FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1997
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to
0-20668
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(Commission file number)
ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.
---------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3164595
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
440 Lincoln Street, Worcester, Massachusetts 01653
---------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(508) 855-1000
(Registrant's telephone number, including area code)
---------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: 59,651,206
shares of common stock outstanding, as of May 1, 1997.
16
Total Number of Pages
1
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION 8 - 14
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
2
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<S> <C> <C>
(Unaudited)
Three Months Ended
(In millions, except per share data) March 31,
1997 1996
------------------------
Revenues
Net premiums written $ 484.5 $ 475.7
Increase in unearned premiums,
net of prepaid reinsurance premiums 9.4 10.6
--------- ---------
Net premiums earned 475.1 465.1
Net investment income 61.3 52.3
Net realized gains on investments 37.8 45.5
Other income 2.4 0.4
--------- ---------
Total revenues 576.6 563.3
--------- ---------
Expenses
Losses and loss adjustment expenses 346.6 346.2
Policy acquisition and other operating expenses 156.7 146.5
Policyholders' dividends 1.6 3.1
--------- ---------
Total expenses 504.9 495.8
--------- ---------
Income before federal income taxes and minority 71.7 67.5
interest
Federal income tax expense 14.9 13.7
--------- ---------
Income before minority interest 56.8 53.8
Minority interest (5.0) (4.2)
--------- ---------
Net income $ 51.8 $ 49.6
========= =========
Per share data
Net income $ 0.87 $ 0.82
========= =========
Dividends declared to shareholders $ 0.04 $ 0.04
========= =========
Weighted average shares outstanding 59.7 60.5
========= =========
</TABLE>
The accompanying notes are an integral part of these financial
statements
3
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ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
(Unaudited)
(In millions, except share and per share data)
March 31, December 31,
1997 1996
---------------------------
Assets
Investments
Debt securities available-for-sale, at fair value $ 3,558.7 $ 3,527.6
(Amortized cost of $3,536.4 and $3,444.7)
Equity securities available-for-sale, at fair value 311.7 402.9
(Cost of $213.8 and $277.3)
Other investments, at fair value (Cost of $29.5 and 31.3 31.9
$29.3) ---------- ----------
Total investments 3,901.7 3,962.4
Cash and cash equivalents 122.9 96.9
Accrued investment income 63.3 65.3
Premiums receivable (less allowance for
doubtful accounts of $5.5 and $4.5) 415.3 410.2
Finance installment receivables 28.1 29.3
Reinsurance recoverable on paid and unpaid balances 631.7 669.2
Prepaid reinsurance premiums 40.0 45.5
Deferred policy acquisition expenses 166.0 164.2
Deferred federal income taxes 122.6 93.2
Other assets 172.1 167.7
---------- ----------
$ 5,663.7 $ 5,703.9
========== ==========
Liabilities and Shareholders' Equity
Liabilities
Reserve for losses and loss adjustment expenses $ 2,678.5 $ 2,744.1
Unearned premiums 819.0 815.1
Reinsurance premiums payable 30.1 31.4
Commercial paper 27.6 28.0
Other liabilities 371.9 344.7
---------- ----------
Total liabilities 3,927.1 3,963.3
---------- ----------
Minority interest 132.1 132.1
---------- ----------
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 61.9 61.9
shares
Additional paid-in capital 32.0 32.0
Retained earnings 1,491.2 1,441.8
Unrealized appreciation on investments, net of
deferred federal income taxes and minority interest 73.7 127.1
Treasury stock, at cost (2.2 million shares in 1997 (54.3) (54.3)
and 1996) ---------- ----------
Total shareholders' equity 1,604.5 1,608.5
---------- ----------
$ 5,663.7 $ 5,703.9
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial
statements
4
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ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
(Unaudited)
(In millions) Three Months Ended
March 31,
1997 1996
-------------------------
Common stock
Balance at beginning and end of period $ 61.9 $ 61.9
---------- ----------
Additional paid-in capital
Balance at beginning and end of period 32.0 32.0
---------- ----------
Retained earnings
Balance at beginning of period 1,441.8 1,304.9
Net income 51.8 49.6
Dividends declared to shareholders (2.4) (2.4)
---------- ----------
Balance at end of period 1,491.2 1,352.1
---------- ----------
Unrealized appreciation on investments,
net of deferred federal income taxes and
minority interest
Balance at beginning of period 127.1 133.9
Depreciation during the period (89.1) (78.7)
Provision for deferred federal income tax 31.2 27.6
benefit
Minority interest, net of taxes 4.5 2.9
---------- ----------
Balance at end of period 73.7 85.7
---------- ----------
Treasury stock
Balance at beginning of period (54.3) (23.4)
Shares purchased at cost - (23.6)
---------- ----------
Balance at end of period (54.3) (47.0)
---------- ----------
Total shareholders' equity $ 1,604.5 $ 1,484.7
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial
statements
5
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ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C>
(Unaudited)
Three Months Ended
(In millions) March 31,
1997 1996
-------------------------
Cash was (used for) provided by
Operating Activities
Net income $ 51.8 $ 49.6
Adjustments to reconcile net income to
net cash (used for) provided by operating
activities:
Minority interest 5.0 4.2
Net realized gains on investments (37.8) (45.5)
Deferred federal income tax provision 1.5 1.5
Change in assets and liabilities:
Deferred policy acquisition expenses (1.8) (1.2)
Premiums and notes receivable, net of (7.4) (39.7)
reinsurance payable
Unearned premiums, net of prepaid reinsurance 9.4 10.6
premiums
Reserve for losses and loss adjustment
expenses, net of reinsurance recoverable (28.1) 4.8
Other, net 3.8 1.3
---------- ----------
Net cash used for operating activities (3.6) (14.4)
---------- ----------
Investing Activities
Proceeds from sale of available-for-sale debt 287.5 446.2
securities
Proceeds from available-for-sale debt securities 83.7 -
maturing or called
Proceeds from sale of available-for-sale equity
securities and other investments 113.5 163.7
Purchases of available-for-sale debt securities (463.3) (639.1)
Purchases of available-for-sale equity securities (13.4) (39.2)
and other investments
Decrease in net receivable from securities 25.4 100.3
transactions not settled
Capital expenditures (1.0) (0.8)
---------- ----------
Net cash provided by investing activities 32.4 31.1
---------- ----------
Financing Activities
Dividends paid to shareholders (2.4) (2.4)
Commercial paper redeemed, net (0.4) (3.9)
Treasury stock purchased, at cost - (23.6)
---------- ----------
Net cash used for financing activities (2.8) (29.9)
---------- ----------
Net increase (decrease) in cash and cash equivalents 26.0 (13.2)
Cash and cash equivalents at beginning of period 96.9 125.5
---------- ----------
Cash and cash equivalents at end of period $ 122.9 $ 112.3
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial
statements
6
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ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of
Allmerica Property & Casualty Companies, Inc. (the "Company") have
been prepared in accordance with generally accepted accounting
principles applicable to stock property and casualty insurance
companies for interim financial information and with the requirements
of Form 10-Q. The financial statements should be read in conjunction
with the financial statements included in the Company's Form 10-K, for
the year ended December 31, 1996.
In the opinion of management, the financial statements reflect all
adjustments of a normal recurring nature necessary for a fair
presentation of the interim periods. Certain reclassifications have
been made to the 1996 consolidated financial statements in order to
conform to the 1997 presentation. Interim results are not necessarily
indicative of results expected for the entire year. These financial
statements should be read in conjunction with the Company's 1996 Form
10-K filed with the Securities and Exchange Commission.
2. Earnings Per Share
Earnings per share are based on a monthly weighted average of shares
outstanding. The weighted average number of shares of common stock
and equivalents was 59.7 million and 60.5 million for the three month
periods ended March 31, 1997 and 1996, respectively. 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. The Company purchased a total of 2.1 million
shares since the implementation of the repurchase program.
Recently the FASB issued Statement of Financial Accounting Standards
No. 128, Earnings Per Share, which supersedes APB Opinion No. 15,
Earnings Per Share. This standard replaces the primary EPS
requirements with a basic EPS computation and requires a dual
presentation of basic and diluted EPS for those companies with complex
capital structures. The Company intends to adopt the standards of
Statement No. 128 for financial statements issued after December 15,
1997. The impact of this statement is expected to be immaterial on
the Company's EPS calculation.
3. Proposed Transaction
On February 19, 1997, Allmerica Financial Corporation ("AFC") and the
Company 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 the Company that it does
not already own for consideration consisting of $17.60 in cash without
interest and 0.4 shares of AFC Common Stock, $.01 par value, subject
to adjustment. The maximum number of shares of AFC Common Stock to be
issued in the Merger is approximately 9.67 million shares. Also,
immediately prior to the Merger, the Company'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.
7
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PART I - FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
The results of operations for Allmerica Property & Casualty Companies,
Inc. and subsidiaries (the "Company") include the accounts of
Allmerica Property & Casualty Companies, Inc. ("Allmerica P&C"), a
non-insurance holding company; The Hanover Insurance Company
("Hanover"), a property and casualty insurance company wholly owned by
Allmerica P&C; Citizens Corporation, a non-insurance holding company
for Citizens Insurance Company of America (collectively, "Citizens");
and certain other insurance and non-insurance subsidiaries. Hanover
owns 82.5% of the outstanding common stock of Citizens Corporation.
Results of Operations
- ---------------------
Consolidated Overview
Net Income
The Company's consolidated net income increased $2.2 million, to $51.8
million, or $0.87 per share, in the first quarter of 1997, compared to
net income of $49.6 million, or $0.82 per share for the same period in
1996. Net realized gains were $37.8 million during the first quarter
of 1997, versus $45.5 million during the comparable period of 1996,
reflecting a decrease in the sale of equity securities by Hanover.
Excluding realized gains and losses, net of taxes and minority
interest, net income increased $7.7 million, to $29.5 million in the
first quarter of 1997. This increase is primarily attributable to a
$9.0 million increase in net investment income, in addition to a $2.9
million decrease in the underwriting loss. The growth in net
investment income resulted primarily from an increase in average
invested assets and the Company's portfolio shift to higher yielding
debt securities, including longer duration and non-investment grade
securities. The slight improvement in underwriting results is
primarily attributable to decreased catastrophes and other weather
related losses at Hanover, partially offset by reduced favorable
development of prior year reserves at Hanover and higher policy
acquisition and other underwriting expenses at both Hanover and
Citizens. Federal income tax expense increased $1.2 million, to $14.9
million during the first quarter of 1997, and the effective tax rate
increased from 20.3% in the first quarter of 1996, to 20.8%, for the
same period in 1997. Minority interest in Citizens net income was
$5.0 million in the first quarter of 1997, compared to $4.2 million
during the first quarter of 1996.
Underwriting results
Consolidated net premiums earned increased $10.0 million, or 2.2%, to
$475.1 million in the first quarter of 1997. Personal segment net
premiums earned increased $15.2 million, or 5.4%, to $295.4 million,
reflecting the accounting effects of restructuring a reinsurance
contract at Hanover, increasing both net premiums earned and losses in
the personal automobile line by approximately $4.0 million. In
addition, increases since March 31, 1996, of 2.6% in policies in force
in Hanover's personal automobile line and 2.5% in
policies in force in Hanover's homeowners line, contributed to the
increase in net premiums earned. Growth in Citizens' personal segment
is attributable to increases in net premiums earned in Ohio and
Indiana resulting from expansion in these states, a $3.0 million
decrease in premiums ceded to Michigan Catastrophic Claims Association
(MCCA) and to increases in personal automobile and homeowners rates.
Commercial segment net premiums earned decreased $5.2 million, or 2.8%
to $179.7 million. This decrease is primarily attributable to rate
reductions in the workers compensation line at both Hanover and
Citizens.
The consolidated underwriting loss for the first quarter of 1997
decreased $2.9 million to a loss of $27.8 million. This slight
improvement in underwriting results is primarily attributable to
decreased catastrophes and other weather related losses at Hanover,
partially offset by reduced favorable development of prior year
reserves at Hanover and higher policy acquisition and other
underwriting expenses at both Hanover and Citizens. Policy
acquisition and other underwriting expenses increased $8.2 million, or
5.6%, to $154.7 million during the first
8
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quarter of 1997 reflecting increased involuntary pool related expenses
at Hanover, in addition to higher technology expenses at both Hanover
and Citizens.
Investment results
Net investment income before taxes increased $9.0 million, or 17.2%,
to $61.3 million during the first quarter of 1997 compared to $52.3
million in the comparable quarter of 1996. The increase in the first
quarter of 1997 is primarily the result of an increase in average
invested assets and the Company's portfolio shift to higher yielding
debt securities, including longer duration and non-investment grade
securities. The average pre-tax yield on debt securities was 6.8%
and 6.0% for the first quarter of 1997 and 1996, respectively.
Average invested assets increased $97.4 million, or 2.5%, to $3,932.1
million at March 31, 1997 compared to $3,834.7 million at March 31,
1996.
Net realized gains on investments before taxes were $37.8 million and
$45.5 million in the first quarter of 1997 and 1996, respectively.
The decrease in net realized gains in the first quarter of 1997
reflects a decrease in the sale of equity securities at Hanover. In
both periods, net realized investment gains resulted primarily from
the sale 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 $14.9 million in the first
quarter of 1997 compared to $13.7 million in the comparable period of
1996. The increase in 1997 represents an increase in the effective
tax rate from 20.3% in 1996 to 20.8% in 1997.
Segment Results
- ----------------
Personal Segment
The personal segment represented 62.2% and 60.2% of total net premiums
earned in the first quarter of 1997 and 1996, respectively.
<TABLE> Hanover Citizens Consolidated
<S> <C> <C> <C> <C> <C> <C>
For the Quarters Ended 1997 1996 1997 1996 1997 1996
March 31, (In millions) ------------------ ------------------ -----------------
Net premiums earned $ 151.7 $ 145.1 $ 143.7 $ 135.1 $ 295.4 $ 280.2
Losses and loss adjustment expenses 112.8 116.3 113.8 107.4 226.6 223.7
Policy acquisition and other underwriting
expenses 51.0 49.0 39.5 36.4 90.5 85.4
------------------ ------------------- -----------------
Underwriting loss $ (12.1) $ (20.2) $ (9.6) $ (8.7) $ (21.7) $ (28.9)
================== =================== =================
</TABLE>
Revenues
Personal segment net premiums earned increased $15.2 million, or
5.4%, to $295.4 million during the first quarter of 1997, compared to
$280.2 million in the first quarter of 1996. Hanover's personal
segment net premiums earned increased $6.6 million, or 4.5%, to $151.7
million during the first quarter of 1997. This increase was 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 approximately $4.0 million. A 2.6%
increase in polices in force in the personal automobile line as well
as a 2.5% increase in policies in force in the homeowners' line, since
March 31, 1996, also contributed to the increase in net premiums
earned. These increases were partially offset by a mandated 6.2%
decrease in Massachusetts personal automobile rates which became
effective January 1, 1997. In March 1997, the Massachusetts Division
of Insurance approved Hanover's 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.
9
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Citizens' personal segment net premiums earned increased $8.6 million,
or 6.4%, to $143.7 million in the first quarter of 1997. This
increase is primarily attributable to a decrease in premiums ceded to
MCCA and to increases in personal automobile and homeowners rates.
The non-recurring decrease in premiums ceded to MCCA was a result of a
lower surcharge effective January 1, 1997 for personal automobile
policies written. This growth is partially offset by a 2.0% decrease
in policies in force in the personal automobile line since March 31,
1996, attributable to continued strong competition in Michigan.
Underwriting results
The personal segment underwriting loss in the first quarter of 1997
decreased $7.2 million, to a loss of $21.7 million. Hanover's
underwriting results improved $8.1 million, to a loss of $12.1
million. Citizens' underwriting loss increased $0.9 million, to a
loss of $9.6 million.
Hanover's personal segment losses and LAE decreased $3.5 million, or
3.0% to $112.8 million in the first quarter of 1997. This decrease is
primarily attributable to a $18.2 million decreases in losses and LAE
in the homeowners line resulting from decreased catastrophes during
the first quarter of 1997. Catastrophe losses in Hanover's personal
segment decreased $16.1 million, to $1.7 million in the first quarter
of 1997 from $17.8 million during the comparable period of 1996.
These decreases were significantly offset by a $14.8 million increase
in losses and LAE in the personal automobile line, primarily
reflecting a $9.0 million reduction in favorable development of prior
year reserves and an increase in current year claims severity, in
addition to the aforementioned accounting effects of restructuring a
reinsurance contract.
Citizens' underwriting loss increased $0.9 million to a loss of $9.6
million during the first quarter of 1997. Catastrophe losses
increased $1.2 million over the prior year first quarter, primarily in
the homeowners line.
Policy acquisition and other underwriting expenses in the personal
segment increased $5.1 million, or 6.0%, to $90.5 million in the first
quarter of 1997, reflecting increased involuntary pool related
expenses at Hanover, growth in net premiums earned primarily at
Citizens, and higher technology expenses at both Hanover and Citizens
Commercial Segment
The commercial segment represented 37.8% and 39.8% of total net
premiums earned in the first quarter of 1997 and 1996, respectively.
<TABLE> Hanover Citizens Consolidated
<S> <C> <C> <C> <C> <C> <C>
For the Quarters Ended 1997 1996 1997 1996 1997 1996
March 31, (In millions) ------------------ ------------------ ------------------
Net premiums earned $ 113.5 $ 115.5 $ 66.2 $ 69.4 $ 179.7 $ 184.9
Losses and loss adjustment expenses 75.3 74.4 44.7 48.1 120.0 122.5
Policy acquisition and other underwriting
expenses 46.5 43.7 17.7 17.4 64.2 61.1
Policyholders' dividends - 1.3 1.6 1.8 1.6 3.1
------------------ ------------------- ------------------
Underwriting loss $ (8.3) $ (3.9) $ 2.2 $ 2.1 $ (6.1) $ (1.8)
================== =================== =================
</TABLE>
Revenues
Commercial segment net premiums earned decreased $5.2 million, or
2.8%, to $179.7 million in the first quarter of 1997. Hanover's
commercial segment net premiums earned decreased $2.0 million, or
1.7%, to $113.5 million. This decrease is primarily attributable to
rate decreases of 6.7% since January 1, 1997, in the workers'
compensation line. Citizens' commercial segment net premiums earned
decreased $3.2 million, or 4.6%, to $66.2 million, in the first
quarter of 1997. This decrease is primarily attributable to decreases
in rates for workers'
10
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compensation. Rates in this line were decreased 6.4% and 8.7%
effective June 1, 1996 and March 1, 1997, 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 the first quarter of 1997
increased $4.3 million, to a loss of $6.1 million. Hanover's
underwriting loss increased $4.4 million, to a loss of $8.3 million
and Citizens' underwriting profit increased $0.1 million, to a profit
of $2.2 million in the first quarter of 1997.
Hanover's commercial segment losses and LAE increased $0.9 million, or
1.2%, to $75.3 million in the first quarter of 1997. This increase is
primarily attributable to increases in losses and LAE in the workers'
compensation and commercial automobile lines of $5.1 million and $6.1
million, respectively. The increase in the workers' compensation line
resulted from a decrease in favorable claims experience on prior
accident years in addition to an increase in loss severity. Commercial
automobile losses and LAE increased as a result of a reduction in
favorable claims experience on prior accident years. These increases
were significantly offset by a decrease in losses and LAE in the
commercial multiple peril lines of $7.0 million, to $35.6 million due
to an increase in favorable development on prior accident years, as
well as a decrease in catastrophes from $5.8 million in the first
quarter of 1996 to $2.1 million in 1997.
Citizens' losses and LAE decreased $3.4 million, or 7.1%, to $44.7
million in the first quarter of 1997. This reflects a decrease in
losses and LAE in the workers' compensation line of $5.7 million, or
28.9%, to $14.0 million, primarily as a result of favorable claims
activity in prior accident years.
Policy acquisition and other underwriting expenses in the commercial
segment increased $3.1 million, or 5.1%, to $64.2 million in the first
quarter of 1997, primarily attributable to increased technology
expenses at both Hanover and Citizens.
11
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Reserve for Losses and Loss Adjustment Expenses
- ------------------------------------------------
The Company regularly updates its reserve estimates as new information
becomes available and further events occur which may impact the
resolution of unsettled claims. Changes in prior reserve estimates are
reflected in results of operations in the year such changes are
determined to be needed and recorded. The table below provides a
reconciliation of the beginning and ending reserve for unpaid losses
and LAE as follows:
<TABLE>
<S> <C> <C>
For the three months ended March 31, (In millions) 1997 1996
------------------------
Reserve for losses and LAE, beginning of period $ 2,744.1 $ 2,896.0
Incurred losses and LAE, net of reinsurance
recoverable:
Provision for insured events of the current 382.2 377.6
period
Decrease in provision for insured events of (35.6) (31.4)
prior years ---------- ----------
Total incurred losses and LAE 346.6 346.2
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events 111.4 111.0
of current period
Losses and LAE attributable to insured events 269.2 232.7
of prior years ---------- ----------
Total payments 380.6 343.7
Change in reinsurance recoverable on unpaid (31.6) (29.7)
losses ---------- ----------
Reserve for losses and LAE, end of period $ 2,678.5 $ 2,868.8
========== ==========
</TABLE>
As part of an ongoing process, the reserves have been re-estimated for
all prior accident years and were decreased by $35.6 million and $31.4
million for the three month periods ended March 31, 1997 and 1996,
respectively. The increase in favorable development on prior years'
loss reserves of $4.2 million results primarily from a $12.4 million
increase in favorable development at Citizens to $20.5 million. The
favorable reserve development at Citizens in both years primarily
reflects the initiatives taken by Citizens to manage medical costs in
both automobile lines and the workers' compensation line, as well as
the impact of the Michigan Supreme Court ruling on worker's
compensation indemnity payments, which decreases the maximum amount to
be paid for indemnity cases on all existing and future claims.
Hanover's favorable development decreased $8.2 million to $15.1
million during the first quarter of 1997. This decrease is primarily
attributable to decreased favorable development in the personal
automobile and workers' compensation lines, partially offset by an
increase in favorable development in the commercial multiple peril
line.
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.
12
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Investment Portfolio
- --------------------
The Company's investment portfolio decreased $60.7 million, to
$3,901.7 at March 31, 1997 from $3,962.4 million at December 31, 1996.
Hanover's investment portfolio decreased $37.0 million, to $2,320.2
million, and Citizens' investment portfolio decreased $25.7 million,
to $1,579.5 million. These decreases were primarily attributable to a
decrease in unrealized appreciation of $53.4 million during the first
quarter of 1997. Debt securities increased $31.1 million, to $3,558.7
million, from $3,527.6 million and represented 91.2% and 89.0% of the
carrying value of all investments at March 31, 1997 and December 31,
1996, 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 decreased $41.1 million, to $2,220.1 million,
from $2,261.2 million during 1997 and represented 62.4% and 64.1% of
the total debt securities at March 31, 1997 and December 31, 1996,
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 March 31, 1997, $311.7 million, or 8.0% of the investment portfolio
was invested in equity securities compared to $402.9 million, or 10.2%
at December 31, 1996.
Liquidity and Capital Resources
- -------------------------------
Liquidity describes the ability of a company to generate sufficient
cash flows to meet the cash requirements of business operations. As a
holding company, Allmerica P&C's primary source of cash for the
payment of dividends to its shareholders is dividends from its
insurance subsidiaries. However, dividend payments to Allmerica P&C
by its insurance subsidiaries are subject to limitations imposed by
state regulators, such as the requirement that cash dividends be paid
out of unreserved and unrestricted earned surplus and restrictions on
the payment of "extraordinary" dividends, as defined.
Sources of cash for the Company's insurance subsidiaries are from
premiums collected, investment income and maturing investments.
Primary cash outflows are paid losses and loss adjustment expenses,
policy acquisition expenses, other underwriting expenses and
investment purchases. Cash outflows related to claim losses and loss
adjustment expenses can be variable because of uncertainties
surrounding settlement dates for liabilities for unpaid losses and
because of the potential for large losses either individually or in
the aggregate. Accordingly, the Company's strategy is to monitor
available cash and short-term investment balances in relation to
projected cash needs by matching maturities of investments with
expected payments of current and long-term liabilities. The Company
periodically adjusts its investment policy to respond to changes in
short-term and long-term cash requirements.
Net cash used for operating activities for the three months ended
March 31, 1997 and 1996 was $3.6 million and $14.4 million,
respectively. This decrease is primarily attributable to an increase
in net investment income, in addition to the timing of cash receipts
and payments of premiums and claims, respectively.
Net cash provided by investing activities for the three months ended
March 31, 1997 and 1996 was $32.4 million and $31.1 million,
respectively. In 1997 and 1996, net cash provided resulted from net
sales of equity securities and other investments in addition to the
timing of cash payments to settle securities transactions, partially
offset by net purchases of debt securities.
Net cash used for financing activities for the three months ended
March 31, 1997 and 1996 was $2.8 million and $29.9, respectively. In
the first quarter of 1997, the Company did not repurchase its common
stock, while during the comparable period of 1996, the Company
repurchased .9 million shares at a cost of $23.6 million.
Shareholders' equity was $1,604.5 million at March 31, 1997, or $26.88
per share, compared to $1,608.5 million at December 31, 1996, or
$26.99 per share. Shareholders' equity reflects net income for the
period, the repurchase of treasury stock and the impact of a $53.4
million 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.
13
=======================================================================
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 March 31, 1997, these lines totaled $40 million and
are subject to annual renewal. There were no borrowings under these
lines of credit during the first quarter of 1997. 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, AFC and the Company 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 the Company that it does not already own for consideration
consisting of $17.60 in cash without interest and 0.4 shares of AFC
Common Stock, $.01 par value, subject to adjustment. The maximum
number of shares of AFC Common Stock to be issued in the Merger is
approximately 9.67 million shares. Also, immediately prior to the
Merger, the Company'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. As of March 31, 1997, no payments have been made to
Allmerica P&C.
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 as Exhibit 99.1 to
the Company's 1996 Form 10-K 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 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.
14
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PART II - OTHER INFORMATION
ITEM 6
Exhibits and Reports on Form 8-K
(a) Exhibits.
EX - 11 Statement regarding computation of per share earnings.
EX - 27 Financial Data Schedule
(b) Reports on Form 8-K
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.
15
=======================================================================
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Allmerica Property & Casualty Companies, Inc.
Registrant
Dated May 14, 1997 /s/ John F. O'Brien
------------------------------------
John F. O'Brien
President and Chief Executive
Officer
Dated May 14, 1997 /s/ Edward J. Pary III
------------------------------------
Edward J. Parry III
Vice President, Chief Financial
Officer, Treasurer and Principal
Accounting Officer
16
=======================================================================
Exhibit 11
ALLMERICA PROPERTY & CASUALTY COMPANIES, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
For the Periods Ended March 31, 1997 and 1996
(in millions, except per share data)
<TABLE>
Quarter Ended
March 31,
<S> <C> <C>
----------------
1997 1996
----------------
Primary:
Average shares outstanding 59.7 60.5
Net effect of dilutive stock options based on the treasury - -
stock method using average market price
----------------
TOTALS 59.7 60.5
================
Net income available to shareholders $ 51.8 $ 49.6
================
Per share amount $ 0.87 $ 0.82
Fully diluted:
Average shares outstanding 59.7 60.5
Net effect of dilutive stock options based on the treasury - -
stock method using average market price
----------------
TOTALS 59.7 60.5
================
Net income available to shareholders $ 51.8 $ 49.6
================
Per share amount $ 0.87 $ 0.82
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 3559
<DEBT-CARRYING-VALUE> 3536
<DEBT-MARKET-VALUE> 3559
<EQUITIES> 312
<MORTGAGE> 0
<REAL-ESTATE> 4
<TOTAL-INVEST> 3902
<CASH> 123
<RECOVER-REINSURE> 38
<DEFERRED-ACQUISITION> 166
<TOTAL-ASSETS> 5664
<POLICY-LOSSES> 2678
<UNEARNED-PREMIUMS> 819
<POLICY-OTHER> 30
<POLICY-HOLDER-FUNDS> 12
<NOTES-PAYABLE> 28
0
0
<COMMON> 62
<OTHER-SE> 1543
<TOTAL-LIABILITY-AND-EQUITY> 5664
475
<INVESTMENT-INCOME> 61
<INVESTMENT-GAINS> 38
<OTHER-INCOME> 2
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<UNDERWRITING-AMORTIZATION> 103
<UNDERWRITING-OTHER> 55
<INCOME-PRETAX> 72
<INCOME-TAX> 15
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<EPS-PRIMARY> 0.87
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<RESERVE-OPEN> 2744
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<PROVISION-PRIOR> (36)
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<CUMULATIVE-DEFICIENCY> (32)
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