measuring the accumulated postretirement benefit obligation
at December 31, 1996, health care costs were assumed to decrease 9.0% in 1997,
declining thereafter until the ultimate rate of 5.5% is reached in 2001 and
remaining at that level thereafter. The health care cost trend rate assumption
has a significant effect on the amounts reported. To illustrate, increasing
the assumed health care cost trend rates by 1% in each year would increase the
medical accumulated postretirement benefit obligation as of December 31, 1996
by $1.6 million, or 8.5%, and the aggregate of the service and interest cost
components of annual net periodic postretirement benefit expense by $0.2
million or 9.6%.

The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% as of December 31, 1996 and 1995.
The assumed rate of future annual salary increases was 5.5% at both valuation
dates.

12. POSTEMPLOYMENT BENEFITS

Effective January 1, 1994, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 112 (SFAS No. 112), "Employers'
Accounting for Postemployment Benefits," which requires employers to recognize
the costs and obligations of severance, disability and related life insurance
and health care benefits to be paid to inactive or former employees after
employment but before retirement. Prior to adoption, the Company had
recognized the cost of these benefits on an accrual or paid basis, depending
on the plan. Implementation of SFAS No. 112 resulted in a transition
obligation of $2.0 million, net of deferred federal

37
<PAGE>

ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

income taxes, and is reported as a cumulative effect of a change in accounting
principle in the consolidated statement of income. The 1996, 1995 and the 1994
expenses after recognition of the cumulative effect, are not significant.

13. STOCK OPTION PLANS

In October 1995, the FASB issued Statement of Financial Accounting Standards
(SFAS No. 123) "Accounting for Stock-Based Compensation." The standard is
effective for fiscal years beginning after December 15, 1995, and requires the
Company either to apply a fair value measure to any stock-based compensation
granted by the Company after December 31, 1994, or continue to apply the
valuation provisions of existing accounting standards, but with pro-forma net
income and earnings per share disclosures using a fair value methodology to
value the stock-based compensation. Beginning for the year ended December 31,
1996, the Company has elected to continue to apply the valuation provisions of
existing accounting standards (APB No. 25). The pro-forma effect of applying
SFAS No. 123 is not material.

Effective May 17, 1995, the Company adopted a Long Term Stock Incentive Plan
(the "Employees' Plan"). Key employees of the Company and its subsidiaries are
eligible for awards pursuant to the Plan administered by the Compensation
Committee of the Board of Directors (the "Committee") of the Company. Under
the terms of the Employees' Plan, options may be granted to eligible employees
at a price not less than the market price of the Company's common stock on the
date of grant. At December 31, 1996, 78,800, 92,000 and 3,000 option shares
were outstanding at an option price of $21.00, $25.50 and $26.625 per share,
respectively. At December 31, 1995, 110,000 option shares were outstanding at
an option price of $21.00 per share. Option shares may be exercised subject to
the terms prescribed by the Committee at the time of grant, otherwise options
vest at the rate of 20% annually for five consecutive years and must be
exercised not later than ten years from the date of grant. During 1996, there
were 6,000 options exercised. There were no options exercised in 1995. At
December 31, 1996, there were 14,800 options exercisable and 820,200 option
shares were available for future grant.

14. RELATED PARTY TRANSACTIONS

The Company has agreements under which FAFLIC provides management, space and
other services including accounting, electronic data processing, human
resources, legal and other staff functions. Charges for these services are
based on full cost including all direct and indirect overhead costs, and
amounted to $59.3 million, $52.1 million and $64.4 million in 1996, 1995 and
1994, respectively.

Hanover leases office space from FAFLIC under a lease agreement which
expires December 31, 2010. The annual lease cost was $1.0 million during each
of the years ended December 31, 1996, 1995 and 1994, respectively. The annual
lease cost of this agreement is included within the amount of charges above
for 1996, 1995 and 1994, respectively. Amgro leases office space from FAFLIC
as a tenant at will. The annual lease cost was $0.3 million during each of the
years ended December 31, 1996, 1995 and 1994, respectively and is included in
the charges above.

15. LEASE COMMITMENTS

Excluding related party occupancy and lease costs, the Company has certain
operating lease arrangements for property and equipment. As of December 31,
1996, future minimum rental payments under non-cancelable, long-term operating
leases were approximately $44.9 million payable as follows: 1997--$14.7
million; 1998--$11.7 million; 1999--$8.5 million; 2000--$5.7 million; 2001--
$2.9 million; and $1.4 million thereafter. All leases expire prior to the year
2005.

38
<PAGE>

ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

It is expected that, in the normal course of business, leases that expire
will be renewed or replaced by leases on other property and equipment; thus,
it is anticipated that future minimum lease commitments will not be less than
the amounts shown for 1997. Certain equipment and fixtures leases are subject
to buyout options. Rent expense, excluding related party charges, was $16.7
million, $19.2 million and $20.6 million in 1996, 1995 and 1994, respectively.

16. CONTINGENCIES

Litigation

On June 23, 1995, the governor of Maine approved a legislative settlement
for the Maine Workers' Compensation Residual Market Pool deficit for the Years
1988 through 1992. The settlement provides for an initial funding of $220.0
million toward the deficit. The insurance carriers were liable for $65.0
million and employers would contribute $110.0 million payable through
surcharges on premiums over the course of the next ten years. The major
insurers are responsible for 90% of the $65.0 million. Hanover's allocated
share of the settlement is approximately $4.2 million, which was paid in
December 1995. The remainder of the deficit of $45.0 million will be paid by
the Maine Guaranty Fund, payable in quarterly contributions over ten years. A
group of smaller carriers filed litigation to appeal the settlement. The
Company believes that adequate reserves have been established for any
additional liability.

The Company has been named a defendant in various other legal proceedings
arising in the normal course of business. In the opinion of management, based
on the advice of legal counsel, the ultimate resolution of these proceedings
will not have a material effect on the Company's consolidated financial
statements. However, liabilities related to these proceedings could be
established in the near term if estimates of the ultimate resolution of these
proceedings are revised.

17. DIVIDEND RESTRICTIONS

New Hampshire and Michigan limit the payment of dividends and other
distributions to shareholders. Under current law, extraordinary dividends and
other distributions may only be paid from statutory policyholders' surplus,
excluding dividends paid, as of the December 31st preceding. An extraordinary
dividend or distribution includes any dividend or distribution of cash or
other property, whose fair market value together with that of other dividends
or distributions made within the preceding 12 months exceeds 10% of such
insurers surplus as regards policyholders as of December 31, next preceding.
Based on the 1996 statutory financial statements of Hanover, the maximum
dividend that may be paid to Allmerica P&C at January 1, 1997, without prior
approval from the New Hampshire Commissioner of Insurance, is $15.4 million,
which considers dividends declared to Allmerica P&C of $105.0 million during
1996, including $80.0 million which was declared in December. On January 2,
1997, Hanover declared an extraordinary dividend in the amount of $120.0
million, payable on or after January 21, 1997 to Allmerica P&C. The dividend
which was approved by the New Hampshire Insurance Department on January 9,
1997, is to be paid in a lump sum or in such installments as Allmerica P&C, in
its discretion may determine.

Under the Michigan Insurance Code, cash dividends may be paid by Citizens
Insurance only from earnings and policyholders' surplus. In addition, a
Michigan insurer may not pay an "extraordinary" dividend to its stockholders
without the prior approval of the Michigan Insurance Commissioner. An
extraordinary dividend or distribution is defined as a dividend or
distribution of cash or other property whose fair market value, together with
that of other dividends and distributions made within the preceding 12 months,
exceeds the greater of 10% of policyholders' surplus as of December 31 of the
preceding year or the statutory net income less realized gains, for the
immediately preceding calendar year. At January 1, 1997, Citizens Insurance
could pay dividends of $39.9 million without approval of the Michigan
Insurance Commissioner.

39
<PAGE>

ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

18. SEGMENT INFORMATION

The Company is engaged primarily in the property and casualty insurance
business and operates in the United States. Substantially all of the Company's
earnings are generated in Michigan at Citizens and the Northeast (Connecticut,
Massachusetts, New York, New Jersey, New Hampshire, Rhode Island, Vermont and
Maine) at Hanover. The Company's insurance operations are segmented into
personal and commercial lines of business, based on common underlying risks
and customer types for individual products in those segments. The personal
segment includes products such as automobile insurance and homeowners
insurance. The commercial segment includes products such as automobile
insurance, commercial multiple-peril insurance, and workers' compensation
insurance. Investments are available for payments of claims and expenses for
all products. Investment income, realized gains and total assets have not been
identified to specific segments.

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
INCOME
BEFORE
NET FEDERAL
PREMIUMS INVESTMENT REALIZED UNDERWRITING INCOME TOTAL
EARNED INCOME GAIN (LOSS) PROFIT (LOSS) TAXES ASSETS
-------- ---------- ----------- ------------- ------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
1996
Hanover
Personal...... $ 607.3 $(47.2)
Commercial.... 455.5 (41.7)
-------- ------ ----- ------ ------ --------
Total....... $1,062.8 $146.5 $33.1 $(88.9) $ 92.2 $3,200.9
======== ====== ===== ====== ====== ========
Citizens
Personal...... $ 554.6 $ (1.3)
Commercial.... 280.9 2.0
-------- ------ ----- ------ ------ --------
Total....... $ 835.5 $ 88.9 $15.0 $ (0.7) $105.5 $2,503.0
======== ====== ===== ====== ====== ========
1995
Hanover
Personal...... $ 577.1 $ 23.6
Commercial.... 468.3 (62.6)
-------- ------ ----- ------ ------ --------
Total....... $1,045.4 $130.8 $10.8 $(39.0) $109.7 $3,271.0
======== ====== ===== ====== ====== ========
Citizens
Personal...... $ 536.2 $(26.6)
Commercial.... 281.6 40.0
-------- ------ ----- ------ ------ --------
Total....... $ 817.8 $ 78.8 $ 3.8 $ 13.4 $ 96.6 $2,470.8
======== ====== ===== ====== ====== ========
1994
Hanover
Personal...... $ 548.2 $ 6.3
Commercial.... 480.4 (76.0)
-------- ------ ----- ------ ------ --------
Total....... $1,028.6 $127.6 $ 4.6 $(69.7) $ 67.8 $3,075.2
======== ====== ===== ====== ====== ========
Citizens
Personal...... $ 496.1 $(32.3)
Commercial.... 266.6 1.6
-------- ------ ----- ------ ------ --------
Total....... $ 762.7 $ 74.8 $(1.1) $(30.7) $ 45.3 $2,333.5
======== ====== ===== ====== ====== ========
</TABLE>

40
<PAGE>

ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

19. QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)

A summary of unaudited quarterly results of consolidated operations for
1996, 1995 and 1994 is presented below:

<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED, 1996
-------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
--------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues................. $ 563.3 $ 532.3 $ 539.3 $ 558.8
Net income..................... $ 49.6 $ 28.6 $ 40.8 $ 27.4
Net income per share........... $ 0.82 $ 0.48 $ 0.68 $ 0.46
Dividends declared per share... $ 0.04 $ 0.04 $ 0.04 $ 0.04
<CAPTION>
FOR THE THREE MONTHS ENDED, 1995
-------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
--------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues................. $ 512.8 $ 516.8 $ 540.3 $ 525.2
Net income..................... $ 32.7 $ 36.4 $ 43.1 $ 27.9
Net income per share........... $ 0.53 $ 0.59 $ 0.70 $ 0.46
Dividends declared per share... $ 0.04 $ 0.04 $ 0.04 $ 0.04
<CAPTION>
FOR THE THREE MONTHS ENDED, 1994
-------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
--------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues................. $ 494.2 $ 496.8 $ 509.0 $ 504.8
(Loss) income before cumulative
effect of a change in
accounting.................... $ (8.5) $ 28.8 $ 49.5 $ 31.4
Cumulative effect of a change
in accounting................. $ (2.0) -- -- --
Net (loss) income.............. $ (10.5) $ 28.8 $ 49.5 $ 34.1
(Loss) income before cumulative
effect of a change in
accounting per share.......... $ (0.14) $ 0.47 $ 0.80 $ 0.51
Cumulative effect of a change
in accounting per share....... $ (0.03) -- -- --
Net income (loss) per share.... $ (0.17) $ 0.47 $ 0.80 $ 0.51
Dividends declared per share... $ 0.04 $ 0.04 $ 0.04 $ 0.04
</TABLE>
- --------
Note: Due to the use of weighted average shares outstanding when calculating
earnings per share, the sum of the quarterly per share data may not equal the
per share data for the year.

41
<PAGE>

PART IV

ITEM 14

EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(A)(1) FINANCIAL STATEMENTS AND INDEX

The consolidated financial statements are listed under Item 8 of this Form
10-K/A.

(A)(2) FINANCIAL STATEMENT SCHEDULES AND INDEX

The Financial Statement Schedules and Index were previously filed in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1996,
filed March 24, 1997.

42
<PAGE>

(A)(3) EXHIBITS

(2) Agreement and Plan of Merger, dated as of February 19, 1997, among
Allmerica Property and Casualty, Allmerica Financial Corporation and
APY Acquisition, Inc. incorporated by reference to Exhibit 1 to the
Current Report on Form 8-K of Allmerica Financial Corporation
(Commission File No. 1-13754) dated February 19, 1997.

(3) 3.1 Articles of Incorporation. Filed as Appendix B to the Registrant's
Form S-4, No. 33-51696, filed on November 4, 1992, and incorporated
herein by reference.

3.2 By laws. Filed as Appendix C to the Registrant's Form S-4, No.
33-51696, filed on November 4, 1992, and incorporated herein by
reference.

(4) Form of Stock Certificate of Allmerica Property & Casualty Companies,
Inc. incorporated by reference to exhibit 3.3 to Amendment No. 1 to
the Registrant's Form S-4, No. 33-51696, filed on October 13, 1992.

(10) Material Contracts

(10.1) The Hanover Insurance Company's Management Reward Plan
(Executive Compensation Plan) and the Hanover Insurance
Company's Excess Benefit Retirement Plan filed as Exhibit
(10.1) to the Hanover Insurance Company's 1990 Annual Report
on Form 10-K and incorporated herein by reference.

(10.2) The Hanover Insurance Company's Supplemental Employee
Retirement Plan. Filed as Exhibit (10.2) to the Hanover
Insurance Company's 1990 Annual Report on Form 10-K and
incorporated herein by reference.

(10.3) Citizens Insurance Company of America's Management Reward Plan
(Executive Compensation Plan) filed as Exhibit (10.3) to the
Allmerica Property & Casualty Insurance Companies, Inc. 1992
Annual Report on Form 10-K and incorporated herein by
reference.

(10.4) Citizens Insurance Company of America's Excess Benefit
Retirement Plan filed as Exhibit (10.4) to the Allmerica
Property & Casualty Insurance Companies, Inc. 1992 Annual
Report on Form 10-K and incorporated herein by reference.

(10.5) Citizens Insurance Company of America's Supplemental Employee
Retirement Plan. Filed as Exhibit (10.5) to the Allmerica
Property & Casualty Insurance Companies, Inc. 1992 Annual
Report on Form 10-K and incorporated herein by reference.

(10.6) Allmerica Financial 1993 Annual Incentive Plan incorporated by
reference to Exhibit (10.6) to the Allmerica Property &
Casualty Companies, Inc. 1993 Annual Report on Form 10-K and
incorporated herein by reference.

(10.7) State Mutual Companies Long Term Performance Unit Plan
incorporated by reference to Exhibit (10.7) to the Allmerica
Property & Casualty Companies, Inc. 1993 Annual Report on Form
10-K and incorporated herein by reference.

(10.8) Consolidated Service Agreement between State Mutual Life
Assurance Company of America and their subsidiaries dated
September 30, 1993 incorporated by reference to Exhibit (10.8)
to the Allmerica Property & Casualty Companies, Inc. 1993
Annual Report on Form 10-K and incorporated herein by
reference.

(10.9) Indenture of Lease between First Allmerica Financial Life
Insurance Company and The Hanover Insurance Company of
America, dated July 3, 1984 and Corrected First Amendment to
Indenture Lease dated December 20, 1993 incorporated by
reference to Exhibit (10.10) to the Allmerica Property &
Casualty Companies, Inc. 1993 Annual Report on Form 10-K and
incorporated herein by reference.

43
<PAGE>

(10.10) Citizens Insurance Company of America Stock Option Plan dated
June 3, 1994, incorporated by reference to Exhibit (10.11) to
the Allmerica Property & Casualty Companies, Inc. 1994 Annual
Report on Form 10-K and incorporated herein by reference.

(10.11) Indenture of Lease between First Allmerica Financial Life
Insurance Company and The Hanover Insurance Company of
America, dated March 23, 1993, by and between Aetna Life
Insurance Company and First Allmerica Life Insurance Company,
including amendments thereto, relating to property in
Atlanta, Georgia incorporated by reference to Exhibit (10.12)
to the Allmerica Property & Casualty Companies, Inc. 1994
Annual Report on Form 10-K and incorporated herein by
reference.

(10.12) Allmerica Financial Cash Balance Plan incorporated by
reference to Exhibit (10/13) to the Allmerica Property &
Casualty Companies, Inc. third quarter report on Form 10-Q
and incorporated herein by reference.

(10.13) Allmerica Property & Casualty Companies, Inc. 1995 Long Term
Stock Incentive Plan incorporated by reference to Exhibit A
to Allmerica Property & Casualty Companies, Inc. definitive
Proxy Statement dated March 30, 1995 and incorporated herein
by reference.

(11) Statement regarding computation of per share earnings.+

(21) Subsidiaries of the Registrant.+

(23) Consent of Independent Accountants in reference to the Registration
Statement on Form S-8 (No. 333-11123)

(24) Power of Attorney+

(99.1) Important factors regarding forward-looking statements+

+ Previously filed in the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996, filed March 24, 1997.

(B) REPORT ON FORM 8-K

On December 18, 1996, a report on Form 8-K was filed reporting under item 5,
Other Events, the announcement by the Registrant that AFC had made a proposal
to the Board of Directors of the Registrant to acquire the remaining shares of
common stock of the Registrant that it did not already own.

On February 20, 1997, a report on Form 8-K was filed reporting under item 5,
Other Events, the announcement that the Registrant and AFC entered into an
agreement and plan of merger, pursuant to which AFC will acquire all of the
remaining shares of common stock of the Registrant that it did not already
own.

44
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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

Date: June 12, 1997 By: /s/ Edward J. Parry, III
---------------------------------
Vice President, Chief Financial
Officer, Treasurer and Principal
Accounting Officer

<PAGE>

EXHIBIT 23

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-11123) of Allmerica Property & Casualty
Companies, Inc. of our report dated February 3, 1997, except as to Notes 1 and
2, which are as of February 19, 1997, which appears in this Annual Report on
Form 10-K/A.

/s/ Price Waterhouse LLP
------------------------------
Price Waterhouse LLP

Boston, Massachusetts
June 11, 1997