FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to
1-13754
(Commission file number)
ALLMERICA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-3263626
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
440 Lincoln Street, Worcester, Massachusetts 01653
(Address of principal executive offices)
(Zip Code)
(508) 855-1000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: 50,134,651
shares of common stock outstanding, as of May 1, 1996.
27
Total Number of Pages
TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION
Item 1. - Financial Statements (Unaudited)
Consolidated Statements of Income 3
Consolidated Statements of Shareholders' Equity 4
Consolidated Balance Sheets 5
Consolidated Statements of Cash Flows 6
Notes to Interim Consolidated Financial Statements 7-9
Item 2. - Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10-25
PART II. - OTHER INFORMATION
Item 6. - Exhibits and Reports on Form 8-K 26
SIGNATURES
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
<TABLE>
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME <FN1>
<CAPTION>
(Unaudited)
Quarter Ended
March 31,
(In millions, except per share data) 1996 1995
<S> <C> <C>
REVENUES
Premiums $ 547.6 $ 566.8
Universal life and investment
product policy fees 46.5 41.1
Net investment income 161.1 182.5
Net realized investment gains(losses) 51.6 (2.2)
Realized gain on sale of mutual fund
processing business 0.0 20.7
Other income 21.6 32.5
Total revenues 828.4 841.4
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses 496.9 523.2
Policy acquisition expenses 119.7 115.3
Other operating expenses 115.6 123.7
Total benefits, losses and expenses 732.2 762.2
Income before federal income taxes 96.2 79.2
Federal income tax expense
Current 18.6 17.6
Deferred 5.6 6.5
Total federal income tax expense 24.2 24.1
Income before minority interest and
extraordinary item 72.0 55.1
Minority interest (24.7) (15.9)
Income before extraordinary item 47.3 39.2
Extraordinary item - demutualization expenses 0.0 (2.5)
Net income $ 47.3 $ 36.7
PER SHARE DATA
Income before extraordinary item $ 0.94
Extraordinary item - demutualization expenses 0.00
Net income $ 0.94
Dividends declared to shareholders $ 0.05
Weighted average shares outstanding 50.1
<FN>
<FN1>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
Page 3
<TABLE>
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY <FN1>
<CAPTION>
(Unaudited)
Quarter Ended
March 31,
(In millions) 1996 1995
<S> <C> <C>
COMMON STOCK
Balance at beginning and end of period $ 0.5 $ 0.0
ADDITIONAL PAID-IN-CAPITAL
Balance at beginning and end of period 1,382.5 0.0
RETAINED EARNINGS
Balance at beginning of period 38.2 1,071.4
Net income 47.3 36.7
Dividends to shareholders (2.5) 0.0
Balance at end of period 83.0 1,108.1
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS
Balance at beginning of period 153.0 (79.0)
Net (depreciation) appreciation on available-for-sale securities (133.4) 161.1
Benefit (provision) for deferred federal income taxes 46.7 (56.6)
Minority interest 23.6 (25.9)
Balance at end of period 89.9 (0.4)
Total shareholders' equity $ 1,555.9 $ 1,107.7
<FN>
<FN1>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
Page 4
<TABLE>
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS <FN1>
<CAPTION>
(Unaudited)
March 31, December 31,
(In millions, except per share data) 1996 1995
<S> <C> <C>
ASSETS
Investments:
Fixed maturities-at fair value (amortized cost of $7,823.8 and $7,467.9) $ 7,943.0 7,739.3
Equity securities-at fair value (cost of $331.1 and $410.6) 426.1 517.2
Mortgage loans 741.4 799.5
Real estate 169.3 179.6
Policy loans 125.6 123.2
Other long-term investments 73.8 71.9
Total investments 9,479.2 9,430.7
Cash and cash equivalents 139.1 289.5
Accrued investment income 165.7 163.2
Deferred policy acquisition costs 769.0 735.7
Reinsurance receivables:
Future policy benefits 99.7 97.1
Outstanding claims, losses and loss adjustment expenses 770.8 799.6
Unearned premiums 47.4 43.8
Other 57.9 58.9
Total reinsurance receivables 975.8 999.4
Deferred federal income taxes 100.4 81.2
Premiums, accounts and notes receivable 540.9 526.7
Other assets 402.2 363.6
Closed Block assets 828.8 818.9
Separate account assets 4,761.6 4,348.8
Total assets $ 18,162.7 $ 17,757.7
LIABILITIES
Policy liabilities and accruals:
Future policy benefits $ 2,645.3 $ 2,639.3
Outstanding claims, losses and loss adjustment expenses 3,060.4 3,081.3
Unearned premiums 818.3 800.9
Contractholder deposit funds and other policy liabilities 2,498.3 2,737.4
Total policy liabilities and accruals 9,022.3 9,258.9
Expenses and taxes payable 743.4 603.0
Reinsurance premiums payable 17.2 42.0
Short-term debt 189.9 31.2
Deferred federal income taxes 34.5 47.8
Long-term debt 202.2 202.3
Closed Block liabilities 912.7 902.0
Separate account liabilities 4,750.1 4,337.8
Total liabilities 15,872.3 15,425.0
Minority interest 734.5 758.5
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, $0.01 par value, 20.0 million shares authorized, none issued 0.0 0.0
Common stock, $0.01 par value, 300.0 million shares authorized, 50.1 million shares
issued and outstanding 0.5 0.5
Additional paid-in-capital 1,382.5 1,382.5
Unrealized appreciation on investments, net 89.9 153.0
Retained earnings 83.0 38.2
Total shareholders' equity 1,555.9 1,574.2
Total liabilities and shareholders' equity $ 18,162.7 $ 17,757.7
<FN>
<FN1>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
Page 5
<TABLE>
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS <FN1>
<CAPTION>
(Unaudited)
Quarter Ended
March 31,
(In millions) 1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 47.3 $ 36.7
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Minority interest 24.7 15.9
Net realized gains (52.2) (18.5)
Deferred federal income taxes 5.6 6.5
Change in assets and liabilities:
Deferred policy acquisition costs (11.0) (12.9)
Premiums and notes receivable, net of reinsurance payable (38.5) (45.1)
Accrued investment income (1.7) 3.5
Policy liabilities and accruals, net (17.7) 9.2
Reinsurance receivable 23.6 5.7
Expenses and taxes payable 166.4 (5.5)
Separate account activity, net (0.5) (0.8)
Other, net (30.7) (21.6)
Net cash provided by (used in) operating activities 115.3 (26.9)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities of available-for-sale fixed maturities 1,055.1 570.6
Proceeds from maturities of held-to-maturity fixed maturities 0.0 71.2
Proceeds from disposals of equity securities 165.6 26.2
Proceeds from disposals of other investments 17.6 1.5
Proceeds from mortgages matured or collected 49.5 70.9
Purchase of available-for-sale fixed maturities (1,410.7) (669.5)
Purchase of held-to-maturity fixed maturities 0.0 (25.0)
Purchase of equity securities (41.6) (65.2)
Purchase of other investments (5.8) (5.7)
Proceeds from sale of mutual fund processing business 0.0 32.8
Capital expenditures (0.9) (1.5)
Other, net 4.1 0.0
Net cash (used in) provided by investing activities (167.1) 6.3
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to contractholder deposit funds 116.1 157.1
Withdrawals from contractholder deposit funds (330.3) (271.2)
Change in short-term debt 158.7 70.7
Dividends paid to shareholders (3.5) (1.0)
Other, net (23.6) 0.0
Net cash used in financing activities (82.6) (44.4)
Net decrease in cash and cash equivalents (134.4) (65.0)
Net change in cash held in the Closed Block (16.0) 0.0
Cash and cash equivalents, beginning of period 289.5 539.7
Cash and cash equivalents, end of period $ 139.1 $ 474.7
<FN>
<FN1>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
Page 6
ALLMERICA FINANCIAL CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
First Allmerica Financial Life Insurance Company ("FAFLIC", 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" or the "Company").
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 for all periods presented.
The interim consolidated financial statements of AFC include the accounts
of AFC, FAFLIC, its wholly owned life insurance subsidiary, Allmerica
Financial Life Insurance and Annuity Company ("AFLIAC", formerly SMA Life
Assurance Company), non-insurance subsidiaries (principally brokerage and
investment advisory subsidiaries), and Allmerica Property & Casualty
Companies, Inc. ("Allmerica P&C", a 59.2%-owned non-insurance holding
company). The Closed Block assets and liabilities at March 31, 1996 and
December 31, 1995 and its results of operations in 1996 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 3). 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 81.4%-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 accompanying interim consolidated financial statements reflect, in
the opinion of the Company's management, all adjustments, consisting of
only normal and recurring adjustments, necessary for a fair presentation
of the financial position and results of operations. Certain
reclassifications have been made to the 1995 consolidated statements of
income in order to conform to the 1996 presentation. The results of
operations for the quarter ended March 31, 1996 are not necessarily
indicative of the results to be expected for the full year. These
financial statements should be read in conjunction with the Company's
1995 Annual Report to Shareholders, as filed on Form 10-K to the
Securities and Exchange Commission.
2. Federal Income Taxes
Federal income tax expense for the quarters ended March 31, 1996 and
1995, has been computed using estimated effective tax rates for the AFC
and Allmerica P&C tax-paying groups. These rates are revised, if
necessary, at the end of each successive interim period to reflect the
current estimates of the annual effective tax rates.
Page 7
3. Closed Block
Included in other income in the Consolidated Statement of Income in the
first quarter of 1996 is a net pre-tax contribution from the Closed Block
of $3.4 million. Summarized financial information of the Closed Block is
as follows:
<TABLE>
ALLMERICA FINANCIAL CORPORATION
CLOSED BLOCK BALANCE SHEETS
<CAPTION>
(Unaudited)
March 31, December 31,
(In millions) 1996 1995
<S> <C> <C>
ASSETS
Fixed maturities-at fair value (amortized cost of $442.9 and $447.4) $ 444.4 458.0
Mortgage loans 65.1 57.1
Policy loans 238.1 242.4
Cash and cash equivalents 33.6 17.6
Accrued investment income 15.8 16.6
Deferred policy acquisition costs 23.1 24.5
Other assets 8.7 2.7
Total assets $ 828.8 $ 818.9
LIABILITIES
Policy liabilities and accruals $ 885.7 $ 899.2
Other liabilities 27.0 2.8
Total liabilities $ 912.7 $ 902.0
</TABLE>
<TABLE>
ALLMERICA FINANCIAL CORPORATION
CLOSED BLOCK STATEMENT OF INCOME
<CAPTION>
(Unaudited)
Quarter Ended
March 31,
(In millions) 1996
<S> <C>
REVENUES
Premiums $ 29.6
Net investment income 13.1
Net realized investment gains 0.6
Total revenues 43.3
BENEFITS AND EXPENSES
Policy benefits 38.7
Policy acquisition expenses 0.9
Other operating expenses 0.3
Total benefits and expenses 39.9
Contribution from the Closed Block $ 3.4
</TABLE>
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.
4. 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 operates principally in five 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.
Page 8
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.
In addition to the five operating segments, the Company also has a
Corporate segment, which consists primarily of Senior Debentures and a
portion of the net proceeds from the Company's initial public offering.
Summarized below is financial information with respect to business
segments for the periods indicated.
<TABLE>
SEGMENT FINANCIAL DATA
<CAPTION>
(Unaudited)
Quarter Ended
March 31,
(In millions) 1996 1995
<S> <C> <C>
Revenues:
Risk Management
Regional Property and Casualty $ 563.3 $ 512.8
Corporate Risk Management Services 86.8 75.7
Subtotal 650.1 588.5
Retirement and Asset Management
Retail Financial Services 107.1 142.0
Institutional Services 70.7 114.8
Allmerica Asset Management 1.0 0.9
Subtotal 178.8 257.7
Corporate 0.5 0.0
Eliminations (1.0) (4.8)
Total $ 828.4 $ 841.4
Income (loss) from continuing operations
before income taxes:
Risk Management
Regional Property and Casualty $ 67.5 $ 43.7
Corporate Risk Management Services 4.1 2.6
Subtotal 71.6 46.3
Retirement and Asset Management
Retail Financial Services 14.9 7.9
Institutional Services 13.4 24.5
Allmerica Asset Management 0.3 0.5
Subtotal 28.6 32.9
Corporate (4.0) 0.0
Total $ 96.2 $ 79.2
<CAPTION>
(Unaudited)
As of As of
March 31, December 31,
(In millions) 1996 1995
<S> <C> <C>
Identifiable assets:
Risk Management
Regional Property and Casualty $ 5,789.3 $ 5,741.8
Corporate Risk Management Services 483.4 458.9
Subtotal 6,272.7 6,200.7
Retirement and Asset Management
Retail Financial Services 7,679.0 7,218.6
Institutional Services 4,156.1 4,280.9
Allmerica Asset Management 2.5 2.1
Subtotal 11,837.6 11,501.6
Corporate 52.4 55.4
Total $ 18,162.7 $ 17,757.7
</TABLE>
Page 9
PART I
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the interim consolidated results of operations
and financial condition of the Company should be read in conjunction with
the interim Consolidated Financial Statements and related footnotes
included elsewhere herein.
INTRODUCTION
The results of operations for Allmerica Financial Corporation and
subsidiaries ("AFC" or "the Company") include the accounts of AFC, First
Allmerica Financial Life Insurance Company ("FAFLIC", formerly State
Mutual Life Assurance Company of America ["State Mutual"]), its wholly
owned life insurance subsidiary, Allmerica Financial Life Insurance and
Annuity Company ("AFLIAC", formerly SMA Life), Allmerica Property &
Casualty Companies, Inc. ("Allmerica P&C", a 59.2%-owned non-insurance
holding company), The Hanover Insurance Company ("Hanover", a wholly
owned subsidiary of Allmerica P&C), Citizens Corporation ("Citizens", an
81.4%-owned subsidiary of Hanover), Citzens Insurance Company of America
(a wholly owned subsidiary of Citizens) and certain other insurance and
non-insurance subsidiaries.
CLOSED BLOCK
On completion of its demutualization, FAFLIC established a Closed Block
for the payment of future benefits, policyholders' dividends and certain
expenses and taxes relating to certain classes of policies. FAFLIC
allocated to the Closed Block an amount of assets expected to produce
cash flows which, together with anticipated revenues from the Closed
Block business, are reasonably expected to be sufficient to support the
Closed Block business. The Closed Block includes only those revenues,
benefit payments, dividends and premium taxes considered in funding the
Closed Block and excludes many costs and expenses associated with
operating the Closed Block and administering the policies included
therein. Since many expenses related to the Closed Block were excluded
from the calculation of the Closed Block contribution, the contribution
from the Closed Block does not represent the actual profitability of the
Closed Block. As a result of such exclusion, operating costs and
expenses outside the Closed Block are disproportionate to the business
outside the Closed Block.
The contribution from the Closed Block is included in `Other income' in
the interim Consolidated Financial Statements. The pre-tax contribution
from the Closed Block for the quarter ended March 31, 1996 was $3.4
million.
Page 10
FAFLIC's conversion to a stock life insurance company, which was
completed October 16, 1995, and the establishment of the Closed Block
have affected the presentation of the Company's interim Consolidated
Financial Statements. For comparability with the prior period, the
following table presents the results of operations of the Closed Block
combined with the results of operations outside the Closed Block for the
quarter ended March 31, 1996. Management's discussion and analysis
addresses the results of operations as combined unless otherwise noted.
<TABLE>
<CAPTION>
(Unaudited)
Quarter Ended
March 31,
(In millions) 1996 1995
<S> <C> <C>
REVENUES
Premiums $ 577.2 $ 566.8
Universal life and investment
product policy fees 46.5 41.1
Net investment income 174.2 182.5
Net realized investment gains(losses) 52.2 (2.2)
Realized gain on sale of mutual fund
processing business 0.0 20.7
Other income 18.2 32.5
Total revenues 868.3 841.4
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses 535.6 523.2
Policy acquisition expenses 120.6 115.3
Other operating expenses 115.9 123.7
Total benefits, losses and expenses 772.1 762.2
Income before federal income taxes 96.2 79.2
Federal income tax expense
Current 18.6 17.6
Deferred 5.6 6.5
Total federal income tax expense 24.2 24.1
Income before minority interest and
extraordinary item 72.0 55.1
Minority interest (24.7) (15.9)
Income before extraordinary item 47.3 39.2
Extraordinary item - demutualization expenses 0.0 (2.5)
Net income $ 47.3 $ 36.7
</TABLE>
Page 11
RESULTS OF OPERATIONS
CONSOLIDATED OVERVIEW
Quarter Ended March 31, 1996 Compared to Quarter Ended March 31, 1995
The Company's consolidated net income increased $10.6 million to $47.3
million in the first quarter of 1996. Net income includes certain items
which management believes are not indicative of overall operating trends.
The following table reflects consolidated net income adjusted for these
items, all net of taxes and minority interest.
<TABLE>
<CAPTION>
(Unaudited)
Quarter Ended
March 31,
(In millions) 1996 1995
<S> <C> <C>
Net income $ 47.3 $ 36.7
Adjustments:
Net realized investment (gains) losses (20.8) 1.3
Net gain on disposal of business 0.0 (13.4)
Extraordinary item - demutualization expenses 0.0 2.5
Differential earnings tax adjustment 0.0 0.8
Adjusted net income $ 26.5 $ 27.9
</TABLE>
The decrease in adjusted net income of $1.4 million is primarily
attributable to severe weather-related claims in the Regional Property
and Casualty segment during the first quarter of 1996, partially offset
by increased income in the Retail Financial Services and Institutional
Services segments.
Premium revenue increased $10.4 million, or 1.8%, to 577.2 million during
the first quarter of 1996. Property and casualty premiums earned
increased $9.3 million, or 2.0%, to $465.1 million, as a result of
increases in policies in force in the personal automobile and homeowners'
lines at Hanover, and to price increases in the personal automobile and
homeowners' lines at Citizens. Premiums in the Corporate Risk Management
Services segment increased $8.5 million, or 13.0%, to $73.8 million due
to growth in risk sharing and non-medical products. Premiums in the
Retail Financial Services segment decreased $7.4 million, or 16.2%, to
$38.3 million, primarily reflecting the cession of substantially all
yearly renewable term ("term") insurance which had contributed $4.5
million of premiums during the first quarter of 1995.
Universal life and investment product policy fees increased $5.4 million,
or 13.1%, to $46.5 million during the first three months of 1996. This
resulted from additional deposits and appreciation on variable products
account balances.
Net investment income before taxes decreased $8.3 million, or 4.5%, to
$174.2 million during the first three months of 1996. This decrease
primarily reflects a reduction in invested assets due to declining GIC
deposits. Since March 1995, when S&P lowered the claims-paying ratings
of FAFLIC and AFLIAC to A+ (Good), sales of traditional GICs have
substantially ceased. This decrease was partially offset by proceeds of
$248.0 million and $197.2 million from the Company's initial public
offering and income from the issuance of Senior Debentures, respectively,
in October 1995. The average gross yield of the fixed maturity
investment portfolio decreased from 7.3% in the first quarter of 1995 to
6.9% in the first quarter of 1996.
Net realized gains on investments before taxes were $52.2 million during
the first three months of 1996 compared to losses of $2.2 million during
the first three months of 1995. After taxes, net realized gains were
$33.9 million versus losses of $1.4 million in the first quarter of 1996
and 1995, respectively. During the first quarter of 1996 the Regional
Property and Casualty segment revised its investment strategy, resulting
in the sale of a substantial portion of its equity portfolio and the
purchase of tax-exempt securities. This is consistent with the segment's
strategy to maximize after-tax net investment income.
Results in the first three months of 1995 included a $20.7 million pre-
tax gain from the March 1995 sale of the Company's mutual fund processing
business.
Policy benefits, claims, losses and LAE increased $12.4 million, or 2.4%
to $535.6 million during the first three months of 1996. This increase
is primarily attributable to a $24.4 million, or 7.6%, increase in losses
and loss
Page 12
adjustment expenses ("LAE") in the Company's Regional Property and
Casualty segment as a result of catastrophe losses and severe weather
during the first three months of 1996. This was partially offset by
decreased policy benefits of $13.5 million, or 23.1%, in the
Institutional Services segment as a result of the continuing decline of
Guaranteed Investment Contracts ("GICs") during 1996.
Policy acquisition expenses consist primarily of commissions, premium
taxes and other policy issuance costs. Policy acquisition expenses
increased $5.3 million, or 4.6%, to $120.6 million during the first
quarter of 1996. This was primarily due to an increase of $2.2 million,
or 2.2%, to $103.7 million in the Regional Property and Casualty segment
reflecting growth in net premiums earned. Policy acquisition expenses in
the Retail Financial Services segment increased $3.0 million, or 24.2%,
to $15.4 million as a result of growth in variable universal life and
individual annuity products, and to additional amortization due to the
lowering of fees on certain variable products which resulted in revised
estimates of future profits.
Other operating expenses decreased $7.8 million, or 6.3%, to $115.9
million in the first quarter of 1996. This was due primarily to a
decrease of $15.7 million, or 59.7%, to $10.6 million in other operating
expenses in the Institutional Services segment resulting from the sale of
the mutual fund processing business in March, 1995. Other operating
expenses in the Regional Property and Casualty segment decreased $1.4
million as a result of reduced technology expenses and decreases in
employee related expenses in 1996, primarily at Citizens. These
decreases were partially offset by an increase of $4.4 million, or 17.3%,
to $29.9 million in the Corporate Risk Management Services segment due to
increased commissions and sales incentives, increased claim processing
expenses to cover growth in claims volume and increased expenses for
information technology. In addition, the Company incurred $4.5 million
of other operating expenses in the Corporate segment in 1996, primarily
related to interest paid on the Company's Senior Debentures.
Federal income tax expense increased $0.1 million in the first quarter of
1996, while the effective tax rate decreased from 30.4% in the first
quarter of 1995 to 25.2% in the first quarter of 1996. For the life
insurance subsidiaries, the decrease resulted from changes in reserve
estimates in 1995 related to ongoing IRS examinations, as well as a
differential earnings charge in the first quarter of 1995 which was no
longer required in 1996. For the property and casualty subsidiaries, a
slight decrease resulted from a higher underwriting loss and a greater
proportion of income from tax-exempt bonds in the first quarter of 1996.
SEGMENT RESULTS
The following is management's discussion and analysis of the Company's
results of operations by business segment. 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. These segments are
Regional Property and Casualty; Corporate Risk Management Services;
Retail Financial Services; Institutional Services; and Allmerica Asset
Management. The Regional Property and Casualty segment consists of the
Company's 59.2% ownership of Allmerica P&C; however, all property and
casualty results presented include 100% of Allmerica P&C's pretax results
of operations, consistent with the presentation in the Company's
consolidated financial statements. The other segments are all owned and
operated by FAFLIC and its wholly owned subsidiaries.
In addition to the five operating segments, the Company also has a
Corporate segment, which consists primarily of Senior Debentures and a
portion of the net proceeds from the Company's initial public offering.
Page 13
RISK MANAGEMENT
Regional Property and Casualty
The following table summarizes the results of operations for the Regional
Property and Casualty segment.
<TABLE>
Regional Property and Casualty
<CAPTION>
(Unaudited)
Quarter Ended
March 31,
(In millions) 1996 1995
<S> <C> <C>
Revenues
Net premiums earned $ 465.1 $ 455.8
Net investment income 52.3 53.0
Net realized gains 45.5 0.0
Other income 0.4 4.0
Total revenues 563.3 512.8
Losses and LAE <FN1> 349.3 323.4
Policy acquisition expenses 103.7 101.5
Other operating expenses 42.8 44.2
Income before taxes $ 67.5 $ 43.7
<FN>
<FN1>
Includes policyholders' dividends of $3.1 million and $1.6 million for the quarters ended March 31, 1996 and 1995,
respectively.
</FN>
</TABLE>
Quarter Ended March 31, 1996 Compared to Quarter Ended March 31, 1995
INCOME BEFORE TAXES
Income before taxes increased $23.8 million, or 54.5%, to $67.5 million
in the first quarter of 1996. The increase in income before taxes is
primarily attributable to a $45.5 million increase in realized gains
primarily related to the sale of equity securities. This increase
reflects the Regional Property and Casualty segment's decision to
increase the proportion of debt securities in the portfolio. Income
before taxes in the quarter was significantly impacted by catastrophes
and other severe weather related losses. This resulted in a $25.9
million increase in losses and loss adjustment expenses (LAE) to $349.3
million in the first quarter of 1996. Direct catastrophe losses in the
first quarter of 1996 were $28.7 million, compared to $1.9 million in the
first quarter of 1995. This was partially offset by favorable claims
experience on current and prior accident years at both Hanover and
Citizens, primarily in the workers' compensation lines.
Page 14
LINES OF BUINESS RESULTS
Personal Lines of Business
The personal lines represented 60.2% and 58.9% of total net premiums
earned in the first quarter of 1996 and 1995, respectively.
<TABLE>
<CAPTION>
Total Regional
Hanover Citizens Property and Casualty
For the Quarters Ended
March 31, (In millions) 1996 1995 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net premiums earned $ 145.1 $ 139.2 $ 135.1 $ 129.3 $ 280.2 $ 268.5
Losses and loss adjustment expenses 116.3 92.1 107.4 104.6 223.7 196.7
Policy acquisition expenses 35.9 33.8 27.2 26.0 63.1 59.8
Other underwriting expenses 13.1 11.6 9.2 10.3 22.3 21.9
Underwriting (loss) profit $ (20.2) $ 1.7 $ (8.7) $ (11.6) $ (28.9) $ (9.9)
</TABLE>
Revenues
Net premiums earned by the personal lines increased $11.7 million, or
4.4%, to $280.2 million during the first quarter of 1996, compared to
$268.5 million in the first quarter of 1995. Net premiums earned by
Hanover's personal lines increased $5.9 million, or 4.2%, to $145.1
million during the first quarter of 1996. This increase was primarily
attributable to increases in policies in force in the personal automobile
and homeowners lines and price increases in the homeowners line. Premium
growth in Hanover's personal lines was impacted by a mandated 4.5%
decrease in Massachusetts personal automobile rates which became
effective January 1, 1996. Approximately 40% of Hanover's personal
automobile business is currently written in Massachusetts. Net premiums
earned by Citizens' personal lines increased $5.8 million, or 4.5%, to
$135.1 million in the first quarter of 1996. This increase is primarily
attributable to price increases in the personal automobile and homeowners
lines.
Underwriting Results
The personal lines' underwriting loss increased $19.0 million, to a loss
of $28.9 million in the first quarter of 1996. Hanover's underwriting
loss increased $21.9 million, while Citizens' improved $2.9 million.
Losses and LAE in Hanover's personal lines increased $24.2 million, or
26.3% to $116.3 million in the first quarter of 1996. This increase is
primarily attributable to an $18.8 million increase in losses and LAE in
the homeowners line resulting from increased catastrophes during the
quarter. Direct catastrophe losses in the personal lines increased $16.1
million, to $17.8 million in the first quarter of 1996 from $1.7 million
during the first quarter of 1995.
Citizens' improved underwriting results are primarily attributable to
favorable claims experience on current and prior accident years in the
personal automobile line. This improvement was attained in spite of a
$4.1 million increase in catastrophes in the first quarter of 1996. There
were no catastrophes in the personal lines during the first quarter of
1995.
The increase in policy acquisition expenses in the personal lines of
$3.3 million, or 5.5%, to $63.1 million in the first quarter of 1996
reflects the growth in net earned premium at both Hanover and Citizens.
Other underwriting expenses at Hanover increased $1.5 million, or 12.9%
to $13.1 million, reflecting costs associated with the expansion of
Hanover's group business. Other underwriting expenses at Citizens
decreased $1.1 million, or 10.7%, to $9.2 million, reflecting reduced
technology expenses and decreases in employee related expenses in 1996.
Page 15
Commercial Lines of Business
The commercial lines represented 39.8% and 41.1% of total net premiums
earned in the first quarter of 1996 and 1995, respectively.
<TABLE>
<CAPTION>
Total Regional
Hanover Citizens Property and Casualty
For the Quarters Ended
March 31, (In millions) 1996 1995 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net premiums earned $ 115.5 $ 121.6 $ 69.4 $ 65.7 $ 184.9 $ 187.3
Losses and loss adjustment expenses 74.4 84.0 48.1 41.1 122.5 125.1
Policy acquisition expenses 27.0 28.9 13.6 12.8 40.6 41.7
Other underwriting expenses 16.7 17.0 3.8 5.3 20.5 22.3
Policyholders' dividends 1.3 0.5 1.8 1.1 3.1 1.6
Underwriting (loss) profit $ (3.9) $ (8.8) $ 2.1 $ 5.4 $ (1.8) $ (3.4)
</TABLE>
Revenues
Net premiums earned by the commercial lines decreased $2.4 million, or
1.3%, to $184.9 million in the first quarter of 1996. Net premiums
earned by Hanover's commercial lines decreased $6.1 million, or 5.0%, to
$115.5 million. This decrease is primarily attributable to declines in
policies in force in commercial multiple peril, workers compensation and
commercial automobile lines, and to the withdrawal from a large voluntary
pool on December 1, 1995. Rate decreases of 5.4% and 1.0% in the workers
compensation and commercial multiple peril lines also contributed to the
decrease in net earned premium at Hanover. Net premiums earned by
Citizens' commercial lines increased $3.7 million, or 5.6%, to $69.4
million, in the first quarter of 1996. The increase is primarily
attributable to increases in policies in force in all major lines except
workers' compensation, resulting from marketing programs developed with
Citizens' agents which target growth in this line, and to price increases
in the commercial automobile line. Increases in exposures per policy in
the commercial multiple peril and workers' compensation lines as a result
of the strong Michigan economy also contributed to premium growth. This
was partially offset by rate decreases of 8.5% and 7.0% effective May 1,
and December 1, 1995, respectively, in the workers' compensation line.
Continued competitive conditions in the workers' compensation line at
both Hanover and Citizens may result in future price decreases that will
impact growth in this line. In addition, Hanover's premium growth in the
commercial lines may be impacted by continued competitive pricing in 1996
as a result of soft market conditions combined with Hanover's effort to
maintain its current underwriting standards.
Underwriting Results
The commercial lines' underwriting loss improved $1.6 million, or 47.1%
to a loss of $1.8 million in the first quarter of 1996. Hanover's
underwriting loss improved $4.9 million, or 55.7%, to a loss of $3.9
million and Citizens' underwriting profit decreased $3.3 million, or
61.1%, to $2.1 million in the first quarter of 1996.
Losses and LAE for Hanover's commercial lines decreased $9.6 million, or
11.4%, to $74.4 million in the first quarter of 1996. This improvement is
primarily attributable to a decrease of $10.8 million and $6.8 million in
the workers' compensation and commercial automobile lines, respectively,
as a result of favorable claims experience on the current and prior
years. Hanover does not expect the current loss trend in the workers'
compensation line to
Page 16
continue in the future. Losses and LAE in the commercial multiple peril
lines increased $7.7 million, to $42.6 million, primarily due to an
increase in direct catastrophes from $0.2 million in 1995 to $6.1 million
in 1996.
Losses and LAE for Citizens' commercial lines increased $7.0 million, or
17.0%, to $48.1 million in the first quarter of 1996. This increase was
primarily attributable to a $6.5 million increases in losses and LAE in
the commercial multiple peril line resulting from increased claims
activity.
Policy acquisition expenses in the commercial lines decreased $1.1
million, or 2.6% , to $40.6 million in the first quarter of 1996.
Hanover's policy acquisition expenses decreased $1.9 million, or 6.6%, to
$27.0 million, primarily attributable to the decrease in net earned
premium and to decreases in commission expenses in a workers'
compensation pool. Citizens' policy acquisition expenses increased $0.8
million, or 6.3%, to $13.6 million, reflecting the growth in net earned
premium. Other underwriting expenses at Hanover decreased $0.3 million,
or 1.8%, to $16.7 million, also reflecting the decrease in net earned
premiums. Other underwriting expenses at Citizens decreased $1.5
million, or 28.3%, to $3.8 million, reflecting reduced technology
expenses and decreases in employee related expenses in 1996.
INVESTMENT RESULTS
Net investment income before taxes remained relatively unchanged at $52.3
million in 1996 compared to $53.0 million in the comparable quarter of
1995. The increase in average invested assets during the first quarter of
1996 was offset by a decrease in average debt security yield from 6.4% in
the first quarter of 1995 to 5.9% in the first quarter of 1996. Net
investment income after taxes increased $0.3 million, to $43.9 million
primarily attributable to the increase in tax-exempt debt securities.
During the first quarter of 1996 the Regional Property and Casualty
segment revised its investment strategy, resulting in the sale of a
substantial portion of its equity portfolio and the purchase of tax-
exempt securities. This is consistent with the segment's strategy of
maximizing after-tax net investment income. As a result of the sale of
equity securities, the Regional Property and Casualty segment had
realized gains of $45.5 million during the first quarter of 1996 compared
to realized gains of $49 thousand in the first quarter of 1995.
RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The Regional Property and Casualty segment regularly updates its reserve
estimates as new information becomes available and further events occur
which may impact the resolution of unsettled claims. Changes in prior
reserve estimates are reflected in results of operations in the year such
changes are determined to be needed and recorded. The table below
provides a reconciliation of the beginning and ending reserve for unpaid
losses and LAE as follows:
<TABLE>
<CAPTION>
For the three months ended March 31, (In millions) 1996 1995
<S> <C> <C>
Reserve for losses and LAE, beginning of period $ 2,896.0 $ 2,821.7
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of the current year 377.6 334.8
Decrease in provision for insured events of prior years (31.4) (13.0)
Total incurred losses and LAE 346.2 321.8
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current year 111.0 87.3
Losses and LAE attributable to insured events of prior years 232.7 202.1
Total payments 343.7 289.4
Change in reinsurance recoverable on unpaid losses (29.7) (4.1)
Reserve for losses and LAE, end of period $ 2,868.8 $ 2,850.0
</TABLE>
Page 17
As part of an ongoing process, the reserves have been re-estimated for
all prior accident years and were decreased by $31.4 million and $13.0
million for the three month periods ended March 31, 1996 and 1995,
respectively. The increase in favorable development on prior years' loss
reserves of $18.4 million results primarily from a $9.4 million increase
in favorable development at Citizens to $8.1 million. The favorable
reserve development at Citizens in 1996 primarily reflects the
initiatives taken by Citizens to manage medical costs in both automobile
lines and the workers' compensation line, as well as the impact of the
Michigan Supreme Court ruling on worker's compensation indemnity
payments, which decreases the maximum amount to be paid for indemnity
cases on all existing and future claims. Hanover's favorable development
increased $9.0 million to $23.3 million during the first quarter of 1996.
This increase is primarily attributable to increased favorable
development in the voluntary pools, and to increased favorable
development in the workers' compensation and commercial automobile lines
at Hanover. The increase was partially offset by unfavorable development
in the commercial multiple peril line.
Page 18
Corporate Risk Management Services
The following table summarizes the results of operations for the
Corporate Risk Management Services ("CRMS") segment for the periods
indicated.
<TABLE>
Corporate Risk Management Services
<CAPTION>
(Unaudited)
Quarter Ended
March 31,
(In millions) 1996 1995
<S> <C> <C>
Premiums and premium equivalents
Premiums $ 73.8 $ 65.3
Premium equivalents 142.6 125.1
Total premiums and premium equivalents $ 216.4 $ 190.4
Revenues
Premiums $ 73.8 $ 65.3
Net investment income 4.8 3.7
Net realized (losses) gains (0.1) 0.1
Other income 8.3 6.6
Total revenues 86.8 75.7
Policy benefits, claims and losses 52.0 46.9
Policy acquisition expenses 0.8 0.7
Other operating expenses 29.9 25.5
Income before taxes $ 4.1 $ 2.6
</TABLE>
Quarter Ended March 31, 1996 Compared to Quarter Ended March 31, 1995
Income before taxes increased $1.5 million, or 57.7%, to $4.1 million in
the first quarter of 1996. This increase was primarily attributable to
premium growth in the Company's risk sharing, non-medical, and
administrative services only ("ASO") product lines, partially offset by
corresponding increases in benefits and claims expenses.
Premiums increased $8.5 million, or 13.0%, to $73.8 million in the first
quarter of 1996 primarily due to increases in risk sharing, stop loss,
group life, dental, and reinsurance services, all totaling $9.5 million.
These increases were partially offset by decreases of $1.1 million in
full indemnity medical products. The decrease in full indemnity health
business is consistent with the Company's strategy to de-emphasize these
products in favor of the more profitable risk sharing arrangements.
Net investment income increased $1.1 million, or 29.7%, to $4.8 million
in the first quarter of 1996 due to growth in invested assets.
Other income increased $1.7 million, or 25.8%, to $8.3 million in the
first quarter of 1996 due primarily to an increase in fees from ASO
contracts.
Policy benefits, claims and losses increased $5.1 million, or 10.9%, to
$52.0 million in the first quarter of 1996. This increase is principally
related to the increased premium growth, as well as continued unfavorable
loss experience in the long term disability income line. These increases
were partially offset by modest improvements in mortality and morbidity
in the group life and health lines.
Other operating expenses increased $4.4 million, or 17.3%, to $29.9
million in the first quarter of 1996 primarily due to increases in
commissions and sales incentives, increases in claims processing expenses
to cover growth in claims volume and increased expenses for information
technology.
Page 19
RETIREMENT AND ASSET MANAGEMENT
Retail Financial Services
The following table summarizes the results of operations for the Retail
Financial Services segment for the periods indicated.
<TABLE>
Retail Financial Services
<CAPTION>
(Unaudited)
Quarter Ended
March 31,
(In millions) 1996 1995
<S> <C> <C>
Revenues
Premiums $ 38.3 $ 45.7
Fees 42.5 37.7
Net investment income 59.2 56.2
Net realized gains (losses) 0.9 (2.2)
Other income 6.1 4.6
Total revenues 147.0 142.0
Policy benefits, claims and losses 89.3 94.4
Policy acquisition expenses 15.4 12.4
Other operating expenses 27.4 27.3
Income before taxes $ 14.9 $ 7.9
</TABLE>
Quarter Ended March 31, 1996 Compared to Quarter Ended March 31, 1995
Income before taxes increased $7.0 million, or 88.6%, to $14.9 million in
the first quarter of 1996. This increase was primarily attributable to
growth in variable products' fee revenue, income earned on the proceeds
from the recent initial public offerings and improved mortality
experience. These increases were partially offset by an increase in
policy acquisition expenses.
The decrease in premiums of $7.4 million, or 16.2%, to $38.3 million
during the first quarter of 1996 is primarily due to the Company's ceding
substantially all of its term life insurance business, which contributed
$4.5 million in premiums in the first quarter of 1995. The remaining
decrease in premiums results from the Company's shift in focus from
traditional life insurance products to variable life insurance and
annuity products.
The increase in fee revenue of $4.8 million, or 12.7%, to $42.5 million
in the first quarter of 1996 is due to additional deposits and
appreciation on variable products account balances. Fees from variable
universal life increased $2.0 million, or 24.4%, from $8.2 million to
$10.2 million for the first quarter of 1996 compared to the same period
in 1995. Fees from annuities increased $4.5 million, or 60.8%, from $7.4
million to $11.9 million in the first quarter of 1996. These increases
were partially offset by a continued decline in fees from non-variable
universal life. The Company expects fees on this product to decrease as
policies in force and related contract values decline.
Net investment income increased $3.0 million, or 5.3 %, to $59.2 million
for the first quarter of 1996 resulting from income earned on proceeds
from the Company's recent initial public offering.
Policy benefits, claims, and losses decreased $5.1 million, or 5.4%, to
$89.3 million in the first quarter of 1996. Non-variable universal life
policy benefits decreased $3.7 million, or 14.5%, to $21.9 million in
1996 as a result of more favorable mortality experience. Traditional
policy benefits decreased $3.4 million, or 8.0%, to $39.0 million in
1996, due primarily to the 1995 cession of term life insurance which had
incurred benefits of $1.7 million during the first quarter of 1995.
The increase in policy acquisition expenses of $3.0 million, or 24.2%, to
$15.4 million for the quarter ended March 31, 1996 is primarily due to
the growth in variable universal life and individual annuity products,
and to additional amortization due to the lowering of fees on certain
variable products which resulted in revised estimates of future profits.
Page 20
Interest Margins
The results of the Retail Financial Services segment depend, to a large
degree, on the maintenance of profitable margins between investment
results from investment assets supporting universal life and general
account annuity products and the interest credited on those products.
The following table sets forth interest earned, interest credited and the
related interest margin.
<TABLE>
Interest Margins
<CAPTION>
(Unaudited)
Quarter Ended
March 31,
(In millions) 1996 1995
<S> <C> <C>
Net investment income $ 36.8 $ 38.3
Less: Interest credited 25.0 26.6
Interest margins <FN1> $ 11.8 $ 11.7
<FN>
<FN1>
Interest margins represent the difference between income earned on investment assets and interest credited to customers'
universal life and general account annuity policies.
</FN>
</TABLE>
Assuming the continuation of the current interest rate and competitive
environments, the Company expects 1996 interest margins to remain
consistent with 1995.
Institutional Services
The following table summarizes the results of operations for the
Institutional Services segment for the periods indicated.
<TABLE>
Institutional Services
<CAPTION>
(Unaudited)
Quarter Ended
March 31,
(In millions) 1996 1995
<S> <C> <C>
Revenues
Fees, premiums and non-insurance income <FN1> $ 6.4 $ 19.8
Net investment income
GICs 29.5 41.8
Other 27.9 27.8
Net realized gains (losses) 5.9 (0.1)
Gain on sale of mutual fund processing business 0.0 20.7
Total revenues 69.7 110.0
Policy benefits, claims and losses
Interest credited to GICs 27.4 38.4
Other 17.6 20.1
Policy acquisition expenses 0.7 0.7
Other operating expenses 10.6 26.3
Income before taxes $ 13.4 $ 24.5
<FN>
<FN1>
Fees, premiums and non-insurance income includes fees from retirement services, mutual fund services, institutional
401(k) recordkeeping services, and other miscellaneous non-insurance related fees. In March 1995, the Company sold its
mutual fund processing business.
</FN>
</TABLE>
Quarter Ended March 31, 1996 Compared to Quarter Ended March 31, 1995
Income before taxes decreased $11.1 million, or 45.3%, to $13.4 million
in the first quarter of 1996. This decrease was primarily attributable
to the sale of the Company's mutual fund processing business in March
1995, resulting in a pre-tax gain of $20.7 million, partially offset by a
$6.0 million increase in realized investment gains. Additionally,
results in the first quarter of 1995 include a pre-tax operating loss of
$2.3 million from the mutual fund processing business. This was
partially offset by a decline in the interest margin on GICs of $1.3
million, due to declining GIC deposits.
Fees, premiums, and non-insurance income declined $13.4 million, or
67.7%, to $6.4 million in 1996. As noted above, this decrease was
primarily attributable to the $18.4 million decrease in revenues from the
mutual fund processing business, which was sold in March 1995.
Page 21
Net investment income related to GICs and interest credited to GIC
contractholders have declined as a result of declining GIC deposits due
to the downgrading in March 1995 of FAFLIC's and AFLIAC's S&P Rating to
A+ (Good). As a result, sales of traditional GICs have substantially
ceased. Management expects GIC deposits and related income to continue
to decline.
Net realized gains increased $6.0 million, to $5.9 million in the first
quarter of 1996. This increase resulted from $2.8 million of gains on
the sale of real estate properties and $2.6 million of gains on interest
rate futures contracts related to GICs.
Other operating expenses decreased $15.7 million, or 59.7%, to $10.6
million in the first quarter of 1996. This decrease was primarily
attributable to the sale of the mutual fund processing business, which
incurred $20.7 million of operating expenses in the first quarter of
1995.
Allmerica Asset Management
The following table summarizes the results of operations for the
Allmerica Asset Management segment for the periods indicated.
<TABLE>
Allmerica Asset Management
<CAPTION>
(Unaudited)
Quarter Ended
March 31,
(In millions) 1996 1995
<S> <C> <C>
Fees and other income $ 1.0 $ 0.9
Other operating expenses 0.7 0.4
Income before taxes $ 0.3 $ 0.5
</TABLE>
Since 1994, the Company has provided investment advisory and sub-advisory
services, primarily to affiliates, through its registered investment
advisor, Allmerica Asset Management.
Corporate
The following table summarizes the results of operations for the
Corporate segment for the periods indicated.
<TABLE>
Corporate
<CAPTION>
(Unaudited)
Quarter Ended
March 31,
(in millions) 1996 1995
<S> <C> <C>
Investment and other income $ 0.5 $ 0.0
Other operating expenses 4.5 0.0
Loss before taxes $ (4.0) $ 0.0
</TABLE>
This segment consists primarily of $52.9 million in net proceeds retained
by the holding company of the $248.0 million from the Company's initial
public offering. These proceeds were invested and earned $0.5 million in
net investment income in the first quarter of 1996. The segment incurred
$4.5 million of other operating expenses in 1996 primarily reflecting
$3.8 million in interest expense on the Company's 7 5/8% Senior
Debentures issued in October, 1995.
Page 22
Investment Portfolio
The Company had investment assets diversified across several asset
classes, as follows:
<TABLE>
Investment Portfolio <FN1>
<CAPTION>
March 31, 1996 December 31, 1995
Carrying Value % of Total Carrying Value % of Total
(Dollars in millions) Carrying Value Carrying Value
<S> <C> <C> <C> <C>
Fixed maturities<FN2> $ 8,387.4 80.6% $ 8,197.3 78.1%
Equity securities<FN2> 426.1 4.1 517.2 4.9
Mortgages 806.5 7.8 856.5 8.2
Policy loans 363.7 3.5 365.7 3.5
Real estate 169.3 1.6 179.6 1.7
Cash and cash equivalents 172.7 1.7 307.1 2.9
Other invested assets 73.8 0.7 71.9 0.7
Total $10,399.5 100.0% $10,495.3 100.0%
<FN>
<FN1>
Includes Closed Block invested assets with a carrying value of $781.2 million and $775.1 million at March 31, 1996 and
December 31, 1995, respectively.
<FN2>
The Company carries the fixed maturities and equity securities in its investment portfolio at market value.
</FN>
</TABLE>
Total investment assets decreased $95.8 million, or 0.9%, to $10.4
billion during the first three months of 1996. This decrease is
primarily attributable to a decline in GIC invested assets and to market
value depreciation, partially offset by investments made with proceeds
from the debt and stock offerings. Equity securities decreased $91.1
million, or 17.6%, to $426.1 million, as a result of the Regional
Property and Casualty segment's shift in portfolio holdings from equity
securities to tax-exempt fixed maturity securities. This portfolio shift
also contributed to an increase in fixed maturities of $190.1 million, or
2.3%, in spite of market value depreciation of $161.3 million.
Additionally, mortgage loans decreased $50.0 million, or 5.8%, to $806.5
million caused primarily by loan repayments. The real estate portfolio
decreased $10.3 million, or 5.7%, to $169.3 million during the first
three months of 1996 due to sales of these properties. Cash and cash
equivalents decreased $134.4 million, or 43.8%, to $172.7 million.
The Company's fixed maturity portfolio is comprised of primarily
investment grade corporate securities, tax-exempt issues of state and
local governments, U.S. government and agency securities and other
issues. Investment grade securities comprised 87.6% and 88.7% of the
Company's total fixed maturity portfolio at March 31, 1996 and December
31, 1995, respectively. Although management expects that a substantial
portion of new funds will be invested in investment grade fixed
maturities, the Company may invest a portion of new funds in below
investment grade fixed maturities or equity interests, which management
anticipates will not become a significant portion of its total investment
portfolio.
The following table illustrates asset valuation allowances and additions
to or deductions from such allowances for the periods indicated.
<TABLE>
Valuation Allowances
<CAPTION>
(Dollars in millions) Other
Invested
Mortgages Real Estate Assets Total
Year Ended December 31, 1995
<S> <C> <C> <C> <C>
Beginning balance $ 47.2 $ 22.9 $ 3.7 $ 73.8
Provision (benefits) 1.5 (0.6) 0.0 0.9
Write-offs<FN1> (14.9) (2.7) 0.0 (17.6)
Ending balance 33.8 19.6 3.7 57.1
Valuation allowance as a percentage of
carrying value before reserves 3.8% 9.8% 4.9% 4.9%
<CAPTION>
Three Months Ended March 31, 1996
<S> <C> <C> <C> <C>
Provision (benefits) $ 1.9 $ (0.6) $ 0.0 $ 1.3
Write-offs<FN1> 0.0 0.0 0.0 0.0
Ending balance 35.7 19.0 3.7 58.4
Valuation allowance as a percentage of
carrying value before reserves 4.2% 10.1% 4.8% 5.3%
<FN>
<FN1>
Write-offs reflect asset sales, foreclosures and forgiveness of debt upon restructurings.
</FN>
</TABLE>
Page 23
The decrease in write-offs of mortgages during 1996 as compared to 1995
reflects a decrease in foreclosures, debt restructuring agreements and
discounted payoffs, as well as the improved real estate market.
INCOME TAXES
AFC and its life insurance subsidiaries (including certain noninsurance
operations) file a consolidated United States federal income tax return.
Entities included within the consolidated group are segregated into
either a life insurance or a nonlife insurance company subgroup. The
consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible nonlife 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.
For the quarter ended March 31, 1995, FAFLIC, as a mutual insurance
company until October 1995, was required to adjust its deduction for
policyholder dividends by the differential earnings amount under Section
809 of the Internal Revenue Code. 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 IRS. As a stock company, AFC, including its life
insurance subsidiaries, is no longer required to reduce its policyholder
dividend deduction by the differential earnings amount.
Provision for federal income taxes before minority interest was $24.2
million during the first three months of 1996 compared to $24.1 million
during the same period in 1995. These provisions resulted in
consolidated effective federal tax rates of 25.2% and 30.4%,
respectively. The effective tax rates for AFLIAC and FAFLIC and its non-
insurance subsidiaries were 36.7% and 42.5% during the first three months
of 1996 and 1995, respectively. The effective tax rates for the Regional
Property and Casualty subsidiaries were 20.3% and 20.6% during the first
three months of 1996 and 1995, respectively. The reduction in the rate
for FAFLIC resulted from changes in reserve estimates in 1995 related to
ongoing IRS examinations, as well as a differential earnings charge
during the first three months of 1995, which was no longer required in
the first three months of 1996. The slight decrease in the rate for the
Regional Property and Casualty subsidiaries reflects a higher
underwriting loss and a greater proportion of income from tax-exempt
bonds in 1996 than in the first quarter 1995.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity describes the ability of a company to generate sufficient cash
flows to meet the cash requirements of business operations. As a holding
company, AFC's primary source of cash is dividends from its insurance
subsidiaries. However, dividend payments to AFC by its insurance
subsidiaries are subject to limitations imposed by state regulators, such
as the requirement that cash dividends be paid out of unreserved and
unrestricted earned surplus and restrictions on the payment of
"extraordinary" dividends, as defined.
Sources of cash for the Company's insurance subsidiaries are from
premiums collected, investment income and maturing investments. Primary
cash outflows are paid benefits, claims losses and loss adjustment
expenses, policy acquisition expenses, other underwriting expenses and
investment purchases. Cash outflows related to benefits, claim losses
and loss adjustment expenses can be variable because of uncertainties
surrounding settlement dates for liabilities for unpaid losses and
because of the potential for large losses either individually or in the
aggregate. Accordingly, the Company's strategy is to monitor available
cash and short-term investment balances in relation to projected cash
needs by matching maturities of investments with expected payments of
current and long-term liabilities. The Company periodically adjusts its
investment policy to respond to changes in short-term and long-term cash
requirements.
Net cash provided by operating activities was $115.3 million for the
first three months of 1996, compared to cash used of $26.9 million in the
comparable prior year period. The increase during the first three months
of 1996 was due to the timing of payments on policy liabilities and
premiums, the timing of cash receipts and payments related to reinsurance
due and the timing of payments for securities acquired and other expenses
and taxes payable.
Net cash used for investing activities was $167.1 million during the
first three months of 1996, compared to $6.3 million provided during the
comparable prior year period. In the first three months of 1996, the net
cash used resulted from net purchases of fixed maturities, partially
offset by net disposals of equity securities and mortgage loan
repayments. In the first three months of 1995, proceeds from the sale of
the mutual fund processing business and mortgage loan repayments,
substantially offset by net purchases of fixed maturities and equity
securities, resulted in the net cash provided.
Page 24
Net cash used for financing activities was $82.6 million and $44.4
million during the three months ended March 31, 1996 and 1995,
respectively. The Company made cash payments on withdrawals from GICs
that exceeded cash received from deposits on these contracts by $214.2
million and $114.1 million in the first three months of 1996 and 1995,
respectively. Although the Company expects this trend in negative
financing cash flows from GIC withdrawals to continue, particularly in
1996, the Company does not expect GIC withdrawals to have a material
impact on liquidity due to the Company's asset and liability matching.
Due to the restrictive withdrawal provisions on the Company's GICs,
payments under these contracts are scheduled and predictable, which
allows the Company to maintain a close correlation between asset and
liability cash flows. Therefore, cash provided by deposits is
substantially offset by cash used for purchases of investments to match
the liabilities; and cash used for withdrawals is substantially offset
with cash provided by net investment income and by sales or maturities of
investments that support the maturing GIC contracts.
On October 16, 1995, FAFLIC converted from a policyholder owned to
stockholder owned insurance company and AFC became the holding company
for FAFLIC. AFC also raised net proceeds of $248.0 million from the sale
of Common Stock and issued $200.0 million principal amount 7 5/8% Senior
Debentures due 2025 with net proceeds to the Company of $197.2 million.
The Company will also pay approximately $15.3 million per year in
interest payments on the Senior Debentures. AFC has sufficient funds at
the holding company or available through dividends from FAFLIC to meet
its obligations to pay interest on the Senior Debentures and dividends,
when and if declared by the Board of Directors, on the common stock.
Whether the Company will pay dividends in the future depends upon the
costs of administering a dividend program as compared to the benefits
conferred, and upon the earnings and financial condition of AFC.
Based on current trends, the Company expects to continue to generate
sufficient positive operating cash to meet all short-term and long-term
cash requirements. The Company maintains a high degree of liquidity
within the investment portfolio in fixed maturity investments, common
stock and short-term investments. FAFLIC and Allmerica P&C have $165.0
million and $80.0 million available, respectively, under various
committed short-term lines of credit, with no amounts outstanding at
March 31, 1996. FAFLIC and Allmerica P&C had $60.0 million and $26.1
million, respectively, of commercial paper borrowings outstanding at
March 31, 1996.
AFC and FAFLIC are prohibited from entering into any merger,
consolidation or other business combination with any entity, and from
issuing any shares of capital stock, or securities convertible into
capital stock, until October 17, 1996, without the prior approval of the
Commonwealth of Massachusetts Insurance Commissioner.
RECENT DEVELOPMENTS
The Company expects second quarter results to be impacted by catastrophe
losses related to its property and casualty insurance operations in
Michigan and Indiana. The Company expects to incur an estimated $14
million in pre-tax catastrophe losses, net of reinsurance, resulting from
tornadoes and wind storms that struck the two states in April. The
Company believes the after-tax impact on second quarter net income will
be less than $10 million.
On March 29, 1996, the Company announced that a commission-free trading
program for its odd-lot shareholders will begin April 17. Shareholders
holding fewer than 100 shares on March 29, 1996, the record date for the
program, are eligible to sell all of their shares of common stock in a
single transaction, or to purchase additional shares to increase their
holdings to a round lot of 100 shares, free of brokerage costs, mailing
charges, or administrative expenses. This program will end on October
17, 1996.
Page 25
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EX-27 Financial data schedule
(b) Reports on Form 8-K
On March 26, 1996, a report on Form 8-K was filed under Item 5, Other
Events, the announcement by the Registrant that first quarter results
will be impacted by an estimated $24.0 million in catastrophe losses.
On May 2, 1996, a report on Form 8-K was filed reporting under Item 5,
Other Events, the announcement by the Registrant that Citizens
Corporation second quarter results will be impacted by an estimated $14.0
million in catastrophe losses.
Page 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Allmerica Financial Corporation
Registrant
Dated May 10, 1996
/s/ John F. O'Brien
John F. O'Brien
President and Chief Executive Officer
Dated May 10, 1996
/s/ Eric A. Simonsen
Eric A. Simonsen
Vice President, Chief Financial Officer and Principal Accounting
Officer
Page 27
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the interim
consolidated balance sheet and income statement of Allmerica Financial
Corporation as of March 31, 1996 and for the period then ended, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 7943
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 426
<MORTGAGE> 741
<REAL-ESTATE> 169
<TOTAL-INVEST> 9479
<CASH> 139
<RECOVER-REINSURE> 48
<DEFERRED-ACQUISITION> 769
<TOTAL-ASSETS> 18163
<POLICY-LOSSES> 2645
<UNEARNED-PREMIUMS> 818
<POLICY-OTHER> 3060
<POLICY-HOLDER-FUNDS> 2498
<NOTES-PAYABLE> 392
0
0
<COMMON> 1
<OTHER-SE> 1555
<TOTAL-LIABILITY-AND-EQUITY> 18163
548
<INVESTMENT-INCOME> 161
<INVESTMENT-GAINS> 52
<OTHER-INCOME> 68<F1>
<BENEFITS> 497
<UNDERWRITING-AMORTIZATION> 120
<UNDERWRITING-OTHER> 116
<INCOME-PRETAX> 96
<INCOME-TAX> 24
<INCOME-CONTINUING> 72
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47
<EPS-PRIMARY> 0.94
<EPS-DILUTED> 0.94
<RESERVE-OPEN> 2896
<PROVISION-CURRENT> 378
<PROVISION-PRIOR> (31)
<PAYMENTS-CURRENT> 111
<PAYMENTS-PRIOR> 233
<RESERVE-CLOSE> 2869
<CUMULATIVE-DEFICIENCY> (30)
<FN>
<F1>Includes universal life and investment product policy fees of $46 million.
</FN>
</TABLE>
