<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
STATEMENT OF ADDITIONAL INFORMATION
FOR
INDIVIDUAL AND GROUP VARIABLE ANNUITY CONTRACTS FUNDED THROUGH
ALLMERICA SELECT SEPARATE ACCOUNT
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH THE PROSPECTUS FOR THE VARIABLE ACCOUNT DATED JULY 8, 1996
("THE PROSPECTUS"). THE PROSPECTUS MAY BE OBTAINED FROM ALLMERICA INVESTMENTS,
INC., 440 LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653, 800-366-1492.
DATED: JULY 8, 1996
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY . . . . . . . . . . . . . . . . . . . . 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE
COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
UNDERWRITERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ANNUITY PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 7
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 9
GENERAL INFORMATION AND HISTORY
Allmerica Select Separate Account ("Variable Account") is a separate investment
account of First Allmerica Financial Life Insurance Company (the "Company")
authorized by vote of the Board of Directors on August 20, 1991. The Company,
organized under the laws of Massachusetts in 1844, is the fifth oldest life
insurance company in America. As of December 31, 1995, the Company and its
subsidiaries had over $11 billion in combined assets and over $35.2 billion of
life insurance in force. Effective October 16, 1995, the Company converted from
a mutual life insurance company, known as State Mutual Life Assurance Company of
America, to a stock life insurance company and adopted its present name. The
Company is a wholly-owned subsidiary of Allmerica Financial Corporation ("AFC").
The Company's principal office is located at 440 Lincoln Street, Worcester,
Massachusetts 01653, telephone (508) 855-1000 ("Principal Office").
Currently, 11 Sub-Account(s) of the Variable Account are available under the
Contracts. Each Sub-Account invests in a corresponding investment portfolio of
Allmerica Investment Trust ("Trust"), Variable Insurance Products Fund ("VIP")
or T. Rowe Price International Series, Inc. ("T. Rowe Price").
The Trust, VIP and T. Rowe Price are open-end, diversified, management
investment companies. Seven different funds of the Trust are available under
the Contracts: Select International Equity Fund, Select Aggressive Growth Fund,
Select Capital Appreciation Fund, Select Growth Fund, Select Growth and Income
Fund, Select Income Fund and Money Market Fund. Three of the portfolios of VIP
are available under the Contracts: the
- 2 -
<PAGE>
Fidelity VIP High Income Portfolio, Fidelity VIP Equity-Income Portfolio and
Fidelity VIP Growth Portfolio. One portfolio of T. Rowe Price is available
under the Contracts: the T. Rowe Price International Stock Portfolio. Each
Fund, Portfolio and Series available under the Contracts has its own investment
objectives and certain attendant risks.
TAXATION OF THE CONTRACT, VARIABLE
ACCOUNT AND THE COMPANY
The Company currently imposes no charge for taxes payable in connection with the
Contract, other than for state and local premium taxes and similar assessments
when applicable. The Company reserves the right to impose a charge for any
other taxes that may become payable in the future in connection with the
Contracts or the Variable Account.
The Variable Account is considered to be a part of and taxed with the operations
of the Company. The Company is taxed as a life insurance company under
subchapter L of the Internal Revenue Code (the "Code") and files a consolidated
tax return with its affiliated companies.
The Company reserves the right to make a charge for any effect which the income,
assets, or existence of Contracts or the Variable Account may have upon its tax.
Such charge for taxes, if any, will be assessed on a fair and equitable basis in
order to preserve equity among classes of Contract Owners. The Variable Account
presently is not subject to tax.
SERVICES
CUSTODIAN OF SECURITIES. The Company serves as custodian of the assets of the
Variable Account. Trust shares owned by the Sub-Accounts are held on an open
account basis. A Sub-Account's ownership of Trust shares is reflected on the
records of the Trust and not represented by any transferable stock certificates.
EXPERTS. The financial statements of the Company as of December 31, 1995 and
1994 and for each of the three years in the period ended December 31, 1995 and
of Allmerica Select Separate Account of the Company as of December 31, 1995 and
for the periods indicated, included in this Statement of Additional Information
constituting part of the Registration Statement, have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Contracts.
- 3 -
<PAGE>
UNDERWRITERS
Allmerica Investments, Inc. ("Allmerica Investments"), a registered broker-
dealer under the Securities Exchange Act of 1934 and a member of the National
Association of Securities Dealers, Inc. (NASD), serves as principal underwriter
for the Contracts pursuant to a contract with the Company and the Variable
Account. Allmerica Investments distributes the Contracts on a best efforts
basis. Allmerica Investments, Inc., 440 Lincoln Street, Worcester,
Massachusetts 01653 was organized in 1969 as a wholly-owned subsidiary of First
Allmerica and is, at present, indirectly wholly-owned by First Allmerica.
The Contracts offered by this Prospectus are offered continuously and may be
purchased from certain independent broker-dealers which are NASD members and
whose representatives are authorized by applicable law to sell variable annuity
contracts.
All persons selling the Contracts are required to be licensed by their
respective state insurance authorities for the sale of variable annuity
contracts. The Company pays commissions not to exceed 6.0% of purchase payments
to entities which sell the Contracts. To the extent permitted under NASD rules,
promotional incentives or payments may also be provided to such entities based
on sales volumes, the assumption of wholesaling functions, or other sales-
related criteria. Additional payments may be made for other services not
directly related to the sale of the Contracts, including the recruitment and
training of personnel, production of promotional literature, and similar
services.
Commissions paid by the Company do not result in any charge to Contract Owners
or to the Variable Account in addition to the charges described under "CHARGES
AND DEDUCTIONS" in the Prospectus. The Company intends to recoup the commission
and other sales expense through a combination of anticipated surrender,
withdrawal, and/or annuitization charges, profits from the Company's general
account, including the investment earnings on amounts allocated to accumulate on
a fixed basis in excess of the interest credited on fixed accumulations by the
Company, and the profit, if any, from the mortality and expense risk charge.
The aggregate amount of commissions retained by Allmerica Investments, Inc. with
respect to sales of the Contracts in 1995 was $0.00 and $0.00 in 1994. The
aggregate amount of commissions paid to independent broker-dealers in 1995 was
$8,979,395.64 and $7,542,837.54 in 1994.
ANNUITY PAYMENTS
The method by which the Accumulated Value under the Contract is determined is
described in detail under "COMPUTATION OF CONTRACT VALUES AND ANNUITY PAYMENTS"
in the Prospectus.
- 4 -
<PAGE>
Illustration of Accumulation Unit Calculation Using Hypothetical Example. The
Accumulation Unit calculation for a daily Valuation Period may be illustrated by
the following hypothetical example: Assume that the assets of a Sub-Account at
the beginning of a one-day Valuation Period were $5,000,000; that the value of
an Accumulation Unit on the previous date was $1.135000; and that during the
Valuation Period, the investment income and net realized and unrealized capital
gains exceed net realized and unrealized capital losses by $1,675. The
Accumulation Unit value at the end of the current Valuation Period would be
calculated as follows:
(1) Accumulation Unit Value - Previous Valuation Period. . . . . . . $ 1.135000
(2) Value of Assets - Beginning of Valuation Period. . . . . . . . . $5,000,000
(3) Excess of investment income and net gains over capital losses. . . . $1,675
(4) Adjusted Gross Investment Rate for the valuation period (3):(2). . 0.000335
(5) Annual Charge (one day equivalent of 1.40% per annum). . . . . . . 0.000039
(6) Net Investment Rate (4) - (5). . . . . . . . . . . . . . . . . . . 0.000296
(7) Net Investment Factor 1.000000 + (6) . . . . . . . . . . . . . . . 1.000296
(8) Accumulation Unit Value - Current Period (1) x (7) . . . . . . . $ 1.135336
Conversely, if unrealized capital losses and charges for expenses and taxes
exceeded investment income and net realized capital gains of $1,675, the
accumulated unit value at the end of the Valuation Period would have been
$1.134576.
The method for determining the amount of annuity payments is described in detail
under "COMPUTATION OF CONTRACT VALUES AND ANNUITY PAYMENTS" in the Prospectus.
Illustration of Variable Annuity Payment Calculation Using Hypothetical Example.
The determination of the Annuity Unit value and the variable annuity payment may
be illustrated by the following hypothetical example: Assume an Annuitant has
40,000 Accumulation Units in a Variable Account, and that the value of an
Accumulation Unit on the Valuation Date used to determine the amount of the
first variable annuity payment is $1.120000. Therefore, the Accumulation Value
of the Contract is $44,800 (40,000 x $1.120000). Assume also that the Contract
Owner elects an option for which the first monthly payment is $6.57 per $1,000
of Accumulated Value applied. Assuming no premium tax or contingent deferred
sales charge, the first monthly payment would be 44.800 multiplied by $6.57, or
$294.34.
- 5 -
<PAGE>
Next, assume that the Annuity Unit value for the assumed rate of 3-1/2% per
annum for the Valuation Date as of which the first payment was calculated was
$1.100000. Annuity Unit values will not be the same as Accumulation Unit values
because the former reflect the 3-1/2% assumed interest rate used in the annuity
rate calculations. When the Annuity Unit value of $1.100000 is divided into the
first monthly payment the number of Annuity Units represented by that payment is
determined to be 267.5818. The value of this same number of Annuity Units will
be paid in each subsequent month under most options. Assume further that the
net investment factor for the Valuation Period applicable to the next annuity
payment is 1.000190. Multiplying this factor by .999906 (the one-day adjustment
factor for the assumed interest rate of 3-1/2% per annum) produces a factor of
1.000096. This is then multiplied by the Annuity Unit value on the immediately
preceding Valuation Date (assumed here to be $1.105000). The result is an
Annuity Unit value of $1.105106 for the current monthly payment. The current
monthly payment is then determined by multiplying the number of Annuity Units by
the current Annuity Unit value, or 267.5818 times $1.105106, which produces a
current monthly payment of $295.71.
Method for Determining Variable Annuity Option V Redemption and Illustration
Using Hypothetical Example. As discussed in the Prospectus under "DESCRIPTION
OF VARIABLE ANNUITY OPTIONS," the Annuitant, or the beneficiary if the Annuitant
has died, may choose at any time to withdraw the Contract and receive its
commuted value. Commuted value is the present value of remaining payments
commuted at 3-1/2% interest. However, if the annuitant elects the withdrawal,
the remaining payments are deemed to be the remaining payments that would have
been payable had the Surrender Value, rather than the Accumulation Value, been
applied at the Annuity Date. The determination of the commuted value upon
withdrawal by an Annuitant may be illustrated by the following hypothetical
example.
Assume an annuity period of 10 years or longer is elected. The number of
Annuity Units each payment is based on would be calculated using the Accumulated
Value. Assume this results in 267.5818 Annuity Units. Assume the commuted
value is requested with 60 monthly payments remaining and a current Annuity Unit
Value of $1.200000. Based on these assumptions, the dollar amount of remaining
payments would be $321.10 a month for 60 months. If the commuted value was
requested by a beneficiary, the value would be based on the present value at 3-
1/2% interest of this stream of annuity payments. The commuted value would be
$17,725.49. However, if the commuted value is requested by an Annuitant, the
value is calculated as if the Surrender Value, not the Accumulated Value, had
been used to calculated the number of Annuity Units. Assume this results in 250
Annuity Units. Based on these assumptions, the dollar amount of remaining
payments would be $300 a month for 60 months. The present value at 3-1/2% of
all remaining payments would be $16,560.72.
- 6 -
<PAGE>
PERFORMANCE INFORMATION
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to certain indices described in the prospectus under
"PERFORMANCE INFORMATION." In addition, The Company may provide advertising,
sales literature, periodic publications or other material information on various
topics of interest to Contract Owners and prospective Contract Owners. These
topics may include the relationship between sectors of the economy and the
economy as a whole and its effect on various securities markets, investment
strategies and techniques (such as value investing, market timing, dollar cost
averaging, asset allocation, constant ratio transfer and account rebalancing),
the advantages and disadvantages of investing in tax-deferred and taxable
investments, customer profiles and hypothetical purchase and investment
scenarios, financial management and tax and retirement planning, and investment
alternatives to certificates of deposit and other financial instruments,
including comparisons between the Contracts and the characteristics of and
market for such financial instruments.
The Contracts have been offered to the public only since March 15, 1994.
However, total return data may be advertised based on the period of time that
the Funds have been in existence. The results for any period prior to the
Contract being offered will be calculated as if the Contracts have been offered
during that period of time, with all charges assumed to be those applicable to
the Contracts.
TOTAL RETURN
"Total Return" refers to the total of the income generated by an investment in a
Sub-Account and of the changes of value of the principal invested (due to
realized and unrealized capital gains or losses) for a specified period, reduced
by the Sub-Account(s) asset charge and any applicable contingent deferred sales
charge which would be assessed upon complete withdrawal of the investment.
Total Return figures are calculated by standardized methods prescribed by rules
of the Securities and Exchange Commission. The quotations are computed by
finding the average annual compounded rates of return over the specified periods
that would equate the initial amount invested to the ending redeemable values,
according to the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment to the Variable Account of $1,000
T = average annual total return
n = number of years
ERV = the ending redeemable value of the $1,000 payment at the end of the
specified period
- 7 -
<PAGE>
The calculation of Total Return includes the annual charges against the asset of
the Sub-Account. This charge is 1.40% on an annual basis. The calculation of
ending redeemable value assumes (1) the policy was issued at the beginning of
the period and (2) a complete surrender of the policy at the end of the period.
The deduction of the contingent deferred sales charge, if any, applicable at the
end of the period is included in the calculation, according to the following
schedule:
YEARS FROM DATE OF PURCHASE CHARGE AS PERCENTAGE
PAYMENT TO DATE OF OF NEW PURCHASE PAYMENTS
WITHDRAWAL WITHDRAWN*
0-1 6.5%
2 6.0%
3 5.0%
4 4.0%
5 3.0%
6 2.0%
7 1.0%
more than 7 0%
*Subject to the maximum limit described in the prospectus.
No contingent deferred sales charge is deducted upon expiration of the periods
specified above. In all Contract years, a certain amount (withdrawn without
withdrawal charges, as described in the Prospectus) is not subject to the
contingent deferred sales charge.
The calculations of Total Return include the deduction of the $30 Annual
Contract fee.
SUPPLEMENTAL TOTAL RETURN INFORMATION
The Supplemental Total Return Information in this section refers to the total of
the income generated by an investment in a Sub-Account and of the changes of
value of the principal invested (due to realized and unrealized capital gains or
losses) for a specified period reduced by the Sub-Account's assets charges.
However, it is assumed that the investment is NOT withdrawn at the end of each
period.
The quotations of Supplemental Total Return are computed by finding the average
annual compounded rates of return over the specified periods that would equate
the initial amount invested to the ending values, according to the following
formula:
- 8 -
<PAGE>
P(1 + T)n = EV
Where: P = a hypothetical initial payment to the Variable Account of $1,000
T = average annual total return
n = number of years
EV = the ending value of the $1,000 payment at the end of the
specified period
The calculation of Supplemental Total Return reflects the 1.40% annual charge
against the assets of the Sub-Accounts. The ending value assumes that the
policy is NOT withdrawn at the end of the specified period, and there is
therefore no adjustment for the contingent deferred sales charge that would be
applicable if the policy was withdrawn at the end of the period.
The calculations of Supplemental Total Return include the deduction of the $30
Annual Contract fee.
YIELD AND EFFECTIVE YIELD - MONEY MARKET SUB-ACCOUNT
Set forth below is yield and effective yield information for the Money Market
Sub-Account for the seven-day period ended December 31, 1995:
Yield 5.69%
Effective Yield 5.53%
The yield and effective yield figures are calculated by standardized methods
prescribed by rules of the Securities and Exchange Commission. Under those
methods, the yield quotation is computed by determining the net change
(exclusive of capital changes) in the value of a hypothetical pre-existing
account having a balance of one accumulation unit of the Sub-Account at the
beginning of the period, subtracting a charge reflecting the annual 1.40%
deduction for mortality and expense risk and the administrative charge, dividing
the difference by the value of the account at the beginning of the same period
to obtain the base period return, and then multiplying the return for a seven-
day base period by (365/7), with the resulting yield carried to the nearest
hundredth of one percent.
The Money Market Sub-Account computes effective yield by compounding the
unannualized base period return by using the formula:
Effective Yield = [ (base period return + 1) (365/7)] - 1
The calculations of yield and effective yield do NOT reflect the $30 Annual
Contract fee.
FINANCIAL STATEMENTS
Financial Statements are included for First Allmerica Financial Life Insurance
Company
- 9 -
<PAGE>
and for its Allmerica Select Separate Account.
- 10 -
<PAGE>
FIRST ALLMERICA
FINANCIAL LIFE
INSURANCE COMPANY
FINANCIAL STATEMENTS
DECEMBER 31, 1995
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
First Allmerica Financial Life Insurance Company
(formerly known as State Mutual Life Assurance Company of America)
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholder's equity, and of cash flows
present fairly, in all material respects, the financial position of First
Allmerica Financial Life Insurance Company and its subsidiaries at December
31, 1995 and 1994, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1995, 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.
As discussed in the accompanying notes to the consolidated financial
statements, the Company changed its method of accounting for investments
(Notes 1 and 3) and postemployment benefits (Notes 11) in 1994 and for
postretirement benefits (Note 10) in 1993.
/s/ Price Waterhouse LLP
Boston, Massachusetts
February 5, 1996
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Allmerica Financial Corporation)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions, except per share data) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums $ 2,222.8 $ 2,181.8 $ 2,079.3
Universal life and investment product policy fees 170.4 156.8 143.7
Net investment income 710.1 743.1 782.8
Net realized investment gains 19.1 1.1 61.0
Realized gain on sale of subsidiary -- -- 35.7
Realized gain on sale of mutual fund processing business 20.7 -- --
Realized gain on issuance of subsidiary common stock -- -- 62.9
Other income 95.4 112.3 73.8
----------------------------------------
Total revenues 3,238.5 3,195.1 3,239.2
----------------------------------------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss adjustment expenses 2,008.3 2,047.0 1,987.2
Policy acquisition expenses 470.3 475.7 435.8
Other operating expenses 455.0 518.9 421.3
----------------------------------------
Total benefits, losses and expenses 2,933.6 3,041.6 2,844.3
----------------------------------------
Income before federal income taxes 304.9 153.5 394.9
----------------------------------------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current 119.7 45.4 95.1
Deferred (37.0) 8.0 (20.4)
----------------------------------------
Total federal income tax expense 82.7 53.4 74.7
----------------------------------------
Income before minority interest, extraordinary item, and
cumulative effect of accounting change 222.2 100.1 320.2
Minority interest (73.1) (51.0) (122.8)
----------------------------------------
Income before extraordinary item and cumulative effect of
accounting changes 149.1 49.1 197.4
Extraordinary item - demutualization expenses (12.1) (9.2) (4.6)
Cumulative effect of changes in accounting principles -- (1.9) (35.4)
----------------------------------------
Net income $ 137.0 $ 38.0 $ 157.4
----------------------------------------
----------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Allmerica Financial Corporation)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
(In millions, except per share data) 1995 1994
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities-at amortized cost (fair value of $949.9 in 1994) $ -- $ 959.3
Fixed maturities-at fair value (amortized cost of $7,467.9 and $6,724.6) 7,739.3 6,512.0
Equity securities-at fair value (cost of $410.6 and $260.4) 517.2 286.4
Mortgage loans 799.5 1,106.7
Real estate 179.6 180.3
Policy loans 123.2 364.9
Other long-term investments 71.9 68.1
-------------------------------
Total investments 9,430.7 9,477.7
-------------------------------
Cash and cash equivalents 236.6 539.7
Accrued investment income 163.0 186.6
Deferred policy acquisition costs 735.7 802.8
-------------------------------
Reinsurance receivables:
Future policy benefits 97.1 59.7
Outstanding claims, losses and loss adjustment expenses 799.6 741.0
Unearned premiums 43.8 61.9
Other 58.9 62.1
-------------------------------
Total reinsurance receivables 999.4 924.7
-------------------------------
Deferred federal income taxes 81.2 189.1
Premiums, accounts and notes receivable 526.7 510.3
Other assets 361.4 324.9
Closed Block assets 818.9 --
Separate account assets 4,348.8 2,965.7
-------------------------------
Total assets $ 17,702.4 $ 15,921.5
-------------------------------
-------------------------------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits $ 2,639.3 $ 3,416.4
Outstanding claims, losses and loss adjustment expenses 3,081.3 2,991.5
Unearned premiums 800.9 796.6
Contractholder deposit funds and other policy liabilities 2,737.4 3,435.7
-------------------------------
Total policy liabilities and accruals 9,258.9 10,640.2
-------------------------------
Expenses and taxes payable 600.3 589.2
Reinsurance premiums payable 42.0 65.8
Short-term debt 28.0 32.8
Deferred federal income taxes 47.8 13.8
Long-term debt 2.8 2.7
Closed Block liabilities 902.0 --
Separate account liabilities 4,337.8 2,954.9
-------------------------------
Total liabilities 15,219.6 14,299.4
-------------------------------
Minority interest 758.5 629.7
Commitments and contingencies (Notes 14 and 19)
SHAREHOLDERS' EQUITY
Common stock, $10 par value, 1 million shares authorized, 500,000
shares issued and outstanding 5.0 --
Additional paid-in-capital 392.4 --
Unrealized appreciation (depreciation) on investments, net 153.0 (79.0)
Retained earnings 1,173.9 1,071.4
-------------------------------
Total shareholders' equity 1,724.3 992.4
-------------------------------
Total liabilities and shareholders' equity $ 17,702.4 $ 15,921.5
-------------------------------
-------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
2
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Allmerica Financial Corporation)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of year $ -- $ -- $ --
Demutualization transaction 5.0 -- --
----------------------------------------
Balance at end of year 5.0 -- --
----------------------------------------
ADDITIONAL PAID-IN-CAPITAL
Balance at beginning of year -- -- --
Contributed from parent 392.4 -- --
----------------------------------------
Balance at end of year 392.4 -- --
----------------------------------------
RETAINED EARNINGS
Balance at beginning of year 1,071.4 1,033.4 876.0
Net income prior to demutualization 93.2 38.0 157.4
----------------------------------------
1,164.6 1,071.4 1,033.4
Demutualization transaction (34.5) -- --
Net income subsequent to demutualization 43.8 -- --
----------------------------------------
Balance at end of year 1,173.9 1,071.4 1,033.4
----------------------------------------
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS
Balance at beginning of year (79.0) 17.5 20.6
----------------------------------------
Cumulative effect of accounting change:
Net appreciation on available-for-sale debt securities -- 296.1 --
Provision for deferred federal income taxes and minority interest -- (149.1) --
----------------------------------------
-- 147.0 --
----------------------------------------
Effect of transfer of securities from held-to-maturity to available-for-sale:
Net appreciation on available-for-sale debt securities 22.4 -- --
Provision for deferred federal income taxes and minority interest (9.6) -- --
----------------------------------------
12.8 -- --
----------------------------------------
Appreciation (depreciation) during the period:
Net appreciation (depreciation) on available-for-sale securities 466.0 (492.1) (9.6)
(Provision) benefit for deferred federal income taxes (163.1) 171.9 2.8
Minority interest (83.7) 76.7 3.7
----------------------------------------
219.2 (243.5) (3.1)
----------------------------------------
Balance at end of year 153.0 (79.0) 17.5
----------------------------------------
Total shareholders' equity $1,724.3 $ 992.4 $ 1,050.9
----------------------------------------
----------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(a wholly owned subsidiary of Allmerica Financial Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 137.0 $ 38.0 $ 157.4
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority interest 73.1 50.1 112.7
Net realized gains (39.8) (1.1) (159.6)
Deferred federal income taxes (benefits) (37.0) 8.0 (20.4)
Increase in deferred policy acquisition costs (38.4) (34.6) (51.8)
Increase in premiums and notes receivable, net of reinsurance payable (42.0) (25.6) (37.5)
(Increase) decrease in accrued investment income 7.0 4.6 (1.6)
Increase in policy liabilities and accruals, net 116.2 175.9 131.7
(Increase) decrease in reinsurance receivable (75.6) (31.9) 18.6
Increase in expenses and taxes payable 7.5 88.0 104.7
Separate account activity, net (0.1) 0.4 21.4
Other, net 23.9 59.9 2.7
-----------------------------------------
Net cash provided by operating activities 131.8 331.7 278.3
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities of available-for-sale
fixed maturities 2,738.4 2,097.8 --
Proceeds from disposals of held-to-maturity fixed maturities 271.3 304.4 2,094.9
Proceeds from disposals of equity securities 120.0 143.9 585.8
Proceeds from disposals of other investments 40.5 25.9 74.0
Proceeds from mortgages matured or collected 230.3 256.4 291.2
Purchase of available-for-sale fixed maturities (3,273.3) (2,150.1) --
Purchase of held-to-maturity fixed maturities -- (111.6) (2,577.1)
Purchase of equity securities (254.0) (172.2) (673.3)
Purchase of other investments (24.8) (26.6) (46.5)
Proceeds from sale of businesses 32.9 -- 79.5
Capital expenditures (14.1) (43.1) (37.5)
Other investing activities, net 4.7 2.4 1.3
-----------------------------------------
Net cash (used in) provided by investing activities (128.1) 327.2 (207.7)
-----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to contractholder deposit funds 445.8 786.3 738.7
Withdrawals from contractholder deposit funds (1,069.9) (1,187.0) (894.0)
Change in short-term debt (4.8) (6.0) 1.4
Change in long-term debt 0.2 0.3 --
Dividends paid to minority shareholders (4.1) (4.2) (3.9)
Capital contributed from parent 392.4 -- 156.2
Payments for policyholders' membership interests (27.9) -- --
Net proceeds from issuance of long-term debt -- -- --
Other, net (20.9) -- (1.3)
-----------------------------------------
Net cash used in financing activities (289.2) (410.6) (2.9)
-----------------------------------------
Net (decrease) increase in cash and cash equivalents (285.5) 248.3 67.7
Net change in cash held in the Closed Block (17.6) -- --
Cash and cash equivalents, beginning of year 539.7 291.4 223.7
-----------------------------------------
Cash and cash equivalents, end of year $ 236.6 $ 539.7 $ 291.4
-----------------------------------------
-----------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 4.1 $ 4.3 $ 1.7
Income taxes paid $ 90.6 $ 46.1 $ 57.3
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
First Allmerica Financial Life Insurance Company ("FAFLIC" or the "Company",
formerly State Mutual Life Assurance Company of America ["State Mutual"]) was
organized as a mutual life insurance company until October 16, 1995. FAFLIC
converted to a stock life insurance company pursuant to a plan of
reorganization effective October 16, 1995 and became a wholly owned
subsidiary of Allmerica Financial Corporation ("AFC"). The consolidated
financial statements have been prepared as if FAFLIC were organized as a
stock life insurance company for all periods presented. Thus, generally
accepted accounting principles for stock life insurance companies have been
applied retroactively for all periods presented.
The consolidated financial statements of FAFLIC include the accounts of
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC", formerly
SMA Life Assurance Company) its wholly owned life insurance subsidiary,
non-insurance subsidiaries (principally brokerage and investment advisory
subsidiaries), and Allmerica Property and Casualty Companies, Inc.
("Allmerica P&C", a 58.3%-owned non-insurance holding company). The Closed
Block assets and liabilities at December 31, 1995 and its results of
operations subsequent to demutualization are presented in the consolidated
financial statements as single line items. Prior to demutualization such
amounts are presented line by line in the consolidated financial statements
(see Note 6). Unless specifically stated, all disclosures contained herein
supporting the consolidated financial statements as of December 31, 1995 and
the year then ended exclude the Closed Block related amounts. All significant
intercompany accounts and transactions have been eliminated.
Minority interest relates to the Company's investment in Allmerica P&C
and its only significant subsidiary, The Hanover Insurance Company
("Hanover"). Hanover's 81.1%-owned subsidiary is Citizens Corporation, the
holding company for Citizens Insurance Company of America ("Citizens").
Minority interest also includes an amount related to the minority interest in
Citizens Corporation.
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. CLOSED BLOCK
As of October 16, 1995, the Company established and began operating a closed
block (the "Closed Block") for the benefit of the participating policies
included therein, consisting of certain individual life insurance participating
policies, individual deferred annuity contracts and supplementary contracts not
involving life contingencies which were in force on October 16, 1995; such
policies constitute the "Closed Block Business". The purpose of the Closed Block
is to protect the policy dividend expectations of such FAFLIC dividend paying
policies and contracts after the demutualization. Unless the Commissioner
consents to an earlier termination, the Closed Block will continue to be in
effect until the date none of the Closed Block policies are in force. On
October 16, 1995, FAFLIC allocated to the Closed Block assets in an amount that
is expected to produce cash flows which, together with future revenues from the
Closed Block Business, are reasonably sufficient to support the Closed Block
Business, including provision for payment of policy benefits, certain future
expenses and taxes and for continuation of policyholder dividend scales payable
in 1994 so long as the experience underlying such dividend scales continues. The
Company expects that the factors underlying such experience will fluctuate in
the future and policyholder dividend scales for Closed Block Business will be
set accordingly.
Although the assets and income allocated to the Closed Block inure solely
to the benefit of the holders of policies included in the Closed Block, the
excess of Closed Block liabilities over Closed Block assets at October 16, 1995
measured on a GAAP basis represent the expected future post-tax income from the
Closed Block which may be recognized in income over the period the policies and
contracts in the Closed Block remain in force.
If the actual income from the Closed Block in any given period equals or
exceeds the expected income for such period as determined at October 16, 1995,
the expected income would be recognized in income for that period. Further, any
excess of the actual income over the expected income would also be recognized in
income to the extent that the aggregate expected income for all prior periods
exceeded the aggregate actual income. Any remaining excess of actual income over
expected income would be accrued as a liability for policyholder dividends in
the Closed Block to be paid to the Closed Block policyholders. This accrual for
future dividends effectively limits the actual Closed Block income recognized in
income to the Closed Block income expected to emerge from operation of the
Closed Block as determined as of October 16, 1995.
If, over the period the policies and contracts in the Closed Block remain
in force, the actual income from the Closed Block is less than the expected
income from the Closed Block, only such actual income
5
<PAGE>
(which could reflect a loss) would be recognized in income. If the actual income
from the Closed Block in any given period is less than the expected income for
that period and changes in dividends scales are inadequate to offset the
negative performance in relation to the expected performance, the income inuring
to shareholders of the Company will be reduced. If a policyholder dividend
liability had been previously established in the Closed Block because the actual
income to the relevant date had exceeded the expected income to such date, such
liability would be reduced by this reduction in income (but not below zero) in
any periods in which the actual income for that period is less than the expected
income for such period.
C. VALUATION OF INVESTMENTS
Effective January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS No. 115). 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. Investments classified as
held-to-maturity shall be investments that the enterprise has the positive
intent and ability to hold until maturity. Trading securities are investments
which are bought and held principally for the purpose of selling them in the
near term. Investments classified as neither trading securities nor
held-to-maturity shall be classified as available-for-sale securities. 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 excluded from earnings and reported as a
separate component of shareholder equity until realized. SFAS No. 115 also
requires that for a decline in the fair value which is judged to be other than
temporary, the cost basis of the security should be written down to fair value,
and the amount of the write-down recognized in earnings as a realized loss.
Previously, the Company classified all of its fixed maturities and equity
securities as available-for-sale or held-to-maturity investments. Fixed
maturities held-to-maturity consist of certain bonds, presented at amortized
cost, that management intends and has the ability to hold until maturity. Fixed
maturities available-for-sale consist of certain bonds and redeemable preferred
stocks, presented at fair value, that management may not hold until maturity.
Equity securities available-for-sale are comprised of common stocks which are
carried at fair value. Prior to January 1, 1994, all fixed maturity investments,
which included bonds and redeemable preferred stocks, were principally carried
at amortized cost. Equity securities, which included common and non-redeemable
preferred stock, were carried at fair value. Unrealized gains or losses on
investments classified as available-for-sale, net of deferred federal income
taxes, minority interest, deferred policy acquisition expenses and amounts
attributable to participating contractholders, are included as a separate
component of shareholders' equity. As discussed in Note 3, the Company
transferred all securities classified as held-to-maturity to available-for-sale
on November 30, 1995.
Realized gains and losses on sales of fixed maturities and equity
securities are determined on the specific-identification basis using amortized
cost for fixed maturities and cost for equity securities. Fixed maturities and
equity securities with other than temporary declines in fair value are written
down to estimated fair value resulting in the recognition of realized losses.
Mortgage loans on real estate are stated at unpaid principal balances, net
of unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by management to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which management believes may not be collectible in
full. In establishing reserves, management considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
Real estate that has been acquired through the foreclosure of mortgage
loans is valued at the estimated fair value at the time of foreclosure. The
Company considers several methods in determining fair value at foreclosure,
using primarily third-party appraisals and discounted cash flow analyses. After
foreclosure, the Company makes a determination as to whether the asset should be
held for production of income or held for sale.
Real estate investments held for the production of income and held for sale
are carried at depreciated cost less valuation allowances, if necessary, to
reduce the carrying value to fair value. Depreciation is generally calculated
using the straight-line method.
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans and real
estate are included in realized investment gains or losses.
6
<PAGE>
D. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities, investment and loan
commitments, and interest rate futures contracts. These instruments involve
credit risk and also may be subject to risk of loss due to interest rate
fluctuation. The Company evaluates and monitors each financial instrument
individually and, when appropriate, obtains collateral or other security to
minimize losses.
E. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
F. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Property and casualty, group life and group health insurance business
acquisition costs are deferred and amortized over the terms of the insurance
policies. Acquisition costs related to universal life products and
contractholder deposit funds are deferred and amortized in proportion to total
estimated gross profits over the expected life of the contracts using a revised
interest rate applied to the remaining benefit period. Acquisition costs related
to annuity and other life insurance businesses are deferred and amortized,
generally in proportion to the ratio of annual revenue to the estimated total
revenues over the contract periods based upon the same assumptions used in
estimating the liability for future policy benefits. Deferred acquisition costs
for each product are reviewed to determine if they are recoverable from future
income, including investment income. If such costs are determined to be
unrecoverable, they are expensed at the time of determination.
Although realization of deferred policy acquisition costs is not assured,
management believes it is more likely than not that all of 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 gross profits or
total revenues discussed above are reduced. The amount of amortization of
deferred policy acquisition costs could be revised in the near term if any of
the estimates discussed above are revised.
G. PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is provided using the
straight-line or accelerated method over the estimated useful lives of the
related assets which generally range from 3 to 30 years. Amortization of
leasehold improvements is provided using the straight-line method over the
lesser of the term of the leases or the estimated useful life of the
improvements.
H. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of certain pension, variable annuity
and variable life insurance contractholders. Assets consist principally of
bonds, common stocks, mutual funds, and short-term obligations at market value.
The investment income, gains, and losses of these accounts generally accrue to
the contractholders and, therefore, are not included in the Company's net
income. Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
shareholders' equity or net investment income.
I. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, health and annuity products.
Such liabilities are established in amounts adequate to meet the estimated
future obligations of policies in force. The liabilities associated with
traditional life insurance products are computed using the net level premium
method for individual life and annuity policies, and are based upon estimates as
to future investment yield, mortality and withdrawals that include provisions
for adverse deviation. Future policy benefits for individual life insurance and
annuity policies are computed using interest rates ranging from 2 1/2% to 6% for
life insurance and 2% to 9 1/2% for annuities. Estimated liabilities are
established for group life and health policies that contain experience rating
provisions. Mortality, morbidity and withdrawal assumptions for all policies are
based on the Company's own experience and industry standards. Liabilities for
universal life include deposits received from customers and investment earnings
on their fund balances, less administrative charges. Universal life fund
balances are also assessed mortality and surrender charges.
Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made on property and casualty and health insurance
for reported losses and estimates of losses incurred but not reported. These
liabilities are determined using case basis evaluations and statistical analyses
and represent estimates of the ultimate cost of all losses incurred but not
paid. These estimates are continually reviewed and adjusted as necessary; such
adjustments are reflected in current operations. Estimated amounts of salvage
and subrogation on unpaid property and casualty losses are deducted from the
liability for unpaid claims.
Premiums for property and casualty, group life, and accident and health
insurance are reported as earned on a pro-rata basis over the contract period.
The unexpired portion of these premiums is recorded as unearned premiums.
7
<PAGE>
Contractholder deposit funds and other policy liabilities include
investment-related products such as guaranteed investment contracts, deposit
administration funds and immediate participation guarantee funds and consist of
deposits received from customers and investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates
discussed above. Although the adequacy of these amounts cannot be assured,
management believes that it is more likely than not that policy liabilities and
accruals will be sufficient to meet future obligations of policies in force. The
amount of liabilities and accruals, however, could be revised in the near term
if the estimates discussed above are revised.
J. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual and group
annuity products, excluding universal life and investment-related products, are
considered revenue when due. Property and casualty and group life, accident and
health insurance premiums are recognized as revenue over the related contract
periods. Benefits, losses and related expenses are matched with premiums,
resulting in their recognition over the lives of the contracts. This matching is
accomplished through the provision for future benefits, estimated and unpaid
losses and amortization of deferred policy acquisition costs. Revenues for
investment-related products consist of net investment income and contract
charges assessed against the fund values. Related benefit expenses primarily
consist of net investment income credited to the fund values after deduction for
investment and risk charges. Revenues for universal life products consist of net
investment income, and mortality, administration and surrender charges assessed
against the fund values. Related benefit expenses include universal life benefit
claims in excess of fund values and net investment income credited to universal
life fund values.
K. POLICYHOLDER DIVIDENDS
Prior to demutualization, certain life, health and annuity insurance policies
contained dividend payment provisions that enabled the policyholder to
participate in the earnings of the Company. The amount of policyholders'
dividends was determined annually by the Board of Directors. The aggregate
amount of policyholders' dividends was related to the actual interest,
mortality, morbidity and expense experience for the year and the Company's
judgment as to the appropriate level of statutory surplus to be retained. The
participating life insurance in force was 16.2% of the face value of total life
insurance in force at December 31, 1994. The premiums on participating life,
health and annuity policies were 11.3%, 6.4% and 6.6% of total life, health and
annuity statutory premiums prior to demutualization in 1995, 1994 and 1993,
respectively. Total policyholders' dividends were $23.3 million, $32.8 million
and $24.2 million prior to demutualization in 1995, 1994 and 1993, respectively.
L. FEDERAL INCOME TAXES
AFC, FAFLIC, AFLIAC and FAFLIC's non-insurance domestic subsidiaries file a
consolidated United States federal income tax return. Entities included within
the consolidated group are segregated into either a life insurance or non-life
insurance company subgroup. The consolidation of these subgroups is subject to
certain statutory restrictions on the percentage of eligible non-life tax losses
that can be applied to offset life company taxable income. Allmerica P&C and its
subsidiaries file a separate United States federal income tax 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
No. 109). These differences result primarily from loss reserves, policy
acquisition expenses, and unrealized appreciation/depreciation on investments.
M. NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" was issued. This statement requires
companies to write down to fair value long-lived assets whose carrying value is
greater than the undiscounted cash flows of those assets. The statement also
requires that long-lived assets of which management is committed to dispose,
either by sale or abandonment, be valued at the lower of their carrying amount
or fair value less costs to sell. This statement is effective for fiscal years
beginning after December 15, 1995. Management expects that adoption of this
statement will not have a material effect on the financial statements.
N. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
8
<PAGE>
2. SIGNIFICANT TRANSACTIONS
Pursuant to the plan of reorganization effective October 16, 1995, AFC issued
37.5 million shares of its common stock to eligible policyholders. AFC also
issued 12.6 million shares of its common stock at a price of $21.00 per share in
a public offering, resulting in net proceeds of $248.0 million, and issued
Senior Debentures in the principal amount of $200.0 million which resulted in
net proceeds of $197.2 million. AFC contributed $392.4 million of these proceeds
to FAFLIC.
Effective March 31, 1995, the Company entered into an agreement with TSSG,
a division of First Data Corporation, pursuant to which the Company sold its
mutual fund processing business and agreed not to engage in this business for
four years after that date. In accordance with this agreement, the Company
received proceeds of $32.1 million. A gain of $13.5 million, net of taxes of
$7.2 million, was recorded in March 1995.
In March and April, 1993, Citizens Corporation, a newly formed holding
company for Citizens, issued approximately 19.35% of its common stock in an
initial public offering, generating net proceeds of $156.2 million (7.0 million
shares at $24.00 per share). Proceeds to Citizens Corporation were reduced by
underwriting and other stock issuance costs. A non-taxable gain of $62.9 million
was recorded in 1993 in connection with this initial public offering. This gain
is non-taxable because only newly-issued shares of Citizens Corporation were
issued to the public.
Effective December 31, 1992, Hanover entered into a definitive agreement to
sell its wholly owned subsidiary, Beacon Insurance Company of America, and its
wholly owned subsidiary, American Select Insurance Company, for $89.7 million. A
gain of $20.7 million, net of taxes of $15.0 million, was recorded in 1993.
3. INVESTMENTS
A. FIXED MATURITIES AND EQUITY SECURITIES
Effective January 1, 1994, the Company adopted SFAS No. 115, which requires that
investments be classified into one of three categories: held-to-maturity,
available-for-sale, or trading.
The effect of implementing SFAS No. 115 as of January 1, 1994 was an
increase in the carrying value of fixed maturity investments of $335.3 million,
a decrease in deferred policy acquisition costs of $20.8 million, an increase in
policyholder liabilities of $18.4 million, a net increase in deferred income tax
liabilities of $103.7 million, an increase in minority interest of $45.4
million, and an increase in shareholders' equity of $147.0 million, which
resulted from changing the carrying value of certain fixed maturities from
amortized cost to fair value and related adjustments. 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 securities with amortized cost and fair value of
$696.4 million and $725.6 million, respectively, from the held-to-maturity
category to the available-for-sale category, which resulted in a net increase in
shareholders' equity of $12.8 million.
The amortized cost and fair value of available-for-sale and
held-to-maturity fixed maturities and equity securities were as follows:
<TABLE>
<CAPTION>
December 31
(In millions) 1995
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE Gross Gross
Amortized Unrealized Unrealized Fair
Cost (1) Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. government and agency securities $ 377.0 $ 21.0 $ -- $ 398.0
States and political subdivisions 2,110.6 60.7 4.0 2,167.3
Foreign governments 60.6 3.4 0.6 63.4
Corporate fixed maturities 4,582.1 200.8 16.4 4,766.5
U.S. government mortgage-backed securities 337.6 8.6 2.1 344.1
Total fixed maturities available-for-sale $ 7,467.9 $ 294.5 $ 23.1 $ 7,739.3
---------------------------------------------------------
Equity securities $ 410.6 $ 111.7 $ 5.1 $ 517.2
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
December 31
(In millions) 1994
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE Gross Gross
Amortized Unrealized Unrealized Fair
Cost (1) Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. government and agency securities $ 280.2 $ 4.8 $ 9.1 $ 275.9
States and political subdivisions 2,011.3 14.9 76.2 1,950.0
Foreign governments 96.8 1.8 12.8 85.8
Corporate fixed maturities 4,201.4 24.7 157.4 4,068.7
U.S. government mortgage-backed securities 134.9 0.4 3.7 131.6
----------------------------------------------------------
Total fixed maturities available-for-sale $ 6,724.6 $ 46.6 $ 259.2 $ 6,512.0
----------------------------------------------------------
----------------------------------------------------------
Equity securities $ 260.4 $ 35.3 $ 9.3 $ 286.4
----------------------------------------------------------
----------------------------------------------------------
HELD-TO-MATURITY
State and political subdivisions $ 8.1 $ 0.1 $ 0.8 7.4
Foreign governments 20.7 0.2 0.2 20.7
Corporate fixed maturities 927.3 13.7 22.5 918.5
Corporate mortgage-backed securities 3.2 0.1 -- 3.3
----------------------------------------------------------
Total fixed maturities held-to-maturity $ 959.3 $ 14.1 $ 23.5 $ 949.9
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In March 1994, AFLIAC voluntarily withdrew its license in New York in order
to provide for certain commission arrangements prohibited by New York comparable
to AFLIAC's competitors. In connection with the withdrawal, FAFLIC, which is
licensed in New York, became qualified to sell the products previously sold by
AFLIAC in New York. AFLIAC agreed with the New York Department of Insurance to
maintain, through a custodial account in New York, a security deposit, the
market value of which will at all times equal 102% of all outstanding general
account liabilities of AFLIAC for New York policyholders, claimants and
creditors. At December 31, 1995, the amortized cost and market value of assets
on deposit were $295.0 million and $303.6 million, respectively. At December 31,
1994, the amortized cost and market value of assets on deposit were $327.9
million and $323.5 million, respectively. In addition, fixed maturities,
excluding those securities on deposit in New York, with an amortized cost of
$82.2 million and $67.0 million were on deposit with various state and
governmental authorities at December 31, 1995 and 1994, respectively.
There were approximately $21.8 million of contractual fixed maturity
investment commitments at December 31, 1994 and none at December 31, 1995.
The amortized cost and fair value by maturity periods for fixed maturities
are shown below. 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, or the Company may have the right to put
or sell the obligations back to the issuers. Mortgage backed securities are
included in the category representing their ultimate maturity.
10
<PAGE>
<TABLE>
<CAPTION>
December 31
(In millions) 1995
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Available-for-Sale
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less $ 970.8 $ 975.6
Due after one year through five years 3,507.9 3,657.1
Due after five years through ten years 1,794.0 1,866.0
Due after ten years 1,195.2 1,240.6
-----------------------------
Total $ 7,467.9 $ 7,739.3
-----------------------------
-----------------------------
</TABLE>
The proceeds from sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions)
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Proceeds from Sales
of Available-for-Sale Gross Gross
1995 Securities Gains Losses
<S> <C> <C> <C>
Fixed maturities $ 1,612.3 $ 23.7 $ 33.0
---------------------------------------
Equity securities $ 122.2 $ 23.1 $ 6.9
---------------------------------------
1994
Fixed maturities $ 1,026.2 $ 12.6 $ 21.6
---------------------------------------
Equity securities $ 124.3 $ 17.4 $ 4.5
---------------------------------------
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions)
Equity
Fixed Securities
Maturities and Other (1) Total
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1995
Net appreciation (depreciation),
beginning of year $ (89.4) $ 10.4 $ (79.0)
---------------------------------------
Effect of transfer of securities
between classifications:
Net appreciation on available-
for-sale fixed maturities 29.2 -- 29.2
Effect of transfer on deferred
policy acquisition costs and
on policy liabilities (6.8) -- (6.8)
Provision for deferred federal
income taxes and minority
interest (9.6) -- (9.6)
---------------------------------------
12.8 -- 12.8
---------------------------------------
Net appreciation on available-
for-sale securities 465.4 87.5 552.9
Net depreciation from the effect
on deferred policy acquisition
costs and on policy liabilities (86.9) (86.9)
Provision for deferred federal
income taxes and minority interest (193.2) (53.6) (246.8)
---------------------------------------
185.3 33.9 219.2
---------------------------------------
Net appreciation, end of year $ 108.7 $ 44.3 $ 153.0
---------------------------------------
---------------------------------------
1994
Net appreciation, beginning of year $ -- $ 17.5 $ 17.5
---------------------------------------
Cumulative effect of accounting
change:
Net appreciation on available-
for-sale fixed maturities 335.3 -- 335.3
Net depreciation from the effect
of accounting change on
deferred policy acquisition
costs and on policy liabilities (39.2) -- (39.2)
Provision for deferred federal
income taxes and minority
interest (149.1) -- (149.1)
---------------------------------------
147.0 17.5 164.5
---------------------------------------
Net depreciation on available-
for-sale securities (547.9) (17.4) (565.3)
Net appreciation from the effect
on deferred policy acquisition
costs and on policy liabilities 73.2 -- 73.2
Benefit for deferred federal income
taxes and minority interest 238.3 10.3 248.6
---------------------------------------
Net appreciation (depreciation),
end of year $ (89.4) $ 10.4 $ (79.0)
---------------------------------------
---------------------------------------
</TABLE>
(1) Includes net appreciation on other investments of $6.9 million and $0.6
million in 1995 and 1994, respectively.
11
<PAGE>
B. MORTGAGE LOANS AND REAL ESTATE
FAFLIC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans $ 799.5 $ 1,106.7
-----------------------
Real estate:
Held for sale 168.9 134.5
Held for production of income 10.7 45.8
-----------------------
Total real estate 179.6 180.3
-----------------------
Total mortgage loans and real estate $ 979.1 $ 1,287.0
-----------------------
-----------------------
</TABLE>
Reserves for mortgage loans were $33.8 million and $47.2 million as of
December 31, 1995 and 1994, respectively.
During 1995, 1994 and 1993, non-cash investing activities included real
estate acquired through foreclosure of mortgage loans, which had a fair value of
$26.1 million, $39.2 million and $26.7 million, respectively.
At December 31, 1995, contractual commitments to extend credit under
commercial mortgage loan agreements amounted to approximately $8.2 million in
the Closed Block. These commitments generally expire within one year. There
are no contractual commitments to extend credit under commercial mortgage
loan agreements outside the Closed Block.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C> <C>
Property type:
Office building $ 435.9 $ 553.6
Residential 145.3 207.3
Retail 205.6 246.5
Industrial / warehouse 93.8 144.1
Other 151.9 205.6
Valuation allowances (53.4) (70.1)
-----------------------
Total $ 979.1 $ 1,287.0
-----------------------
-----------------------
Geographic region:
South Atlantic $ 281.4 $ 374.2
Pacific 191.9 238.7
East North Central 118.2 138.5
Middle Atlantic 148.9 151.2
West South Central 79.7 102.3
New England 94.9 103.1
Other 117.5 249.1
Valuation allowances (53.4) (70.1)
-----------------------
Total $ 979.1 $ 1,287.0
-----------------------
-----------------------
</TABLE>
At December 31, 1995, scheduled mortgage loan maturities were as follows:
1996 - $206.1 million; 1997 - $143.7 million; 1998 - $167.4 million; 1999 -
$109.9 million; 2000 - $124.2 million; and $48.2 million thereafter. Actual
maturities could differ from contractual maturities because borrowers may have
the right to prepay obligations with or without prepayment penalties and loans
may be refinanced. During 1995, the Company refinanced $24.0 million of mortgage
loans based on terms which differed from those granted to new borrowers.
12
<PAGE>
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the consolidated balance sheets and
changes thereto are shown below.
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions)
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
1995 Balance at Balance at
January 1 Additions Deductions December 31
<S> <C> <C> <C> <C>
Mortgage loans $ 47.2 $ 1.5 $ 14.9 $ 33.8
Real estate 22.9 (0.6) 2.7 19.6
-----------------------------------------------------
Total $ 70.1 $ 0.9 $ 17.6 $ 53.4
-----------------------------------------------------
-----------------------------------------------------
1994
Mortgage loans $ 73.8 $ 14.6 $ 41.2 $ 47.2
Real estate 21.0 3.2 1.3 22.9
-----------------------------------------------------
Total $ 94.8 $ 17.8 $ 42.5 $ 70.1
-----------------------------------------------------
-----------------------------------------------------
1993
Mortgage loans $ 86.7 $ 4.6 $ 17.5 $ 73.8
Real estate 8.3 12.7 -- 21.0
-----------------------------------------------------
Total $ 95.0 $ 17.3 $ 17.5 $ 94.8
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
D. FUTURES CONTRACTS
FAFLIC purchases and sells futures contracts on margin to hedge against interest
rate fluctuations and their effect on the net cash flows from the sales of
guaranteed investment contracts. The notional amount of such futures contracts
outstanding were $74.7 million and $126.6 million at December 31, 1995 and 1994,
respectively. Because the Company purchases and sells futures contracts through
brokers who assume the risk of loss, the Company's exposure to credit risk under
futures contracts is limited to the margin deposited with the broker. The
maturity of all futures contracts outstanding are less than one year. The fair
value of futures contracts outstanding were $75.7 million and $126.5 million at
December 31, 1995 and 1994, respectively.
Gains and losses on hedge contracts related to interest rate fluctuations
are deferred and recognized in income over the period being hedged corresponding
to related guaranteed investment contracts. Deferred hedging gains and (losses)
were $5.6 million, $(7.7) million, and $6.9 million in 1995, 1994 and 1993,
respectively. Gains and losses on hedge contracts that are deemed ineffective by
management are realized immediately.
A reconciliation of the notional amount of futures contracts is as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Contracts outstanding,
beginning of year $ 126.6 $ 141.7 $ 120.0
New contracts 343.5 816.0 493.3
Contracts terminated (395.4) (831.1) $ (471.6)
---------------------------------------
Contracts outstanding, end of year $ 74.7 $ 126.6 $ 141.7
---------------------------------------
---------------------------------------
</TABLE>
E. FOREIGN CURRENCY SWAP CONTRACTS
The Company enters into foreign currency swap contracts to hedge exposure to
currency risk on foreign fixed maturity investments. Interest and principal
related to foreign fixed maturity investments payable in foreign currencies, at
current exchange rates, are exchanged for the equivalent payment translated at a
specific currency exchange rate. The Company's maximum exposure to counterparty
credit risk is the difference between the foreign currency exchange rate, as
agreed
13
<PAGE>
upon in the swap contract, and the foreign currency spot rate on the date of the
exchange. The fair values of the foreign currency swap contracts outstanding
were $104.2 million and $117.5 million at December 31, 1995 and 1994,
respectively.
The difference between amounts paid and received on foreign currency swap
contracts is reflected in the net investment income related to the underlying
assets and is not material in 1995, 1994, and 1993. The Company had no deferred
gains or losses on foreign currency swap contracts.
A reconciliation of the notional amount of swap contracts is as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Contracts outstanding, beginning
of year $ 118.7 $ 128.8 $ 95.0
New Contracts -- 5.0 50.8
Contracts expired -- (10.1) (17.0)
Contracts terminated (14.1) (5.0) --
---------------------------------------
Contracts outstanding, end
of year $ 104.6 $ 118.7 $ 128.8
---------------------------------------
---------------------------------------
</TABLE>
Expected maturities of foreign currency swap contracts are $36.0 million in
1996, $28.8 million in 1997, and $39.8 million in 1998 and thereafter.
F. OTHER
At December 31, 1995, FAFLIC had no concentration of investments in a single
investee exceeding 10% of shareholders' equity.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities $ 554.0 $ 578.3 $ 601.5
Mortgage loans 97.0 119.9 155.7
Equity securities 16.8 12.1 7.1
Policy loans 20.3 23.3 23.5
Real estate 48.5 44.6 43.4
Other long-term investments 4.4 4.3 2.1
Short-term investments 21.4 9.5 7.4
---------------------------------------
Gross investment income 762.4 792.0 840.7
Less investment expenses (52.3) (48.9) (57.9)
---------------------------------------
Net investment income $ 710.1 $ 743.1 $ 782.8
---------------------------------------
---------------------------------------
</TABLE>
As of December 31, 1995, fixed maturities and mortgage loans on non-accrual
status were $1.4 million and $85.4 million, including restructured loans of
$46.8 million. The effect of non-accruals, compared with amounts that would have
been recognized in accordance with the original terms of the investments, was to
reduce net income by $0.6 million, $5.1 million and $14.0 million in 1995, 1994
and 1993, respectively.
The payment terms of mortgage loans may from time to time be restructured
or modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $98.9 million , $126.8 million and $167.0 million at
December 31, 1995, 1994 and 1993, respectively. Interest income on restructured
mortgage loans that would have been recorded in accordance with the original
terms of such loans amounted to $11.1 million, $14.4 million and $18.1 million
in 1995, 1994 and 1993, respectively. Actual interest income on these loans
included in net investment income aggregated $7.1 million, $8.2 million and
$10.6 million in 1995, 1994 and 1993, respectively.
At December 31, 1995, fixed maturities with a carrying value of $1.4
million were non-income producing for the twelve months ended December 31, 1995.
There were no mortgage loans which were non-income producing for the twelve
months ended December 31, 1995.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities $ (7.0) $ 2.4 $ 48.8
Mortgage loans 1.4 (12.1) (0.5)
Equity securities 16.2 12.4 29.8
Real estate 5.3 1.4 (14.5)
Other 3.2 (3.0) (2.6)
--------------------------------------
Net realized investment gains $ 19.1 $ 1.1 $ 61.0
--------------------------------------
--------------------------------------
</TABLE>
Proceeds from voluntary sales of investments in fixed maturities were
$1,612.3 million, $1,036.5 million and $817.5 million in 1995, 1994 and 1993,
respectively. Realized gains on such sales were $23.7 million, $12.9 million and
$38.8 million; and realized losses were $33.0 million, $21.6 million and $2.6
million for 1995, 1994 and 1993, respectively.
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information about certain financial instruments
(insurance contracts, real estate, goodwill and taxes are excluded) for which it
is practicable to estimate such values, whether or not these instruments are
included in the balance sheet. The fair values presented for certain financial
instruments are estimates
14
<PAGE>
which, in many cases, may differ significantly from the amounts which could be
realized upon immediate liquidation. In cases where market prices are not
available, estimates of fair value are based on discounted cash flow analyses
which utilize current interest rates for similar financial instruments which
have comparable terms and credit quality. Fair values of interest rate futures
were not material at December 31, 1995 and 1994.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
REINSURANCE RECEIVABLES
The carrying amount reported in the consolidated balance sheets approximates
fair value.
POLICY LOANS
The carrying amount reported in the consolidated balance sheets approximates
fair value since policy loans have no defined maturity dates and are inseparable
from the insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under guaranteed investment type
contracts are estimated using discounted cash flow calculations using current
interest rates for similar contracts with maturities consistent with those
remaining for the contracts being valued. Other liabilities are based on
surrender values.
DEBT
The carrying value of short-term debt reported in the balance sheet approximates
fair value. The fair value of long-term debt was estimated using market quotes,
when available, and, when not available, discounted cash flow analyses.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents $ 236.6 $ 236.6 $ 539.7 $ 539.7
Fixed maturities 7,739.3 7,739.3 7,471.3 7,461.9
Equity securities 517.2 517.2 286.4 286.4
Mortgage loans 799.5 845.4 1,106.7 1,105.8
Policy loans 123.2 123.2 364.9 364.9
------------------------------------------------------------
$ 9,415.8 $ 9,461.7 $ 9,769.0 $ 9,758.7
------------------------------------------------------------
------------------------------------------------------------
FINANCIAL LIABILITIES
Guaranteed investment contracts $ 1,632.8 $ 1,677.0 $ 2,170.6 $ 2,134.0
Supplemental contracts without life contingencies 24.4 24.4 25.3 25.3
Dividend accumulations 86.2 86.2 84.5 84.5
Other individual contract deposit funds 95.7 92.8 111.3 108.0
Other group contract deposit funds 894.0 902.8 980.3 969.6
Individual annuity contracts 966.3 810.0 988.9 870.6
Short-term debt 28.0 28.0 32.8 32.8
Long-term debt 2.8 2.9 2.7 2.7
------------------------------------------------------------
$ 3,730.2 $ 3,624.1 $ 4,396.4 $ 4,227.5
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
15
<PAGE>
6. CLOSED BLOCK
Included in other income in the Consolidated Statement of Income in 1995 is a
net pre-tax contribution from the Closed Block of $2.9 million. Summarized
financial information of the Closed Block as of September 30, 1995 (date used to
estimate financial information for the date of establishment of October 16,
1995) and December 31, 1995 and for the period October 1, 1995 through December
31, 1995 is as follows:
<TABLE>
<CAPTION>
(In millions) 1995
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
December 31 September 30
<S> <C> <C>
Assets
Fixed maturities, at fair value
(amortized cost of $447.4 and
$313.3, respectively) $ 458.0 $ 318.4
Mortgage loans 57.1 61.6
Policy loans 242.4 245.3
Cash and cash equivalents 17.6 12.3
Accrued investment income 16.6 15.3
Deferred policy acquisition costs 24.5 24.8
Other assets 2.7 6.4
-----------------------
Total assets $ 818.9 $ 684.1
-----------------------
-----------------------
Liabilities
Policy liabilities and accruals $ 899.2 $ 894.3
Other liabilities 2.8 4.2
-----------------------
Total liabilities $ 902.0 $ 898.5
-----------------------
-----------------------
</TABLE>
<TABLE>
<CAPTION>
Period from October 1 through December 31
(In millions) 1995
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
<S> <C>
Revenues
Premiums $ 11.5
Net investment income 12.8
---------
Total revenues 24.3
---------
Benefits and expenses
Policy benefits 20.6
Policy acquisition expenses 0.8
---------
Total benefits and expenses 21.4
---------
Contribution from the Closed Block $ 2.9
---------
---------
Cash flows
Cash flows from operating activities:
Contribution from the Closed Block $ 2.9
Initial cash transferred to the Closed Block 139.7
Change in deferred policy acquisition costs, net 0.4
Change in premiums and other receivables (0.1)
Change in policy liabilities and accruals 2.0
Change in accrued investment income (1.3)
Other, net 0.8
---------
Net cash provided by operating activities 144.4
---------
---------
Cash flows from investing activities:
Sales, maturities and repayments of investments 29.0
Purchases of investments (158.8)
Other, net 3.0
---------
Net cash used by investing activities (126.8)
---------
Change in cash and cash equivalents and ending balance $ 17.6
---------
---------
</TABLE>
On October 16, 1995, there were no valuation allowances transferred to the
Closed Block on mortgage loans. There are no valuation allowances on mortgage
loans at December 31, 1995.
Many expenses related to Closed Block operations are charged to operations
outside the Closed Block; accordingly, the contribution from the Closed Block
does not represent the actual profitability of the Closed Block operations.
Operating costs and expenses outside of the Closed Block are, therefore,
disproportionate to the business outside the Closed Block.
16
<PAGE>
7. DEBT
Short- and long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C>
Short-Term
Commercial paper $ 27.7 $ 32.8
Other 0.3 --
-----------------------
Total short-term debt $ 28.0 $ 32.8
-----------------------
-----------------------
Long-term debt $ 2.8 $ 2.7
-----------------------
-----------------------
</TABLE>
FAFLIC issues commercial paper primarily to manage imbalances between
operating cash flows and existing commitments. Commercial paper borrowing
arrangements are supported by various lines of credit. As of December 31, 1995,
the weighted average interest rate for outstanding commercial paper was 5.8%.
As of December 31, 1995, FAFLIC had approximately $245.0 million in
committed lines of credit provided by U.S. banks, of which $217.3 million was
available for borrowing. These lines of credit generally have terms of less than
one year, and require the Company to pay annual commitment fees ranging from
0.10% to 0.125% of the available credit. Interest that would be charged for
usage of these lines of credit is based upon negotiated arrangements.
Interest expense was $4.1 million, $4.3 million and $1.6 million in 1995,
1994 and 1993, respectively.
In October, 1995, AFC issued $200.0 million face amount of Senior
Debentures for proceeds of $197.2 million net of discounts and issuance costs.
These securities have an effective interest rate of 7.65%, and mature on October
16, 2025. Interest is payable semiannually on October 15 and April 15 of each
year. The Senior Debentures are subject to certain restrictive covenants,
including limitations on issuance of or disposition of stock of restricted
subsidiaries and limitations on liens. AFC is in compliance with all covenants.
The primary source of cash for repayment of the debt by AFC is dividends from
FAFLIC.
8. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) in the consolidated statements of income is shown below:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current $ 119.7 $ 45.4 $ 95.1
Deferred (37.0) 8.0 (20.4)
---------------------------------------
Total $ 82.7 $ 53.4 $ 74.7
---------------------------------------
---------------------------------------
</TABLE>
The federal income taxes attributable to the consolidated results of
operations are different from the amounts determined by multiplying income
before federal income taxes by the expected federal income tax rate. The sources
of the difference and the tax effects of each were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected federal income tax
expense $ 105.6 $ 53.7 $ 138.2
Tax-exempt interest (32.2) (35.9) (32.8)
Differential earnings amount (7.6) 35.0 (10.9)
Non-taxable gain -- -- (22.0)
Dividend received deduction (4.0) (2.5) (1.3)
Foreign tax credit (0.7) (0.8) (0.9)
Changes in tax reserve estimates 19.3 4.0 3.5
Other, net 2.3 (0.1) 0.9
---------------------------------------
Federal income tax expense $ 82.7 $ 53.4 $ 74.7
---------------------------------------
---------------------------------------
</TABLE>
Until conversion to a stock life insurance company, FAFLIC, as a mutual
company, reduced its deduction for policyholder dividends by the differential
earnings amount. This amount was computed, for each tax year, by multiplying the
average equity base of the FAFLIC/AFLIAC consolidated group, as determined for
tax purposes, by the estimate of an excess of an imputed earnings rate over the
average mutual life insurance companies' earnings rate. The differential
earnings amount for each tax year was subsequently recomputed when actual
earnings rates were published by the Internal Revenue Service (IRS). For its
1995 federal income tax return, FAFLIC has estimated that there will be no tax
effect from a differential earnings amount, including the expected effect of
future recomputations by the IRS. As a stock life company, FAFLIC is no longer
required to reduce its policyholder dividend deduction by the differential
earnings amount.
17
<PAGE>
The deferred income tax asset represents the tax effects of temporary
differences attributable to Allmerica P&C, a separate consolidated group for
federal tax return purposes. Its components were as follows:
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax (assets) liabilities
AMT carryforwards $ (9.8) $ (11.9)
Loss reserve discounting (178.3) (187.6)
Deferred acquisition costs 55.1 54.2
Employee benefit plans (25.5) (22.0)
Investments, net 77.4 (22.7)
Fixed assets 2.5 4.5
Bad debt reserve (1.8) (1.8)
Other, net (0.8) (1.8)
------------------------
Deferred tax asset, net $ (81.2) $ (189.1)
------------------------
------------------------
</TABLE>
The deferred income tax liability represents the tax effects of temporary
differences attributable to the FAFLIC/AFLIAC consolidated federal tax return
group. Its components were as follows:
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax (assets) liabilities
NOL carryforwards $ -- $ (3.3)
AMT carryforwards -- (1.5)
Loss reserve discounting (129.1) (118.2)
Deferred acquisition costs 169.7 199.0
Differential earnings amount -- 27.7
Employee benefit plans (14.6) (15.4)
Investments, net 67.0 (30.9)
Fixed assets (1.7) (0.9)
Bad debt reserve (26.3) (27.9)
Other, net (17.2) (14.8)
------------------------
Deferred tax liability, net $ 47.8 $ 13.8
------------------------
------------------------
</TABLE>
Gross deferred income tax assets totaled $405.1 million and $460.7 million
at December 31, 1995 and 1994, respectively. Gross deferred income tax
liabilities totaled $371.1 million and $285.4 million at December 31, 1995 and
1994, respectively.
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. At December 31, 1995, there are no available non-life
net operating loss carryforwards, and there are available alternative minimum
tax credit carryforwards of $9.8 million.
The Company's federal income tax returns are routinely audited by the IRS,
and provisions are routinely made in the financial statements in anticipation of
the results of these audits. The IRS has examined the FAFLIC/AFLIAC consolidated
group's federal income tax returns through 1988. The IRS has also examined the
Allmerica P&C consolidated group's federal income tax returns through 1988.
Deficiencies asserted with respect to tax years 1977 through 1981 have been paid
and recorded, and the Company has filed a recomputation of such years with
appeals claiming a refund with respect to certain agreed upon issues. The
Company is currently considering its response to certain adjustments proposed by
the IRS with respect to FAFLIC/AFLIAC's federal income tax returns for 1982 and
1983, and to possible adjustments under consideration by the IRS with respect to
Allmerica P&C's federal income tax returns for 1989, 1990, and 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.
9. PENSION PLANS
FAFLIC provides retirement benefits to substantially all of its employees under
three 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 (but
not for eligible agents) effective December 31, 1994. In their place, the
Company adopted a defined benefit cash balance formula, under which the Company
annually provides an allocation to each eligible employee as a percentage of
that employee's salary, similar to a defined contribution plan arrangement. The
1995 allocation was based on 7.0% of each eligible employee's salary.
Continuation of the defined benefit cash balance formula is subject to the
resolution of certain technical issues, and may be subject to receipt of a
favorable determination letter from the IRS that the Company's pension plans, as
amended to reflect the cash balance formula, will continue to satisfy the
requirements of Section 401(a) of the Internal Revenue Code. 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.
18
<PAGE>
Components of net pension expense were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned
during the year $ 19.7 $ 13.0 $ 9.8
Interest accrued on projected
benefit obligations 21.1 20.0 16.9
Actual return on assets (89.3) (2.6) (15.1)
Net amortization and deferral 66.1 (16.3) (5.8)
--------------------------------------
Net pension expense $ 17.6 $ 14.1 $ 5.8
--------------------------------------
--------------------------------------
</TABLE>
The following table summarizes the combined status of the three pension
plans. At December 31, 1995 and 1994, each plan's projected benefit obligation
exceeded its assets.
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation $ 325.6 $ 221.7
Unvested benefit obligation 5.0 3.5
-----------------------
Accumulated benefit obligation $ 330.6 $ 225.2
-----------------------
-----------------------
Pension liability included in
Consolidated Balance Sheets:
Projected benefit obligation $ 367.1 $ 254.6
Plan assets at fair value 321.2 239.7
-----------------------
Plan assets less than projected
benefit obligation (45.9) (14.9)
Unrecognized net loss from
past experience 48.8 42.3
Unrecognized prior service benefit (13.8) (17.3)
Unamortized transition asset (26.5) (28.3)
-----------------------
Net pension liability $ (37.4) $ (18.2)
-----------------------
-----------------------
</TABLE>
Determination of the projected benefit obligations was based on a weighted
average discount rate of 7.0% in 1995 and 8.5% in 1994, and the assumed
long-term rate of return on plan assets was 9%. The actuarial present value of
the projected benefit obligations was determined using assumed rates of increase
in future compensation levels ranging from 5.5% to 6.5%. The effect of changes
in actuarial assumptions, including the decrease in the weighted average
discount rate, was an increase in the Company's projected benefit obligation of
$76.7 million at December 31, 1995. Plan assets are invested primarily in
various separate accounts and the general account of FAFLIC. The plans also hold
stock of AFC.
The Company has a profit sharing and 401(k) plan for its employees.
Effective for plan years beginning after 1994, the profit sharing formula for
employees has been discontinued and a 401(k) match feature has been added to the
continuing 401(k) plan for the employees. Total plan expense in 1995, 1994 and
1993 was $5.2 million, $12.6 million and $22.6 million, respectively. In
addition to this Plan, the Company has a defined contribution plan for
substantially all of its agents. The Plan expense in 1995, 1994 and 1993 was
$3.5 million, $2.7 million and $2.4 million, respectively.
10. OTHER POSTRETIREMENT BENEFIT PLANS
In addition to the Company's pension plans, the Company currently provides
postretirement medical and death benefits to certain full-time employees and
dependents, under several plans sponsored by FAFLIC, 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 the 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 and to restrict eligibility to current employees. The medical
plans have varying copayments and deductibles, depending on the plan. These
plans are unfunded.
Effective January 1, 1993, the Company adopted the provisions of SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions".
SFAS No. 106 requires employers to recognize the costs and obligations of
postretirement benefits other than pensions over the period ending with the date
an employee is fully eligible to receive benefits. Previously, such costs were
generally recognized as expenses when paid. The adoption increased accrued
liabilities by $69.1 million. The effect on the consolidated income statement
was $35.4 million, net of tax of $23.5 million and minority interest of $10.2
million, reported as a cumulative effect of a change in accounting principle.
The ongoing effect of adopting the new standard increased 1993 net periodic
postretirement benefit expense by $6.6 million, and decreased net income by $4.3
million.
19
<PAGE>
The plans' funded status reconciled with amounts recognized in the
Company's consolidated balance sheet were as follows:
<TABLE>
<CAPTION>
December 31
(In millions) 1995 1994
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 44.9 $ 35.2
Fully eligible active plan participants 14.0 15.2
Other active plan participants 45.9 38.5
-----------------------
104.8 88.9
Plan assets at fair value -- --
-----------------------
Accumulated postretirement benefit
obligation in excess of plan assets 104.8 88.9
Unrecognized loss 13.4 4.7
-----------------------
Accrued postretirement benefit costs $ 91.4 $ 84.2
-----------------------
-----------------------
</TABLE>
The components of net periodic postretirement benefit expense were as
follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <S> <C> <C>
Service cost $ 4.2 $ 6.6 $ 3.8
Interest cost 6.9 6.9 5.7
Amortization of (gain) loss (0.5) 1.4 --
-------------------------------------
Net periodic postretirement
benefit expense $ 10.6 $ 14.9 $ 9.5
-------------------------------------
-------------------------------------
</TABLE>
For purposes of measuring the accumulated postretirement benefit obligation
at December 31, 1995, health care costs were assumed to increase 10% in 1996,
declining thereafter until the ultimate rate of 5.5% is reached in 2001 and
remains at that level thereafter. The health care cost trend rate assumption has
a significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation at December 31, 1995
by $10.1 million, and the aggregate of the service and interest cost components
of net periodic postretirement benefit expense for 1995 by $1.2 million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation at January 1, 1993 was 8.5%. The rate was 7.0%
and 8.5% at December 31, 1995 and 1994, respectively. The effect of changes in
actuarial assumptions, including the decrease in the weighted average discount
rate, was an increase in the Company's accumulated postretirement benefit
obligation of $15.1 million at December 31, 1995.
11. 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 $1.9
million, net of federal income taxes and minority interest, and is reported as a
cumulative effect of a change in accounting principle in the consolidated
statement of income. The impact of this accounting change, after recognition of
the cumulative effect, was not significant.
12. DIVIDEND RESTRICTIONS
Massachusetts, Delaware, New Hampshire and Michigan have enacted laws governing
the payment of dividends to stockholders by insurers. These laws affect the
dividend paying ability of FAFLIC, AFLIAC, Hanover and Citizens, respectively.
Massachusetts' statute limits the dividends an insurer may pay in any
twelve month period, without the prior permission of the Commonwealth of
Massachusetts Insurance Commissioner, to the greater of (i) 10% of its statutory
policyholder surplus as of the preceding December 31 or (ii) the individual
company's statutory net gain from operations for the preceding calendar year (if
such insurer is a life company), or its net income for the preceding calendar
year (if such insurer is not a life company). In addition, under Massachusetts
law, no domestic insurer shall pay a dividend or make any distribution to its
shareholders from other than unassigned funds unless the Commissioner shall have
approved such dividend or distribution. At January 1, 1996, FAFLIC could pay
dividends of $144.9 million to AFC without prior approval of the Commissioner.
Dividends from FAFLIC to AFC will be the primary source of cash for
repayment of the debt by AFC and payment of dividends to AFC stockholders.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of
20
<PAGE>
Insurance, is limited to the greater of (i) 10% of its policyholders' surplus as
of the preceding December 31 or (ii) the individual company's statutory net gain
from operations for the preceding calendar year (if such insurer is a life
company) or its net income (not including realized capital gains) for the
preceding calendar year (if such insurer is not a life company). Any dividends
to be paid by an insurer, whether or not in excess of the aforementioned
threshold, from a source other than statutory earned surplus would also require
the prior approval of the Delaware Commissioner of Insurance. At January 1,
1996, AFLIAC could pay dividends of $4.3 million to FAFLIC without prior
approval.
Pursuant to New Hampshire's statute, the maximum dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the New Hampshire Insurance Commissioner, is limited to 10% of
such insurer's statutory policyholder surplus as of the preceding December 31.
At January 1, 1996, the maximum dividend and other distributions that could be
paid to Allmerica P&C by Hanover, without prior approval of the Insurance
Commissioner, was approximately $72.8 million.
Pursuant to Michigan's statute, the maximum dividends and other
distributions that an insurer may pay in any twelve month period, without prior
approval of the Michigan Insurance Commissioner, is limited to the greater of
10% of policyholders' surplus as of December 31 of the immediately preceding
year or the statutory net income less realized gains, for the immediately
preceding calendar year. At January 1, 1996, Citizens Insurance could pay
dividends of $45.6 million to Citizens Corporation without prior approval.
13. SEGMENT INFORMATION
The Company offers financial products and services in two major areas: Risk
Management and Retirement and Asset Management. Within these broad areas, the
Company conducts business principally in five operating segments.
The Risk Management group includes two segments: Regional Property and
Casualty and Corporate Risk Management Services. The Regional Property and
Casualty segment includes property and casualty insurance products, such as
automobile insurance, homeowners insurance, commercial multiple-peril insurance,
and workers' compensation insurance. These products are offered by Allmerica P&C
through its operating subsidiaries, Hanover and Citizens. Substantially all of
the Regional Property and Casualty segment's earnings are generated in Michigan
and the Northeast (Connecticut, Massachusetts, New York, New Jersey, New
Hampshire, Rhode Island, Vermont and Maine). The Corporate Risk Management
Services segment, formerly known as the Employee Benefit Services segment,
includes group life and health insurance products and services which assist
employers in administering employee benefit programs and in managing the related
risks.
The Retirement and Asset Management group includes three segments: Retail
Financial Services, Institutional Services and Allmerica Asset Management. The
Retail Financial Services segment, formerly known as the Individual Financial
Services segment, includes variable annuities, variable universal life-type,
traditional and health insurance products distributed via retail channels to
individuals across the country. The Institutional Services segment includes
primarily group retirement products such as 401(k) plans, tax-sheltered
annuities and GIC contracts which are distributed to institutions across the
country via work-site marketing and other arrangements. Allmerica Asset
Management, formerly included in the results of the Institutional Services
segment, is a Registered Investment Advisor which provides investment advisory
services to other institutions, such as insurance companies and pension plans.
21
<PAGE>
Summarized below is financial information with respect to business segments
for the year ended and as of December 31.
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Risk Management
Regional Property and Casualty $ 2,095.1 $ 2,004.8 $ 2,051.1
Corporate Risk Management 328.5 302.4 296.0
-----------------------------------------
Subtotal 2,423.6 2,307.2 2,347.1
-----------------------------------------
Retirement and Asset Management
Retail Financial Services 486.7 507.9 524.0
Institutional Services 344.1 397.9 382.0
Allmerica Asset Management 4.4 4.0 -
-----------------------------------------
Subtotal 835.2 909.8 906.0
Eliminations (20.3) (21.9) (13.9)
-----------------------------------------
Total $ 3,238.5 $ 3,195.1 $ 3,239.2
-----------------------------------------
-----------------------------------------
Income (loss) from continuing
operations before income taxes:
Risk Management
Regional Property and Casualty $ 206.3 $ 113.1 $ 331.3
Corporate Risk Management 18.3 19.9 18.1
-----------------------------------------
Subtotal 224.6 133.0 349.4
-----------------------------------------
-----------------------------------------
Retirement and Asset Management
Retail Financial Services 35.2 14.2 61.6
Institutional Services 42.8 4.4 (16.1)
Allmerica Asset Management 2.3 1.9 --
-----------------------------------------
Subtotal 80.3 20.5 45.5
-----------------------------------------
Total $ 304.9 $ 153.5 $ 394.9
-----------------------------------------
-----------------------------------------
Identifiable assets:
Risk Management
Regional Property and Casualty $ 5,741.8 $ 5,408.7 $ 5,198.1
Corporate Risk Management 458.9 386.3 367.6
-----------------------------------------
Subtotal 6,200.7 5,795.0 5,565.7
-----------------------------------------
Retirement and Asset Management
Retail Financial Services 7,218.7 5,639.8 5,104.5
Institutional Services 4,280.9 4,484.5 4,708.2
Allmerica Asset Management 2.1 2.2 --
-----------------------------------------
Subtotal 11,501.7 10,126.5 9,812.7
-----------------------------------------
Total $ 17,702.4 $ 15,921.5 $ 15,378.4
-----------------------------------------
-----------------------------------------
</TABLE>
14. LEASE COMMITMENTS
Rental expenses for operating leases, principally with respect to buildings,
amounted to $36.4 million, $35.2 million and $31.9 million in 1995, 1994 and
1993, respectively. At December 31, 1995, future minimum rental payments under
non-cancelable operating leases were approximately $84.6 million, payable as
follows: 1996 - $29.4 million; 1997 - $21.5 million; 1998 - $14.6 million; 1999
- - $8.7 million; 2000 - $5.5 million; and $4.9 million thereafter.
15. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risk in various areas of exposure with
other insurance enterprises or reinsurers. Reinsurance transactions are
accounted for in accordance with the provisions of SFAS No. 113.
Amounts recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with the reinsured policy. 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; consequently, allowances are established for amounts deemed
uncollectible. 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.
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
22
<PAGE>
Market Pool ("MWCRP") and the Michigan Catastrophic Claims Association ("MCCA").
As of December 31, 1995, 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 in 1995, 1994 and 1993 were
$49.1 million and $37.9 million, $50.0 million and $34.6 million, and $45.0
million and $31.7 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 small carriers are currently appealing 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 net premiums earned and losses
and loss adjustment expenses in 1995, 1994 and 1993 of $66.8 million and $62.9
million, $80.0 million and $24.2 million, and $76.4 million and $126.8 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 effects of reinsurance were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Life insurance premiums:
Direct $ 438.9 $ 447.2 $ 453.0
Assumed 71.0 54.3 31.3
Ceded (150.3) (111.0) (83.2)
----------------------------------------
Net premiums $ 359.6 $ 390.5 $ 401.1
----------------------------------------
----------------------------------------
Property and casualty
premiums written:
Direct $ 2,039.4 $ 1,992.4 $ 1,906.2
Assumed 125.0 128.6 106.3
Ceded (279.1) (298.1) (267.4)
----------------------------------------
Net premiums $ 1,885.3 $ 1,822.9 $ 1,745.1
----------------------------------------
----------------------------------------
Property and casualty
premiums earned:
Direct $ 2,021.7 $ 1,967.1 $ 1,870.1
Assumed 137.7 116.1 114.8
Ceded (296.2) (291.9) (306.7)
----------------------------------------
Net premiums $ 1,863.2 $ 1,791.3 $ 1,678.2
----------------------------------------
----------------------------------------
Life insurance and other individual
policy benefits, claims, losses and
loss adjustment expenses:
Direct $ 749.6 $ 773.0 $ 819.4
Assumed 38.5 28.9 6.8
Ceded (69.5) (61.6) (38.4)
----------------------------------------
Net policy benefits, claims, losses
and loss adjustment expenses $ 718.6 $ 740.3 $ 787.8
----------------------------------------
----------------------------------------
Property and casualty benefits,
claims, losses and loss
adjustment expenses:
Direct $ 1,372.7 $ 1,364.4 $ 1,310.3
Assumed 146.1 102.7 98.8
Ceded (229.1) (160.4) (209.7)
----------------------------------------
Net policy benefits, claims, losses
and loss adjustment expenses $ 1,289.7 $ 1,306.7 $ 1,199.4
----------------------------------------
----------------------------------------
</TABLE>
23
<PAGE>
16. DEFERRED POLICY ACQUISITION EXPENSES
The following reflects the amount of policy acquisition expenses deferred and
amortized:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 802.8 $ 746.9 $ 700.4
Acquisition expenses deferred 504.8 510.3 482.3
Amortized to expense
during the year (470.3) (475.7) (435.8)
Adjustment to equity
during the year (50.4) 21.3 --
Transferred to the Closed Block (24.8) -- --
Adjustment for cession of
term life insurance (26.4) -- --
---------------------------------------
Balance at end of year $ 735.7 $ 802.8 $ 746.9
---------------------------------------
---------------------------------------
</TABLE>
17. LIABILITIES FOR OUTSTANDING CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES
The Company regularly updates its estimates at liabilities for outstanding
claims, losses and loss adjustment expenses as new information becomes available
and further events occur which may impact the resolution of unsettled claims for
its property and casualty and its accident and health lines of business. Changes
in prior estimates are reflected in results of operations in the year such
changes are determined to be needed and recorded.
The liability for outstanding claims, losses and loss adjustment expenses
related to the Company's accident and health business was $375.9 million, $305.0
million and $276.3 million at December 31, 1995, 1994 and 1993, respectively.
Accident and health claim liabilities have been re-estimated for all prior years
and were increased by $26.4 million, $6.5 million and $12.7 million in 1995,
1994 and 1993, respectively. Unfavorable development in the accident and health
business during 1995 is primarily due to reserve strengthening and adverse
experience in the Company's individual disability line of business.
The following table provides a reconciliation of the beginning and ending
property and casualty reserve for unpaid losses and loss adjustment expenses
(LAE):
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserve for losses and LAE,
beginning of year $ 2,821.7 $ 2,717.3 $ 2,598.9
Incurred losses and LAE, net
of reinsurance recoverable:
Provision for insured events of
the current year 1,427.3 1,434.8 1,268.2
Decrease in provision for insured
events of prior years (137.6) (128.1) (68.8)
----------------------------------------
Total incurred losses and LAE 1,289.7 1,306.7 1,199.4
----------------------------------------
Payments, net of reinsurance
recoverable:
Losses and LAE attributable to
insured events of current year 652.2 650.2 523.5
Losses and LAE attributable to
insured events of prior years 614.3 566.9 564.3
----------------------------------------
Total payments 1,266.5 1,217.1 1,087.8
----------------------------------------
Less reserves assumed by purchaser
of Beacon -- -- (28.8)
----------------------------------------
Change in reinsurance recoverable
on unpaid losses 51.1 14.8 35.6
----------------------------------------
Reserve for losses and LAE,
end of year $ 2,896.0 $ 2,821.7 $ 2,717.3
----------------------------------------
----------------------------------------
</TABLE>
As part of an ongoing process, the property and casualty reserves have been
re-estimated for all prior accident years and were decreased by $137.6 million,
$128.1 million and $68.8 million in 1995, 1994 and 1993, respectively. 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. 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
24
<PAGE>
$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.
The increase in favorable development on prior years' reserves of $59.3
million in 1994 primarily results from an increase in favorable development in
the voluntary and involuntary pools of $47.0 million in 1994. The remainder of
the favorable reserve development in 1994 is the result of favorable severity
trends, primarily in the personal automobile and commercial multiple peril
lines.
This favorable development reflects the Regional Property and Casualty
subsidiaries' 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 business written by the Regional Property and Casualty
subsidiaries, the exposure to environmental liabilities is relatively small.
Losses and LAE reserves related to environmental damage and toxic tort
liability, included in the total reserve for losses and LAE, were $28.6 million
and $19.4 million, net of reinsurance of $8.4 million and $8.1 million, at the
end of 1995 and 1994, respectively. During 1995, the Regional Property and
Casualty subsidiaries redefined their environmental liabilities in conformity
with new guidelines issued by the NAIC. The 1994 liability has been conformed to
the 1995 presentation. This had no impact on results of operations. Management
believes that, notwithstanding the evolution of case law expanding such
liability, recorded reserves for environmental liability are adequate, and is
not aware of any litigation or pending claims that may result in additional
material liabilities in excess of recorded reserves. 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. At Citizens,
environmental reserves are primarily related to 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 environmental liability could be revised in the near term if the
estimates used in determining the liability are revised.
18. MINORITY INTEREST
The Company's interest in Allmerica P&C, is represented by ownership of 58.3%,
57.4% and 57.4% of the outstanding shares of common stock at December 31, 1995,
1994 and 1993, respectively. Earnings and shareholders' equity attributable to
minority shareholders are included in minority interest in the consolidated
financial statements.
19. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions have contributed to an increase in the number of
insurance companies that are under regulatory supervision. This is expected to
result in an increase in mandatory assessments by state guaranty funds, or
voluntary payments by, solvent insurance companies to cover losses to
policyholders of insolvent or rehabilitated companies. Mandatory assessments,
which are subject to statutory limits, can be partially recovered through a
reduction in future premium taxes in some states. The Company is not able to
reasonably estimate the potential effect on it of any such future assessments or
voluntary payments.
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 are liable for $65.0 million payable
on or before January 1, 1996, and employers will 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 Surplus payable in quarterly contributions over ten
years. The smaller carriers have recently 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.
RESIDUAL MARKETS
The Company is required to participate in residual markets in various states.
The results of the residual markets are not subject to the predictability
associated with the Company's own managed business, and are significant to the
workers' compensation line of business and both the private passenger and
commercial automobile lines of business.
25
<PAGE>
20. STATUTORY FINANCIAL INFORMATION
The insurance subsidiaries are required to file annual statements with state
regulatory authorities prepared on an accounting basis prescribed or permitted
by such authorities (statutory basis). Statutory surplus differs from
shareholders' equity reported in accordance with generally accepted accounting
principles for stock life insurance companies primarily because policy
acquisition costs are expensed when incurred, investment reserves are based on
different assumptions, postretirement benefit costs are based on different
assumptions and reflect a different method of adoption, life insurance reserves
are based on different assumptions and income tax expense reflects only taxes
paid or currently payable. Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(In millions) 1995 1994 1993
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory net income (Unconsolidated)
Property and Casualty Companies $ 139.8 $ 74.5 $ 166.8
Life and Health Companies 134.3 40.7 114.8
----------------------------------------
Statutory Shareholders'
Surplus (Unconsolidated)
Property and Casualty Companies $ 1,151.7 $ 989.8 $ 960.1
Life and Health Companies 965.6 465.3 526.4
----------------------------------------
</TABLE>
21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for 1995 and 1994 are summarized below:
<TABLE>
<CAPTION>
For the Three Months Ended
(In millions)
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995 March 31 June 30 Sept. 30 Dec. 31
Total revenues $ 841.4 $ 793.4 $ 819.2 $ 784.5
------------------------------------------------------
Income before extraordinary item $ 39.2 $ 29.9 $ 34.8 $ 45.2
Extraordinary item - demutualization expenses (2.5) (3.5) (4.7) (1.4)
------------------------------------------------------
Net income $ 36.7 $ 26.4 $ 30.1 $ 43.8
------------------------------------------------------
------------------------------------------------------
1994
Total revenues $ 815.4 $ 786.8 $ 799.3 $ 793.6
------------------------------------------------------
Income (loss) before extraordinary item $ (10.9) $ 15.7 $ 26.6 $ 17.7
Extraordinary item - demutualization expenses (1.6) (2.5) (2.8) (2.3)
Cumulative effect of changes in accounting principles (1.9) -- -- --
------------------------------------------------------
Net income $ (14.4) $ 13.2 $ 23.8 $ 15.4
------------------------------------------------------
------------------------------------------------------
</TABLE>
26
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES -- December 31, 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
SELECT SELECT
AGGRESSIVE GROWTH GROWTH
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investment in shares of Allmerica Investment Trust . . . . . . . . . . $ 3,109,345 $ 2,740,451
Receivable from the Company Financial Life Insurance
Company (Sponsor) . . . . . . . . . . . . . . . . . . . . . . . . . . 14,434 21,964
----------- -----------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,123,779 2,762,415
LIABILITIES:
Payable to the Company Financial Life Insurance
Company (Sponsor) . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
----------- -----------
Net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,123,779 $ 2,762,415
----------- -----------
----------- -----------
Net asset distribution by category:
Qualified variable annuity policies . . . . . . . . . . . . . . . . . $ 957,957 $ 1,135,786
Non-qualified variable annuity policies . . . . . . . . . . . . . . . 2,165,822 1,626,629
Value of investment by the Company Financial Life Insurance
Company (Sponsor). . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Value of annuitant mortality fluctuation reserve. . . . . . . . . . . -- --
----------- -----------
$ 3,123,779 $ 2,762,415
----------- -----------
----------- -----------
Qualified units outstanding, December 31, 1995 . . . . . . . . . . . . 733,842 894,909
Net asset value per qualified unit, December 31, 1995. . . . . . . . . $ 1.305399 $ 1.269163
Non-qualified units outstanding, December 31, 1995 . . . . . . . . . . 1,659,126 1,281,655
Net asset value per non-qualified unit, December 31, 1995. . . . . . . $ 1.305399 $ 1.269163
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
SELECT
SELECT SELECT MONEY INTERNATIONAL
GROWTH & INCOME INCOME MARKET EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Investment in shares of Allmerica Investment Trust . . . . . . . . . . $ 4,858,200 $ 4,694,539 $ 4,396,732 $ 2,143,676
Receivable from the Company Financial Life Insurance
Company (Sponsor) . . . . . . . . . . . . . . . . . . . . . . . . . . 6,357 22,301 -- --
----------- ----------- ----------- -----------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,864,557 4,716,840 4,396,732 2,143,676
LIABILITIES:
Payable to the Company Financial Life Insurance
Company (Sponsor) . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 106,723 1,892
----------- ----------- ----------- -----------
Net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,864,557 $ 4,716,840 $ 4,290,009 $ 2,141,784
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net asset distribution by category:
Qualified variable annuity policies . . . . . . . . . . . . . . . . . $ 2,273,431 $ 2,385,743 $ 1,921,257 $ 673,728
Non-qualified variable annuity policies . . . . . . . . . . . . . . . 2,581,126 2,322,166 2,359,404 1,467,943
Value of investment by the Company Financial Life Insurance
Company (Sponsor). . . . . . . . . . . . . . . . . . . . . . . . . . -- -- -- 113
Value of annuitant mortality fluctuation reserve. . . . . . . . . . . 10,000 8,931 9,348 --
----------- ----------- ----------- -----------
$ 4,864,557 $ 4,716,840 $ 4,290,009 $ 2,141,784
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Qualified units outstanding, December 31, 1995 . . . . . . . . . . . . 1,716,566 2,080,909 1,803,629 597,214
Net asset value per qualified unit, December 31, 1995. . . . . . . . . $ 1.324407 $ 1.146491 $ 1.065217 $ 1.128120
Non-qualified units outstanding, December 31, 1995 . . . . . . . . . . 1,956,442 2,033,245 2,223,727 1,301,329
Net asset value per non-qualified unit, December 31, 1995. . . . . . . $ 1.324407 $ 1.146491 $ 1.065217 $ 1.128120
</TABLE>
-1-
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
SELECT VIPF
CAPITAL APPRECIATION HIGH INCOME
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investment in shares of Allmerica Investment Trust . . . . . . . . . . $ 521,164 --
Investment in shares of Fidelity Variable Insurance
Products Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- $ 290,435
Investment in shares of T. Rowe Price International Series, Inc. . . . -- --
Receivable from the Company Financial Life Insurance
Company (Sponsor) . . . . . . . . . . . . . . . . . . . . . . . . . . 20,188 8,993
---------- ----------
Net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 541,352 $ 299,428
---------- ----------
---------- ----------
Net asset distribution by category:
Qualified variable annuity policies . . . . . . . . . . . . . . . . . $ 171,086 $ 136,071
Non-qualified variable annuity policies . . . . . . . . . . . . . . . 369,989 163,138
Value of investment by the Company Financial Life Insurance
Company (Sponsor). . . . . . . . . . . . . . . . . . . . . . . . . . 277 219
---------- ----------
$ 541,352 $ 299,428
---------- ----------
---------- ----------
Qualified units outstanding, December 31, 1995 . . . . . . . . . . . . 123,708 124,118
Net asset value per qualified unit, December 31, 1995. . . . . . . . . $ 1.382983 $ 1.096305
Non-qualified units outstanding, December 31, 1995 . . . . . . . . . . 267,730 149,007
Net asset value per non-qualified unit, December 31, 1995. . . . . . . $ 1.382983 $ 1.096305
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
VIPF VIPF T. ROWE
EQUITY INCOME GROWTH INTERNATIONAL STOCK
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Investment in shares of Allmerica Investment Trust . . . . . . . . . . -- -- --
Investment in shares of Fidelity Variable Insurance
Products Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 509,423 $ 321,102 --
Investment in shares of T. Rowe Price International Series, Inc. . . . -- -- $ 255,141
Receivable from the Company Financial Life Insurance
Company (Sponsor) . . . . . . . . . . . . . . . . . . . . . . . . . . 2,096 2,311 27,082
---------- ---------- ----------
Net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 511,519 $ 323,413 $ 282,223
---------- ---------- ----------
---------- ---------- ----------
Net asset distribution by category:
Qualified variable annuity policies . . . . . . . . . . . . . . . . . $ 201,457 $ 135,480 $ 139,944
Non-qualified variable annuity policies . . . . . . . . . . . . . . . 309,824 187,686 142,066
Value of investment by the Company Financial Life Insurance
Company (Sponsor). . . . . . . . . . . . . . . . . . . . . . . . . . 238 247 213
---------- ---------- ----------
$ 511,519 $ 323,413 $ 282,223
---------- ---------- ----------
---------- ---------- ----------
Qualified units outstanding, December 31, 1995 . . . . . . . . . . . . 169,144 109,704 131,459
Net asset value per qualified unit, December 31, 1995. . . . . . . . . $ 1.191039 $ 1.234960 $ 1.064543
Non-qualified units outstanding, December 31, 1995 . . . . . . . . . . 260,329 152,178 133,653
Net asset value per non-qualified unit, December 31, 1995. . . . . . . $ 1.191039 $ 1.234960 $ 1.064543
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE>
<TABLE>
<CAPTION>
ALLMERICA SELECT SEPARATE ACCOUNT
STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
SELECT SELECT SELECT
AGGRESSIVE GROWTH GROWTH GROWTH AND INCOME
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
12/31/95 12/31/95 12/31/95
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . -- $ 400 $ 236,018
EXPENSES:
Mortality and expense risk fees. . . . . . . . . . . . . . $ 23,477 20,936 38,187
Administrative expense charges . . . . . . . . . . . . . . 2,817 2,512 4,582
--------- --------- ---------
Total expenses . . . . . . . . . . . . . . . . . 26,294 23,448 42,769
--------- --------- ---------
Net investment income (loss) . . . . . . . . . . . . . . . . (26,294) (23,048) 193,249
--------- --------- ---------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain . . . . . . . . . . . . . . . . . . . . 16,936 11,771 10,683
Net unrealized gain . . . . . . . . . . . . . . . . . . . 493,437 274,119 568,163
--------- --------- ---------
Net realized and unrealized gain on investments. . . . . . 510,373 285,890 578,846
--------- --------- ---------
Net increase in net assets from operations . . . . . . . . $ 484,079 $ 262,842 $ 772,095
--------- --------- ---------
--------- --------- ---------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SELECT MONEY SELECT
INCOME MARKET INTERNATIONAL EQUITY
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
12/31/95 12/31/95 12/31/95
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . $ 203,753 $ 177,979 $ 28,766
EXPENSES:
Mortality and expense risk fees. . . . . . . . . . . . . . 37,213 38,949 16,550
Administrative expense charges . . . . . . . . . . . . . . 4,466 4,674 1,986
--------- --------- ---------
Total expenses . . . . . . . . . . . . . . . . . 41,679 43,623 18,536
--------- --------- ---------
Net investment income (loss) . . . . . . . . . . . . . . . . 162,074 134,356 10,230
--------- --------- ---------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain . . . . . . . . . . . . . . . . . . . . 8,732 -- 10,175
Net unrealized gain . . . . . . . . . . . . . . . . . . . 242,639 -- 199,163
--------- --------- ---------
Net realized and unrealized gain on investments. . . . . . 251,371 -- 209,338
--------- --------- ---------
Net increase in net assets from operations . . . . . . . . $ 413,445 $ 134,356 $ 219,568
--------- --------- ---------
--------- --------- ---------
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
ALLMERICA SELECT SEPARATE ACCOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
SELECT VIPF VIPF
CAPITAL APPRECIATION HIGH INCOME EQUITY INCOME
FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD
4/28/95* TO 12/31/95 5/1/95* TO 12/31/95 5/1/95* TO 12/31/95
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,933 -- $ 4,111
EXPENSES:
Mortality and expense risk fees. . . . . . . . . . . . . . . 1,130 $ 726 1,837
Administrative expense charges . . . . . . . . . . . . . . . 135 87 220
-------- -------- --------
Total expenses . . . . . . . . . . . . . . . . . . 1,265 813 2,057
-------- -------- --------
Net investment income (loss) . . . . . . . . . . . . . . . . 8,668 (813) 2,054
-------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain. . . . . . . . . . . . . . . . . . . . . . 354 619 874
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . 27,053 6,246 35,367
-------- -------- --------
Net realized and unrealized gain (loss) on investments . . . 27,407 6,865 36,241
-------- -------- --------
Net increase (decrease) in net assets from operations. . . . $ 36,075 $ 6,052 $ 38,295
-------- -------- --------
-------- -------- --------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
VIPF T. ROWE
GROWTH INTERNATIONAL STOCK
FOR THE PERIOD FOR THE PERIOD
5/1/95* TO 12/31/95 5/1/95* TO 12/31/95
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . -- --
EXPENSES:
Mortality and expense risk fees. . . . . . . . . . . . . . . $ 779 $ 576
Administrative expense charges . . . . . . . . . . . . . . . 93 69
------- -------
Total expenses . . . . . . . . . . . . . . . . . . 872 645
------- -------
Net investment income (loss) . . . . . . . . . . . . . . . . (872) (645)
------- -------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain. . . . . . . . . . . . . . . . . . . . . . 892 16
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . (6,028) 8,398
------- -------
Net realized and unrealized gain (loss) on investments . . . (5,136) 8,414
------- -------
Net increase (decrease) in net assets from operations. . . . $(6,008) $ 7,769
------- -------
------- -------
</TABLE>
*Date of initial investment
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SELECT AGGRESSIVE GROWTH SELECT GROWTH SELECT GROWTH & INCOME
PERIOD FROM PERIOD FROM PERIOD FROM
YEAR ENDED 4/28/94* YEAR ENDED 4/28/94* YEAR ENDED 4/19/94*
12/31/95 TO 12/31/94 12/31/95 TO 12/31/94 12/31/95 TO 12/31/94
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income (loss) . . . . . . . . . . . . . . .$ (26,294) $ (3,115) $ (23,048) $ (2,611) $ 193,249 $ 53,049
Net realized gain (loss) from security transactions. . . . 16,936 101 11,771 1,654 10,683 2,358
Net unrealized gain (loss) on investments. . . . . . . . . 493,437 10,676 274,119 (1,748) 568,163 (70,428)
---------- -------- ---------- -------- ---------- ----------
Net increase (decrease) in net assets from operations. . . 484,079 7,662 262,842 (2,705) 772,095 (15,021)
---------- -------- ---------- -------- ---------- ----------
FROM CAPITAL TRANSACTIONS:
Net purchase payments. . . . . . . . . . . . . . . . . . . 271,631 23,204 247,421 16,647 381,309 100,298
Terminations . . . . . . . . . . . . . . . . . . . . . . . (22,871) (1,482) (12,655) (1,544) (32,802) (6,891)
Annuity benefits . . . . . . . . . . . . . . . . . . . . . (13,460) -- (9,608) -- (15,579) --
Other transfers from (to) the General Account of First
Allmerica Financial Life Insurance Company (Sponsor). . . 1,446,202 928,814 1,493,444 768,573 1,983,301 1,697,847
Net increase in investment by the Company Financial
Life Insurance Company (Sponsor). . . . . . . . . . . . . -- -- -- -- -- --
---------- -------- ---------- -------- ---------- ----------
Net increase in net assets from capital transactions . . . 1,681,502 950,536 1,718,602 783,676 2,316,229 1,791,254
---------- -------- ---------- -------- ---------- ----------
Net increase in net assets . . . . . . . . . . . . . . . . 2,165,581 958,198 1,981,444 780,971 3,088,324 1,776,233
NET ASSETS:
Beginning of period . . . . . . . . . . . . . . . . . . . 958,198 -- 780,971 -- 1,776,233 --
---------- -------- ---------- -------- ---------- ----------
End of period. . . . . . . . . . . . . . . . . . . . . . .$3,123,779 $958,198 $2,762,415 $780,971 $4,864,557 $1,776,233
---------- -------- ---------- -------- ---------- ----------
---------- -------- ---------- -------- ---------- ----------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SELECT
SELECT INCOME MONEY MARKET INTERNATIONAL EQUITY
PERIOD FROM PERIOD FROM PERIOD FROM
YEAR ENDED 4/19/94* YEAR ENDED 4/28/94* YEAR ENDED 5/27/94*
12/31/95 TO 12/31/94 12/31/95 TO 12/31/94 12/31/95 TO 12/31/94
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income (loss) . . . . . . . . . . . . . . . $ 162,074 $ 54,490 $ 134,356 $ 39,757 $ 10,230 $ (477)
Net realized gain (loss) from security transactions. . . . 8,732 (513) -- -- 10,175 1,992
Net unrealized gain (loss) on investments. . . . . . . . . 242,639 (65,115) -- -- 199,163 (13,999)
---------- ---------- ---------- ---------- ---------- --------
Net increase (decrease) in net assets from operations. . . 413,445 (11,138) 134,356 39,757 219,568 (12,484)
---------- ---------- ---------- ---------- ---------- --------
FROM CAPITAL TRANSACTIONS:
Net purchase payments. . . . . . . . . . . . . . . . . . 498,807 174,228 11,468,186 7,935,472 214,178 18,216
Terminations . . . . . . . . . . . . . . . . . . . . . . . (46,136) (15,373) (60,708) (53,224) (30,670) (60)
Annuity benefits . . . . . . . . . . . . . . . . . . . . . (5,600) -- -- -- (17,277) 659,181
Other transfers from (to) the General Account of First
Allmerica Financial Life Insurance Company (Sponsor). . . 1,951,842 1,756,765 (9,379,959) (5,793,871) 1,091,032
Net increase in investment by the Company Financial
Life Insurance Company (Sponsor). . . . . . . . . . . . . -- -- -- -- -- 100
---------- ---------- ---------- ---------- ---------- --------
Net increase in net assets from capital transactions . . . 2,398,913 1,915,620 2,027,519 2,088,377 1,257,263 677,437
---------- ---------- ---------- ---------- ---------- --------
Net increase in net assets . . . . . . . . . . . . . . . . 2,812,358 1,904,482 2,161,875 2,128,134 1,476,831 664,953
NET ASSETS:
Beginning of period . . . . . . . . . . . . . . . . . . . . 1,904,482 -- 2,128,134 -- 664,953 --
---------- ---------- ---------- ---------- ---------- --------
End of period . . . . . . . . . . . . . . . . . . . . . . . $4,716,840 $1,904,482 $4,290,009 $2,128,134 $2,141,784 $664,953
---------- ---------- ---------- ---------- ---------- --------
---------- ---------- ---------- ---------- ---------- --------
</TABLE>
-5-
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SELECT CAPITAL
APPRECIATION VIPF HIGH INCOME VIPF EQUITY INCOME
PERIOD FROM PERIOD FROM PERIOD FROM
4/28/95* TO 12/31/95 5/1/95* TO 12/31/95 5/1/95* TO 12/31/95
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income (loss) . . . . . . . . . . . . . . . . . $ 8,668 $ (813) $ 2,054
Net realized gain from security transactions . . . . . . . . . 354 619 874
Net unrealized gain (loss) on investments. . . . . . . . . . . 27,053 6,246 35,367
--------- --------- ---------
Net increase (decrease) in net assets from operations. . . . . 36,075 6,052 38,295
--------- --------- ---------
FROM CAPITAL TRANSACTIONS:
Net purchase payments. . . . . . . . . . . . . . . . . . . . . 74,004 24,172 40,532
Terminations . . . . . . . . . . . . . . . . . . . . . . . . . -- (5,093) (4,994)
Other transfers from the General Account of First
Allmerica Financial Life Insurance Company (Sponsor). . . . . 431,073 274,097 437,486
Net increase in investment by the Company Financial Life
Insurance Company (Sponsor) . . . . . . . . . . . . . . . . . 200 200 200
--------- --------- ---------
Net increase in net assets from capital transactions . . . . . 505,277 293,376 473,224
--------- --------- ---------
Net increase in net assets . . . . . . . . . . . . . . . . . . 541,352 299,428 511,519
NET ASSETS:
Beginning of period . . . . . . . . . . . . . . . . . . . . . -- -- --
--------- --------- ---------
End of period . . . . . . . . . . . . . . . . . . . . . . . . $ 541,352 $ 299,428 $ 511,519
--------- --------- ---------
--------- --------- ---------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
VIPF GROWTH T. ROWE INTERNATIONAL STOCK
PERIOD FROM PERIOD FROM
5/1/95* TO 12/31/95 5/1/95* TO 12/31/95
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income (loss) . . . . . . . . . . . . . . . $ (872) $ (645)
Net realized gain from security transactions . . . . . . . 892 16
Net unrealized gain (loss) on investments. . . . . . . . . (6,028) 8,398
--------- ---------
Net increase (decrease) in net assets from operations. . . (6,008) 7,769
--------- ---------
FROM CAPITAL TRANSACTIONS:
Net purchase payments. . . . . . . . . . . . . . . . . . . 17,133 11,459
Terminations . . . . . . . . . . . . . . . . . . . . . . . -- --
Other transfers from the General Account of First
Allmerica Financial Life Insurance Company (Sponsor). . . 312,088 262,795
Net increase in investment by the Company Financial
Life Insurance Company (Sponsor). . . . . . . . . . . . . 200 200
--------- ---------
Net increase in net assets from capital transactions . . . 329,421 274,454
--------- ---------
Net increase in net assets . . . . . . . . . . . . . . . . 323,413 282,223
NET ASSETS:
Beginning of period . . . . . . . . . . . . . . . . . . . . -- --
--------- ---------
End of period . . . . . . . . . . . . . . . . . . . . . . $ 323,413 $ 282,223
--------- ---------
--------- ---------
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
-6-
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1995
NOTE 1 - ORGANIZATION
Allmerica Select Separate Account (Allmerica Select) is a separate
investment account of the Company Financial Life Insurance Company (the
Company), established on April 1, 1994 for the purpose of separating from the
general assets of the Company those assets used to fund certain variable
annuity policies issued by the Company. Effective October 16, 1995,
concurrent with the demutualization, the Company's name was changed from
State Mutual Life Assurance Company of America. Under applicable insurance
law, the assets and liabilities of Allmerica Select are clearly identified
and distinguished from the other assets and liabilities of the Company.
Allmerica Select cannot be charged with liabilities arising out of any other
business of the Company.
Allmerica Select is registered as a unit investment trust under the
Investment Company Act of 1940, as amended (the 1940 Act). Allmerica Select
currently offers eleven Sub-Accounts. Each Sub-Account invests exclusively in
a corresponding investment portfolio of the Allmerica Investment Trust (the
Trust) managed by Allmerica Investment Management Company, Inc., a
wholly-owned subsidiary of the Company or of the Variable Insurance Products
Fund (VIPF) managed by Fidelity Management and Research Company (Fidelity
Management), or of T. Rowe Price International Series, Inc. (T. Rowe)
managed by Price-Fleming. The Trust, VIPF, and T. Rowe (the Funds) are
open-end, diversified series management investment companies registered under
the 1940 Act.
Allmerica Select has two types of variable annuity policies, "qualified"
policies and "non-qualified" policies. A qualified policy is one that is
purchased in connection with a retirement plan which meets the requirements
of Section 401, 403, 408, or 457 of the Internal Revenue Code, while a
non-qualified policy is one that is not purchased in connection with one of
the indicated retirement plans. The tax treatment for certain partial
redemptions or surrenders will vary according to whether they are made from a
qualified policy or a non-qualified policy.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Investments - Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per
share of the respective investment portfolio of the Trust, VIPF, and T. Rowe.
Net realized gains and losses on securities sold are determined on the
average cost method. Dividends and capital gain distributions are recorded on
the ex-dividend date and are reinvested in additional shares of the
respective investment portfolio of the Trust, VIPF, and T. Rowe at net asset
value.
Federal Income Taxes -The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code and files a consolidated
federal income tax return with the Company. The Company anticipates no tax
liability resulting from the operations of Allmerica Select. Therefore, no
provision for income taxes has been charged against Allmerica Select.
Annuitant Mortality Fluctuation Reserve - A strengthening reserve required
for doing business in the state of New York. The purpose of the reserve is
to provide for future mortality experience which is less favorable than that
assumed in pricing the annuity. This reserve is funded by the Company.
-7-
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1995, CONTINUED
NOTE 3 - INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share
of each Sub-Account's investment in the Trust, VIPF, and T. Rowe at December
31, 1995 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PORTFOLIO INFORMATION
INVESTMENT NUMBER OF AGGREGATE NET ASSET VALUE
PORTFOLIO SHARES COST PER SHARE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allmerica Investment Trust:
Select Aggressive Growth . . . . . . . . 1,682,546 $ 2,605,231 $ 1.848
Select Growth. . . . . . . . . . . . . . 2,001,790 2,468,079 1.369
Select Growth and Income . . . . . . . . 3,831,388 4,360,465 1.268
Select Income. . . . . . . . . . . . . . 4,584,511 4,517,015 1.024
Money Market . . . . . . . . . . . . . . 4,396,732 4,396,732 1.000
Select International Equity. . . . . . . 1,887,039 1,958,511 1.136
Select Capital Appreciation. . . . . . . 380,690 494,111 1.369
Fidelity Variable Insurance Products Fund:
High Income. . . . . . . . . . . . . . . 24,103 284,189 12.050
Equity Income. . . . . . . . . . . . . . 26,436 474,057 19.270
Growth . . . . . . . . . . . . . . . . . 10,997 327,130 29.200
T. Rowe Price International Series, Inc.:
International Stock. . . . . . . . . . . 22,659 246,744 11.260
</TABLE>
NOTE 4 - RELATED PARTY TRANSACTIONS
The Company makes a charge of 1.25% per annum based on the average daily
net assets of each Sub-Account at each valuation date for mortality and
expense risks. The Company also charges each Sub-Account .15% per annum based
on the average daily net assets of each Sub-Account for administrative
expenses. These charges are deducted from the daily value of each Sub-Account
but are paid to the Company on a monthly basis.
A contract fee is currently deducted on the policy anniversary date and
upon full surrender of the policy. The contract fee is $30. For the year
ended December 31, 1995, contract fees deducted from accumulated value in
Allmerica Select amounted to $4,901.
Allmerica Investments, Inc., (Allmerica Investments), a wholly-owned
subsidiary of the Company, is the principal underwriter and general
distributor of Allmerica Select, and does not receive any compensation for
sales of the Allmerica Select policies. Commissions are paid by the Company
to registered representatives of broker-dealers who are registered under the
Securities Exchange Act of 1934 and are members of the National Association
of Securities Dealers. As the current series of policies have a contingent
deferred sales charge, no deduction is made for sales charges at the time of
the sale. For the year ended December 31, 1995, the Company received $1,246
for contingent deferred sales charges applicable to Allmerica Select.
-8-
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1995, CONTINUED
NOTE 5 - POLICYOWNERS AND SPONSOR TRANSACTIONS
Transactions from policyowners and sponsor were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1995 1994
---- ----
UNITS AMOUNT UNITS AMOUNT
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SELECT AGGRESSIVE GROWTH
ISSUANCE OF UNITS. . . . . . . . . . . . . . . . . 1,562,355 $ 1,835,864 959,605 $ 952,354
REDEMPTION OF UNITS. . . . . . . . . . . . . . . . (127,181) (154,362) (1,811) (1,818)
------------ ------------ ------------ ------------
NET INCREASE.. . . . . . . . . . . . . . . . . . 1,435,174 $ 1,681,502 957,794 $ 950,536
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
SELECT GROWTH
ISSUANCE OF UNITS. . . . . . . . . . . . . . . . . 1,476,227 $ 1,789,220 758,002 $ 785,560
REDEMPTION OF UNITS. . . . . . . . . . . . . . . . (55,816) (68,871) (1,849) (1,884)
------------ ------------ ------------ ------------
NET INCREASE . . . . . . . . . . . . . . . . . . . 1,420,411 $ 1,720,349 756,153 $ 783,676
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
SELECT GROWTH AND INCOME
ISSUANCE OF UNITS. . . . . . . . . . . . . . . . 2,022,590 $ 2,427,395 1,730,638 $ 1,798,192
REDEMPTION OF UNITS. . . . . . . . . . . . . . . (73,628) (111,166) (6,592) (6,938)
------------ ------------ ------------ ------------
NET INCREASE . . . . . . . . . . . . . . . . . . . 1,948,962 $ 2,316,229 1,724,046 $ 1,791,254
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
SELECT INCOME
ISSUANCE OF UNITS. . . . . . . . . . . . . . . . . 2,406,756 $ 2,616,226 1,931,971 $ 1,931,241
REDEMPTION OF UNITS . . . . . . . . . . . . . . . (208,889) (217,313) (15,684) (15,621)
------------ ------------ ------------ ------------
NET INCREASE . . . . . . . . . . . . . . . . . . . 2,197,867 $ 2,398,913 1,916,287 $ 1,915,620
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
MONEY MARKET
ISSUANCE OF UNITS. . . . . . . . . . . . . . . . . 11,475,182 $ 12,005,362 7,881,195 $ 7,940,059
REDEMPTION OF UNITS. . . . . . . . . . . . . . . . (9,533,159) (9,977,843) (5,795,862) (5,851,682)
------------ ------------ ------------ ------------
NET INCREASE . . . . . . . . . . . . . . . . . . . 1,942,023 $ 2,027,519 2,085,333 $ 2,088,377
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
SELECT INTERNATIONAL EQUITY
ISSUANCE OF UNITS. . . . . . . . . . . . . . . . . 1,299,084 $ 1,377,879 700,918 $ 682,730
REDEMPTION OF UNITS. . . . . . . . . . . . . . . . (96,005) (120,616) (5,454) (5,293)
------------ ------------ ------------ ------------
NET INCREASE . . . . . . . . . . . . . . . . . . . 1,203,079 $ 1,257,263 695,464 $ 677,437
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
SELECT CAPITAL APPRECIATION
ISSUANCE OF UNITS. . . . . . . . . . . . . . . . . 394,750 $ 509,562 -- --
REDEMPTION OF UNITS. . . . . . . . . . . . . . . . (3,312) (4,285) -- --
------------ ------------ ------------ ------------
NET INCREASE . . . . . . . . . . . . . . . . . . . 391,438 $ 505,277 -- --
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
VIPF HIGH INCOME
ISSUANCE OF UNITS. . . . . . . . . . . . . . . . . 284,162 $ 306,219 -- --
REDEMPTION OF UNITS. . . . . . . . . . . . . . . . (12,037) (12,843) -- --
------------ ------------ ------------ ------------
NET INCREASE . . . . . . . . . . . . . . . . . . . 273,125 $ 293,376 -- --
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
VIPF EQUITY INCOME
ISSUANCE OF UNITS. . . . . . . . . . . . . . . . . 443,027 $ 486,952 -- --
REDEMPTION OF UNITS. . . . . . . . . . . . . . . . (13,554) (13,728) -- --
------------ ------------ ------------ ------------
NET INCREASE.. . . . . . . . . . . . . . . . . . . 429,473 $ 473,224 -- --
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
VIPF GROWTH
ISSUANCE OF UNITS. . . . . . . . . . . . . . . . . 267,887 $ 329,470 -- --
REDEMPTION OF UNITS. . . . . . . . . . . . . . . . (5) (49) -- --
------------ ------------ ------------ ------------
NET INCREASE . . . . . . . . . . . . . . . . . . . 267,882 $ 329,421 -- --
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
T. ROWE INTERNATIONAL STOCK
ISSUANCE OF UNITS. . . . . . . . . . . . . . . . . 268,735 $ 278,037 --
REDEMPTION OF UNITS. . . . . . . . . . . . . . . . (3,623) (3,583) -- --
------------ ------------ ------------ ------------
NET INCREASE . . . . . . . . . . . . . . . . . . . 265,112 $ 274,454 -- --
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
-9-
<PAGE>
ALLMERICA SELECT SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1995, CONTINUED
NOTE 6 - DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code, a
variable annuity contract, other than a contract issued in connection with
certain types of employee benefit plans, will not be treated as an annuity
contract for federal income tax purposes for any period for which the
investments of the segregated asset account on which the contract is based
are not adequately diversified. The Code provides that the "adequately
diversified" requirement may be met if the underlying investments satisfy
either a statutory safe harbor test or diversification requirements set forth
in regulations issued by the Secretary of Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that Allmerica Select satisfies the current
requirements of the regulations, and it intends that Allmerica Select will
continue to meet such requirements.
NOTE 7 - PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of the Trust, VIPF, and T. Rowe
shares by Allmerica Select during the year ended december 31, 1995 were as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
SUB-ACCOUNTS PURCHASES SALES
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Allmerica Investment Trust:
Select Aggressive Growth $ 1,768,354 $ 128,502
Select Growth 1,766,629 93,815
Select Growth and Income 2,616,672 111,369
Select Income 2,796,603 258,005
Money Market 8,860,563 6,591,260
Select International Equity 1,394,551 125,792
Select Capital Appreciation 503,182 9,424
Fidelity Variable Insurance Products Fund:
High Income 303,345 19,774
Equity Income 499,022 25,839
Growth 341,595 15,357
T. Rowe Price International Series, Inc.:
International Stock 261,597 14,870
------------ ------------
Totals $ 21,112,113 $ 7,394,007
------------ ------------
------------ ------------
</TABLE>
-10-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of the Company Financial Life Insurance
Company and Policyowners of Allmerica Select Separate
Account of the Company Financial Life Insurance Company
In our opinion, the accompanying statements of assets and liabilities and
the related statements of operations and of changes in net assets present
fairly, in all material respects, the financial position of each of the
Sub-Accounts (Select Aggressive Growth, Select Growth, Select Growth &
Income, Select Income, Money Market, Select International Equity, Select
Capital Appreciation, VIPF High Income, VIPF Equity Income, VIPF Growth, and
T. Rowe International Stock) constituting the Allmerica Select Separate
Account of the Company Financial Life Insurance Company at December 31,
1995, the results of each of their operations and the changes in each of
their net assets for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company Financial Life Insurance Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
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,
which included confirmation of investments owned at December 31, 1995 by
correspondence with the Funds provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 23, 1996
-11-