FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to ____________
Commission file number: 1-13754
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: 50,270,905 of common stock
outstanding, as of May 1, 1997.
28
Total Number of Pages Included in This Document
<PAGE>
TABLE OF CONTENTS
PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
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 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 26
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
March 31,
(In millions, except
per share data) 1997 1996
<S> <C> <C>
REVENUES
Premiums $562.3 $547.6
Universal life and
investment product
policy fees 56.3 46.5
Net investment income 163.4 161.1
Net realized investment
gains 44.0 51.6
Other income 28.9 21.6
-------- --------
Total revenues 854.9 828.4
-------- --------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims,
losses and loss
adjustment expenses 492.3 496.9
Policy acquisition expenses 119.8 119.7
Loss from cession of
disability income business 53.9 0.0
Other operating expenses 134.9 115.6
------- -------
Total benefits, losses and
expenses 800.9 732.2
------- -------
Income before federal
income taxes 54.0 96.2
------- -------
Federal income tax expense
Current 6.0 18.6
Deferred 3.7 5.6
------- -------
Total federal income tax
expense 9.7 24.2
------- -------
Income before minority
interest 44.3 72.0
Minority interest
Distributions on Company-
obligated mandatorily
redeemable preferred
securities of subsidiary
trust (2.4) 0.0
Equity in earnings (26.0) (24.7)
-------- --------
(28.4) (24.7)
-------- --------
Net income $15.9 $47.3
======== ========
PER SHARE DATA
Net income $0.32 $0.94
======== ========
Dividends declared to
shareholders $0.05 $0.05
======== ========
Weighted average shares
outstanding 50.2 50.1
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 3
<PAGE>
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
March 31,
(In millions) 1997 1996
<S> <C> <C>
COMMON STOCK
Balance at beginning and end of period $0.5 $0.5
------- -------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period 1,382.5 1,382.5
Issuance costs of Company-obligated
mandatorily redeemable preferred
securities of subsidiary trust (3.7) 0.0
------- --------
Balance at end of period 1,378.8 1,382.5
------- --------
RETAINED EARNINGS
Balance at beginning of period 210.1 38.2
Net income 15.9 47.3
Dividends to shareholders (2.5) (2.5)
-------- --------
Balance at end of period 223.5 83.0
-------- --------
NET UNREALIZED APPRECIATION ON INVESTMENTS
Balance at beginning of period 131.6 153.0
Net depreciation on available-for-sale
securities (136.3) (133.4)
Benefit for deferred federal income taxes 47.7 46.7
Minority interest 26.2 23.6
-------- --------
Balance at end of period 69.2 89.9
-------- --------
Total shareholders' equity $1,672.0 $1,555.9
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 4
<PAGE>
<TABLE>
<CAPTION>
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
(In millions, except per share data) 1997 1996
<S> <C> <C>
ASSETS
Investments:
Fixed maturities-at fair value
(amortized cost of $7,314.1 and
$7,305.5) $7,358.2 $7,487.8
Equity securities-at fair value
(cost of $265.4 and $328.2) 381.6 473.6
Mortgage loans 646.5 650.1
Real estate 100.9 120.7
Policy loans 135.8 132.4
Other long-term investments 135.3 128.8
-------- --------
Total investments 8,758.3 8,993.4
-------- --------
Cash and cash equivalents 553.3 178.5
Accrued investment income 151.8 149.0
Deferred policy acquisition costs 831.4 822.7
Reinsurance receivable on paid and unpaid
losses,benefits and unearned premiums 841.4 875.6
Deferred federal income taxes 122.6 93.2
Premiums, accounts and notes receivable,
net 542.5 533.0
Other assets 314.8 307.5
Closed Block assets 803.7 811.8
Separate account assets 6,705.8 6,233.0
--------- ---------
Total assets $19,625.6 $18,997.7
========= =========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits $2,610.7 $2,613.7
Outstanding claims, losses and loss
adjustment expenses 2,890.0 2,944.1
Unearned premiums 828.0 822.5
Contractholder deposit funds and other
policy liabilities 1,926.9 2,060.4
-------- --------
Total policy liabilities and accruals 8,255.6 8,440.7
-------- --------
Expenses and taxes payable 712.5 622.3
Reinsurance premiums payable 30.1 31.4
Short-term debt 67.6 38.4
Deferred federal income taxes 19.1 34.7
Long-term debt 202.2 202.2
Closed Block liabilities 883.9 892.1
Separate account liabilities 6,700.2 6,227.2
-------- --------
Total liabilities 16,871.2 16,489.0
-------- --------
Minority interest:
Company-obligated mandatorily redeemable
preferred securities of subsidiary
trust 300.0 0.0
Common stock 782.4 784.0
--------- ---------
Total minority interest 1,082.4 784.0
--------- ---------
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 1,378.8 1,382.5
Unrealized appreciation on investments,
net 69.2 131.6
Retained earnings 223.5 210.1
--------- ---------
Total shareholders' equity 1,672.0 1,724.7
--------- ---------
Total liabilities and shareholders'
equity $19,625.6 $18,997.7
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 5
<PAGE>
<TABLE>
<CAPTION>
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
(In millions) 1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $15.9 $47.3
Adjustments to reconcile net income
to net cash provided by operating
activities:
Minority interest 28.4 24.7
Net realized gains (44.9) (52.2)
Net amortization and depreciation 6.3 14.6
Deferred federal income taxes 3.7 5.6
Change in deferred acquisition costs 8.8 (11.0)
Change in premiums and notes receivable,
net of reinsurance payable (10.6) (38.5)
Change in accrued investment income (3.4) (1.7)
Change in policy liabilities and
accruals, net (61.3) (17.7)
Change in reinsurance receivable 34.3 23.6
Change in expenses and taxes
payable 89.7 166.4
Separate account activity, net 0.2 (0.5)
Other, net (12.4) (45.3)
--------- ---------
Net cash provided by operating
activities 54.7 115.3
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities of
available-for-sale fixed maturities 891.3 1,055.1
Proceeds from disposals of equity
securities 116.3 165.6
Proceeds from disposals of other
investments 29.0 17.6
Proceeds from mortgages matured or
collected 25.5 49.5
Purchase of available-for-sale fixed
maturities (910.0) (1,410.7)
Purchase of equity securities (16.0) (41.6)
Purchase of other investments (32.2) (5.8)
Capital expenditures (3.3) (0.9)
Other investing activities, net 0.1 4.1
--------- ---------
Net cash provided by (used in)
investing activities 100.7 (167.1)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds 56.7 116.1
Withdrawals from contractholder deposit
funds (175.0) (330.3)
Change in short-term debt 29.2 158.7
Net proceeds from issuance of Company-
obligated mandatorily redeemable preferred
securities of subsidiary trust 296.3 0.0
Dividends paid to shareholders (3.5) (3.5)
Subsidiary treasury stock purchased,at cost 0.0 (23.6)
--------- ---------
Net cash provided by (used in)
financing activities 203.7 (82.6)
--------- ---------
Net change in cash and cash equivalents 359.1 (134.4)
Net change in cash held in the Closed
Block 15.7 (16.0)
Cash and cash equivalents, beginning
of period 178.5 289.5
--------- ---------
Cash and cash equivalents, end of period $553.3 $139.1
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 6
<PAGE>
ALLMERICA FINANCIAL CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Allmerica
Financial Corporation ("AFC" or the "Company") have been prepared in accordance
with generally accepted accounting principles for stock life insurance
companies for interim financial information and with the requirements of form
10-Q.
The interim consolidated financial statements of AFC include the accounts of
AFC, First Allmerica Financial Life Insurance Company ("FAFLIC"), its wholly
owned life insurance subsidiary, Allmerica Financial Life Insurance and Annuity
Company ("AFLIAC"), non-insurance subsidiaries (principally brokerage and
investment advisory subsidiaries), and Allmerica Property & Casualty Companies,
Inc. ("Allmerica P&C", a 59.5%-owned non-insurance holding company). The
Closed Block assets and liabilities at March 31, 1997 and December 31, 1996 are
presented in the consolidated financial statements as single line items.
Results of operations for the Closed Block for the three months ended March 31,
1997 and 1996 are included in other income in the consolidated financial
statements. All significant intercompany accounts and transactions have been
eliminated.
Minority interest relates to the Company's investment in Allmerica P&C and its
subsidiary, The Hanover Insurance Company ("Hanover"). Hanover's 82.5%-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 1996 consolidated statements of income in order to conform to
the 1997 presentation. The results of operations for the three months ended
March 31, 1997 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 1996 Annual Report to Shareholders, as filed on Form 10-K with
the Securities and Exchange Commission.
2. Significant Transactions
In April 1997, the Company entered into a letter of intent for the 100%
coinsurance of its disability income line of business. The consummation of the
transaction is subject to a number of conditions, including the negotiation and
execution of definitive documentation and the receipt of regulatory approvals.
The proposed transaction has resulted in the recognition of a $53.9 million
pre-tax loss.
On February 19, 1997, AFC and Allmerica P&C entered into an Agreement and Plan
of Merger (the "Merger Agreement") pursuant to which AFC will acquire all of
the outstanding Common Stock, $1.00 par value per share, of Allmerica P&C that
it does not already own for consideration consisting of $17.60 in cash, without
interest, and 0.4 shares of Common Stock, $0.01 par value, of AFC (the "AFC
Common Stock"), subject to adjustment. The maximum number of shares of AFC
Common Stock to be issued in the Merger is approximately 9.67 million shares.
Also, immediately prior to the Merger, Allmerica P&C's Certificate of
Incorporation will be amended to authorize a new class of Common Stock, one
share of which will be exchanged for each share of Common Stock currently held
by SMA Financial Corp., a wholly-owned subsidiary of AFC. The consummation of
the Merger is subject to the satisfaction of various conditions, including the
approval of regulatory authorities.
On February 3, 1997, AFC Capital Trust (the "Trust"), a subsidiary business
trust of AFC, issued $300.0 million Series A Capital Securities ("Capital
Securities"), which pay cumulative dividends at a rate of 8.207% semiannually
commencing August 15, 1997. The Trust exists for the sole purpose of issuing
the Capital Securities and investing the proceeds thereof in an equivalent
amount of 8.207% Junior Subordinated Deferrable Interest Debentures due 2027 of
AFC (the "Subordinated Debentures"). Through certain guarantees, the
Subordinated Debentures and the terms of related agreements, AFC has
irrevocably and unconditionally guaranteed the obligations of the Trust under
the Capital Securities. Net proceeds from the offering of approximately $296.3
million are intended to fund a portion of the acquisition of the 24.2 million
publicly held shares of Allmerica P&C pursuant to the Merger Agreement.
3. Federal Income Taxes
Federal income tax expense for the three months ended March 31, 1997 and 1996,
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
<PAGE>
4. Closed Block
Included in other income in the Consolidated Statements of Income in the first
three months of 1997 and 1996 is a net pre-tax contribution from the Closed
Block of $5.5 million and $3.4 million, respectively. Summarized financial
information of the Closed Block is as follows:
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1997 1996
(In millions) <C> <C>
<S>
ASSETS
Fixed maturities, at fair value
(amortized cost of $418.5 and $397.2) $416.9 $403.9
Mortgage loans 113.3 114.5
Policy loans 227.6 230.2
Cash and cash equivalents 8.4 24.1
Accrued investment income 14.9 14.3
Deferred policy acquisition costs 19.8 21.1
Other assets 2.8 3.7
-------- --------
Total assets $803.7 $811.8
======== ========
LIABILITIES
Policy liabilities and accruals $873.2 $883.4
Other liabilities 10.7 8.7
-------- --------
Total liabilities $883.9 $892.1
======== ========
(Unaudited)
Three Months Ended
March 31,
1997 1996
<C> <C>
REVENUES
Premiums $29.3 $29.6
Net investment income 13.5 13.1
Net realized investment gains 0.9 0.6
------- -------
Total revenues 43.7 43.3
------- -------
BENEFITS AND EXPENSES
Policy benefits 37.3 38.7
Policy acquisition expenses 0.9 0.9
Other operating expenses 0.0 0.3
------- -------
Total benefits and expenses 38.2 39.9
------- -------
Contribution from the Closed Block $ 5.5 $ 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.
5. 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 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 includes variable annuities, variable
universal life, and
Page 8
<PAGE>
traditional 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 worksite
marketing and other arrangements. Allmerica Asset Management is a Registered
Investment Advisor which provides investment advisory services, primarily to
affiliates, and 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 the proceeds from the issuance of Company-
obligated mandatorily redeemable preferred securities, 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>
<CAPTION>
(Unaudited)
Three Months Ended
March 31,
(In millions) 1997 1996
<S> <C> <C>
Revenues:
Risk Management
Regional Property and
Casualty $576.6 $563.3
Corporate Risk Management
Services 93.9 86.8
-------- --------
Subtotal 670.5 650.1
-------- --------
Retirement and Asset Management
Retail Financial Services 117.1 107.1
Institutional Services 64.0 71.8
Allmerica Asset Management 2.3 1.0
-------- --------
Subtotal 183.4 179.9
-------- --------
Corporate 3.8 0.5
Eliminations (2.8) (2.1)
-------- --------
Total $854.9 $828.4
======== ========
Income (loss) from continuing
operations before income taxes:
Risk Management
Regional Property and
Casualty $ 71.7 $ 67.5
Corporate Risk Management
Services 2.0 4.1
-------- --------
Subtotal 73.7 71.6
-------- --------
Retirement and Asset Management
Retail Financial Services (33.3) 14.9
Institutional Services 14.7 13.4
Allmerica Asset Management 0.1 0.3
-------- --------
Subtotal (18.5) 28.6
-------- --------
Corporate (1.2) (4.0)
-------- --------
Total $ 54.0 $ 96.2
======== ========
</TABLE>
<TABLE>
<CAPTION>
(Unaudited)
As of As of
March 31, December 31,
1997 1996
<S> <C> <C>
Identifiable assets:
Risk Management
Regional Property and
Casualty $ 5,663.7 $ 5,703.9
Corporate Risk Management
Services 519.6 506.0
---------- ----------
Subtotal 6,183.3 6,209.9
---------- ----------
Retirement and Asset Management
Retail Financial Services 9,237.6 8,873.5
Institutional Services 3,843.5 3,879.0
Allmerica Asset Management 2.7 2.4
---------- ----------
Subtotal 13,083.8 12,754.9
Corporate 358.5 32.9
---------- ----------
Total $19,625.6 $18,997.7
========== ==========
</TABLE>
Page 9
<PAGE>
6. Earnings Per Share
Earnings per share are based on a monthly weighted average of shares
outstanding. The weighted average number of shares of common stock and
equivalents was 50.2 million and 50.1 million for the three month periods ended
March 31, 1997 and 1996, respectively.
Recently the FASB issued Statement of Financial Accounting Standards No. 128,
Earnings Per Share, which supersedes APB Opinion No. 15, Earnings Per Share.
This standard replaces the primary EPS requirements with a basic EPS
computation and requires a dual presentation of basic and diluted EPS for those
companies with complex capital structures. The Company intends to adopt the
standards of Statement No. 128 for financial statements issued after December
15, 1997. The impact of this statement is expected to be immaterial on the
Company's EPS calculation.
Page 10
<PAGE>
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") its wholly owned life insurance subsidiary,
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC"), Allmerica
Property & Casualty Companies, Inc. ("Allmerica P&C", a 59.5%-owned
non-insurance holding company), The Hanover Insurance Company ("Hanover", a
wholly owned subsidiary of Allmerica P&C), Citizens Corporation ("Citizens", an
82.5%-owned subsidiary of Hanover), Citizens 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 was $5.5 million for the three months ended March 31, 1997 and
$3.4 million for the three months ended March 31, 1996.
Page 11
<PAGE>
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 prior periods, the following table presents the results of
operations of the Closed Block combined with the results of operations outside
the Closed Block for the three months ended March 31, 1997 and 1996.
Management's discussion and analysis addresses the results of operations as
combined unless otherwise noted.
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
March 31,
(In millions) 1997 1996
<S> <C> <C>
REVENUES
Premiums $591.6 $577.2
Universal life and investment
product policy fees 56.3 46.5
Net investment income 176.9 174.2
Net realized investment gains 44.9 52.2
Other income 23.4 18.2
-------- --------
Total revenues 893.1 868.3
-------- --------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses
and loss adjustment expenses. 529.6 535.6
Policy acquisition
expenses 120.7 120.6
Loss from cession of disability
income business 53.9 0.0
Other operating expenses 134.9 115.9
-------- --------
Total benefits, losses and expenses 839.1 772.1
-------- --------
Income before federal income
taxes 54.0 96.2
-------- --------
Federal income tax expense
Current 6.0 18.6
Deferred 3.7 5.6
-------- --------
Total federal income tax expense 9.7 24.2
-------- --------
Income before minority interest 44.3 72.0
Minority interest
Distributions on Company-obligated
mandatorily redeemable preferred
securities of subsidiary trust (2.4) 0.0
Equity in earnings (26.0) (24.7)
-------- --------
(28.4) (24.7)
-------- --------
Net income $15.9 $47.3
======== ========
</TABLE>
Page 12
<PAGE>
Results of Operations
Consolidated Overview
Quarter Ended March 31, 1997 Compared to Quarter Ended March 31,1996
The Company's consolidated net income for the first quarter decreased $31.4
million, or 66.4%, to $15.9 million, compared to the same period in 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 as applicable.
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
March 31,
(In millions) 1997 1996
<S> <C> <C>
Net income $15.9 $47.3
Adjustments:
Net realized investment gains (17.7) (20.8)
Contingency payment from sale of mutual
fund processing business 0.0 (1.0)
Loss from cession of disability income
business 35.0 0.0
-------- --------
Adjusted net income $33.2 $25.5
======== ========
</TABLE>
The increase in adjusted net income of $7.7 million, or 30.2%, is primarily
attributable to pre-tax increases of $8.6 million and $7.8 million in the
Regional Property and Casualty and Retail Financial Services segments,
respectively, partially offset by pre-tax decreases of $2.5 million and $1.7
million in the Corporate Risk Management and Corporate segments, respectively.
The increase in the Regional Property and Casualty segment was primarily a
result of increased net investment income and a decrease in underwriting losses
due to fewer catastrophes and other weather related losses. The increase in
the Retail Financial Services segment related primarily to growth in variable
products' fee income, partially offset by less favorable mortality experience.
These increases were partially offset by a reduction of adjusted net income in
the Corporate Risk Management Services' segment, primarily due to adverse
claims experience in the group life product line. Additionally, the decrease
in the Corporate segment's adjusted net income resulted from accrued
distributions on the Company-obligated mandatorily redeemable preferred
securities of the subsidiary trust ("Capital Securities"), issued February 3,
1997.
Premium revenue increased $14.4 million , or 2.5%, to $591.6 million in the
first quarter of 1997. Property and Casualty premiums earned increased $10.0
million, or 2.2%, to $475.1 million, reflecting the accounting effects of
restructuring a reinsurance contract at Hanover, increasing both net premiums
earned and losses in the personal automobile line by approximately $4.0
million. In addition, a 2.6% increase in policies in force in Hanover's
personal automobile line as well as a 2.5% increase in policies in force in
Hanover's homeowners line, contributed to the increase in net premiums earned.
Growth in Citizens' premiums of $5.4 million is attributable to increases in
net premiums earned in Ohio and Indiana resulting from expansion in these
states, a decrease in premiums ceded to the Michigan Catastrophic Claims
Association ("MCCA") and to increases in personal automobile and homeowners
rates. Premiums in the Corporate Risk Management segment increased $4.9
million, or 6.6%, to $78.7 million due to increases in reinsurance, fully
insured group dental and stop loss product lines, partially offset by a
decrease in risk-sharing products.
Universal life and investment product policy fees increased $9.8 million, or
21.1%, reflecting additional deposits and appreciation on variable products'
account balances.
Net investment income increased $2.7 million, or 1.5% to $176.9 million. This
increase is primarily due to increased income on fixed maturities as a result
of the continued shift to higher yielding, longer duration debt securities, and
the temporary investment of the proceeds from the issuance of Capital
Securities in the first quarter of 1997. These increases were offset by a
reduction in invested assets due to declining Guaranteed Investment Contracts
("GICs") deposits and by a decrease in real estate income due to continued
sales of these properties in 1997.
Net realized investment gains were $44.9 million and $52.2 million, before
taxes, and $17.7 million and $20.8 million, net of taxes and minority interest,
for the three months ended March 31, 1997 and 1996, respectively. In the
Regional Property and Casualty segment, net realized gains decreased $7.7
million, or 16.9%, reflecting a decrease in the sale of equity securities by
Hanover. The Retail Financial Services segment realized investment gains of
$0.9 million in the first quarter of 1996 decreased $2.2 million to net
realized losses of $1.3 million in the first quarter of 1997, due primarily to
less favorable market
Page 13
<PAGE>
interest rate conditions in the first quarter of 1997, which were reflected in
disposals of fixed maturities. Additionally, an increase in the Institutional
Services segment's real estate sales during the first quarter of 1997
contributed to an increase in net realized gains of $1.5
million.
Other income increased $5.2 million, or 28.6%, to $23.4 million in the first
quarter of 1997. Other income in the Retail Financial Services segment
increased $2.4 million, primarily attributable to increased investment
management income resulting from increased assets under management.
Additionally, Corporate Risk Management Services' other income increased $1.1
million, or 13.3% to $9.4 million in the first quarter of 1997, due primarily
to growth in Administrative Services Only ("ASO") fees. Additionally, other
income in the Regional Property and Casualty segment increased $2.0 million in
the first quarter of 1997.
Policy benefits, claims, losses and loss adjustment expenses decreased $6.0
million, or 1.1% to $529.6 million in the first quarter of 1997, primarily due
to a $10.7 million, or 23.8%, decrease in policy benefits in the Institutional
Services segment principally resulting from the continuing decline of GICs.
This decrease was offset by a $6.6 million, or 12.7%, increase in the Corporate
Risk Management segment primarily due to unfavorable mortality experience in
the group life product line in the first quarter of 1997 compared to unusually
favorable mortality experience in the first quarter of 1996. Additionally,
underwriting losses in the Regional Property and Casualty segment decreased
$2.9 million due to decreased catastrophes and other weather related losses at
Hanover, partially offset by reduced favorable development of prior year
reserves at Hanover.
Policy acquisition expenses consist primarily of commissions, premium taxes and
other policy issuance costs. Policy acquisition expenses remained relatively
unchanged in the first quarter of 1997 compared to the first quarter of 1996
increasing $0.1 million to $120.7 million.
Results in the first quarter of 1997 included a $53.9 million pre-tax loss
resulting from an agreement to cede the Company's disability income line of
business.
Other operating expenses increased $19.0 million, or 16.4%, to $134.9 million
in the first quarter of 1997. Other operating expenses in the Regional
Property & Casualty segment increased $10.7 million, or 25.0%, to $53.5 million
reflecting increased involuntary pool related expenses at Hanover, in addition
to increased technology expenses at both Hanover and Citizens. Other operating
expenses in the Retail Financial Services segment increased $2.9 million, or
10.6%, to $30.3 million primarily due to growth in variable life insurance and
annuities product lines. The increase of $2.5 million of other operating
expenses in the Corporate Risk Management Services segment resulted from
increased commissions and premium taxes from growth in premiums and ASO fees.
Federal income tax expense decreased $14.5 million in the first quarter of
1997, while the effective tax rate decreased from 25.2% to 17.8% in the same
period. For the life insurance subsidiaries, a decrease in the effective tax
rate from an expense of 36.7% to a benefit of 29.9% resulted primarily from an
$18.9 million tax benefit related to the agreement to cede the individual
disability income business. For the Regional Property and Casualty
subsidiaries, the effective rate remained relatively unchanged, increasing from
20.3% to 20.8%.
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 59.5% ownership of Allmerica P&C; however,
all property and casualty results presented include 100% of Allmerica P&C's
pre-tax 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 the proceeds from the issuance of Company-
obligated mandatorily redeemable preferred securities, Senior Debentures and a
portion of the net proceeds from the Company's initial public offering.
Page 14
<PAGE>
Risk Management
Regional Property and Casualty
The following table summarizes the results of operations for the Regional
Property and Casualty segment.
<TABLE>
<CAPTION>
(Unaudited)
Quarter Ended
March 31,
(In millions) 1997 1996
<S> <C> <C>
Revenues
Net premiums earned $475.1 $465.1
Net investment income 61.3 52.3
Net realized gains 37.8 45.5
Other income 2.4 0.4
-------- --------
Total revenues 576.6 563.3
Losses and LAE<FN1> 348.2 349.3
Policy acquisition and other
operating expenses 156.7 146.5
-------- --------
Income before taxes $71.7 $67.5
======== ========
<FN>
<FN1>
Includes policyholders' dividends of $1.6 million and $3.1 million for the
quarters ended March 31, 1997 and 1996, respectively.
</FN>
</TABLE>
Quarter Ended March 31, 1997 Compared to Quarter Ended March 31, 1996
INCOME BEFORE TAXES
Income before taxes increased $4.2 million, or 6.2%, to $71.7 million in the
first quarter of 1997. Net realized gains were $37.8 million during the first
quarter of 1997, versus $45.5 million during the comparable period of 1996,
reflecting a decrease in the sale of equity securities by Hanover. Excluding
realized gains and losses, income before taxes increased $11.9 million, to
$33.9 million in the first quarter of 1997. This increase is primarily
attributable to a $9.0 million increase in net investment income, in addition
to a $2.9 million decrease in the underwriting loss. The growth in net
investment income resulted primarily from an increase in average invested
assets and Regional Property & Casualty's portfolio shift to higher yielding
debt securities, including longer duration and non-investment grade securities.
The slight improvement in underwriting results is primarily attributable to
decreased catastrophes and other weather related losses at Hanover, partially
offset by reduced favorable development of prior year reserves at Hanover and
higher policy acquisition and other underwriting expenses at both Hanover and
Citizens.
LINES OF BUSINESS RESULTS
Personal Lines of Business
The personal lines of business represented 62.2% and 60.2% of total net
premiums earned in the first quarter of 1997 and 1996, respectively.
<TABLE>
<CAPTION>
Hanover Citizens Consolidated
For the Quarters Ended 1997 1996 1997 1996 1997 1996
March 31 (In millions) <C> <C> <C> <C> <C> <C>
<S>
Net premiums earned $151.7 $145.1 $143.7 $135.1 $295.4 $280.2
Losses and loss
adjustment expenses 112.8 116.3 113.8 107.4 226.6 223.7
Policy acquisition and
other underwriting
expenses 51.0 49.0 39.5 36.4 90.5 85.4
-------- ------- ------- ------- ------- -------
Underwriting loss $ (12.1) $(20.2) $(9.6) $(8.7) $(21.7) $(28.9)
======== ======= ======= ======= ======= =======
</TABLE>
Page 15
<PAGE>
Revenues
Personal lines' net premiums earned increased $15.2 million, or 5.4%, to $295.4
million during the first quarter of 1997, compared to $280.2 million in the
first quarter of 1996. Hanover's personal lines net premiums earned increased
$6.6 million, or 4.5%, to $151.7 million during the first quarter of 1997.
This increase was primarily attributable to an increase in the personal
automobile line associated with the accounting effects of restructuring a
reinsurance contract, increasing net premiums earned by approximately $4.0
million. A 2.6% increase in polices in force in the personal automobile line
as well as a 2.5% increase in policies in force in the homeowners' line, since
March 31, 1996, also contributed to the increase in net premiums earned. These
increases were partially offset by a mandated 6.2% decrease in Massachusetts
personal automobile rates which became effective January 1, 1997. In March
1997, the Massachusetts Division of Insurance approved Hanover's plan to offer
a safe driver's discount of 10% on automobile insurance premiums. Management
believes these rate decreases may unfavorably impact premium growth in
Massachusetts. Approximately 39% of Hanover's personal automobile business is
currently written in Massachusetts.
Citizens' personal lines net premiums earned increased $8.6 million, or 6.4%,
to $143.7 million in the first quarter of 1997. This increase is primarily
attributable to a decrease in premiums ceded to MCCA and to increases in
personal automobile and homeowners rates. The non-recurring decrease in
premiums ceded to MCCA was a result of a lower surcharge effective January 1,
1997 for personal automobile policies written. This growth is partially offset
by a 2.0% decrease in policies in force in the personal automobile line since
March 31, 1996, attributable to continued strong competition in Michigan.
Underwriting results
The personal lines' underwriting loss in the first quarter of 1997 decreased
$7.2 million, to a loss of $21.7 million. Hanover's underwriting results
improved $8.1 million, to a loss of $12.1 million. Citizens' underwriting loss
increased $0.9 million, to a loss of $9.6 million.
Hanover's personal lines losses and LAE decreased $3.5 million, or 3.0%, to
$112.8 million in the first quarter of 1997. This decrease is primarily
attributable to an $18.2 million decrease in losses and LAE in the homeowners
line resulting from decreased catastrophes during the first quarter of 1997.
Catastrophe losses in Hanover's personal lines decreased $16.1 million, to $1.7
million in the first quarter of 1997 from $17.8 million in the comparable
period of 1996. These decreases were significantly offset by a $14.8 million
increase in losses and LAE in the personal automobile line, primarily
reflecting a $9.0 million reduction in favorable development of prior year
reserves and an increase in current year claims severity, in addition to the
aforementioned accounting effects of restructuring a reinsurance contract.
Citizens' underwriting loss increased $0.9 million to a loss of $9.6 million
during the first quarter of 1997. Catastrophe losses increased $1.2 million
over the prior year first quarter, primarily in the homeowners line.
Policy acquisition and other underwriting expenses in the personal lines
increased $5.1 million, or 6.0%, to $90.5 million in the first quarter of 1997,
reflecting increased involuntary pool related expenses at Hanover, growth in
net premiums earned primarily at Citizens, and higher technology expenses at
both Hanover and Citizens.
Page 16
<PAGE>
Commercial Lines of Business
The commercial lines of business represented 37.8% and 39.8% of total net
premiums earned in the first quarter of 1997 and 1996, respectively.
<TABLE>
<CAPTION>
Hanover Citizens Consolidated
For the Quarters Ended 1997 1996 1997 1996 1997 1996
March 31 (In millions) <C> <C> <C> <C> <C> <C>
<S>
Net premiums earned $113.5 $115.5 $66.2 $69.4 $179.7 $184.9
Losses and loss
adjustment expenses 75.3 74.4 44.7 48.1 120.0 122.5
Policy acquisition and
other underwriting
expenses 46.5 43.7 17.7 17.4 64.2 61.1
Policyholders' dividends 0.0 1.3 1.6 1.8 1.6 3.1
------ ------ ------ ------ ------ ------
Underwriting (loss) profit$(8.3) $(3.9) $2.2 $2.1 $(6.1) $(1.8)
====== ====== ====== ====== ====== ======
</TABLE>
Revenues
Commercial lines' net premiums earned decreased $5.2 million, or 2.8%, to
$179.7 million in the first quarter of 1997. Hanover's commercial lines net
premiums earned decreased $2.0 million, or 1.7%, to $113.5 million. This
decrease is primarily attributable to rate decreases of 6.7% since January 1,
1997, in the workers' compensation line. Citizens' commercial lines net
premiums earned decreased $3.2 million, or 4.6%, to $66.2 million in the first
quarter of 1997. This decrease is primarily attributable to decreases in rates
for workers' compensation. Rates in this line were decreased 6.4% and 8.7%
effective June 1, 1996 and March 1, 1997, respectively. Management believes
competitive conditions in the workers' compensation line may impact future
growth in net premiums earned.
Underwriting results
The commercial lines' underwriting loss for the first quarter of 1997 increased
$4.3 million, to a loss of $6.1 million. Hanover's underwriting loss increased
$4.4 million, to a loss of $8.3 million and Citizens' underwriting profit
increased $0.1 million, to a profit of $2.2 million in the first quarter of
1997.
Hanover's commercial lines losses and LAE increased $0.9 million, or 1.2%, to
$75.3 million in the first quarter of 1997. This increase is primarily
attributable to increases in losses and LAE in the workers' compensation and
commercial automobile lines of $5.1 million and $6.1 million, respectively.
The increase in the workers' compensation line resulted from a decrease in
favorable claims experience on prior accident years in addition to an increase
in loss severity. Commercial automobile losses and LAE increased as a result
of a reduction in favorable claims experience on prior accident years. These
increases were significantly offset by a decrease in losses and LAE in the
commercial multiple peril lines of $7.0 million, to $35.6 million due to an
increase in favorable development on prior accident years, as well as a
decrease in catastrophes from $5.8 million in the first quarter of 1996 to $2.1
million in 1997.
Citizens' losses and LAE decreased $3.4 million, or 7.1%, to $44.7 million in
the first quarter of 1997. This reflects a decrease in losses and LAE in the
workers' compensation line of $5.7 million, or 28.9%, to $14.0 million,
primarily as a result of favorable claims activity in prior accident years.
Policy acquisition and other underwriting expenses in the commercial segment
increased $3.1 million, or 5.1%, to $64.2 million in the first quarter of 1997,
primarily attributable to increased technology expenses at both Hanover and
Citizens.
INVESTMENT RESULTS
Net investment income before taxes increased $9.0 million, or 17.2%, to $61.3
million during the first quarter of 1997 compared to $52.3 million in the
comparable quarter of 1996. The increase in the first quarter of 1997 is
primarily the result of an increase in average invested assets and Regional
Property & Casualty's portfolio shift to higher yielding debt securities,
including longer duration and non-investment grade securities. The average
pre-tax yield on debt securities was 6.8% and
PAGE 17
<PAGE>
6.0% for the first quarter of 1997 and 1996, respectively. Average invested
assets increased $97.4 million,or 2.5%, to $3,932.1 million at March 31, 1997
compared to $3,834.7 million at March 31, 1996.
Net realized gains on investments before taxes were $37.8 million and $45.5
million in the first quarter of 1997 and 1996, respectively. The decrease in
net realized gains in the first quarter of 1997 reflects a decrease in the sale
of equity securities at Hanover. In both periods, net realized investment
gains resulted primarily from the sale of appreciated equity securities, due to
Regional Property & Casualty's strategy of shifting to a higher level of debt
securities.
RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The Regional Property and Casualty segment maintains reserves to provide for
its estimated ultimate liability for losses and loss adjustment expenses with
respect to reported and unreported claims incurred as of the end of each
accounting period. These reserves are estimates, involving actuarial
projections at a given point in time, of what management expects the ultimate
settlement and administration of claims will cost based on facts and
circumstances then known, predictions of future events, estimates of future
trends in claim severity and judicial theories of liability and other factors.
The inherent uncertainty of estimating insurance reserves is greater for
certain types of property and casualty insurance lines, particularly workers'
compensation and other liability lines, where a longer period of time may
elapse before a definitive determination of ultimate liability may be made,
where the technological, judicial and political climates involving these types
of claims are changing.
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 quarter ended March 31, (In millions) 1997 1996
<S> <C> <C>
Reserve for losses and LAE, beginning of
period $2,744.1 $2,896.0
Incurred losses and LAE, net of
reinsurance recoverable:
Provision for insured events of the
current year 382.2 377.6
Decrease in provision for insured events
of prior years (35.6) (31.4)
-------- --------
Total incurred losses and LAE 346.6 346.2
-------- --------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured
events of current year 111.4 111.0
Losses and LAE attributable to insured
events of prior years 269.2 232.7
-------- --------
Total payments 380.6 343.7
-------- --------
Change in reinsurance recoverable on unpaid
losses (31.6) (29.7)
--------- ---------
Reserve for losses and LAE, end of period $2,678.5 $2,868.8
========= =========
</TABLE>
As part of an ongoing process, the reserves have been re-estimated for all
prior accident years and were decreased by $35.6 million and $31.4 million for
the three month periods ended March 31, 1997 and 1996, respectively. The
increase in favorable development on prior years' loss reserves of $4.2 million
results primarily from a $12.4 million increase in favorable development at
Citizens to $20.5 million. The favorable reserve development at Citizens in
both years primarily reflects the initiatives taken by Citizens to manage
medical costs in both automobile lines and the workers' compensation line, as
well as the impact of the Michigan Supreme Court ruling on worker's
compensation indemnity payments, which decreases the maximum amount to be paid
for indemnity cases on all existing and future claims. Hanover's favorable
development decreased $8.2 million to $15.1 million during the first quarter of
1997. This decrease is primarily attributable to decreased favorable
development in the personal automobile and workers' compensation lines,
partially offset by an increase in favorable development in the commercial
multiple peril line.
Page 18
<PAGE>
The Regional Property and Casualty segment regularly reviews its reserving
techniques, its overall reserving position and its reinsurance. Based on (i)
review of historical data, legislative enactment, judicial decisions, legal
developments in impositions of damages, changes in political attitudes and
trends in general economic conditions, (ii) review of per claim information,
(iii) historical loss experience of the Company and the industry, (iv) the
relatively short-term nature of most policies, and (v) internal estimates of
required reserves, management believes that adequate provision has been made
for loss reserves. However, establishment of appropriate reserves is an
inherently uncertain process and there can be no certainty that current
established reserves will prove adequate in light of subsequent actual
experience. A significant change to the estimated reserves could have a
material impact on the results of operations.
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>
<CAPTION>
(Unaudited)
Quarter Ended
March 31,
(In millions) 1997 1996
<S> <C> <C>
Premiums and premium equivalents
Premiums $78.7 $73.8
Premium equivalents 150.8 142.6
------- -------
Total premiums and premium
equivalents $229.5 $216.4
======= =======
Revenues
Premiums $78.7 $73.8
Net investment income 5.5 4.8
Net realized gains (losses) 0.3 (0.1)
Other income 9.4 8.3
------- -------
Total revenues 93.9 86.8
Policy benefits, claims and losses 58.6 52.0
Policy acquisition expenses 0.9 0.8
Other operating expenses 32.4 29.9
------- -------
Income before taxes $2.0 $4.1
======= =======
</TABLE>
Quarter Ended March 31, 1997 Compared to Quarter Ended March 31, 1996
Income before taxes decreased $2.1 million, or 51.2%, to $2.0 million in the
first quarter of 1997 compared to the same period in 1996. In the first
quarter of 1996, CRMS released reserves of $1.2 million related to a litigation
settlement. Excluding this item, income before taxes decreased $0.9 million,
or 31.0%. This decrease was primarily due to adverse claims experience in the
group life product line, partially offset by improved claims experience in the
group long-term disability line and by growth in the Company's reinsurance,
fully insured group dental, stop loss and ASO product lines.
Premiums increased $4.9 million, or 6.6%, to $78.7 million in the first quarter
of 1997, primarily due to increases in reinsurance, fully insured group dental
and stop loss product lines totaling $6.2 million. These increases were
partially offset by a decrease of $1.8 million in risk-sharing premiums due to
cancellations.
Other income increased $1.1 million, or 13.3%, to $9.4 million in the first
quarter of 1997, due to growth in ASO fees.
Policy benefits, claims and losses increased $6.6 million, or 12.7%, to $58.6
million in the first quarter of 1997. Excluding the aforementioned reserve
release, policy benefits, claims and losses increased $5.4 million, or 10.2%.
This increase is primarily due to an increase in group life claims of $4.8
million due to unfavorable experience in the first quarter of 1997
combined with unusually favorable claims experience in the first quarter of
1996. Growth in the fully insured dental product line also contributed $2.2
million to the increase. These increases were partially offset by improved
morbidity in the long-term disability income line which resulted in a $1.8
million decrease in claims.
Other operating expenses increased $2.5 million, or 8.4%, to $32.4 million in
the first quarter of 1997, primarily due to increases in commissions resulting
from the growth in premiums and ASO fees.
Page 19
<PAGE>
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>
<CAPTION>
(Unaudited)
Quarter Ended
March 31,
(In millions) 1997 1996
<S> <C> <C>
Revenues
Premiums $37.8 $38.3
Fees 49.7 42.5
Net investment income 60.6 59.2
Net realized (losses) gains (1.3) 0.9
Other income 8.5 6.1
------- -------
Total revenues 155.3 147.0
Policy benefits, claims and
losses 88.5 89.3
Policy acquisition expenses 15.9 15.4
Loss from cession of disability
income business 53.9 0.0
Other operating expenses 30.3 27.4
------- -------
(Loss) income before taxes $(33.3) $14.9
======= =======
</TABLE>
Quarter Ended March 31, 1997 Compared to Quarter Ended March 31, 1996
Income before taxes decreased $48.2 million, or 323.5%, to a loss before taxes
of $33.3 million in the first quarter of 1997. This decrease is attributable
to a $53.9 million loss in 1997 related to an agreement to cede the individual
disability income business. Excluding this non-recurring charge, income before
taxes increased $5.7 million, or 38.3%, to $20.6 million in the first quarter
of 1997. This increase is primarily due to growth in variable products' fee
income, partially offset by losses from sales of fixed maturities and less
favorable mortality experience.
Premiums decreased $0.5 million, or 1.3%, to $37.8 million during the first
quarter of 1997. This decrease is primarily due to the Company's decision in
the first half of 1996 to discontinue issuing new individual disability income
policies.
Fee revenue increased $7.2 million, or 16.9%, to $49.7 million in the first
quarter of 1997 due to additional deposits and appreciation on variable
products' account balances. Fees from annuities increased $5.8 million, or
48.7%, to $17.7 million in the first quarter of 1997 compared to the same
period in 1996. Fees from variable universal life policies increased $2.1
million, or 20.6%, to $12.3 million in the first quarter of 1997. 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 $1.4 million, or 2.4%, to $60.6 million in the
first quarter of 1997. This increase is primarily due to a series of modest
portfolio shifts, beginning in the second quarter of 1996, to higher yielding
debt securities, including longer duration and non-investment grade securities.
During the first quarter of 1997, investment income from fixed maturities
increased $2.6 million to $45.8 million as compared to $43.2 million in the
same period in 1996. Related average yields rose from 7.5% in 1996 to 8.1% in
1997. This increase was partially offset by decreased investment income from
real estate properties resulting from continued sales of real estate
investments.
Net realized gains of $0.9 million for the quarter ended March 31, 1996
decreased $2.2 million to net realized losses of $1.3 million for the quarter
ended March 31, 1997. This change is principally related to $2.0 million of
losses on disposals of fixed maturities during the first quarter of 1997 versus
$1.4 million of gains on disposals of fixed maturities for the first quarter of
1996, due to less favorable market interest rate conditions in the first
quarter of 1997.
Other income increased $2.4 million, or 39.3%, to $8.5 million in 1997. This
increase is primarily attributable to increased investment management fee
income resulting from increased assets under management.
Policy benefits, claims, and losses decreased $0.8 million, or 0.9%, to $88.5
million in the first quarter of 1997. Universal life and variable universal
life product lines increased $4.0 million due to unfavorable mortality
experience during the first quarter of 1997. These increases were more than
offset by decreased benefits of $1.4 million in the individual disability
income line due to the Company's decision to discontinue selling this product,
decreased benefits of $1.8 million in the individual annuities product due to
reduced crediting rates, and decreased claims of $1.4 million in traditional
benefits from improved mortality experience.
Page 20
<PAGE>
The loss from the cession of the disability income business of $53.9 million is
a non-recurring charge related to an agreement to cede the Company's individual
disability income block.
Other operating expenses include insurance taxes, licenses, fees, and
administrative expenses incurred to support sales and marketing of products
sold in this segment. The increase of $2.9 million, or 10.6%, to $30.3 million
for the quarter ended March 31, 1997 is primarily related to an increase of
$1.5 million in subadvisor fees and brokerage commissions, resulting from the
growth in investments under management. Additionally, increases in commissions
and premium taxes resulted from continued growth in the variable product lines.
Interest Margins
The results of the Retail Financial Services segment depend, in part, 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>
<CAPTION>
(Unaudited)
Quarter Ended
March 31,
(In millions) 1997 1996
<S> <C> <C>
Net investment income $36.1 $36.8
Less: Interest Credited 24.6 25.0
------ ------
Interest margins<FN1> $11.5 $11.8
====== ======
<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>
Interest margins were relatively consistent in 1997, as compared to 1996.
Institutional Services
The following table summarizes the results of operations for the Institutional
Services segment for the periods indicated.
<TABLE>
<CAPTION>
(Unaudited)
Quarter Ended
March 31,
(In millions) 1997 1996
<S> <C> <C>
Revenues
Fees, premiums and non-insurance
income<FN1> $10.0 $8.2
Net investment income
GICs 20.7 29.5
Other 25.9 28.2
Net realized gains 7.4 5.9
------ ------
Total revenues 64.0 71.8
Policy benefits, claims and losses
Interest credited to GICs 17.7 27.4
Other 16.6 17.6
Policy acquisition expenses 0.7 0.7
Other operating expenses 14.3 12.7
------- -------
Income before taxes $14.7 $13.4
======= =======
<FN>
<FN1>
Fees, premiums and non-insurance income includes fees from retirement
services, institutional 401(K) recordkeeping services, and other miscellaneous
non-insurance related fees.
</FN>
</TABLE>
Quarter Ended March 31, 1997 compared to Quarter Ended March 31, 1996
Income before taxes increased $1.3 million, or 9.7%, to $14.7 million in the
first quarter of 1997. During the first quarter of 1996, Institutional
Services recognized a contingency payment from the sale of the mutual fund
processing business of $1.5 million. Excluding this item, income before taxes
increased $2.8 million, or 23.5%. This change was primarily attributable to
increased realized gains of $1.5 million and increased telemarketing income of
$0.6 million, as well as an increase in the net
Page 21
<PAGE>
GIC margin of $0.9 million. These increases were partially offset by a $1.1
million reduction in the contribution from defined benefit plans primarily
resulting from less favorable mortality in the first quarter of 1997 compared
to the first quarter of 1996.
Fees, premiums and non-insurance income increased $1.8 million, or 22.0%, to
$10.0 million in the first quarter of 1997. Excluding the aforementioned
contingency payment, fees, premiums and non-insurance income increased $3.3
million, or 49.3%. This increase was primarily due to growth in the Company's
new group variable life product line and telemarketing services line of $1.8
million and $1.3 million, respectively.
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 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. In the first quarter of
1997, the interest margin on GICs increased $0.9 million due to the combination
of slightly higher investment yields and lower average crediting rates.
Other net investment income decreased $2.3 million, or 8.2% to $25.9 million in
the first quarter of 1997. This decrease resulted from a decline in average
invested assets due to cancellations of defined benefit plans, as well as
transfers of certain plan assets to the separate accounts.
Net realized investment gains increased $1.5 million, or 25.4% to $7.4 million
in the first quarter of 1997, as a result of sales of real estate during the
quarter.
Other policy benefits, claims and losses consist primarily of benefits provided
by the Company's defined contribution and defined benefit plans, including
annuity benefits for certain defined benefit plan participants electing that
option. Other policy benefits, claims and losses decreased from $17.6 million
in the first quarter of 1996 to $16.6 million in the first quarter of 1997.
This was primarily due to less favorable mortality in the defined benefit plan
product line in the first quarter of 1997 compared to the first quarter of
1996..
Other operating expenses increased $1.6 million, or 12.6%, to $14.3 million in
the first quarter of 1997. This increase was primarily attributable to growth
in group variable life products and telemarketing services of $1.6 million and
$0.7 million, respectively.
Allmerica Asset Management
The following table summarizes the results of operations for the Allmerica
Asset Management segment for the periods indicated.
<TABLE>
<CAPTION>
(Unaudited)
Quarter Ended
March 31,
(In millions) 1997 1996
<S> <C> <C>
Fees and other income:
External $0.4 $0.2
Internal 1.9 0.8
------ -----
Total revenues 2.3 1.0
Other operating expenses 2.2 0.7
------ -----
Income before taxes $0.1 $0.3
====== =====
</TABLE>
Since 1994, the Company has provided investment advisory and sub-advisory
services, primarily to affiliates, through its registered investment advisor,
Allmerica Asset Management ("AAM"). In the second quarter of 1996, AAM
finalized contracts with two related parties, FAFLIC and AFLIAC, to provide
investment advisory services at cost. The internal fees and corresponding
operating expenses related to these contracts totaled $1.1 million for the
quarter ended March 31, 1997.
Page 22
<PAGE>
Corporate
The following table summarizes the results of operations for the Corporate
segment for the periods indicated.
<TABLE>
<CAPTION>
(Unaudited)
Quarter Ended
March 31,
(In millions) 1997 1996
<S> <C> <C>
Revenues
Investment and other income $3.1 $0.5
Realized gain 0.7 0.0
------ ------
Total revenues 3.8 0.5
Other operating expenses 5.0 4.5
------ ------
Loss before taxes and minority interest (1.2) (4.0)
Minority interest:
Distributions on Company-obligated
mandatorily redeemable preferred
securities of subsidiary trust (3.8) 0.0
------ ------
Loss before taxes $(5.0) $(4.0)
====== ======
</TABLE>
This segment consists primarily of $358.5 million of cash, investments, and
other assets financed by the $296.3 million in net proceeds from the February
3, 1997 issuance of Company-obligated mandatorily redeemable preferred
securities of a subsidiary trust, AFC Capital Trust. Investment and other
income increased $2.6 million, to $3.1 million in 1997, primarily due to the
net proceeds from these securities. These proceeds were invested in the short-
term investment portfolio during the remainder of the first quarter of 1997.
For all periods presented, other operating expenses consist principally of $3.8
million in interest expense on the Company's 7 5/8% Senior Debentures.
Additionally, the Series A Capital Securities, issued by AFC Capital Trust, pay
cumulative distributions at a rate of 8.207% semiannually commencing August 15,
1997. Minority interest represents the accrual of these distributions from the
date of issuance.
Investment Portfolio
The Company had investment assets diversified across several asset classes, as
follows:
<TABLE>
<CAPTION>
March 31, 1997<FN1> December 31, 1996<FN1>
(Dollars in millions) Carrying % of Total Carrying % of Total
Value Carrying Value Value Carrying Value
<S> <C> <C> <C> <C>
Fixed maturities <FN2> $7,775.1 77.2% $7,891.7 79.4%
Equity securities<FN2> 381.6 3.8 473.6 4.8
Mortgages 759.8 7.5 764.6 7.7
Policy loans 363.4 3.6 362.6 3.6
Real estate 100.9 1.0 120.7 1.2
Cash and cash equivalents 561.7 5.6 202.6 2.0
Other invested assets 135.3 1.3 128.8 1.3
--------- -------- --------- --------
Total $10,077.8 100.0% $9,944.6 100.0%
========= ======== ========= ========
<FN>
<FN1>
Includes Closed Block invested assets with a carrying value of $766.2
million and $772.7 million at March 31, 1997 and December 31, 1996,
respectively.
<FN2>
The Company carries the fixed maturities and equity securities in its
investment portfolio at market value.
</FN>
</TABLE>
Total investment assets increased $133.2 million, or 1.3%, to $10.1 billion
during the first quarter of 1997. This increase is primarily attributable to
the net proceeds from the issuance of Capital Securities in the first quarter
of 1997, partially offset by market value depreciation in the fixed maturities
portfolio and a decline in invested assets related to the settlement of GIC
contracts. Equity securities decreased $92.0 million, or 19.4%, to $381.6
million, as a result of the Regional Property and Casualty segment's continued
shift in portfolio holdings from equity securities to fixed maturity
securities. Despite this portfolio shift, fixed maturities decreased $116.6
million, or 1.5%, due primarily to market value depreciation of $146.5 million
and to financing of net GIC withdrawals. Additionally, real estate decreased
$19.8 million, or 16.4%, to $100.9 million during the first quarter of 1997 due
to sales of investment properties. The Company intends to sell its holdings in
this portfolio within the next several years. Cash and cash equivalents
increased $359.1 million, or 177.2%, to $561.7 million primarily due to the
investment of the net proceeds from the aforementioned Capital Securities
issuance. These proceeds were held in short term securities during the first
quarter of 1997.
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. Based on ratings by
the National
Page 23
<PAGE>
Association of Insurance Commissioners, investment grade securities comprised
81.8% and 84.8% of the Company's total fixed maturity portfolio at March 31,
1997 and December 31, 1996, respectively. In 1996 and continuing in the first
quarter of 1997, there was a modest shift to higher yielding debt securities,
including longer duration and non-investment grade securities. The average
yield on debt securities was 7.6% and 6.9% for the quarters ended March 31,
1997 and 1996, respectively. Although management expects that a substantial
portion of new funds will be invested in investment grade fixed maturities, the
Company may continue to invest a portion of new funds in below investment grade
fixed maturities or equity interests.
The following table illustrates asset valuation allowances and additions to or
deductions from such allowances for the periods indicated.
<TABLE>
<CAPTION>
Other
Invested
(Dollars in millions) Mortgages Real Estate Assets Total
<S> <C> <C> <C> <C>
Year Ended December 31, 1996
Beginning balance $33.8 $19.6 $3.7 $57.1
Provision 5.5 0.0 0.0 5.5
Write-offs<FN1> (19.7) (4.7) (3.7) (28.1)
------- ------- ------ -------
Ending balance $19.6 $14.9 $0.0 $34.5
Valuation allowance as a
percentage of carrying value
before reserves 2.5 % 11.0 % 0.0 % 3.8 %
Three months ended March 31,
1997
Benefits (0.3) 0.0 0.0 (0.3)
Write-offs<FN1> (1.2) (0.8) 0.0 (2.0)
------- ------- ------ -------
Ending balance $18.1 $14.1 $0.0 $32.2
Valuation allowance as a
percentage of carrying value
before reserves 2.7 % 12.3 % 0.0 % 4.1 %
<FN>
<FN1>
Write-offs reflect asset sales, foreclosures and forgiveness of debt upon
restructuring.
</FN>
</TABLE>
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 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.
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. In addition, there were no
differential earnings adjustments in the first quarter of 1997 or 1996 related
to any prior tax year.
Provision for federal income taxes before minority interest was $9.7 million
during the first quarter of 1997 compared to $24.2 million during the same
period in 1996. These provisions resulted in consolidated effective federal
tax rates of 17.8% and 25.2%, respectively. The effective tax rate for AFLIAC,
FAFLIC and its non-insurance subsidiaries was a benefit of 29.9% in the first
quarter of 1997 versus an expense of 36.7% in the first quarter of 1996. The
effective tax rates for the Regional Property and Casualty subsidiaries were
20.8% and 20.3% during the first quarter of 1997 and 1996, respectively. The
change in the rate for the FAFLIC/AFLIAC consolidated group resulted primarily
from an $18.9 million tax benefit related to the agreement to cede the
individual disability income business.
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.
Page 24
<PAGE>
Sources of cash for the Company's insurance subsidiaries are from premiums and
fees 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. 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 decreased from $115.3 million in the
first quarter of 1996 to $54.7 million in the same period of 1997. This
decrease resulted primarily from increased commissions and other deferrable
expenses related to the growth in the annuity and variable universal life
product lines of the Retail Financial Services segment. In addition, 1996 cash
provided by operating activities was positively impacted by the receipt of an
$11.1 million litigation settlement in the Corporate Risk Management Services
segment.
Net cash provided by investing activities was $100.7 million during the first
quarter of 1997, as compared to net cash used of $167.1 million in 1996. This
increase primarily reflects fewer net purchases of fixed maturities during
1997. In 1996, purchases of fixed maturities were unusually high due to the
investment of the remaining net proceeds of the Company's initial public
offering of stock and debt. In addition, a greater volume of repurchase
agreements were used in 1996 to delay sales of investments during that period,
decreasing the cash provided by investing activities.
Net cash provided by financing activities was $203.7 million during the first
quarter of 1997, as compared to net cash used of $82.6 million during the
comparable prior year period. In 1997, cash provided by financing activities
was positively impacted by the Company's receipt of proceeds of $296.3 million
from the issuance of Company-obligated mandatorily redeemable preferred
securities of a subsidiary trust. Additionally, a decrease in short-term debt
during 1997 was primarily offset by a decrease in cash used to finance cash
payments on net withdrawals from GICs. Although the Company expects the trend
in negative financing cash flows from GIC withdrawals to continue, the Company
does not expect GIC withdrawals to have a material impact on liquidity. Also,
the Company did not repurchase subsidiary common stock during the first quarter
of 1997, while it repurchased 0.9 million shares at a cost of $23.6 million in
the first quarter of 1996.
On February 3, 1997, AFC Capital Trust (the "Trust"), a subsidiary business
trust of AFC, issued $300 million Series A Capital Securities, which pay
cumulative distributions at a rate of 8.207% semiannually commencing August 15,
1997. The Trust exists for the sole purpose of issuing the Capital Securities
and investing the proceeds thereof in an equivalent amount of 8.207% Junior
Subordinated Deferrable Interest Debentures due 2027 of AFC (the "Subordinated
Debentures"). Through certain guarantees, the Subordinated Debentures and the
terms of related agreements, AFC has irrevocably and unconditionally guaranteed
the obligations of the Trust under the Capital Securities. Net proceeds from
the offering of approximately $296.3 million are intended to fund a portion of
the acquisition of the 24.2 million publicly held shares of Allmerica P&C
pursuant to an Agreement and Plan of Merger dated February 19, 1997.
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,
Subordinated 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 $100.0 million and $40.0 million,
respectively, under various committed short-term lines of credit. At March 31,
1997, no amounts were outstanding and $90.0 million and $12.4 million were
available for borrowing by FAFLIC and Allmerica P&C, respectively. FAFLIC and
Allmerica P&C had $10.0 million and $27.6 million, respectively, of commercial
paper borrowings outstanding at March 31, 1997. In addition, FAFLIC and AFLIAC
had $29.5 million of repurchase agreements outstanding at March 31, 1997 down
from $102.6 million at March 31, 1996. The repurchase agreements in 1996 were
used to delay sales of investments, while the reduced balance in 1997
represents short-term borrowings used to satisfy ongoing cash requirements.
Recent Developments
In April 1997, the Company entered into a letter of intent for the 100%
coinsurance of its disability income line of business. The consummation of the
transaction is subject to a number of conditions, including the negotiation and
execution of definitive documentation and the receipt of regulatory approvals.
The proposed transaction has resulted in the recognition of a $53.9 million
pre-tax loss.
On February 19, 1997, the Company and Allmerica P&C entered into an Agreement
and Plan of Merger (the "Merger Agreement") pursuant to which the Company will
acquire all of the outstanding Common Stock, $1.00 par value per share, of
Allmerica P&C that it does not already own for consideration consisting of
$17.60 in cash, without interest, and 0.4 shares
Page 25
<PAGE>
of common stock, $.01 par value, of the Company (the "AFC Common Stock"),
subject to adjustment. The maximum number of shares of AFC Common Stock to be
issued in the Merger is approximately 9.67 million shares. Also, immediately
prior to the Merger, Allmerica P&C's Certificate of Incorporation will be
amended to authorize a new class of Common Stock, one share of which will be
exchanged for each share of Common Stock currently held by SMA Financial Corp.,
a wholly-owned subsidiary of the Company. The consummation of the Merger is
subject to the satisfaction of various conditions, including the approval of
regulatory authorities.
Forward-Looking Statements
The Company wishes to caution readers that the following important factors,
among others, in some cases have affected and in the future could affect, the
Company's actual results and could cause the Company's actual results for 1996
and beyond to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company. When used in the MD&A
discussion, the words "believes," "anticipated," "expects" and similar
expressions are intended to identify forward looking statements. See "Important
Factors Regarding Forward-Looking Statements" filed as Exhibit 99-2 to the
Company's Annual Report on Form 10-K for the period ended December 31, 1996.
Factors that may cause actual results to differ materially from those
contemplated or projected, forecast, estimated or budgeted in such forward
looking statements include among others, the following possibilities: (i)
adverse catastrophe experience and severe weather; (ii) adverse loss
development for events the Company insured in prior years or adverse trends in
mortality and morbidity; (iii) heightened competition, including the
intensification of price competition, the entry of new competitors, and the
introduction of new products by new and existing competitors; (iv) adverse
state and federal legislation or regulation, including decreases in rates,
limitations on premium levels, increases in minimum capital and reserve
requirements, benefit mandates, limitations on the ability to manage care and
utilization, and tax treatment of insurance products; (v) changes in interest
rates causing a reduction of investment income or in the market value of
interest rate sensitive investments; (vi) failure to obtain new customers,
retain existing customers or reductions in policies in force by existing
customers; (vii) higher service, administrative, or general expense due to the
need for additional advertising, marketing, administrative or management
information systems expenditures; (viii) loss or retirement of key executives;
(ix) increases in medical costs, including increases in utilization, costs of
medical services, pharmaceuticals, durable medical equipment and other covered
items; (x) termination of provider contracts or renegotiation at less
cost-effective rates or terms of payment; (xi) changes in the Company's
liquidity due to changes in asset and liability matching; (xii) restrictions on
insurance underwriting, based on genetic testing and other criteria; (xiii)
adverse changes in the ratings obtained from independent rating agencies, such
as Moody's, Standard and Poors, A.M. Best, and Duff & Phelps; (xiv) lower
appreciation on and decline in value of managed investments, resulting in
reduced variable products, assets and related fees; and (xv) possible claims
relating to sales practices for insurance products.
Page 26
<PAGE>
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits
EX - 11 Statement regarding computation of per share earnings
EX - 27 Financial Data Schedule
(b) Reports on Form 8K
On February 5, 1997, a report on Form 8-K was filed reporting under
item 5, Other Events, the announcement of the sale of $300 million of
Capital Securities issued by AFC Capital Trust I.
On February 20, 1997, a report on Form 8-K was filed reporting under
item 5, Other Events, the announcement that the Company and Allmerica
P&C entered into an Agreement and Plan of Merger.
On April 15, 1997, a report on Form 8-K was filed reporting under
item 5, Other Events, the announcement that the Company had entered
into an agreement in principle to cede its individual disability
insurance business under a 100% coinsurance arrangement.
Page 27
<PAGE>
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 14, 1997
/s/ John F. O'Brien
John F. O'Brien
President and Chief Executive Officer
Dated May 14, 1997
/s/ Edward J. Parry III
Edward J. Parry III
Vice President, Treasurer and
Principal Accounting Officer
Page 28
<PAGE>
Exhibit 11
ALLMERICA FINANCIAL CORPORATION
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
For the Quarter Ended March 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31,
(In millions, except per share data) 1997
<S> <C>
Primary:
Average shares outstanding 50.1
Net effect of dilutive stock options
based on the treasury stock
method using average market
price 0.1
-----
TOTALS 50.2
=====
Net income $15.9
Per share amount $0.32
Fully diluted:
Average shares outstanding 50.1
Net effect of dilutive stock options
based on the treasury stock
method using the higher of
period end or average market
price 0.1
-----
TOTALS 50.2
=====
Net income $15.9
Per share amount $0.32
</TABLE>
<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, 1997 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-31-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 7358
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 382
<MORTGAGE> 647
<REAL-ESTATE> 101
<TOTAL-INVEST> 8758
<CASH> 553
<RECOVER-REINSURE> 841
<DEFERRED-ACQUISITION> 831
<TOTAL-ASSETS> 19626
<POLICY-LOSSES> 2611
<UNEARNED-PREMIUMS> 828
<POLICY-OTHER> 2890
<POLICY-HOLDER-FUNDS> 1927
<NOTES-PAYABLE> 270
0
0
<COMMON> 1
<OTHER-SE> 1671
<TOTAL-LIABILITY-AND-EQUITY> 19626
562
<INVESTMENT-INCOME> 163
<INVESTMENT-GAINS> 44
<OTHER-INCOME> 85
<BENEFITS> 492
<UNDERWRITING-AMORTIZATION> 120
<UNDERWRITING-OTHER> 189
<INCOME-PRETAX> 54
<INCOME-TAX> 10
<INCOME-CONTINUING> 44
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
<RESERVE-OPEN> 2744
<PROVISION-CURRENT> 382
<PROVISION-PRIOR> (36)
<PAYMENTS-CURRENT> 111
<PAYMENTS-PRIOR> 269
<RESERVE-CLOSE> 2678
<CUMULATIVE-DEFICIENCY> (32)
</TABLE>
