<PAGE>
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FORM 10-K/A
(Amendment No. 1)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1996
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 IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
440 LINCOLN STREET, WORCESTER, 01653
MASSACHUSETTS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
Registrant's telephone number, including area code: (508) 855-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class of securities Name of Exchange on which Registered
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
7 5/8% SENIOR DEBENTURES DUE 2025 NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Based on the closing sales price of May 30, 1997 the aggregate market
value of the voting stock held by nonaffiliates of the registrant was
$1,829,113,419.
The number of shares outstanding of the registrant's common stock, $.01 par
value, was 50,284,905 shares outstanding as of May 30, 1997.
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<PAGE>
EXPLANATORY NOTE
This Amendment No. 1 to Form 10-K on Form 10-K/A (the "Form 10-K/A") is
being made to clarify certain disclosures in Items 6, 7 and 8 of the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1996
(the "Form 10-K"). Item 14 of the Form 10-K has been restated to indicate the
filing of an updated independent auditors' consent as an exhibit to the
Form 10-K/A and to correct a clerical error in Item 14(a)(2) Financial Statement
Schedules.
<PAGE>
ITEM 6
SELECTED FINANCIAL DATA
Five Year Summary of Selected Financial Highlights
<TABLE>
<CAPTION>
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FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994 1993 1992
=======================================================================================================
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
- -------------------
Revenues
Premiums $ 2,236.3 $ 2,222.8 $ 2,181.8 $ 2,079.3 $ 2,172.4
Universal life and investment product
policy fees 197.2 172.4 156.8 143.7 132.9
Net investment income 672.6 710.5 743.1 782.8 823.7
Net realized gains 65.9 39.8 1.1 159.6 9.6
Other income 102.7 95.4 112.3 73.8 37.1
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Total revenues 3,274.7 3,240.9 3,195.1 3,239.2 3,175.7
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Benefits, Losses and Expenses
Policy benefits, claims, losses and loss
adjustment expenses 1,957.0 2,010.3 2,047.0 1,987.2 2,163.8
Policy acquisition expenses 483.5 470.3 475.7 435.8 424.1
Other operating expenses 502.5 458.5 518.9 421.3 373.5
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Total benefits, losses and expenses 2,943.0 2,939.1 3,041.6 2,844.3 2,961.4
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Income before federal income taxes 331.7 301.8 153.5 394.9 214.3
Federal income tax expense 75.2 82.7 53.4 74.7 62.7
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Income before minority interest,
extraordinary item and cumulative
effect of accounting changes 256.5 219.1 100.1 320.2 151.6
Minority interest (74.6) (73.1) (51.0) (122.8) (54.4)
- -------------------------------------------------------------------------------------------------------
Income before extraordinary item and
cumulative effect of accounting changes 181.9 146.0 49.1 197.4 97.2
Extraordinary item -
demutualization expenses -- (12.1) (9.2) (4.6) --
Cumulative effect of accounting changes -- -- (1.9) (35.4) --
- -------------------------------------------------------------------------------------------------------
Net income $ 181.9 $ 133.9 $ 38.0 $ 157.4 $ 97.2
=======================================================================================================
Adjusted Net Income (1) $ 137.9 $ 116.4 $ 90.4 $ 119.1 $ 109.9
==========================================================================================================
BALANCE SHEET (AT DECEMBER 31)
- ------------------------------
Total assets $18,997.7 $17,757.7 $15,921.5 $15,378.4 $14,083.1
Long-term debt 202.2 202.3 2.7 -- --
Total liabilities 16,489.0 15,425.0 14,299.4 13,711.7 12,764.1
Minority interest 784.0 758.5 629.7 615.8 422.4
Shareholders' equity 1,724.7 1,574.2 992.4 1,050.9 896.6
</TABLE>
(1) Represents net income adjusted for certain items which management believes
are not indicative of overall operating trends, including net realized
investment gains (losses), net gains and losses on disposals of businesses,
extraordinary items, the cumulative effect of accounting changes and
differential earnings tax adjustments. While these items may be significant
components in understanding and assessing the Company's financial
performance, management believes adjusted net income enhances an investor's
understanding of the Company's results of operations by highlighting net
income attributable to the normal, recurring operations of the business.
However, adjusted net income should not be construed as a substitute for net
income determined in accordance with generally accepted accounting
principles.
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3
<PAGE>
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial
Condition and Results of Operations
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The following analysis of the consolidated results of operations and financial
condition of the Company should be read in conjunction with the Consolidated
Financial Statements and related consolidated footnotes included elsewhere
herein.
Introduction
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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 of the Closed Block.
The contribution from the Closed Block is included in 'Other income' in the
Consolidated Financial Statements. The pre-tax contribution from the Closed
Block was $8.6 million for the year ended December 31, 1996 and $2.9 million for
the period October 1, 1995 (date used to estimate financial information for the
date of establishment of October 16, 1995) through December 31, 1995.
FAFLIC's conversion to a stock life insurance company, which was completed
on October 16, 1995, and the establishment of the Closed Block have affected the
presentation of the Company's Consolidated Financial Statements. For
comparability with prior periods, the following table presents the results of
operations of the Closed Block for the year ended December 31, 1996 and the
period October 1, 1995 through December 31, 1995 combined with the results of
operations outside the Closed Block for the years then ended. Management's
discussion and analysis addresses the results of operations as combined unless
otherwise noted.
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1996 1995 1994
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<S> <C> <C> <C>
Revenues
Premiums $2,298.0 $2,234.3 $2,181.8
Universal life and investment
product policy fees 197.2 172.4 156.8
Net investment income 725.2 723.3 743.1
Net realized investment gains 65.2 19.1 1.1
Realized gain on sale of mutual
fund processing business -- 20.7 --
Other income 94.1 92.5 112.3
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Total revenues 3,379.7 3,262.3 3,195.1
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Benefits, Losses and Expenses
Policy benefits, claims, losses
and loss adjustment expenses 2,058.2 2,030.9 2,047.0
Policy acquisition expenses 486.7 471.1 475.7
Other operating expenses 503.1 458.5 518.9
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Total benefits, losses
and expenses 3,048.0 2,960.5 3,041.6
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Income before federal
income taxes 331.7 301.8 153.5
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Federal income tax expense (benefit)
Current 90.9 119.7 45.4
Deferred (15.7) (37.0) 8.0
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Total federal income
tax expense 75.2 82.7 53.4
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Income before minority
interest, extraordinary item,
and cumulative effect of
accounting change 256.5 219.1 100.1
Minority interest (74.6) (73.1) (51.0)
- -------------------------------------------------------------------------------
Income before extraordinary
item and cumulative effect of
accounting change 181.9 146.0 49.1
Extraordinary item -
demutualization expenses -- (12.1) (9.2)
Cumulative effect of change in
accounting principle -- -- (1.9)
- -------------------------------------------------------------------------------
Net income $ 181.9 $ 133.9 $ 38.0
===============================================================================
</TABLE>
4
<PAGE>
Results of Operations
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Consolidated Overview
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1996 Compared to 1995
- ---------------------
The Company's consolidated net income increased $48.0 million to $181.9 million
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>
For the Years Ended December 31
(In millions) 1996 1995
==============================================================================
<S> <C> <C>
Net income $181.9 $133.9
Adjustments:
Net realized investment gains (31.0) (8.5)
Net gain on sale of mutual
fund processing business -- (13.5)
Extraordinary item-
demutualization expense -- 12.1
Contingency payment from sale of mutual
fund processing business (3.1) --
Restructuring costs 0.3 --
Differential earnings tax adjustment (10.2) (7.6)
- -------------------------------------------------------------------------------
Adjusted net income $137.9 $116.4
===============================================================================
</TABLE>
The increase in adjusted net income of $21.5 million is primarily
attributable to pre-tax increases of $39.6 million and $11.1 million in the
Retail Financial Services and Institutional Services segments, respectively,
partially offset by pre-tax decreases of $12.8 million and $43.2 million in the
Corporate and Regional Property and Casualty segments, respectively. The
increase in the Retail Financial Services segment resulted primarily from
increased fees from strong variable product growth, decreased losses in the
disability income line and income earned on proceeds from the Company's October,
1995 initial public offering. The increase in the Institutional Services segment
related principally to exiting certain unprofitable businesses in 1995. These
increases were partially offset by losses in the Corporate segment primarily due
to interest expense on the Company's 7 5/8% Senior Debentures issued in October
1995. Additionally, the Regional Property and Casualty segment's adjusted net
income decreased primarily due to severe weather-related claims during 1996,
partially offset by an increase in net investment income of $25.8 million, as
well as a $5.7 million arbitrated settlement from a voluntary pool.
Premium revenue increased $63.7 million, or 2.9%, to $2,298.0 million during
1996. Property and casualty premiums earned increased $35.1 million, or 1.9%, to
$1,898.3 million, reflecting the accounting effects of restructuring a
reinsurance contract at Hanover, increasing net premiums earned by approximately
$19.0 million. In addition, a 2.0% increase in policies in force in the
homeowners line as well as moderate price increases in this line contributed to
the increase in net premiums earned. The growth in Citizens' personal lines is
due to increases in net premiums earned in Ohio and Indiana resulting from
expansion in these states as well as price increases in the personal automobile
and homeowners lines. These increases were partially offset by decreases in the
commercial line due to rate decreases in workers' compensation, Hanover's
withdrawal from a large voluntary pool and continued competitive market
conditions. Premiums in the Corporate Risk Management Services segment increased
$30.2 million, or 11.1%, to $302.9 million due to increases in reinsurance,
fully insured group dental, group life, and stop loss product lines totaling
$33.1 million. These increases were partially offset by a $4.0 million decrease
in fully insured group medical premiums. Premiums in the Retail Financial
Services segment decreased $2.4 million, or 2.4%, to $95.7 million, primarily
reflecting the Company's continued shift in focus from traditional life
insurance products to variable life insurance and annuity products.
Universal life and investment product policy fees increased $24.8 million,
or 14.4%, to $197.2 million in 1996. This reflected additional deposits and
appreciation on variable products account balances.
Net investment income before taxes was relatively flat, increasing 0.3% to
$725.2 million during 1996. This increase primarily reflects approximately $20.0
million of incremental income in 1996 on proceeds from the Company's initial
public offering and from the issuance of Senior Debentures in October 1995, as
well as approximately $17.2 million in income from increases in short-term debt
used to finance additions to the investment portfolio. In addition, the Regional
Property and Casualty segment had $10.0 million of income from limited
partnerships in 1996. These increases were substantially offset by a reduction
in invested assets due to declining Guaranteed Investment Contracts ("GICs")
deposits resulting in a decline in investment income of $54.4 million. The
average gross yield of the portfolio was 7.2% in 1996 and 1995.
Net realized gains on investments were $65.2 million and $19.1 million,
before taxes, and $42.4 million and $12.4 million, after taxes, in 1996 and
1995, respectively. In 1996, the Regional Property and Casualty segment revised
its investment strategy, resulting in the sale of a portion of its equity
portfolio and the purchase of tax-exempt securities. Consequently, Regional
Property and Casualty segment realized gains increased $22.5 million, to $31.3
million on an after-tax basis in 1996. Additionally, Institutional Services
segment realized investment
5
<PAGE>
gains increased $8.9 million on an after-tax basis in 1996, primarily reflecting
additional real estate sales in favorable market conditions.
Results in 1995 included a $20.7 million pre-tax gain from the March 1995
sale of the Company's mutual fund processing business.
Other income increased $1.6 million, or 1.7%, to $94.1 million in 1996.
Other income from the Retail Financial Services segment increased $6.8 million,
primarily attributable to increased investment management income. Additionally,
other income in the Allmerica Asset Management and Regional Property and
Casualty segments increased $4.4 million and $3.1 million, respectively. These
increases were partially offset by decreases in the Institutional Services
segment resulting primarily from the sale of the mutual fund processing business
in March of 1995, which had contributed revenues of approximately $13.7 million
in that year. Also, 1996 results included a non-recurring $4.8 million pre-tax
contingent payment related to the aforementioned sale. Other income attributable
to the Corporate Risk Management Services segment decreased $2.1 million,
primarily due to an $11.1 million litigation settlement recognized in the fourth
quarter of 1995, partially offset by growth in Administrative Services Only
("ASO") and contract fees totaling $7.9 million.
Policy benefits, claims, losses and loss adjustment expenses ("LAE")
increased $27.3 million, or 1.3%, to $2,058.2 million during 1996. This increase
is primarily attributable to an $83.1 million, or 6.4%, increase in losses and
LAE in the Company's Regional Property and Casualty segment as a result of
catastrophe losses and severe weather in 1996. Additionally, policy benefits,
claims, losses and LAE increased $14.1 million, or 7.2%, in the Corporate Risk
Management Services segment resulting primarily from product growth. These
increases were partially offset by decreased policy benefits of $57.7 million,
or 26.5%, in the Institutional Services segment primarily resulting from the
continuing decline of GICs during 1996 and decreases in the Retail Financial
Services segment of $12.2 million, or 3.9%, due primarily to reserve
strengthening in the disability income line in 1995.
Policy acquisition expenses consist primarily of commissions, premium taxes
and other policy issuance costs. Policy acquisition expenses increased $15.6
million, or 3.3%, to $486.7 million during 1996. This was primarily due to an
increase of $13.5 million, or 3.3%, to $422.6 million in the Regional Property
and Casualty segment primarily reflecting growth in net premiums earned.
Other operating expenses increased $44.6 million, or 9.7%, to $503.1 million
in 1996 across all major segments, except the Institutional Services segment.
Other operating expenses in the Retail Financial Services segment increased
$17.0 million, or 16.8%, to $118.2 million in 1996, primarily from an $8.3
million increase in short-term borrowing costs used to finance additions to the
investment portfolio. Other operating expenses in the Corporate Risk Management
Services segment increased $16.1 million, or 14.6%, to $126.4 million in 1996 as
a result of increased commissions, claims processing expenses and field office
expenses, resulting from the increased volume of both premiums and claims. The
Corporate segment's other operating expenses increased $15.1 million in 1996,
principally related to interest expense on the Company's Senior Debentures for a
full year in 1996 versus one quarter in 1995. Additionally, the Regional
Property and Casualty segment's other operating expenses increased $10.6 million
due primarily to technology and other administrative expenses. These increases
were partially offset by a decrease of $19.8 million in the Institutional
Services segment related to the sale of the mutual fund processing business in
March 1995.
Federal income tax expense decreased $7.5 million in 1996, while the
effective tax rate decreased from 27.4% to 22.7% in the same period. For the
life insurance subsidiaries, the effective rate decreased slightly from 32.0% to
28.9%, primarily due to additional reserves provided for revisions of estimated
prior year tax liabilities in 1995, as well as an increase of $2.6 million in
the differential earnings benefit from 1995 to 1996. For the property and
casualty subsidiaries, a decrease in the effective rate from 25.3% to 18.4%
resulted from a higher underwriting loss and a greater proportion of pre-tax
income from tax-exempt bonds in 1996, and to reserves provided for revisions of
estimated prior year tax liabilities in 1995.
1995 Compared to 1994
- ---------------------
The Company's consolidated net income increased $95.9 million to $133.9 million
in 1995. 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>
FOR THE YEARS ENDED DECMEBER 31
(IN MILLIONS) 1995 1994
===============================================================================
<S> <C> <C>
Net income $133.9 $38.0
Adjustments:
Net realized investment (gains) losses (8.5) 0.1
Net (gain) loss on disposal of businesses (13.5) 6.2
Extraordinary item - demutualization expenses 12.1 9.2
Cumulative effect of accounting change -- 1.9
Differential earnings tax adjustment (7.6) 35.0
- -------------------------------------------------------------------------------
Adjusted net income $116.4 $90.4
===============================================================================
</TABLE>
The increase in adjusted net income of $26.0 million is primarily
attributable to a pre-tax increase of $83.2 million in the Regional Property and
Casualty segment due to improved underwriting results primarily attributable to
favorable 1995 claims experience resulting from a return to more normal
6
<PAGE>
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weather conditions in the Northeast and in Michigan. Additionally, adjusted net
income increased $17.3 million in the Retail Financial Services segment,
resulting primarily from an increase in fee revenue from variable products and a
decrease in policy acquisition expenses for all major products. These increases
were partially offset by an increase in disability income policy benefits and
decreased interest margins. Also, adjusted net income in the Institutional
Services segment increased $13.8 million, primarily attributable to the sale of
the Company's mutual fund processing business in March 1995, which decreased
1995 revenue from this business by $38.3 million and expenses by $49.3 million,
contributing $11.0 million to adjusted net income before taxes for this period.
Premium revenue increased $52.5 million, or 2.4%, to $2,234.3 million during
1995 as a result of increased property and casualty premiums earned, partially
offset by a decrease in premiums from traditional life products. Regional
Property and Casualty premiums earned increased $71.9 million, or 4.0%, to
$1,863.2 million, as a result of growth in the personal lines. Premiums in the
Retail Financial Services segment decreased $23.5 million, or 19.3%, to $98.1
million, reflecting the cession in January of 1995 of substantially all yearly
renewable term ("term") insurance.
Universal life and investment-type product policy fees increased $15.6
million, or 9.9%, to $172.4 million during 1995. This resulted from additional
deposits and appreciation on variable products account balances.
Net investment income before taxes decreased $19.8 million, or 2.7%, to
$723.3 million during 1995. Although overall invested assets have remained at
approximately the same level in 1995 versus 1994, net investment income has
decreased due to decreases in the average portfolio yields. The average gross
yield of the fixed maturity investment portfolio decreased from 7.5% during
1994, to 7.2% during 1995.
Net realized gains on investments before taxes were $19.1 million during
1995, versus $1.1 million during 1994. After taxes, net realized gains on
investments were $12.4 million during 1995, versus $0.7 million during 1994.
This change is primarily attributable to gains taken on sales of equity
securities and real estate, partially offset by losses on sales of fixed
maturities.
Results in 1995 include 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 decreased $16.1 million, or 0.8%, to
$2,030.9 million during 1995. Property and casualty losses and LAE decreased
$15.2 million, or 1.2%, to $1,300.3 million during 1995, primarily due to a
return to more normal weather conditions during the first half of 1995 in the
Northeast and in Michigan. Institutional Services policy benefits decreased
$30.3 million, or 12.2%, to $217.8 million in 1995 as a result of the decrease
in interest credited during 1995, due to declining GIC deposits. These decreases
were partially offset by increases in Retail Financial Services policy benefits
of $14.8 million, or 4.9%, to $315.6 million during 1995, reflecting increased
policy benefits of $21.6 million due to adverse morbidity and reserve
strengthening in the disability line in 1995, partially offset by a decline in
traditional life benefits resulting from the cession of term insurance. Policy
benefits in the Corporate Risk Management Services segment also increased by
$14.6 million, or 8.0%, to $197.2 million during 1995, primarily due to a
deterioration in claims experience in all major lines.
Policy acquisition expenses decreased $4.6 million, or 1.0%, to $471.1
million during 1995. This was due primarily to a decrease of $23.4 million, or
29.4%, to $56.1 million in the Retail Financial Services segment due to reduced
profit margins resulting from increased mortality and reduced investment
margins, which resulted in a corresponding reduction in amortization, and due to
the cession of term insurance, for which the amortization of deferred
acquisition costs totaled $12.1 million in 1994. This decrease was mostly offset
by an increase in policy acquisition expenses in the Regional Property and
Casualty segment of $18.8 million, or 4.8%, to $409.1 million during 1995,
primarily related to the increase in net premiums earned.
Other operating expenses decreased $60.4 million, or 11.6%, to $458.5
million during 1995, resulting primarily from a decrease of $58.1 million in
operating expenses in the Institutional Services segment, caused by the sale of
the mutual fund processing business in March, 1995 and by reduced expenses
resulting from exiting certain other product lines and businesses, primarily
various processing services for defined contribution plans.
Federal income tax expense increased $29.3 million in 1995, while the
effective tax rate decreased from 34.8% in 1994 to 27.4% in 1995. The decrease
in the effective tax rate resulted from a lower expected differential earnings
charge for the life insurance subsidiaries in 1995, which was partially offset
by an increase in the property and casualty effective tax rate due to improved
underwriting results, a decrease in the proportion of pre-tax income
attributable to tax-exempt interest, and to reserves provided for revisions in
estimated prior year tax liabilities.
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
7
<PAGE>
- --------------------------------------------------------------------------------
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 Senior Debentures and a portion of the net
proceeds from the Company's initial public offering. These proceeds are invested
primarily in fixed maturities at December 31, 1996.
RISK MANAGEMENT
- ---------------
Regional Property and Casualty
- ------------------------------
The following table summarizes the results of operations for the Regional
Property and Casualty segment.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
==============================================================================
<S> <C> <C> <C>
Revenues
Net premiums earned $1,898.3 $1,863.2 $1,791.3
Net investment income 235.4 209.6 202.4
Net realized gains 48.1 13.5 3.5
Other income 11.9 8.8 7.6
- ------------------------------------------------------------------------------
Total revenues 2,193.7 2,095.1 2,004.8
Losses and LAE (1) 1,383.4 1,300.3 1,315.5
Policy acquisition expenses 422.6 409.1 390.3
Other operating expenses 190.0 179.4 185.9
- ------------------------------------------------------------------------------
Income before taxes $ 197.7 $ 206.3 $ 113.1
==============================================================================
</TABLE>
(1) Includes policyholders' dividends of $11.5 million, $10.6 million and $8.8
million in 1996, 1995 and 1994, respectively.
INCOME BEFORE TAXES
- -------------------
1996 Compared to 1995
- ---------------------
Income before taxes decreased $8.6 million, or 4.2%, to $197.7 million in 1996.
This decrease resulted from catastrophes and other severe weather related losses
which contributed to an $83.1 million increase in losses and LAE to $1,383.4
million. Catastrophe losses increased $27.3 million, to $62.9 million in 1996
from $35.6 million during the previous year. The increase in losses and LAE was
partially offset by an increase in net investment income of $25.8 million, or
12.3%, to $235.4 million, attributable to an increase in higher-yielding debt
securities in the portfolio and earnings from a limited partnership. The
decrease in income before tax was also offset by a $33.5 million increase in
realized gains, primarily related to the sale of equity securities, reflecting
the Regional Property and Casualty segment's decision during the first quarter
of 1996 to increase the proportion of debt securities in the portfolio. Income
was also favorably impacted by a $5.7 million arbitrated settlement from a
voluntary pool during the third quarter.
1995 Compared to 1994
- ---------------------
Income before taxes increased $93.2 million, or 82.4%, to $206.3 million in
1995. This increase resulted primarily from improved underwriting results
attributable to favorable current year claims experience resulting from a return
to more normal weather conditions in the Northeast and in Michigan. Catastrophe
losses decreased $10.5 million, to $35.6 million in 1995, from $46.1 million
during the previous year.
LINES OF BUSINESS RESULTS
- -------------------------
Personal Lines of Business
- --------------------------
The personal lines represented 61.2%, 59.8% and 58.3% of total net premiums
earned in 1996, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994 1996 1995 1994 1996 1995 1994
==============================================================================================================================
Total Regional Property
Hanover Citizens and Casualty
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net premiums earned $ 607.3 $ 577.1 $ 548.2 $ 554.6 $ 536.2 $ 496.1 $ 1,161.9 $ 1,113.3 $ 1,044.3
Losses and loss adjustment
expenses incurred 452.0 368.6 366.0 404.1 413.6 391.0 856.1 782.2 757.0
Policy acquisition expenses 150.8 135.2 125.9 112.5 108.1 99.5 263.3 243.3 225.4
Other underwriting expenses 51.7 49.7 50.0 39.3 41.1 37.9 91.0 90.8 87.9
- ------------------------------------------------------------------------------------------------------------------------------
Underwriting (loss) profit $ (47.2) $ 23.6 $ 6.3 $ (1.3) $ (26.6) $ (32.3) $ (48.5) $ (3.0) $ (26.0)
==============================================================================================================================
</TABLE>
8
<PAGE>
1996 Compared to 1995
- ---------------------
Revenues
Net premiums earned by the personal lines increased $48.6 million, or 4.4%, to
$1,161.9 million in 1996, compared to $1,113.3 million in 1995. Hanover's
personal lines net premiums earned increased $30.2 million, or 5.2%, to $607.3
million during 1996. This increase is primarily attributable to an increase in
the personal automobile line associated with the accounting effects of
restructuring a reinsurance contract, increasing net premiums earned by $19.0
million. A 2.0% increase in policies in force in Hanover's homeowners line as
well as moderate price increases in this line also contributed to the increase
in net premiums earned. These increases were partially offset by a mandated 4.5%
decrease in Massachusetts personal automobile rates which became effective
January 1, 1996. Effective January 1, 1997, Massachusetts personal automobile
rates were decreased an additional 6.2% as mandated by the Massachusetts
Insurance Commissioner. In addition, in response to increasing price competition
in Massachusetts, Hanover, in February 1997, requested the Massachusetts
Division of Insurance to approve a plan to offer a safe driver's discount of 10%
on automobile insurance premiums. Management believes these actions may
unfavorably impact premium growth in Massachusetts. Approximately 39% of
Hanover's personal automobile business is currently written in Massachusetts.
[LINE GRAPH APPEARS HERE]
Personal Lines
Net Premiums Earned (In millions)
96 - $1,162
95 - $1,113
94 - $1,044
Citizens' personal lines' net premiums earned increased $18.4 million, or
3.4%, to $554.6 million in 1996. This growth is attributable to price increases
in the personal automobile and homeowners lines. The growth is partially offset
by a 3.0% decrease in policies in force in the personal automobile line,
attributable to the segment's selective reduction of writings in Michigan when
rates were viewed as inadequate, and to continued strong competition in
Michigan. While management has taken steps to increase penetration in affinity
groups and has initiated other marketing programs, heightened competition may
continue to result in reduced growth in the personal lines.
Underwriting results
The personal lines' underwriting loss in 1996 increased $45.5 million, to a loss
of $48.5 million. Hanover's underwriting results deteriorated $70.8 million to a
loss of $47.2 million, while Citizens' underwriting loss improved $25.3 million
to a loss of $1.3 million.
Hanover's personal lines' losses and LAE increased $83.4 million, or 22.6%,
to $452.0 million in 1996. This increase is partially attributable to a $28.8
million increase in losses and LAE in the homeowners line, resulting from
increased catastrophes and severe weather. Catastrophe losses in Hanover's
personal lines increased $17.2 million, to $30.6 million in 1996 from $13.4
million in 1995. Losses and LAE in the personal automobile line increased $49.6
million, or 17.8%, to $328.0 million, primarily reflecting the accounting
effects of restructuring a reinsurance contract, increasing losses by $19.0
million, in addition to a moderate increase in claims frequency and a $4.7
million reduction in favorable reserve development.
The improvement in Citizens' underwriting results reflects favorable claims
activity in both current and prior accident years in the personal automobile
line attributable to continued improvements in severity. This was partially
offset by an increase in catastrophe losses of $6.2 million to $13.4 million,
primarily in the homeowners line.
Policy acquisition expenses in the personal lines increased $20.0 million,
or 8.2%, to $263.3 million and other underwriting expenses increased $0.2
million to $91.0 million in 1996. This increase in policy acquisition expenses
is primarily attributable to an increase of $15.6 million, or 11.5%, to $150.8
million at Hanover resulting from a reapportionment of certain acquisition
expenses to the personal lines from the commercial lines, as well as an increase
in net premiums earned. The $2.0 million increase in Hanover's other
underwriting expenses resulted from an increase of approximately $4.0 million in
expenses associated with the policy administration technology project, offset by
a decrease in assessment expenses associated with the reapportionment of an
involuntary pool. Policy acquisition expenses in the personal lines at Citizens
increased $4.4 million, or 4.1%, to $112.5 million in 1996, reflecting growth in
net premiums earned. The $1.8 million decline in Citizens' other underwriting
expenses is primarily attributable to reductions in employee related expenses
and commissions, partially offset by expenses associated with a policy
administration technology project. Management anticipates an increase in this
segment's expense levels due to further planned investments in technology.
1995 Compared to 1994
- ---------------------
Revenues
Net premiums earned by the personal lines increased $69.0 million, or 6.6%, to
$1,113.3 million in 1995. Hanover's net premiums earned increased $28.9 million,
or 5.3%, to $577.1 million in 1995. The increase is primarily attributable to a
2.0% and 1.3% increase in policies in force in the personal automobile and
homeowners lines, respectively, and a 2.5% rate increase in the homeowners line.
Hanover's premium growth in the personal lines in 1995 was partially offset by a
mandated 6.5% decrease in Massachusetts automobile insurance rates, which was
effective January 1, 1995.
9
<PAGE>
Citizens' personal lines net premiums earned increased $40.1 million, or
8.1%, to $536.2 million in 1995. This increase reflects price increases in the
personal automobile and homeowners lines, and was partially offset by a 5.8%
decrease in personal automobile policies in force. This decrease is attributable
to the Company's selective reduction of writings in Michigan when rates were
viewed as inadequate, and to increased competition in affinity group franchise
sales as a result of the January 1995 order by the Michigan Insurance
Commissioner which has permitted competitors to offer similar products.
Underwriting Results
The personal lines underwriting loss decreased $23.0 million, from $26.0 million
in 1994, to $3.0 million in 1995. Hanover's underwriting results improved $17.3
million, from a profit of $6.3 million in 1994, to a profit of $23.6 million in
1995. Citizens' underwriting loss improved $5.7 million, or 17.6%, from $32.3
million in 1994, to $26.6 million in 1995.
The improvement in Hanover's underwriting results is primarily attributable
to favorable claims experience on current years claims in the homeowners line
resulting from a decrease in catastrophe losses from $27.2 million in 1994, to
$13.4 million during 1995, and to a return to more normal weather conditions
during the first half of 1995. This resulted in a decrease in losses and LAE in
the homeowners line of $17.8 million, or 17.9%, from $99.2 million in 1994, to
$81.4 million in 1995.
The change in Citizens' underwriting results reflects a return to more
normal weather conditions in Michigan as well as favorable claims activity in
both current and prior accident years in the personal automobile line
attributable to improvements in severity. Citizens' underwriting results
improved despite a $3.4 million increase in catastrophe losses in the personal
lines, primarily in the homeowners line. Catastrophe losses were $7.2 million
and $3.8 million in Citizens' personal lines in 1995 and 1994, respectively.
The increase in policy acquisition expenses in the personal lines of $17.9
million, or 7.9%, to $243.3 million in 1995, reflects the growth in net earned
premiums at both Hanover and Citizens. Other underwriting expenses at Hanover
remained relatively unchanged at $49.7 million in 1995, compared to $50.0
million in 1994. Other underwriting expenses at Citizens increased by $3.2
million, or 8.4%, to $41.1 million in 1995, reflecting the growth in net
premiums earned in 1995.
Commercial Lines of Business
- ----------------------------
The commercial lines represented 38.8%, 40.2% and 41.7% of net premiums earned
in 1996, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994 1996 1995 1994 1996 1995 1994
====================================================================================================================================
Total Regional Property
Hanover Citizens and Casualty
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net premiums earned $455.5 $468.3 $480.4 $280.9 $281.6 $266.6 $736.4 $749.9 $747.0
Losses and loss adjustment
expenses incurred 315.5 342.8 361.2 200.3 164.7 188.5 515.8 507.5 549.7
Policy acquisition expenses 107.7 114.3 117.6 51.6 51.5 47.3 159.3 165.8 164.9
Other underwriting expenses (1) 74.0 73.8 77.6 27.0 25.4 29.2 101.0 99.2 106.8
- ------------------------------------------------------------------------------------------------------------------------------------
Underwriting (loss) profit $(41.7) $(62.6) $(76.0) $ 2.0 $ 40.0 $ 1.6 $(39.7) $(22.6) $(74.4)
====================================================================================================================================
</TABLE>
(1) Includes policyholders' dividends.
1996 Compared to 1995
- ---------------------
Revenues
Commercial lines' net premiums earned in 1996 decreased $13.5 million, or 1.8%,
to $736.4 million. Hanover's commercial lines net premiums earned decreased
$12.8 million, or 2.7%, to $455.5 million. This decrease is primarily
attributable to Hanover's withdrawal from a large voluntary pool on December 1,
1995, and to aggregate rate decreases of 14.6% since January 1, 1995, in the
workers' compensation line. Citizens' commercial lines' net premiums earned
decreased $0.7 million, or 0.2%, to $280.9 million in 1996. This decrease
primarily reflects rate reductions and a 1.4% decrease in policies in force in
the workers' compensation line due to continuing competition in this line in
Michigan. Rates in the workers' compensation line at Citizens were decreased
8.5%, 7.0% and 6.4% effective May 1, 1995, December 1, 1995, and June 1, 1996,
respectively. This decrease is partially offset by an increase in policies in
force in the commercial multiple peril and commercial automobile lines of 13.2%
and 3.7%, respectively. Management believes competitive conditions in the
workers' compensation line may impact future growth in net premiums earned.
Underwriting results
The commercial lines' underwriting loss for 1996 increased $17.1 million, or
75.7% to a loss of $39.7 million. Hanover's underwriting loss improved $20.9
million, or 33.4%, to a loss of $41.7 million and Citizens' underwriting profit
decreased $38.0 million, to a profit of $2.0 million in 1996.
Hanover's commercial lines losses and LAE decreased $27.3 million, or 8.0%,
to $315.5 million in 1996. This improvement is primarily attributable to a $41.5
million decrease in losses and LAE resulting from the withdrawal from a large
voluntary pool.
10
<PAGE>
However, this decrease was partially offset by increased losses in the workers'
compensation line of $17.9 million, primarily due to a $19.8 million decrease in
favorable reserve development during 1996.
Citizens' underwriting profit decreased primarily due to an increase in
loss severity and frequency in the commercial multiple peril line. Commercial
multiple peril losses and LAE increased $16.9 million, or 42.4%, to $56.8
million in 1996, partially offset by a $5.1 million, or 9.4% increase to $59.1
million in net premiums earned. Workers' compensation net premiums earned
decreased $17.6 million, or 11.9%, to $130.7 million in 1996, while losses and
LAE increased $9.6 million, or 15.0%, to $73.4 million in this line, primarily
due to reduced favorable development of prior year reserves. Catastrophe losses
in the commercial lines were $1.9 million in 1996 compared to $0.8 million
during 1995.
[LINE GRAPH APPEARS HERE]
Commercial Lines
Underwriting Loss ( In millions)
96 - $39.7
95 - $22.6
94 - $74.4
Policy acquisition expenses in the commercial lines decreased $6.5 million,
or 3.9%, to $159.3 million in 1996 and other underwriting expenses increased
$1.8 million, or 1.8%, to $101.0 million. Hanover's policy acquisition expenses
decreased $6.6 million, or 5.8%, to $107.7 million, primarily attributable to a
reapportionment of certain acquisition expenses from the commercial lines to the
personal lines, as well as the decrease in net earned premium. Other
underwriting expenses at Hanover increased $0.2 million, to $74.0 million as a
result of an increase of approximately $3.0 million in expenses associated with
the policy administration technology project, which were partially offset by a
net decrease in assessment expenses associated with voluntary and involuntary
pools. Citizens' policy acquisition expenses in the commercial lines remained
consistent between years, primarily as a result of flat net earned premiums.
Other underwriting expenses increased $1.6 million, or 6.3%, to $27.0 million in
1996, due to investments in technology and increased policyholders' dividends,
partially offset by reductions in employee related expenses and commissions.
Management anticipates an increase in its expense levels due to further planned
investments in technology.
1995 Compared to 1994
- ---------------------
Revenues
Commercial lines' net premiums earned increased $2.9 million, to $749.9 million
in 1995. Hanover's commercial lines net premiums earned decreased $12.1 million,
or 2.5%, to $468.3 million in 1995, reflecting decreases in policies in force in
all major commercial lines, particularly a $10.7 million, or 9.4%, decrease in
commercial automobile net premiums earned to $103.1 million, resulting from
continued competitive market conditions affecting Hanover. Workers' compensation
net premiums earned at Hanover decreased $6.4 million, or 5.8%, to $104.4
million in 1995, primarily as a result of rate decreases and an increasing level
of large deductible policies.
Citizens' commercial lines' net premiums earned increased $15.0 million, or
5.6%, to $281.6 million in 1995. This increase primarily reflects growth of 8.1%
in total commercial policies in force. The overall growth includes increases in
policies in force in the commercial automobile and commercial multiple peril
lines of 12.5% and 11.6%, respectively, along with a decrease in workers'
compensation policies in force of 4.6% and rate decreases of 15.5% in the
workers' compensation line in 1995. These decreases in workers' compensation
premiums were more than offset by increased workforce coverage due to full
employment in Michigan. Price increases in the commercial automobile line also
contributed to the increase in net premiums earned.
Underwriting Results
The commercial lines' underwriting loss improved $51.8 million to $22.6 million
in 1995. Hanover's underwriting loss improved to a loss of $62.6 million, from
$76.0 million, and Citizens' underwriting profit increased from $1.6 million in
1994, to $40.0 million in 1995.
Hanover's commercial lines' losses and LAE decreased by $18.4 million, or
5.1%, to $342.8 million in 1995. This improvement is primarily attributable to
decreased losses and LAE in the workers' compensation and commercial automobile
lines. Losses and LAE in the workers' compensation line decreased $34.7 million,
or 47.6%, from $72.9 million in 1994 to $38.2 million in 1995. This decrease
resulted from continued favorable claims experience for both the current and
prior years. Commercial automobile losses and LAE decreased $14.9 million, or
17.0%, from $87.7 million in 1994 to $72.8 million in 1995. This decrease
results from favorable claims experience in this line for both the current and
prior years, and a decrease in premiums earned. Losses and LAE in Hanover's
other commercial lines, which consist primarily of voluntary pools, general
liability and inland marine, increased $28.9 million, or 55.0%, from $52.5
million in 1994, to $81.4 million in 1995. Commercial lines were also
unfavorably impacted by a $25.9 million loss in an industrial voluntary pool,
including a $12.0 million charge during the fourth quarter of 1995.
The improvement in Citizens' underwriting results in 1995 reflects
favorable claims activity in both current and prior accident years in the
workers' compensation line attributable to improvements in severity and
frequency, and to severe weather and large claims in the first half of 1994
which had an adverse impact on the commercial multiple peril and commercial
automobile lines.
11
<PAGE>
Policy acquisition expenses in the commercial lines decreased $0.9 million,
or 0.5%, to $165.8 million in 1995. Policy acquisition expenses in the
commercial lines at Citizens increased $4.2 million, or 8.9%, from $47.3 million
in 1994, to $51.5 million in 1995, reflecting the growth in net premiums earned.
Hanover's policy acquisition expenses decreased $3.3 million, or 2.8%, from
$117.6 million in 1994, to $114.3 million in 1995, reflecting the decrease in
net earned premiums. Other underwriting expenses at Hanover decreased $3.8
million, or 4.9%, from $77.6 million in 1994, to $73.8 million in 1995,
reflecting the decrease in net premiums written. Other underwriting expenses at
Citizens decreased $3.8 million, or 13.0%, from $29.2 million in 1994, to $25.4
million in 1995. This decrease reflects the unusually high level of expenses
incurred during 1994 resulting from the expansion into Ohio including the cost
of preparing to write multi-state and cross-state commercial line policies, as
well as a reduction in 1995 administrative expenses resulting from process
improvements in the commercial lines.
INVESTMENT RESULTS
- ------------------
Net investment income before tax was $235.4 million, $209.6 million and $202.4
million in 1996, 1995 and 1994, respectively. The increase from 1995 to 1996
represents an increase in average invested assets, $10.0 million of income from
limited partnerships, and the Regional Property and Casualty segment's portfolio
shift to higher yielding debt securities, including longer duration and non-
investment grade securities. Refer to the discussion in the Investment Portfolio
section on page 18 for additional information about investment and non-
investment grade debt securities. Also, the average pre-tax yield on debt
securities increased from 6.1% in 1995 to 6.4% in 1996. Net investment income
increased from 1994 to 1995 as a result of increased average invested assets
partially offset by a decrease in the portfolio's average pre-tax yield from
6.2% in 1994 to 6.0% in 1995. This decrease resulted primarily from lower yields
available on new investments relative to the yields on maturing investments. Net
realized gains on investments before taxes were $48.1 million, $14.6 million and
$3.5 million in 1996, 1995 and 1994, respectively. The high level of realized
gains in 1996 was primarily the result of sales of appreciated equity securities
due to the strategy of shifting to a higher level of debt securities. The $10.0
million increase in net realized gains in 1995 was due to increased gains on the
sale of equity 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, and 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 YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
================================================================================
<S> <C> <C> <C>
Reserve for losses and LAE,
beginning of year $2,896.0 $2,821.7 $2,717.3
Incurred losses and LAE, net of
reinsurance recoverable:
Provision for insured events
of current year 1,513.3 1,427.3 1,434.8
Decrease in provision for
insured events of prior years (141.4) (137.6) (128.1)
- --------------------------------------------------------------------------------
Total incurred losses and LAE 1,371.9 1,289.7 1,306.7
- --------------------------------------------------------------------------------
Payments, net of reinsurance
recoverable:
Losses and LAE attributable to
insured events of current year 759.6 652.2 650.2
Losses and LAE attributable to
insured events of prior years 627.6 614.3 566.9
- --------------------------------------------------------------------------------
Total payments 1,387.2 1,266.5 1,217.1
- --------------------------------------------------------------------------------
Change in reinsurance recoverable
on unpaid losses (136.6) 51.1 14.8
- --------------------------------------------------------------------------------
Reserve for losses and LAE,
end of year $2,744.1 $2,896.0 $2,821.7
================================================================================
</TABLE>
As part of an ongoing process, the reserves have been re-estimated for all
prior accident years and were decreased by $141.4 million, $137.6 million and
$128.1 million in 1996, 1995, and 1994, respectively. The increase in favorable
development on prior years' reserves of $3.8 million in 1996 results primarily
from an $11.4 million increase in favorable development at Citizens. The
increase in Citizens' favorable development of $11.4 million in 1996 reflects
improved severity in the personal automobile line, where favorable development
increased $28.6 million to $33.0 million in 1996, partially offset by less
favorable development in the workers' compensation
12
<PAGE>
line. In 1995, the workers' compensation line had favorable development of $32.7
million, primarily as a result of Citizens re-estimating reserves to reflect the
new claims cost management programs and the Michigan Supreme Court ruling, which
decreases the maximum to be paid for indemnity cases on all existing and future
claims. In 1996, the favorable development in the workers' compensation line of
$21.8 million also reflected these developments. Hanover's favorable
development, including voluntary and involuntary pools, decreased $7.7 million
in 1996 to $82.9 million, primarily attributable to a decrease in favorable
development in the workers' compensation line of $19.8 million. This decrease is
primarily attributable to a re-estimate of reserves with respect to certain
types of workers' compensation policies including large deductibles and excess
of loss policies. In addition, during 1995 the Regional Property and Casualty
segment refined its estimation of unallocated loss adjustment expenses which
increased favorable development in that year. Favorable development in the
personal automobile line also decreased $4.7 million, to $42.4 million in 1996.
These decreases were offset by increases in favorable development of $1.9
million and $5.6 million, to $12.6 million and $5.7 million, in the commercial
automobile and commercial multiple peril lines, respectively. Favorable
development in other lines increased by $8.8 million, primarily as a result of
environmental reserve strengthening in 1995. Favorable development in Hanover's
voluntary and involuntary pools increased $3.7 million to $4.1 million during
1996. The Regional Property and Casualty segment expects reduced favorable
development at Hanover to continue to impact future earnings.
The increase in favorable development on prior years' reserves of $9.5
million in 1995 results primarily from a $34.6 million increase in favorable
development at Citizens. Favorable development in Citizens' personal automobile
and workers' compensation lines increased $16.6 million and $15.5 million, to
favorable development of $4.4 million and $32.7 million, respectively, due to
the aforementioned change in claims cost management and the Michigan Supreme
Court ruling. Hanover's favorable development, not including the effect of
voluntary and involuntary pools, was relatively unchanged at $90.2 million in
1995 compared to $91.7 million in 1994. Favorable development in Hanover's
workers' compensation line increased $27.7 million to $31.0 million during 1995.
This was offset by decreases of $14.6 million and $12.6 million, to $45.5
million and $0.1 million, in the personal automobile and commercial multiple
peril lines, respectively. Favorable development in Hanover's voluntary and
involuntary pools decreased $23.6 million to $0.4 million during 1995.
This favorable development reflects the Regional Property and Casualty
segment's reserving philosophy consistently applied over these periods.
Conditions and trends that have affected development of the loss and LAE
reserves in the past may not necessarily occur in the future.
Due to the nature of the business written by the Regional Property and
Casualty segment, the exposure to environmental liabilities is relatively small
and therefore its reserves are relatively small compared to other types of
liabilities. Loss and LAE reserves related to environmental damage and toxic
tort liability, included in the reserve for losses and LAE were $50.8 million
and $43.2 million, net of reinsurance of $20.2 million and $8.4 million in 1996
and 1995, respectively. During 1995, the Regional Property and Casualty segment
redefined its environmental liabilities in conformity with new guidelines issued
by the NAIC. This had no impact on results of operations. The Regional Property
and Casualty segment does not specifically underwrite policies that include this
coverage, but as case law expands policy provisions and insurers' liability
beyond the intended coverage, the Regional Property and Casualty segment may be
required to defend such claims. During 1995, Hanover performed an actuarial
review of its environmental reserves. This resulted in Hanover's providing
additional reserves for "IBNR" (incurred but not reported) claims, in addition
to existing reserves for reported claims. Although these claims are not
material, their existence gives rise to uncertainty and is discussed because of
the possibility, however remote, that they may become material. The Regional
Property and Casualty segment believes that, notwithstanding the evolution of
case law expanding liability in environmental claims, recorded reserves related
to these claims are adequate. In addition, the Regional Property and Casualty
segment is not aware of any litigation or pending claims that may result in
additional material liabilities in excess of recorded reserves. The
environmental liability could be revised in the near term if the estimates used
in determining the liability are revised.
Inflation generally increases the cost of losses covered by insurance
contracts. The effect of inflation on the Regional Property and Casualty segment
varies by product. Property and casualty insurance premiums are established
before the amount of losses and LAE, and the extent to which inflation may
affect such expenses, are known. Consequently, the Regional Property and
Casualty segment attempts, in establishing rates, to anticipate the potential
impact of inflation in the projection of ultimate costs. The impact of inflation
has been relatively insignificant in recent years. However, inflation could
contribute to increased losses and LAE in the future.
The 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 enactments, judicial decisions, legal
developments in impositions of damages, changes in political attitudes and
trends in general economic conditions, (ii) review of per claim information,
(iii) historical loss experience of the Regional Property and Casualty segment
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,
13
<PAGE>
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.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
================================================================
<S> <C> <C> <C>
Premiums and premium equivalents
Premiums $302.9 $272.7 $268.0
Premium equivalents 581.4 513.4 459.7
- ----------------------------------------------------------------
Total premiums and
premium equivalents $884.3 $786.1 $727.7
================================================================
Revenues
Premiums $302.9 $272.7 $268.0
Net investment income 21.7 17.6 14.0
Net realized gains (losses) 0.3 (0.5) 0.1
Other income 36.6 38.7 20.3
- ----------------------------------------------------------------
Total revenues 361.5 328.5 302.4
Policy benefits, claims and losses 211.3 197.2 182.6
Policy acquisition expenses 3.1 2.7 2.5
Other operating expenses 126.4 110.3 97.4
- ----------------------------------------------------------------
Income before taxes $ 20.7 $ 18.3 $ 19.9
================================================================
</TABLE>
1996 Compared to 1995
- ---------------------
Income before taxes increased $2.4 million, or 13.1%, to $20.7 million in 1996.
In 1995, CRMS received a one time litigation settlement of $11.1 million.
Excluding this item, income before taxes increased $13.5 million, or 187.5%.
This increase is primarily attributable to premium growth in the Company's
reinsurance, fully insured group dental and group life product lines, and to
improved overall loss trends.
Premiums increased $30.2 million, or 11.1%, to $302.9 million in 1996,
primarily due to increases in reinsurance, fully insured group dental, group
life and stop loss product lines totaling $33.1 million. These increases were
partially offset by a decrease of $4.0 million in fully insured medical
premiums.
Net investment income increased $4.1 million, or 23.3%, to $21.7 million in
1996, due primarily to a $1.6 million increase in income earned on proceeds from
the Company's October, 1995 initial public offerings and approximately $1.4
million from increases in short-term debt used to finance additions to the
investment portfolio. In addition, net investment income increased approximately
$1.2 million from growth in invested assets.
Other income decreased $2.1 million, or 5.4%, to $36.6 million in 1996, due
primarily to the absence in 1996 of the aforementioned $11.1 million litigation
settlement. This decrease was partially offset by growth in ASO and contract
fees of $7.9 million in 1996.
Policy benefits, claims and losses increased $14.1 million, or 7.2%, to
$211.3 million in 1996. This increase is principally related to the growth in
premiums, partially offset by favorable claims experience overall.
Other operating expenses increased $16.1 million, or 14.6%, to $126.4
million in 1996, due primarily to increases in commissions, claims processing
expenses and field office expenses, resulting from the increased volume of both
premiums and claims. In addition, other operating expenses includes
approximately $1.0 million of short-term borrowing costs related to the short-
term debt used to finance additions to the investment portfolio.
1995 Compared to 1994
- ---------------------
Income before taxes decreased $1.6 million, or 8.0%, to $18.3 million in 1995.
This decrease was primarily attributable to adverse claims experience in all
major lines, partially offset by an $11.1 million fourth quarter litigation
settlement representing the recovery of claims paid in prior years.
Premiums increased $4.7 million, or 1.8%, in 1995 as a result of increases
in risk sharing and stop loss products and other products such as group life,
long term disability, and reinsurance, totaling $20.4 million. These increases
were partially offset by decreases of $15.7 million in full indemnity medical
products. The decrease in full indemnity health business is consistent with the
Company's plan to de-emphasize these products in favor of the more profitable
risk sharing arrangements.
Net investment income increased $3.6 million, or 25.7%, to $17.6 million in
1995 due to growth in invested assets.
Other income increased $18.3 million, or 89.7%, to $38.7 million in 1995.
This change is primarily due to an $11.1 million litigation settlement,
recognized in the fourth quarter of 1995, which represents the recovery of prior
years' claims paid. In addition, fees from the administrative services only
business increased $4.0 million, or 27.2%, to $18.7 million in 1995.
Policy benefits, claims and losses increased $14.6 million, or 8.0% in
1995. This increase is principally due to a deterioration in long term
disability, medical, and dental loss experience as well as to growth in
substantially all products except full indemnity medical.
Other operating expenses increased $12.8 million, or 13.1%, in 1995,
primarily due to increases in commissions, increased employee costs, and
increased expenses associated with the Company's client center in Atlanta,
Georgia.
14
<PAGE>
- --------------------------------------------------------------------------------
Retail Financial Services
- -------------------------
The following table summarizes the results of operations for the Retail
Financial Services segment.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
==============================================================
<S> <C> <C> <C>
Revenues
Premiums $ 95.7 $ 98.1 $121.6
Fees 181.2 157.9 143.9
Net investment income 251.3 229.1 223.9
Net realized (losses) gains (1.5) 0.6 (3.1)
Other income 29.2 22.4 21.6
- --------------------------------------------------------------
Total revenues 555.9 508.1 507.9
Policy benefits, claims and losses 303.4 315.6 300.8
Policy acquisition expenses 58.1 56.1 79.5
Other operating expenses 118.2 101.2 113.4
- --------------------------------------------------------------
Income before taxes $ 76.2 $ 35.2 $ 14.2
==============================================================
</TABLE>
1996 Compared to 1995
- ---------------------
Income before taxes increased $41.0 million, or 116.5%, to $76.2 million in 1996
compared to 1995. This increase was primarily attributable to growth in variable
products' fee revenue, decreased losses in the disability income line and income
earned on the proceeds from the October, 1995 initial public offerings.
[GRAPH APPEARS HERE]
Policy Fees
(In millions)
96 - $181
95 - $158
94 - $144
The decrease in premiums of $2.4 million, or 2.4%, to $95.7 million in 1996
is primarily due to the Company's shift in focus from traditional life insurance
products to variable life insurance and annuity products. Premiums from
traditional life products decreased $3.4 million, or 5.1%, to $62.8 million in
1996.
The increase in fee revenue of $23.3 million, or 14.8%, to $181.2 million in
1996 is due to additional deposits and appreciation on variable products account
balances. Fees from annuities increased $20.1 million, or 54.5%, to $57.0
million in 1996. Fees from variable universal life policies increased $8.0
million, or 22.7%, to $43.3 million in 1996. These increases were partially
offset by a continued decline in fees from non-variable universal life of $4.8
million, to $80.9 million, in 1996. The Company expects fees on this product to
decrease as policies in force and related contract values decline.
Net investment income increased $22.2 million, or 9.7%, to $251.3 million in
1996 primarily from $15.4 million in additional income on proceeds from the
October, 1995 initial public offerings. Also, increases in short-term debt used
to finance additions to the investment portfolio resulted in approximately $10.9
million in additional investment income. Partially offsetting these increases
was a slightly lower portfolio yield in 1996.
Other income increased $6.8 million, or 30.4%, to $29.2 million in 1996.
This increase was primarily attributable to increased investment management
income.
Policy benefits, claims, and losses decreased $12.2 million, or 3.9%, to
$303.4 million in 1996. Losses in the disability income line decreased $16.3
million due primarily to reserve strengthening of $14.5 million in 1995.
Additionally, non-variable universal life benefits decreased $2.5 million
principally due to improved mortality experience in 1996. These decreases were
partially offset by an increase in variable products' policy benefits of $6.2
million, which related primarily to growth in these product lines.
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 $17.0 million, or 16.8%, to $118.2 million in
1996 was primarily attributable to $8.3 million of additional interest expense
in 1996 relating to the short-term debt used to finance additions to the
investment portfolio. Additionally, other operating expenses in 1995 included a
$7.5 million decrease due to the cession of substantially all term life
insurance business.
1995 Compared to 1994
- ---------------------
Income before taxes increased $21.0 million, or 147.9%, to $35.2 million in
1995. This increase was primarily attributable to an increase in fee revenue
from variable products and a decrease in policy acquisition expenses for all
major products. These increases were partially offset by an increase in
disability income policy benefits and decreased interest margins.
The decrease in premiums of $23.5 million during 1995 is primarily due to
the Company's ceding substantially all of its term life insurance business,
which contributed $18.7 million in premiums in 1994.
The increase in fee revenue of $14.0 million in 1995 is due to additional
deposits and appreciation on variable products account balances. Fees from
variable universal life increased from $28.9 million during 1994 to $35.3
million in 1995. Fees from annuities increased from $24.1 million for 1994 to
$36.9 million for 1995. Fees from non-variable universal life decreased $5.2
million in 1995 as a result of a decline in policies in force and related
contract values. The Company expects fees on this product to decrease as
policies in force and related contract values continue to decline.
The increase in policy benefits, claims and losses of $14.8 million in 1995
is primarily a result of increases in disability income policy benefits, non-
variable universal life policy benefits, annuity benefits and variable life
benefits, partially offset by a decrease in traditional life benefits due to
cession of substantially all of the term life insurance business. Disability
15
<PAGE>
- --------------------------------------------------------------------------------
income policy benefits increased $21.6 million, reflecting reserve strengthening
and adverse morbidity in 1995, including fourth quarter reserve strengthening of
$11.7 million. Non-variable universal life policy benefits increased $1.8
million due to adverse mortality. Annuity benefits and variable universal life
benefits increased by $3.7 million in total, due primarily to growth in business
and higher crediting rates for annuities. Total traditional policy benefits,
claims and losses decreased from $116.7 million during 1994 to $104.4 million
during 1995. The largest component of this $12.3 million decrease is a $12.5
million decrease in term life insurance benefits due to the cession of
substantially all of this block of business in 1995.
The decrease in policy acquisition expenses of $23.4 million, or 29.4%, to
$56.1 million in 1995 is primarily due to reduced profit margins resulting from
increased mortality and reduced investment margins, which resulted in a
corresponding reduction in amortization. In addition, the 1994 amortization
includes an increase of $9.6 million for the term life insurance product due to
revised estimates of future profits.
Other operating expenses decreased $12.2 million, or 10.8%, to $101.2
million in 1995, resulting primarily from a $7.5 million decrease due to the
cession of substantially all term life insurance business and to significant
non-recurring 1994 expenses.
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>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
=======================================================================
<S> <C> <C> <C>
Net investment income $145.9 $152.7 $157.5
Less: Interest credited 101.3 107.7 102.0
- -----------------------------------------------------------------------
Interest margins (1) $ 44.6 $ 45.0 $ 55.5
=======================================================================
</TABLE>
(1) Interest margins represent the difference between income earned on
investment assets and interest credited to customers' universal life and
general account annuity policies.
Interest margins were relatively consistent in 1996, as compared to 1995.
The decrease in interest margins from 1994 to 1995 is a result of a decline in
policies in force and higher crediting rates resulting from the competetive
environment.
Institutional Services
- ----------------------
The following table summarizes the results of operations for the Institutional
Services segment.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
============================================================
<S> <C> <C> <C>
Revenues
Fees, premiums and
non-insurance income (1) $ 33.5 $ 37.6 $ 72.6
Net investment income
GICs 98.5 152.9 188.2
Other 115.5 113.5 114.6
Net realized gains 19.2 5.5 0.6
Gain on sale of mutual fund
processing business -- 20.7 --
- ------------------------------------------------------------
Total revenues 266.7 330.2 376.0
- ------------------------------------------------------------
Policy benefits, claims and losses
Interest credited to GICs 89.2 137.2 166.6
Other 70.9 80.6 81.5
- ------------------------------------------------------------
Total policy benefits, claims
and losses 160.1 217.8 248.1
Policy acquisition expenses 2.9 3.2 3.4
Other operating expenses 50.9 66.4 120.1
- ------------------------------------------------------------
Income before taxes $ 52.8 $ 42.8 $ 4.4
============================================================
</TABLE>
(1) 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.
1996 Compared to 1995
- ---------------------
Income before taxes increased $10.0 million, or 23.4%, to $52.8 million in 1996.
This change was primarily attributable to increased realized gains of $13.7
million and to decreased other policy benefits, claims and losses of $9.7
million resulting from defined benefit and defined contribution plan
cancellations. These items were partially offset by a net decline of $9.8
million related to the sale of the mutual fund processing business in 1995 and a
decline in the interest margins on GICs of $6.4 million.
Fees, premiums, non-insurance and other income decreased $4.1 million, or
10.9%, to $33.5 million in 1996. This decrease was primarily attributable to a
$13.7 million decrease in revenues due to the absence of the mutual fund
processing business in 1996, partially offset by the 1996 receipt of a non-
recurring $4.8 million contingent payment related to the aforementioned sale and
to $3.0 million from growth in retail telemarketing revenues. Additionally, fee
income increased $1.5 million from the appreciation of separate account balances
in related defined benefit and defined contribution plans.
16
<PAGE>
- --------------------------------------------------------------------------------
Net investment income related to GICs and interest credited to GIC
contractholders have declined in 1996 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.
Net realized gains increased $13.7 million, to $19.2 million in 1996. This
change resulted primarily from increased gains from sales of real estate
properties totaling $12.2 million.
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 declined from
$80.6 million in 1995 to $70.9 million in 1996. This was primarily due to
reductions in the interest credited to participants resulting from the
aforementioned cancellations in defined benefit and defined contribution plans.
Other operating expenses decreased $15.5 million, or 23.3%, to $50.9 million
in 1996. This decrease was primarily attributable to the sale of the mutual fund
processing business, which incurred $19.8 million of operating expenses in 1995.
1995 Compared to 1994
- ---------------------
Income before taxes increased $38.4 million to $42.8 million in 1995. This
increase 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,
and to a $4.9 million increase in realized investment gains. Additionally, in
1995 revenue from the mutual fund processing business decreased $38.3 million
and expenses decreased $49.3 million, contributing another $11.0 million to the
increase in net income before taxes for this period.
Fees, premiums and non-insurance income decreased $35.0 million, or 48.2% in
1995. As noted above, this decrease was primarily attributable to the $38.3
million decrease in revenues from the mutual fund processing business, which was
sold in March 1995.
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). Management
expects GIC deposits and related income to continue to decline.
Net realized gains increased $4.9 million, to $5.5 million in 1995 due to
decreased mortgage loan impairments.
Other operating expenses decreased $53.7 million, or 44.7% in 1995. This
decrease was primarily attributable to the $49.3 million decrease in expenses
for the mutual fund processing business. The remainder of the decrease was due
primarily to decreases in consulting fees, system development costs, and
employee costs as a result of exiting certain other product lines and
businesses, primarily various processing services for defined contribution
plans.
Allmerica Asset Management
- --------------------------
The following table summarizes the results of operations for the Allmerica Asset
Management segment.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
=================================================================
<S> <C> <C> <C>
Fees and other income:
External $ 1.1 $ 1.0 $ 0.7
Internal 7.7 3.4 3.3
- -----------------------------------------------------------------
Total revenues 8.8 4.4 4.0
Other operating expenses 7.7 2.1 2.1
- -----------------------------------------------------------------
Income before taxes $ 1.1 $ 2.3 $ 1.9
=================================================================
</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 $4.3 million for the year ended
December 31, 1996.
Corporate
- ---------
The following table summarizes the results of operations for the Corporate
segment.
<TABLE>
<CAPTION>
Period from
October 1
through
December 31 December 31
(IN MILLIONS) 1996 1995
==============================================================================
<S> <C> <C>
Revenues
Investment and other income $ 2.7 $ 0.4
Realized loss (0.9) --
- ------------------------------------------------------------------------------
Total revenues 1.8 0.4
Other operating expenses 18.6 3.5
- ------------------------------------------------------------------------------
Loss before taxes $(16.8) $(3.1)
==============================================================================
</TABLE>
This segment consists primarily of $32.9 million of cash, investments and
other assets remaining from the $52.9 million in net proceeds retained by the
holding company in the Company's initial public offerings. These investments
earned $2.7 million in net investment income in 1996 and $0.4 million for the
period from October 1, 1995 to December 31, 1995. The segment incurred $18.6
million and $3.5 million of other operating expenses in 1996 and for the period
from October 1, 1995 to December 31, 1995, respectively, primarily $15.3 million
and $3.2 million, respectively, in interest expense on the Company's 7 5/8%
Senior Debentures issued in October 1995.
17
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
- --------------------
The Company had investment assets diversified across several asset classes, as
follows:
<TABLE>
<CAPTION>
December 31
(Dollars in millions) 1996(1) 1995(1)
================================================================================
% of Total % of Total
Carrying Carrying Carrying Carrying
Value Value Value Value
<S> <C> <C> <C> <C>
Fixed maturities (2) $7,891.7 79.4% $ 8,197.3 78.1%
Equity securities (2) 473.6 4.8 517.2 4.9
Mortgages 764.6 7.7 856.5 8.2
Policy loans 362.6 3.6 365.7 3.5
Real estate 120.7 1.2 179.6 1.7
Cash and cash equivalents 202.6 2.0 307.1 2.9
Other invested assets 128.8 1.3 71.9 0.7
- --------------------------------------------------------------------------------
Total $9,944.6 100.0% $10,495.3 100.0%
================================================================================
</TABLE>
(1) Includes Closed Block invested assets with a carrying value of $772.7
million and $775.1 million at December 31, 1996 and 1995, respectively.
(2) The Company carries the fixed maturities and equity securities in its
investment portfolio at market value.
Total investment assets decreased $550.7 million, or 5.2%, to $9.9 billion
during 1996. This decrease is primarily attributable to a decline in invested
assets resulting from the settlement of GIC contracts and to market value
depreciation in the fixed maturities portfolio. Equity securities decreased
$43.6 million, or 8.4%, to $473.6 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. Despite this portfolio shift, fixed
maturities decreased $305.6 million, or 3.7%, due primarily to financing of net
GIC withdrawals and to market value depreciation of $93.0 million. Additionally,
mortgage loans decreased $91.9 million, or 10.7%, to $764.6 million caused
primarily by loan repayments. The real estate portfolio decreased $58.9 million,
or 32.8%, to $120.7 million during 1996 due to sales of investment properties.
The increase in other invested assets of $56.9 million, or 79.1% to $128.8
million primarily relates to third and fourth quarter purchases of limited
partnerships by FAFLIC. Cash and cash equivalents decreased $104.5 million, or
34.0%, to $202.6 million.
[PIE CHART APPEARS HERE]
Bond Portfolio
Credit Quality
Aaa/Aa/A -- 54%
Baa -- 31%
Ba & Below -- 15%
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 Association of Insurance Commissioners, investment grade securities
comprised 84.8% and 88.7% of the Company's total fixed maturity portfolio at
December 31, 1996 and December 31, 1995, respectively. In 1996, 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 7.3%
and 7.2% for 1996 and 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.
18
<PAGE>
The following table illustrates asset valuation allowances and additions to or
deductions from such allowances for the periods indicated.
<TABLE>
<CAPTION>
For the Years Ended December 31
(Dollars in millions)
================================================================================
Other
Real Invested
1995 Mortgages Estate Assets Total
- ----
<S> <C> <C> <C> <C>
Beginning balance $ 47.2 $22.9 $ 3.7 $ 73.8
Provision (benefits) 1.5 (0.6) -- 0.9
Write-offs (1) (14.9) (2.7) -- (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%
1996
- ----
Provision 5.5 -- -- 5.5
Write-offs (1) (19.7) (4.7) (3.7) (28.1)
- --------------------------------------------------------------------------------
Ending balance $ 19.6 $14.9 $ -- $ 34.5
Valuation allowance as a percentage
of carrying value before reserves 2.5% 11.0% --% 3.8%
</TABLE>
(1) Write-offs reflect asset sales, foreclosures and forgiveness of debt upon
restructuring.
The increase in write-offs of mortgages during 1996 as compared to 1995
reflects an increase in the disposal of modified loans which were previously
impaired.
Income Taxes
- ------------
AFC and its life insurance subsidiaries (including certain non-insurance
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.
For the years ended December 31, 1995 and 1994, 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. The differential earnings amount in the current period related to an
adjustment for the 1994 tax year based on the actual average mutual life
insurance companies' earnings rate issued by the IRS in 1996.
Provision for federal income taxes before minority interest was $75.2
million during 1996 compared to $82.7 million during 1995. These provisions
resulted in consolidated effective federal tax rates of 22.7% and 27.4%,
respectively. The effective tax rates for AFLIAC and FAFLIC and its non-
insurance subsidiaries were 28.9% and 32.0% during 1996 and 1995, respectively.
The effective tax rates for the Regional Property and Casualty subsidiaries were
18.4% and 25.3% during 1996 and 1995, respectively. The reduction in the rate
for FAFLIC in 1996 resulted primarily from additional reserves provided for
revisions of estimated prior year tax liabilities in 1995, as well as an
increase of $2.6 million in the differential earnings benefit from 1995 to 1996.
The decrease in the rate for Regional Property and Casualty subsidiaries
reflects a higher underwriting loss and greater proportion of pre-tax income
from tax-exempt bonds in 1996, and to reserves provided for revisions in
estimated prior year tax liabilities in 1995.
Provision for federal income taxes before minority interest was $82.7
million during 1995 compared to $53.4 million during 1994. These provisions
resulted in consolidated effective federal tax rates of 27.4% and 34.8% in 1995
and 1994, respectively. The effective tax rates for AFLIAC and FAFLIC and its
non-insurance subsidiaries were 32.0% and 122.4% during 1995 and 1994,
respectively. The effective tax rates for the Regional Property and Casualty
subsidiaries were 25.3% and 3.5% during 1995 and 1994, respectively. The
significant reduction in the rate for FAFLIC primarily resulted from a
19
<PAGE>
- --------------------------------------------------------------------------------
differential earnings benefit of $7.6 million, or 7.9% of taxable income, during
1995, including a benefit of $15.2 million recognized during the fourth quarter,
versus a charge of $35.0 million, or 86.5% of taxable income, during 1994. The
increase in the rate for the Regional Property and Casualty subsidiaries is
attributable to improved underwriting results, a decrease in the proportion of
pre-tax income attributable to tax-exempt interest, and to reserves provided for
revisions in estimated prior year tax liabilities, including $7.2 million
provided during the fourth quarter of 1995.
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
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 was $156.0 million, $131.2 million
and $331.7 million in 1996, 1995 and 1994, respectively. The increase in 1996
was primarily attributable to an increase in cash provided by the operations of
the life insurance subsidiaries. This increase was partially offset by increased
underwriting losses in the Regional Property and Casualty Insurance subsidiaries
which resulted in an increase in claims payments. The decrease during 1995 was
due primarily to the timing of payments of losses and LAE in the Regional
Property and Casualty Insurance subsidiaries; the timing of cash receipts and
payments relating to reinsurance due primarily to the cession of the yearly
renewable term product in 1995; the decrease in investment income due to the
decrease in GIC assets; and the decrease in other income resulting from the sale
of the mutual fund processing business.
Net cash provided by investing activities was $424.6 in 1996 and $327.2
million in 1994. Net cash used in investing activities was $128.1 million in
1995. The increase from 1995 to 1996 was primarily attributable to increased
sales of investments used to finance net withdrawals from GICs partially offset
by additional purchases of fixed maturities and other long-term investments
financed through an increase in investable cash generated by operations. During
1996, cash flows from investing activities were impacted by delayed sales of
investments financed instead with repurchase agreements. Although the repurchase
agreements were entirely settled by year end, management may utilize this policy
again in future periods.
In 1995, the net cash used resulted from net purchases of fixed maturities
and equity securities which were partially offset by mortgage loan repayments
and proceeds from the sale of the mutual fund processing business. In 1994, a
larger amount of mortgage loan repayments and net sales and maturities of fixed
maturities resulted in the net cash provided.
Net cash used for financing activities was $685.1 million, $235.7 million,
and $410.6 million in 1996, 1995, and 1994 respectively. The Company made cash
payments on withdrawals from GICs that exceeded cash received from deposits on
these contracts by $636.3 million, $624.1 million and $400.7 million in 1996,
1995 and 1994, respectively. Although the Company expects this 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, cash used
to purchase subsidiary common stock increased $21.1 million, to $42.0 million
during the year ended December 31, 1996.
In 1995, the cash used for financing activities was positively impacted by
the Company's receipt of proceeds of $248.0 million and $197.2 million from its
initial public offering of stock and debt, respectively.
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 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 an Agreement and Plan of Merger dated February 19, 1997.
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
20
<PAGE>
- --------------------------------------------------------------------------------
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, 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 December
31, 1996, no amounts were outstanding and $90.2 million and $12.0 million were
available for borrowing by FAFLIC and Allmerica P&C, respectively. FAFLIC and
Allmerica P&C had $9.8 million and $28.0 million, respectively, of commercial
paper borrowings outstanding at December 31, 1996.
RECENT DEVELOPMENTS
- -------------------
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
$33.00 per share of Common Stock, subject to adjustment, payable in cash and
shares of common stock, par value $0.01 per share, of the Company (the "AFC
Common Stock"). In addition, a shareholder of Allmerica P&C may elect to receive
the consideration in cash, without interest, or in shares of AFC Common Stock,
subject to proration as set forth in the Merger Agreement. The maximum number of
shares of AFC Common Stock to be issued in the Merger is approximately 9.67
million shares. The acquisition will be accomplished by merging a newly created,
wholly-owned subsidiary of the Company with and into Allmerica P&C ( the
"Merger") resulting in Allmerica P&C becoming a wholly-owned subsidiary of the
Company. 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.
21
<PAGE>
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of Allmerica Financial Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholders' equity, and of cash flows
present fairly, in all material respects, the financial position of Allmerica
Financial Corporation and its subsidiaries at December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in the accompanying notes to the consolidated financial
statements, the Company changed its method of accounting for investments (Note
1) and postemployment benefits (Note 11) in 1994.
/s/ Price Waterhouse LLP
Boston, Massachusetts
February 3, 1997, except as to Note 1,
which is as of February 19, 1997, and Note 2, which is as of April 14, 1997
Management Report on Responsibility For Financial Reporting
- --------------------------------------------------------------------------------
The management of Allmerica Financial Corporation has the responsibility for
preparing the accompanying consolidated financial statements and for their
integrity and objectivity. The statements were prepared in conformity with
generally accepted accounting principles and include amounts based on
management's informed estimates and judgments. We believe that these statements
present fairly the company's financial position and results of operations and
that the other information contained in the annual report is accurate and
consistent with the financial statements.
Allmerica Financial Corporation's Board of Directors annually appoints
independent accountants to perform an audit of its consolidated financial
statements. The financial statements have been audited by Price Waterhouse LLP,
independent accountants, in accordance with generally accepted auditing
standards. Their audit included consideration of the company's system of
internal control in order to determine the audit procedures required to express
their opinion on the consolidated financial statements.
Management of Allmerica Financial Corporation has established and maintains
a system of internal control that provides reasonable assurance that assets are
safeguarded and that transactions are properly authorized and recorded. The
system of internal control provides for appropriate division of responsibility
and is documented by written policies and procedures that are communicated to
employees with significant roles in the financial reporting process and updated
as necessary. Management continually monitors the system of internal control for
compliance. Allmerica Financial Corporation and its subsidiaries maintain a
strong internal audit program that independently assesses the effectiveness of
the internal controls and recommends possible improvements thereto. Management
recognizes the inherent limitations in all internal control systems and believes
that our system of internal control provides an appropriate balance between the
costs and benefits desired. Management believes that the company's system of
internal control provides reasonable assurance that errors or irregularities
that would be material to the financial statements are prevented or detected in
the normal course of business.
The Audit Committee of the Board of Directors, composed solely of outside
directors, oversees management's discharge of its financial reporting
responsibilities. The committee meets periodically with management, our internal
auditors and our independent accountants, Price Waterhouse LLP. Both our
internal auditors and Price Waterhouse LLP have direct access to the Audit
Committee.
Management recognizes its responsibility for fostering a strong ethical
climate. This responsibility is reflected in the Company's policies which
address, among other things, potential conflicts of interest; compliance with
all domestic and foreign laws including those relating to financial disclosure
and the confidentiality of proprietary information. Allmerica Financial
Corporation maintains a systematic program to assess compliance with these
policies.
/s/ John F. O'Brien /s/ Edward J. Parry, III
John F. O'Brien Edward J. Parry, III
President and Chief Vice President, Chief Financial
Executive Officer Officer, Principal Accounting Officer
22
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS, EXCEPT PER SHARE DATA) 1996 1995 1994
==============================================================================
<S> <C> <C> <C>
REVENUES
- --------
Premiums $2,236.3 $2,222.8 $2,181.8
Universal life and investment
product policy fees 197.2 172.4 156.8
Net investment income 672.6 710.5 743.1
Net realized investment gains 65.9 19.1 1.1
Realized gain on sale of
mutual fund processing
business -- 20.7 --
Other income 102.7 95.4 112.3
- ------------------------------------------------------------------------------
Total revenues 3,274.7 3,240.9 3,195.1
- ------------------------------------------------------------------------------
BENEFITS, LOSSES AND EXPENSES
- -----------------------------
Policy benefits, claims,
losses and loss adjustment
expenses 1,957.0 2,010.3 2,047.0
Policy acquisition expenses 483.5 470.3 475.7
Other operating expenses 502.5 458.5 518.9
- ------------------------------------------------------------------------------
Total benefits, losses and
expenses 2,943.0 2,939.1 3,041.6
- ------------------------------------------------------------------------------
Income before federal income taxes 331.7 301.8 153.5
- ------------------------------------------------------------------------------
Federal income tax expense (benefit)
Current 90.9 119.7 45.4
Deferred (15.7) (37.0) 8.0
- ------------------------------------------------------------------------------
Total federal income tax
expense 75.2 82.7 53.4
- ------------------------------------------------------------------------------
Income before minority interest,
extraordinary item and cumulative
effect of accounting change 256.5 219.1 100.1
Minority interest (74.6) (73.1) (51.0)
- ------------------------------------------------------------------------------
Income before extraordinary item
and cumulative effect
of accounting change 181.9 146.0 49.1
Extraordinary item -
demutualization expenses -- (12.1) (9.2)
Cumulative effect of change in
accounting principle -- -- (1.9)
- ------------------------------------------------------------------------------
Net income $ 181.9 $ 133.9 $ 38.0
==============================================================================
<CAPTION>
For the Period Year Ended
October 1 December 31,
Year Ended through 1995
December 31, December 31, Pro Forma*
1996 1995 (Unaudited)
<S> <C> <C> <C>
Net income after demutualization $ 181.9 $ 40.7 $ 130.6
===============================================================================
Net income after demutualization
per share $ 3.63 $ 0.82 $ 2.61
===============================================================================
Weighted average shares outstanding 50.1 49.4 50.1
===============================================================================
</TABLE>
*The pro forma information gives effect to the transactions referred to in
Note 1N.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
23
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
DECEMBER 31
(IN MILLIONS, EXCEPT PER SHARE DATA) 1996 1995
====================================================================================
<S> <C> <C>
ASSETS
Investments:
Fixed maturities-at fair value (amortized cost of
$7,305.5 and $7,467.9) $ 7,487.8 $ 7,739.3
Equity securities-at fair value (cost of $328.2 and
$410.6) 473.6 517.2
Mortgage loans 650.1 799.5
Real estate 120.7 179.6
Policy loans 132.4 123.2
Other long-term investments 128.8 71.9
- ------------------------------------------------------------------------------------
Total investments 8,993.4 9,430.7
- ------------------------------------------------------------------------------------
Cash and cash equivalents 178.5 289.5
Accrued investment income 149.0 163.2
Deferred policy acquisition costs 822.7 735.7
- ------------------------------------------------------------------------------------
Reinsurance receivables:
Future policy benefits 102.8 97.1
Outstanding claims, losses and loss adjustment
expenses 663.8 799.6
Unearned premiums 46.2 43.8
Other 62.8 58.9
- ------------------------------------------------------------------------------------
Total reinsurance receivables 875.6 999.4
- ------------------------------------------------------------------------------------
Deferred federal income taxes 93.2 81.2
Premiums, accounts and notes receivable 533.0 526.7
Other assets 307.5 363.6
Closed Block assets 811.8 818.9
Separate account assets 6,233.0 4,348.8
- ------------------------------------------------------------------------------------
Total assets $18,997.7 $17,757.7
====================================================================================
LIABILITIES
- -----------
Policy liabilities and accruals:
Future policy benefits $ 2,613.7 $ 2,639.3
Outstanding claims, losses and loss adjustment
expenses 2,944.1 3,081.3
Unearned premiums 822.5 800.9
Contractholder deposit funds and other policy
liabilities 2,060.4 2,737.4
- ------------------------------------------------------------------------------------
Total policy liabilities and accruals 8,440.7 9,258.9
====================================================================================
Expenses and taxes payable 622.3 603.0
Reinsurance premiums payable 31.4 42.0
Short-term debt 38.4 31.2
Deferred federal income taxes 34.7 47.8
Long-term debt 202.2 202.3
Closed Block liabilities 892.1 902.0
Separate account liabilities 6,227.2 4,337.8
- ------------------------------------------------------------------------------------
Total liabilities 16,489.0 15,425.0
- ------------------------------------------------------------------------------------
Minority interest 784.0 758.5
- ------------------------------------------------------------------------------------
Commitments and contingencies (Notes 15 and 20)
SHAREHOLDERS' EQUITY
- --------------------
Preferred stock, $0.01 par value, 20.0 million shares
authorized, none issued -- --
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 131.6 153.0
Retained earnings 210.1 38.2
- ------------------------------------------------------------------------------------
Total shareholders' equity 1,724.7 1,574.2
- ------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $18,997.7 $17,757.7
====================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
24
<PAGE>
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
================================================================================
<S> <C> <C> <C>
COMMON STOCK
- ------------
Balance at beginning of year $ 0.5 $ -- $ --
Demutualization transaction -- 0.4 --
Initial public offering -- 0.1 --
- --------------------------------------------------------------------------------
Balance at end of year 0.5 0.5 --
- --------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
- --------------------------
Balance at beginning of year 1,382.5 -- --
Demutualization transaction -- 1,134.6 --
Initial public offering -- 247.9 --
- --------------------------------------------------------------------------------
Balance at end of year 1,382.5 1,382.5 --
- --------------------------------------------------------------------------------
RETAINED EARNINGS
- -----------------
Balance at beginning of year 38.2 1,071.4 1,033.4
Net income prior to
demutualization -- 93.2 38.0
- --------------------------------------------------------------------------------
38.2 1,164.6 1,071.4
Demutualization transaction -- (1,164.6) --
Net income subsequent to
demutualization 181.9 40.7 --
Dividends to shareholders (10.0) (2.5) --
- --------------------------------------------------------------------------------
Balance at end of year 210.1 38.2 1,071.4
- --------------------------------------------------------------------------------
NET UNREALIZED APPRECIATION
- ---------------------------
(DEPRECIATION) ON INVESTMENTS
- -----------------------------
Balance at beginning of year 153.0 (79.0) 17.5
- --------------------------------------------------------------------------------
Cumulative effect of accounting
change:
Net appreciation on
available-for-sale debt
securities -- -- 296.1
Provision for deferred federal
income taxes and minority
interest -- -- (149.1)
- --------------------------------------------------------------------------------
-- -- 147.0
- --------------------------------------------------------------------------------
Effect of transfer of
securities from
held-to-maturity
to available-for-sale:
Net appreciation on
available-for-sale debt
securities -- 22.4 --
Provision for deferred federal
income taxes and minority
interest -- (9.6) --
- --------------------------------------------------------------------------------
-- 12.8 --
- --------------------------------------------------------------------------------
(Depreciation) appreciation
during the period:
Net (depreciation) appreciation
on available-for-sale
securities (35.1) 466.0 (492.1)
Benefit (provision) for
deferred federal income taxes 12.3 (163.1) 171.9
Minority interest 1.4 (83.7) 76.7
- --------------------------------------------------------------------------------
(21.4) 219.2 (243.5)
- --------------------------------------------------------------------------------
Balance at end of year 131.6 153.0 (79.0)
- --------------------------------------------------------------------------------
Total shareholders' equity $1,724.7 $ 1,574.2 $ 992.4
================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
25
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 199
================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
- -------------------------
ACTIVITIES
- ----------
Net income $ 181.9 $ 133.9 $ 38.0
Adjustments to reconcile net
income to net cash provided
by operating activities:
Minority interest 74.6 73.1 50.1
Net realized gains (65.2) (39.8) (1.1)
Net amortization and
depreciation 44.7 57.7 45.9
Deferred federal income taxes (15.7) (37.0) 8.0
Change in deferred acquisition
costs (73.9) (38.4) (34.6)
Change in premiums and notes
receivable, net of
reinsurance payable (16.7) (42.0) (25.6)
Change in accrued investment
income 16.5 6.8 4.6
Change in policy liabilities
and accruals, net (184.3) 116.2 175.9
Change in reinsurance receivable 123.7 (75.6) (31.9)
Change in expenses and taxes
payable 27.1 7.7 88.0
Separate account activity, net 5.2 (0.1) 0.4
Other, net 38.1 (31.3) 14.0
- --------------------------------------------------------------------------------
Net cash provided by operating
activities 156.0 131.2 331.7
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
------------------------------------
Proceeds from disposals and
maturities of
available-for-sale fixed
maturities 4,018.5 2,738.4 2,097.8
Proceeds from disposals of
held-to-maturity fixed
maturities -- 271.3 304.4
Proceeds from disposals of
equity securities 228.7 120.0 143.9
Proceeds from disposals of
other investments 99.3 40.5 25.9
Proceeds from mortgages matured
or collected 176.9 230.3 256.4
Purchase of available-for-sale
fixed maturities (3,830.7) (3,273.3) (2,150.1)
Purchase of held-to-maturity
fixed maturities -- -- (111.6)
Purchase of equity securities (91.6) (254.0) (172.2)
Purchase of other investments (168.0) (24.8) (26.6)
Proceeds from sale of mutual
fund processing business -- 32.9 --
Capital expenditures (12.8) (14.1) (43.1)
Other investing activities, net 4.3 4.7 2.4
- --------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 424.6 (128.1) 327.2
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Deposits and interest credited
to contractholder deposit funds 268.7 445.8 786.3
Withdrawals from contractholder
deposit funds (905.0) (1,069.9) (1,187.0)
Change in short-term debt 7.2 (1.6) (6.0)
Change in long-term debt (0.1) 0.2 0.3
Dividends paid to shareholders (13.9) (6.6) (4.2)
Net proceeds from issuance of
common stock -- 248.0 --
Payments for policyholders'
membership interests -- (27.9) --
Net proceeds from issuance of
long-term debt -- 197.2 --
Subsidiary treasury stock
purchased, at cost (42.0) (20.9) --
- --------------------------------------------------------------------------------
Net cash used in financing
activities (685.1) (235.7) (410.6)
- --------------------------------------------------------------------------------
Net change in cash and cash
equivalents (104.5) (232.6) 248.3
Net change in cash held in the
Closed Block (6.5) (17.6) --
Cash and cash equivalents,
beginning of year 289.5 539.7 291.4
- --------------------------------------------------------------------------------
Cash and cash equivalents, end
of year $ 178.5 $ 289.5 $ 539.7
================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
- ----------------------------------
Interest paid $ 33.8 $ 4.1 $ 4.3
Income taxes paid $ 68.1 $ 90.6 $ 46.1
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
26
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
------------------------------------------
A. Basis of Presentation and Principles of Consolidation
- --------------------------------------------------------
First Allmerica Financial Life Insurance Company ("FAFLIC") 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 retroactively for all periods
presented.
The consolidated financial statements of AFC include the accounts of
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 and Casualty Companies, Inc. ("Allmerica P&C", a 59.5%-owned non-
insurance holding company). The Closed Block assets and liabilities at December
31, 1996 and 1995 and its results of operations subsequent to demutualization
are presented in the consolidated financial statements as single line items.
Prior to demutualization such amounts are presented line by line in the
consolidated financial statements (see Note 6). Unless specifically stated, all
disclosures contained herein supporting the consolidated financial statements at
December 31, 1996 and 1995 and the years then ended exclude the Closed Block
related amounts. All significant intercompany accounts and transactions have
been eliminated.
Minority interest relates to the Company's investment in Allmerica P&C and
its only significant subsidiary, The Hanover Insurance Company ("Hanover").
Hanover's 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.
On February 19, 1997, the Company announced a definitive merger agreement
under which it would acquire, at consideration of $33.00 per share, all of the
shares of Allmerica P&C currently held by the minority stockholders. Additional
information pertaining to the merger agreement is included in Note 2,
Significant Transactions.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
B. Closed Block
- ---------------
As of October 16, 1995, FAFLIC established and began operating a closed block
(the "Closed Block") for the benefit of the participating policies included
therein, consisting of certain individual life insurance participating policies,
individual deferred annuity contracts and supplementary contracts not involving
life contingencies which were in force on October 16, 1995; such policies
constitute the "Closed Block Business". The purpose of the Closed Block is to
protect the policy dividend expectations of such FAFLIC dividend paying policies
and contracts after the demutualization. Unless the Commissioner consents to an
earlier termination, the Closed Block will continue to be in effect until the
date none of the Closed Block policies is in force. On October 16, 1995, FAFLIC
allocated to the Closed Block assets in an amount that is expected to produce
cash flows which, together with future revenues from the Closed Block Business,
are reasonably sufficient to support the Closed Block Business, including
provision for payment of policy benefits, certain future expenses and taxes and
for continuation of policyholder dividend scales payable in 1994 so long as the
experience underlying such dividend scales continues. The Company expects that
the factors underlying such experience will fluctuate in the future and
policyholder dividend scales for Closed Block Business will be set accordingly.
Although the assets and income allocated to the Closed Block inure solely
to the benefit of the holders of policies included in the Closed Block, the
excess of Closed Block liabilities over Closed Block assets at October 16, 1995
measured on a GAAP basis represent the expected future post-tax income from the
Closed Block which may be recognized in income over the period the policies and
contracts in the Closed Block remain in force.
If the actual income from the Closed Block in any given period equals or
exceeds the expected income for such period as determined at October 16, 1995,
the expected income would be recognized in income for that period. Further, any
excess of the actual income over the expected income would also be recognized in
income to the extent that the aggregate expected income for all prior periods
exceeded the aggregate actual income. Any remaining excess of actual income over
expected income would be accrued as a liability for policyholder dividends in
the Closed Block to be paid to the Closed Block policyholders. This accrual for
future dividends effectively limits the actual Closed Block income recognized in
income to the Closed Block income expected to emerge from operation of the
Closed Block as determined as of October 16, 1995.
If, over the period the policies and contracts in the Closed Block remain
in force, the actual income from the Closed Block is less than the expected
income from the Closed Block, only such actual income (which could reflect a
loss) would be recognized in income. If the actual income from the Closed Block
in any given period is less than the expected income for that period and changes
in dividends scales are inadequate to
27
<PAGE>
- --------------------------------------------------------------------------------
offset the negative performance in relation to the expected performance, the
income inuring to shareholders of the Company will be reduced. If a policyholder
dividend liability had been previously established in the Closed Block because
the actual income to the relevant date had exceeded the expected income to such
date, such liability would be reduced by this reduction in income (but not below
zero) in any periods in which the actual income for that period is less than the
expected income for such period.
C. Valuation of Investments
- ---------------------------
Effective January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain
Investments in Debt and Equity Securities", which requires investments be
classified into one of three categories: held-to-maturity, available-for-sale or
trading. The effect of implementing SFAS No. 115, as of January 1, 1994, was an
increase in the carrying value of fixed maturity investments of $335.3 million,
a decrease in deferred policy acquisition costs of $20.8 million, an increase in
policyholder liabilities of $18.4 million, a net increase in deferred income tax
liabilities of $103.7 million, an increase in minority interest of $45.4 million
and an increase in shareholders' equity of $147.0 million, which resulted from
changing the carrying value of certain fixed maturities from amortized cost to
fair value and related adjustments. The implementation had no effect on net
income.
In November 1995, the Financial Accounting Standards Board issued a Special
Report, A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities, which permitted companies to
reclassify securities, where appropriate, based on the new guidance. As a
result, the Company transferred securities with amortized cost and fair value of
$696.4 million and $725.6 million, respectively, from the held-to-maturity
category to the available-for-sale category, which resulted in a net increase in
shareholders' equity of $12.8 million.
Realized gains and losses on sales of fixed maturities and equity
securities are determined on the specific-identification basis using amortized
cost for fixed maturities and cost for equity securities. Fixed maturities and
equity securities with other than temporary declines in fair value are written
down to estimated fair value resulting in the recognition of realized losses.
Mortgage loans on real estate are stated at unpaid principal balances, net
of unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by management to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which management believes may not be collectible in
full. In establishing reserves, management considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on non-
accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
Real estate that has been acquired through the foreclosure of mortgage
loans is valued at the estimated fair value at the time of foreclosure. The
Company considers several methods in determining fair value at foreclosure,
using primarily third-party appraisals and discounted cash flow analyses. After
foreclosure, the Company makes a determination as to whether the asset should be
held for production of income or held for sale.
Real estate investments held for the production of income and held for
sale are carried at depreciated cost less valuation allowances, if necessary, to
reduce the carrying value to fair value. Depreciation is generally calculated
using the straight-line method.
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other than temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans and real
estate are included in realized investment gains or losses.
D. Financial Instruments
- ------------------------
In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities, investment and loan
commitments, swap contracts and interest rate futures contracts. These
instruments involve credit risk and also may be subject to risk of loss due to
interest rate fluctuation. The Company evaluates and monitors each financial
instrument individually and, when appropriate, obtains collateral or other
security to minimize losses.
E. Cash and Cash Equivalents
- ----------------------------
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
F. Deferred Policy Acquisition Costs
- ------------------------------------
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Property and casualty, group life and group health insurance business
acquisition costs are deferred and amortized over the terms of the insurance
policies. Acquisition costs related to universal life products and
contractholder deposit funds are deferred and amortized in proportion to total
estimated gross profits over the expected life of the contracts using a revised
interest rate applied to the remaining benefit period. Acquisition costs related
to annuity and other life insurance businesses are deferred and amortized,
28
<PAGE>
- --------------------------------------------------------------------------------
generally in proportion to the ratio of annual revenue to the estimated total
revenues over the contract periods based upon the same assumptions used in
estimating the liability for future policy benefits. Deferred acquisition costs
for each product are reviewed to determine if they are recoverable from future
income, including investment income. If such costs are determined to be
unrecoverable, they are expensed at the time of determination.
Although realization of deferred policy acquisition costs is not assured,
management believes it is more likely than not that all of these costs will be
realized. The amount of deferred policy acquisition costs considered realizable,
however, could be reduced in the near term if the estimates of gross profits or
total revenues discussed above are reduced. The amount of amortization of
deferred policy acquisition costs could be revised in the near term if any of
the estimates discussed above are revised.
G. Property and Equipment
- -------------------------
Property, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is provided using the
straight-line or accelerated method over the estimated useful lives of the
related assets which generally range from 3 to 30 years. Amortization of
leasehold improvements is provided using the straight-line method over the
lesser of the term of the leases or the estimated useful life of the
improvements.
H. Separate Accounts
- --------------------
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of certain pension, variable annuity
and variable life insurance contractholders. Assets consist principally of
bonds, common stocks, mutual funds, and short-term obligations at market value.
The investment income, gains, and losses of these accounts generally accrue to
the contractholders and, therefore, are not included in the Company's net
income. Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
shareholders' equity or net investment income.
I. Policy Liabilities and Accruals
- ----------------------------------
Future policy benefits are liabilities for life, health and annuity products.
Such liabilities are established in amounts adequate to meet the estimated
future obligations of policies in force. The liabilities associated with
traditional life insurance products are computed using the net level premium
method for individual life and annuity policies, and are based upon estimates as
to future investment yield, mortality and withdrawals that include provisions
for adverse deviation. Future policy benefits for individual life insurance and
annuity policies are computed using interest rates ranging from 2 1/2% to 6% for
life insurance and 2% to 9 1/2% for annuities. Estimated liabilities are
established for group life and health policies that contain experience rating
provisions. Mortality, morbidity and withdrawal assumptions for all policies are
based on the Company's own experience and industry standards. Liabilities
for universal life include deposits received from customers and investment
earnings on their fund balances, less administrative charges. Universal life
fund balances are also assessed mortality and surrender charges.
Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made on property and casualty and health insurance
for reported losses and estimates of losses incurred but not reported. These
liabilities are determined using case basis evaluations and statistical analyses
and represent estimates of the ultimate cost of all losses incurred but not
paid. These estimates are continually reviewed and adjusted as necessary; such
adjustments are reflected in current operations. Estimated amounts of salvage
and subrogation on unpaid property and casualty losses are deducted from the
liability for unpaid claims.
Premiums for property and casualty, group life, and accident and health
insurance are reported as earned on a pro-rata basis over the contract period.
The unexpired portion of these premiums is recorded as unearned premiums.
Contractholder deposit funds and other policy liabilities include
investment-related products such as guaranteed investment contracts, deposit
administration funds and immediate participation guarantee funds and consist of
deposits received from customers and investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates
discussed above. Although the adequacy of these amounts cannot be assured,
management believes that it is more likely than not that policy liabilities and
accruals will be sufficient to meet future obligations of policies in force. The
amount of liabilities and accruals, however, could be revised in the near term
if the estimates discussed above are revised.
J. Premium and Fee Revenue and Related Expenses
- -----------------------------------------------
Premiums for individual life and health insurance and individual and group
annuity products, excluding universal life and investment-related products, are
considered revenue when due. Property and casualty and group life, accident and
health insurance premiums are recognized as revenue over the related contract
periods. Benefits, losses and related expenses are matched with premiums,
resulting in their recognition over the lives of the contracts. This matching is
accomplished through the provision for future benefits, estimated and unpaid
losses and amortization of deferred policy acquisition costs. Revenues for
investment-related products consist of net investment income and contract
charges assessed against the fund values. Related benefit expenses primarily
consist of net investment income credited to the fund values after deduction for
investment and risk charges. Revenues for universal life products consist of net
investment income, and mortality, administration and surrender charges assessed
against the fund values. Related benefit expenses include universal life benefit
claims in excess of fund values and net investment income credited to universal
life fund values.
29
<PAGE>
- --------------------------------------------------------------------------------
K. Policyholder Dividends
- -------------------------
Prior to demutualization, certain life, health and annuity insurance policies
contained dividend payment provisions that enabled the policyholder to
participate in the earnings of the Company. The amount of policyholders'
dividends was determined annually by the Board of Directors. The aggregate
amount of policyholders' dividends was related to the actual interest,
mortality, morbidity and expense experience for the year and the Company's
judgment as to the appropriate level of statutory surplus to be retained. Upon
demutualization, certain participating individual life insurance policies and
individual annuity and supplemental contracts were transferred to the Closed
Block. The Closed Block was funded to protect the dividend expectations of such
policies and contracts. Accordingly, these policies no longer participate in the
earnings and surplus of the Open Block. Subsequent to demutualization, the
Company ceased issuance of participating policies.
Prior to demutualization, the participating life insurance in force was
16.2% of the face value of total life insurance in force at December 31, 1994.
The premiums on participating life, health and annuity policies were 11.3% and
6.4% of total life, health and annuity statutory premiums prior to
demutualization in 1995 and 1994, respectively. Total policyholders' dividends
were $23.3 million and $32.8 million prior to demutualization in 1995 and 1994,
respectively.
L. Federal Income Taxes
- -----------------------
AFC, FAFLIC, AFLIAC and FAFLIC's non-insurance domestic subsidiaries file a
consolidated United States federal income tax return. Entities included within
the consolidated group are segregated into either a life insurance or non-life
insurance company subgroup. The consolidation of these subgroups is subject to
certain statutory restrictions on the percentage of eligible non-life tax losses
that can be applied to offset life company taxable income. Allmerica P&C and its
subsidiaries file a separate United States federal income tax return.
Deferred income taxes are generally recognized when assets and liabilities
have different values for financial statement and tax reporting purposes, and
for other temporary taxable and deductible differences as defined by Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
No. 109). These differences result primarily from loss reserves, policy
acquisition expenses, and unrealized appreciation/depreciation on investments.
M. New Accounting Pronouncements
- --------------------------------
In March 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" was issued. This statement requires
companies to write down to fair value long-lived assets whose carrying value is
greater than the undiscounted cash flows of those assets. The statement also
requires that long-lived assets of which management is committed to dispose,
either by sale or abandonment, be valued at the lower of their carrying amount
or fair value less costs to sell. This statement is effective for fiscal years
beginning after December 15, 1995. The adoption of this statement has not had a
material effect on the financial statements.
N. Earnings Per Share
- ---------------------
Earnings per share for the year ended December 31, 1996 is based on a weighted
average of the number of shares outstanding during 1996. Earnings per share for
the period October 1, 1995 (date used to estimate financial information for the
effective date of the demutualization transaction of October 16, 1995) through
December 31, 1995 is based on a weighted average of the number of shares
outstanding between October 16, 1995 and December 31, 1995.
The unaudited pro forma earnings per share for the year ended December 31,
1995 is based on a weighted average of the number of shares that would have been
outstanding between January 1, 1995 and December 31, 1995 had the
demutualization transaction occurred as of January 1, 1995.
The unaudited pro forma earnings and earnings per share information give
effect to the demutualization transaction and the Senior Debentures transaction
as if these transactions had occurred as of January 1, 1995. The effect on
earnings is to eliminate demutualization expenses of $12.1 million, to eliminate
a differential earnings adjustment tax credit of $7.6 million and to increase
interest and amortization expense related to the Senior Debentures by $7.8
million, for a net decrease in pro forma earnings of $3.3 million.
The unaudited pro forma information is provided for informational purposes
only and should not be construed to be indicative of the Company's consolidated
results of operations had the transactions been consummated on January 1, 1995,
and does not represent a projection or forecast of the Company's consolidated
results of operations for any future period.
O. Reclassifications
- --------------------
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. SIGNIFICANT TRANSACTIONS
------------------------
In April 1997, the Company entered into a letter of intent for the 100%
coninsurance 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 resulted in the recognition of a $53.9 million pre-tax
loss during the first quarter of 1997.
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
$33.00 per share of Common Stock, subject to adjustment, payable in cash and
shares of common stock, par value $0.01 per share, of the Company (the "AFC
Common Stock"). In addition, a shareholder of Allmerica P&C may elect to receive
the consideration in cash, without interest, or in shares of AFC Common Stock,
subject to proration as set forth in the Merger Agreement. The maximum number of
shares of AFC Common Stock to be issued in the Merger is approximately 9.67
million shares. The acquisition will be accomplished by merging a newly created,
wholly-owned subsidiary of the Company with and into Allmerica P&C ( the
"Merger")
30
<PAGE>
- --------------------------------------------------------------------------------
resulting in Allmerica P&C becoming a wholly-owned subsidiary of the Company.
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.
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 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 an Agreement and Plan of Merger dated February 19, 1997.
Pursuant to the plan of reorganization effective October 16, 1995, the
Company issued 37.5 million shares of its common stock to eligible
policyholders. The Company also issued 12.6 million shares of its common stock
at a price of $21.00 per share in a public offering, resulting in net proceeds
of $248.0 million, and issued Senior Debentures in the principal amount of
$200.0 million which resulted in net proceeds of $197.2 million.
Effective March 31, 1995, the Company entered into an agreement with TSSG,
a division of First Data Corporation, pursuant to which the Company sold its
mutual fund processing business and agreed not to engage in this business for
four years after that date. In accordance with this agreement, the Company
received proceeds of $32.1 million. A gain of $13.5 million, net of taxes of
$7.2 million, was recorded in March 1995. Additionally, the Company received a
non-recurring $3.1 million contingent payment, net of taxes of $1.7 million, in
1996 related to the aforementioned sale.
3. INVESTMENTS
-----------
A. Summary of Investments
- -------------------------
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of SFAS No. 115.
The amortized cost and fair value of available-for-sale fixed maturities
and equity securities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost (1) Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities and
U.S. government and agency
securities $ 279.1 $ 9.3 $ 1.6 $ 286.8
States and political
subdivisions 2,236.9 48.5 7.7 2,277.7
Foreign governments 108.8 7.4 -- 116.2
Corporate fixed maturities 4,297.6 140.4 16.0 4,422.0
Mortgage-backed securities 383.1 4.7 2.7 385.1
- --------------------------------------------------------------------------------
Total fixed maturities $ 7,305.5 $ 210.3 $ 28.0 $ 7,487.8
================================================================================
Equity securities $ 328.2 $ 149.1 $ 3.7 $ 473.6
================================================================================
DECEMBER 31
(IN MILLIONS) 1995
- --------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost (1) Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury securities and
U.S. government and agency
securities $ 377.0 $ 21.0 $ -- $ 398.0
States and political
subdivisions 2,110.6 60.7 4.0 2,167.3
Foreign governments 60.6 3.4 0.6 63.4
Corporate fixed maturities 4,582.1 200.8 16.4 4,766.5
Mortgage-backed securities 337.6 8.6 2.1 344.1
- --------------------------------------------------------------------------------
Total fixed maturities $ 7,467.9 $ 294.5 $ 23.1 $ 7,739.3
================================================================================
Equity securities $ 410.6 $111.7 $ 5.1 $ 517.2
================================================================================
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
31
<PAGE>
- --------------------------------------------------------------------------------
In March 1994, AFLIAC voluntarily withdrew its license in New York in order to
provide for certain commission arrangements prohibited by New York comparable to
AFLIAC's competitors. In connection with the withdrawal, FAFLIC, which is
licensed in New York, became qualified to sell the products previously sold by
AFLIAC in New York. AFLIAC agreed with the New York Department of Insurance to
maintain, through a custodial account in New York, a security deposit, the
market value of which will at all times equal 102% of all outstanding general
account liabilities of AFLIAC for New York policyholders, claimants and
creditors. At December 31, 1996, the amortized cost and market value of assets
on deposit were $284.9 million and $292.2 million, respectively. At December 31,
1995, the amortized cost and market value of assets on deposit were $295.0
million and $303.6 million, respectively. In addition, fixed maturities,
excluding those securities on deposit in New York, with an amortized cost of
$98.0 million and $82.2 million were on deposit with various state and
governmental authorities at December 31, 1996 and 1995, respectively.
There were no contractual fixed maturity investment commitments at December
31, 1996 and 1995, respectively.
The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties, or the Company may have the right to put or sell the
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.
<TABLE>
<CAPTION>
December 31
(In millions) 1996
================================================================================
AMORTIZED FAIR
COST VALUE
<S> <C> <C>
Due in one year or less $ 567.6 $ 571.2
Due after one year through five years 2,216.4 2,297.2
Due after five years through ten years 2,398.2 2,456.9
Due after ten years 2,123.3 2,162.5
- --------------------------------------------------------------------------------
Total $7,305.5 $7,487.8
================================================================================
</TABLE>
The proceeds from voluntary sales of available-for-sale securities and the
gross realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions)
================================================================================
Proceeds from Gross Gross
1996 Voluntary Sales Gains Losses
- ----
<S> <C> <C> <C>
Fixed maturities $2,463.3 $ 19.3 $ 31.0
================================================================================
Equity securities $ 228.7 $ 56.3 $ 1.3
================================================================================
1995
- ----
Fixed maturities $1,612.3 $ 23.7 $ 33.0
================================================================================
Equity securities $ 122.2 $ 23.1 $ 6.9
================================================================================
1994
- ----
Fixed maturities $1,026.2 $ 12.6 $ 21.6
================================================================================
Equity securities $ 124.3 $ 17.4 $ 4.5
================================================================================
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions)
================================================================================
Equity
Fixed Securities
1996 Maturities and Other(1) Total
- ----
<S> <C> <C> <C>
Net appreciation, beginning
of year $ 108.7 $ 44.3 $153.0
- --------------------------------------------------------------------------------
Net (depreciation) appreciation
on available-for-sale securities (94.3) 36.1 (58.2)
Net appreciation from the
effect on deferred policy
acquisition costs and on
policy liabilities 23.1 -- 23.1
Benefit (provision) for deferred
federal income taxes
and minority interest 33.6 (19.9) 13.7
- --------------------------------------------------------------------------------
(37.6) 16.2 (21.4)
- --------------------------------------------------------------------------------
Net appreciation, end of year $ 71.1 $ 60.5 $131.6
================================================================================
</TABLE>
32
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Equity
Fixed Securities
1995 Maturities and Other(1) Total
- ----
<S> <C> <C> <C>
Net (depreciation) appreciation,
beginning of year $ (89.4) $ 10.4 $ (79.0)
- --------------------------------------------------------------------------------
Effect of transfer of securities
between classifications:
Net appreciation on available-
for-sale fixed maturities 29.2 -- 29.2
Effect of transfer on
deferred policy acquisition
costs and on policy liabilities (6.8) -- (6.8)
Provision for deferred
federal income taxes
and minority interest (9.6) -- (9.6)
- --------------------------------------------------------------------------------
12.8 -- 12.8
- --------------------------------------------------------------------------------
Net appreciation on
available-for-sale securities 465.4 87.5 552.9
Net depreciation from the
effect on deferred policy
acquisition costs and
on policy liabilities (86.9) -- (86.9)
Provision for deferred
federal income taxes
and minority interest (193.2) (53.6) (246.8)
- --------------------------------------------------------------------------------
185.3 33.9 219.2
- --------------------------------------------------------------------------------
Net appreciation, end of year $ 108.7 $ 44.3 $ 153.0
================================================================================
1994
- ----
Net appreciation, beginning of year $ -- $ 17.5 $ 17.5
- --------------------------------------------------------------------------------
Cumulative effect of accounting
change:
Net appreciation on available-
for-sale fixed maturities 335.3 -- 335.3
Net depreciation from the
effect of accounting change
on deferred policy acquisition
costs and on policy liabilities (39.2) -- (39.2)
Provision for deferred federal
income taxes and minority
interest (149.1) -- (149.1)
- --------------------------------------------------------------------------------
147.0 17.5 164.5
- --------------------------------------------------------------------------------
Net depreciation on
available-for-sale securities (547.9) (17.4) (565.3)
Net appreciation from the effect
on deferred policy acquisition
costs and on policy liabilities 73.2 -- 73.2
Benefit for deferred federal income
taxes and minority interest 238.3 10.3 248.6
- --------------------------------------------------------------------------------
(236.4) (7.1) (243.5)
- --------------------------------------------------------------------------------
Net (depreciation) appreciation,
end of year $ (89.4) $ 10.4 $ (79.0)
================================================================================
</TABLE>
(1) Includes net appreciation on other investments of $0.6 million, $2.2
million, and $0.6 million in 1996, 1995, and 1994 respectively.
B. Mortgage Loans and Real Estate
- ---------------------------------
AFC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996 1995
================================================================================
<S> <C> <C>
Mortgage loans $650.1 $799.5
- --------------------------------------------------------------------------------
Real estate:
Held for sale 110.4 168.9
Held for production of income 10.3 10.7
- --------------------------------------------------------------------------------
Total real estate 120.7 179.6
- --------------------------------------------------------------------------------
Total mortgage loans and real estate $770.8 $979.1
================================================================================
</TABLE>
Reserves for mortgage loans were $19.6 million and $33.8 million at December
31, 1996 and 1995, respectively.
During 1996, 1995 and 1994, non-cash investing activities included real estate
acquired through foreclosure of mortgage loans, which had a fair value of $0.9
million, $26.1 million and $39.2 million, respectively.
At December 31, 1996, contractual commitments to extend credit under
commercial mortgage loan agreements amounted to approximately $22.1 million, of
which $3.1 million related to the Closed Block. These commitments generally
expire within one year.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996 1995
================================================================================
<S> <C> <C>
Property type:
Office building $317.1 $435.9
Residential 95.4 145.3
Retail 177.0 205.6
Industrial / warehouse 124.8 93.8
Other 91.0 151.9
Valuation allowances (34.5) (53.4)
- --------------------------------------------------------------------------------
Total $770.8 $979.1
================================================================================
Geographic region:
South Atlantic $227.0 $281.4
Pacific 154.4 191.9
East North Central 119.2 118.2
Middle Atlantic 112.6 148.9
West South Central 41.6 79.7
New England 50.9 94.9
Other 99.6 117.5
Valuation allowances (34.5) (53.4)
- --------------------------------------------------------------------------------
Total $770.8 $979.1
================================================================================
</TABLE>
33
<PAGE>
- --------------------------------------------------------------------------------
At December 31, 1996, scheduled mortgage loan maturities were as follows: 1997 -
$131.9 million; 1998 - $161.7 million; 1999 - $99.9 million; 2000 - $138.0
million; 2001 - $34.4 million; and $84.2 million thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties and loans may be
refinanced. During 1996, the Company refinanced $7.8 million of mortgage loans
based on terms which differed from those granted to new borrowers.
C. Investment Valuation Allowances
- ----------------------------------
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the consolidated balance sheets and
changes thereto are shown below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS)
================================================================================
Balance at Balance at
1996 January 1 Additions Deductions December 31
- ----
<S> <C> <C> <C> <C>
Mortgage loans $33.8 $ 5.5 $19.7 $19.6
Real estate 19.6 - 4.7 14.9
- --------------------------------------------------------------------------------
Total $53.4 $ 5.5 $24.4 $34.5
================================================================================
1995
- ----
Mortgage loans $47.2 $ 1.5 $14.9 $33.8
Real estate 22.9 (0.6) 2.7 19.6
- --------------------------------------------------------------------------------
Total $70.1 $ 0.9 $17.6 $53.4
================================================================================
1994
- ----
Mortgage loans $73.8 $14.6 $41.2 $47.2
Real estate 21.0 3.2 1.3 22.9
- --------------------------------------------------------------------------------
Total $94.8 $17.8 $42.5 $70.1
================================================================================
</TABLE>
The carrying value of impaired loans was $33.6 million and $55.7 million,
with related reserves of $11.9 million and $22.3 million as of December 31, 1996
and 1995, respectively. All impaired loans were reserved as of December 31, 1996
and 1995.
The average carrying value of impaired loans was $50.4 million, $117.9
million and $155.5 million, with related interest income while such loans were
impaired, of $5.8 million, $9.3 million and $12.4 million as of December 31,
1996, 1995 and 1994 respectively.
D. Futures Contracts
- --------------------
AFC purchases long futures contracts and sells short futures contracts on margin
to hedge against interest rate fluctuations associated with the sale of
Guaranteed Investment Contracts ("GICs"). The Company is exposed to interest
rate risk from the time of sale of the GIC until the receipt of the deposit and
purchase of the underlying asset to back the liability. The Company's exposure
to credit risk under futures contracts is limited to the margin deposited with
the broker. The Company only trades futures contracts with nationally recognized
brokers, which the Company believes have adequate capital to ensure that there
is minimal danger of default. Total margin deposits at December 31, 1996 were
$0.6 million. The Company does not require collateral or other security to
support financial instruments with credit risk. The notional amount of such
futures contracts outstanding were $(40.0) million net short contracts and $74.7
million long contracts at December 31, 1996 and 1995, respectively. The notional
amounts of the contracts represent the extent of the Company's involvement but
not the future cash requirements, as the Company generally settles open
positions prior to maturity.
The maturity of all futures contracts outstanding are less than one year.
The fair value of futures contracts outstanding were $(39.4) million and $75.7
million at December 31, 1996 and 1995, respectively.
Gains and losses on hedge contracts related to interest rate fluctuations
are deferred and recognized in income over the period being hedged corresponding
to related guaranteed investment contracts. If instruments being hedged by
futures contracts are disposed, any unamortized gains or losses on such
contracts are included in the determination of the gain or loss from the
disposition. Deferred hedging gains (losses) were $0.6 million, $5.6 million and
$(7.7) million in 1996, 1995 and 1994, respectively. Gains and losses on hedge
contracts that are deemed ineffective by management are realized immediately.
A reconciliation of the notional amount of futures contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
================================================================================
<S> <C> <C> <C>
Contracts outstanding,
beginning of year $ 74.7 $ 126.6 $ 141.7
New contracts (44.0) 349.2 816.0
Contracts terminated (70.7) (401.1) (831.1)
- --------------------------------------------------------------------------------
Contracts outstanding, end of year $(40.0) $ 74.7 $ 126.6
================================================================================
</TABLE>
34
<PAGE>
- --------------------------------------------------------------------------------
E. Foreign Currency Swap Contracts
- ----------------------------------
The Company enters into foreign currency swap contracts with swap counterparties
to hedge foreign currency exposure on specific fixed income securities. Interest
and principal related to foreign fixed maturity investments payable in foreign
currencies, at current exchange rates, are exchanged for the equivalent payment
in U.S. dollars translated at a specific currency exchange rate. The primary
risk associated with these transactions is the inability of the counterparty to
meet its obligation. The Company regularly assesses the financial strength of
its counterparties. Generally, the Company only enters into forward or swap
agreements with counterparties rated "A" or better by the nationally recognized
rating agencies. The Company's maximum exposure to counterparty credit risk is
the difference between the foreign currency exchange rate, as agreed upon in the
swap contract, and the foreign currency spot rate on the date of the exchange,
as indicated by the fair value of the contract. The fair values of the foreign
currency swap contracts outstanding were $(9.2) million and $(1.8) million at
December 31, 1996 and 1995, respectively. The Company does not require
collateral or other security to support financial instruments with credit risk.
The difference between amounts paid and received on foreign currency swap
contracts is reflected in the net investment income related to the underlying
assets and is not material in 1996, 1995 and 1994. The Company had no deferred
gains or losses on foreign currency swap contracts. Any gain or loss on the
termination of swap contracts is deferred and recognized when the offsetting
gain or loss is recognized on the hedged transaction.
A reconciliation of the notional amount of swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
================================================================================
<S> <C> <C> <C>
Contracts outstanding,
beginning of year $104.6 $118.7 $128.8
New contracts -- -- 10.1
Contracts expired (36.0) -- (15.1)
Contracts terminated -- (14.1) (5.1)
- --------------------------------------------------------------------------------
Contracts outstanding, end of year $ 68.6 $104.6 $118.7
================================================================================
</TABLE>
Expected maturities of foreign currency swap contracts are $18.2 million in
1997 and $50.4 million in 1999 and thereafter. There are no expected maturities
of foreign currency swap contracts in 1998.
F. Interest Rate and Other Swap Contracts
- -----------------------------------------
The Company enters into interest rate swap contracts to hedge exposure to
interest rate fluctuations. Under these swap contracts, the Company agrees to
exchange, at specified intervals, the difference between fixed and floating
interest amounts calculated on an agreed-upon notional principal amount. In
addition, the Company has entered into two new types of swap contracts in 1996:
security return-linked swap contracts and insurance portfolio-linked swap
contracts for investment purposes. Under the security return-linked contracts,
the Company agrees to exchange cash flows according to the performance of a
specified security or portfolio of securities. Under the insurance portfolio-
linked swap contracts, the Company agrees to exchange cash flows according to
the performance of a specified underwriter's portfolio of insurance business.
As with foreign currency swap contracts, the primary risk associated with these
transactions is the inability of the counterparty to meet its obligation. The
Company regularly assesses the financial strength of its counterparties.
Generally, the Company only enters into forward or swap agreements with
counterparties rated "A" or better by the nationally recognized rating agencies.
Because the underlying principal of swap contracts is not exchanged, the
Company's maximum exposure to counterparty credit risk is the difference in
payments exchanged. At December 31, 1996, the net amount receivable was $0.1
million. The Company does not require collateral or other security to support
financial instruments with credit risk. Swap contracts also subject the Company
to market risk associated with changes in interest rates.
The net amount receivable or payable is recognized over the life of the
swap contract as an adjustment to net investment income. The increase or
(decrease) in net investment income related to interest rate and other swap
contracts was $0.6 million, $0.7 million and $(1.3) million for the years ended
December 31, 1996, 1995, and 1994, respectively. The Company had no deferred
gains or losses relating to interest rate and other swap contracts. The fair
values of interest rate and other swap contracts outstanding were $0.1 million,
$0.4 million and $0.6 million at December 31, 1996, 1995 and 1994, respectively.
Any gain or loss on the termination of interest rate swap contracts accounted
for as hedges are deferred and recognized when the offsetting gain or loss is
recognized on the hedged transaction. Other swap contracts are marked to market
with any gain or loss recognized through income currently.
A reconciliation of the notional amount of interest rate and other swap
contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
================================================================================
<S> <C> <C> <C>
Contracts outstanding,
beginning of year $ 17.5 $22.8 $22.8
New contracts 63.6 -- --
Contracts expired (17.5) (5.3) --
- --------------------------------------------------------------------------------
Contracts outstanding, end of year $ 63.6 $17.5 $22.8
================================================================================
</TABLE>
Expected maturities of interest rate and other swap contracts outstanding
at December 31 are as follows: $43.6 million in 1997, $5.0 million in 1998, and
$15.0 million in 1999 and thereafter.
G. Other
- --------
At December 31, 1996, AFC had no concentration of investments in a single
investee exceeding 10% of shareholders' equity, except for investments with the
U.S. Treasury with a carrying value of $268.3 million.
4. INVESTMENT INCOME AND GAINS AND LOSSES
--------------------------------------
A. Net Investment Income
- ------------------------
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
================================================================================
<S> <C> <C> <C>
Fixed maturities $555.8 $555.1 $578.3
Mortgage loans 69.5 97.0 119.9
Equity securities 11.1 13.2 9.9
Policy loans 10.3 20.3 23.3
Real estate 40.8 48.7 44.6
Other long-term investments 19.0 7.1 5.7
Short-term investments 11.3 21.6 10.3
- --------------------------------------------------------------------------------
Gross investment income 717.8 763.0 792.0
Less investment expenses (45.2) (52.5) (48.9)
- --------------------------------------------------------------------------------
Net investment income $672.6 $710.5 $743.1
================================================================================
</TABLE>
At December 31, 1996, fixed maturities and mortgage loans on non-accrual
status were $2.0 million and $6.8 million, including restructured loans of $4.4
million. The effect of non-
35
<PAGE>
- --------------------------------------------------------------------------------
accruals, compared with amounts that would have been recognized in accordance
with the original terms of the investments, was to reduce net income by $0.5
million, $0.6 million and $5.1 million in 1996, 1995 and 1994, respectively.
The payment terms of mortgage loans may from time to time be restructured
or modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $51.3 million, $98.9 million and $126.8 million at December
31, 1996, 1995 and 1994, respectively. Interest income on restructured mortgage
loans that would have been recorded in accordance with the original terms of
such loans amounted to $7.7 million, $11.1 million and $14.4 million in 1996,
1995 and 1994, respectively. Actual interest income on these loans included in
net investment income aggregated $4.5 million, $7.1 million and $8.2 million in
1996, 1995 and 1994, respectively.
At December 31, 1996, fixed maturities with a carrying value of $2.0
million were non-income producing for the twelve months ended December 31, 1996.
There were no mortgage loans which were non-income producing for the twelve
months ended December 31, 1996.
Included in other long-term investments is income from limited partnerships
of $13.7 million, $0.1 million and $0.6 million in 1996, 1995 and 1994
respectively.
B. Realized Investment Gains and Losses
- ---------------------------------------
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
==========================================================================
<S> <C> <C> <C>
Fixed maturities $(10.1) $(7.0) $ 2.4
Mortgage loans (2.4) 1.4 (12.1)
Equity securities 55.0 16.2 12.4
Real estate 21.1 5.3 1.4
Other 2.3 3.2 (3.0)
- --------------------------------------------------------------------------
Net realized investment gains $ 65.9 $19.1 $ 1.1
==========================================================================
</TABLE>
Proceeds from voluntary sales of investments in fixed maturities were
$2,463.3 million, $1,612.3 million and $1,036.5 million in 1996, 1995 and 1994,
respectively. Realized gains on such sales were $19.3 million, $23.7 million and
$12.9 million; and realized losses were $31.0 million, $33.0 million and $21.6
million for 1996, 1995 and 1994, respectively.
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
-----------------------------------------------
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value information about certain financial instruments
(insurance contracts, real estate, goodwill and taxes are excluded) for which it
is practicable to estimate such values, whether or not these instruments are
included in the balance sheet. The fair values presented for certain financial
instruments are estimates which, in many cases, may differ significantly from
the amounts which could be realized upon immediate liquidation. In cases where
market prices are not available, estimates of fair value are based on discounted
cash flow analyses which utilize current interest rates for similar financial
instruments which have comparable terms and credit quality. Fair values of
interest rate futures were not material at December 31, 1996 and 1995.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and Cash Equivalents
For these short-term investments, the carrying amount approximates fair value.
Fixed Maturities
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
Equity Securities
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
Mortgage Loans
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
Reinsurance Receivables
The carrying amount reported in the consolidated balance sheets approximates
fair value.
Policy Loans
The carrying amount reported in the consolidated balance sheets approximates
fair value since policy loans have no defined maturity dates and are inseparable
from the insurance contracts.
Investment Contracts (Without Mortality Features)
Fair values for the Company's liabilities under guaranteed investment type
contracts are estimated using discounted cash flow calculations using current
interest rates for similar contracts with maturities consistent with those
remaining for the contracts being valued. Other liabilities are based on
surrender values.
Debt
The carrying value of short-term debt reported in the balance sheet approximates
fair value. The fair value of long-term debt was estimated using market quotes,
when available, and, when not available, discounted cash flow analyses.
36
<PAGE>
- --------------------------------------------------------------------------------
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996 1995
================================================================================
Carrying Fair Carrying Fair
FINANCIAL ASSETS Value Value Value Value
- ----------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 178.5 $ 178.5 $ 289.5 $ 289.5
Fixed maturities 7,487.8 7,487.8 7,739.3 7,739.3
Equity securities 473.6 473.6 517.2 517.2
Mortgage loans 650.1 675.7 799.5 845.4
Policy loans 132.4 132.4 123.2 123.2
- --------------------------------------------------------------------------------
$8,922.4 $8,948.0 $9,468.7 $9,514.6
================================================================================
FINANCIAL LIABILITIES
- ---------------------
Guaranteed investment contracts $1,101.3 $1,119.2 $1,632.8 $1,677.0
Supplemental contracts without
life contingencies 23.1 23.1 24.4 24.4
Dividend accumulations 87.3 87.3 86.2 86.2
Other individual contract
deposit funds 76.9 74.3 95.7 92.8
Other group contract deposit
funds 789.1 788.3 894.0 902.8
Individual annuity contracts 935.6 719.0 966.3 810.0
Short-term debt 38.4 38.4 31.2 31.2
Long-term debt 202.2 199.1 202.3 212.4
- --------------------------------------------------------------------------------
$3,253.9 $3,048.7 $3,932.9 $3,836.8
================================================================================
</TABLE>
6. CLOSED BLOCK
------------
Included in other income in the Consolidated Statements of Income in 1996 and
1995 is a net pre-tax contribution from the Closed Block of $8.6 million and
$2.9 million, respectively. Summarized financial information of the Closed Block
as of December 31, 1996 and 1995 and for the period ended December 31, 1996 and
the period from October 1, 1995 through December 31, 1995 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996 1995
==================================================================
Assets
<S> <C> <C>
Fixed maturities, at fair value (amortized
cost of $397.2 and $447.4, respectively) $403.9 $458.0
Mortgage loans 114.5 57.1
Policy loans 230.2 242.4
Cash and cash equivalents 24.1 17.6
Accrued investment income 14.3 16.6
Deferred policy acquisition costs 21.1 24.5
Other assets 3.7 2.7
- -----------------------------------------------------------------
Total assets $811.8 $818.9
=================================================================
Liabilities
Policy liabilities and accruals $883.4 $899.2
Other liabilities 8.7 2.8
- -----------------------------------------------------------------
Total liabilities $892.1 $902.0
=================================================================
</TABLE>
37
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
October 1
through
December 31 December 31
(In millions) 1996 1995
================================================================================
<S> <C> <C>
Revenues
Premiums $ 61.7 $ 11.5
Net investment income 52.6 12.8
Realized investment loss (0.7) --
- --------------------------------------------------------------------------------
Total revenues 113.6 24.3
- --------------------------------------------------------------------------------
Benefits and expenses
Policy benefits 101.2 20.6
Policy acquisition expenses 3.2 0.8
Other operating expenses 0.6 --
- --------------------------------------------------------------------------------
Total benefits and expenses 105.0 21.4
- --------------------------------------------------------------------------------
Contribution from the Closed Block $ 8.6 $ 2.9
================================================================================
Cash flows
Cash flows from operating activities:
Contribution from the Closed Block $ 8.6 $ 2.9
Initial cash transferred to the Closed Block -- 139.7
Change in deferred policy acquisition
costs, net 3.4 0.4
Change in premiums and other receivables 0.2 (0.1)
Change in policy liabilities and accruals (13.9) 2.0
Change in accrued investment income 2.3 (1.3)
Other, net 2.5 0.8
- --------------------------------------------------------------------------------
Net cash provided by operating activities 3.1 144.4
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Sales, maturities and repayments of
investments 188.1 29.0
Purchases of investments (196.9) (158.8)
Other, net 12.2 3.0
- --------------------------------------------------------------------------------
Net cash provided by
(used in) investing activities 3.4 (126.8)
- --------------------------------------------------------------------------------
Net increase in cash and cash equivalents 6.5 17.6
Cash and cash equivalents, beginning
of the year 17.6 --
- --------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 24.1 $ 17.6
================================================================================
</TABLE>
On October 16, 1995, there were no valuation allowances transferred to the
Closed Block on mortgage loans. There were no valuation allowances on mortgage
loans at December 31, 1996 and 1995, respectively.
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.
7. DEBT
----
Short- and long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996 1995
================================================================================
<S> <C> <C>
Short-term
Commercial paper $ 37.8 $ 27.7
Other 0.6 3.5
- --------------------------------------------------------------------------------
Total short-term debt $ 38.4 $ 31.2
================================================================================
Long-term
Senior Debentures (unsecured) $199.5 $199.5
Other 2.7 2.8
- --------------------------------------------------------------------------------
Total long-term debt $202.2 $202.3
================================================================================
</TABLE>
AFC issues commercial paper primarily to manage imbalances between
operating cash flows and existing commitments. Commercial paper borrowing
arrangements are supported by various lines of credit. At December 31, 1996, the
weighted average interest rate for outstanding commercial paper was
approximately 5.5%.
At December 31, 1996, AFC had approximately $140.0 million in committed
lines of credit provided by U.S. banks, of which $102.2 million was available
for borrowing. These lines of credit generally have terms of less than one year,
and require the Company to pay annual commitment fees of 0.07% of the available
credit. Interest that would be charged for usage of these lines of credit is
based upon negotiated arrangements.
During 1996, the Company utilized repurchase agreements to finance certain
investments. Although the repurchase agreements were entirely settled by year
end, management may utilize this policy again in future periods.
In October, 1995, AFC issued $200.0 million face amount of Senior
Debentures for proceeds of $197.2 million net of discounts and issuance costs.
These securities have an effective interest rate of 7.65%, and mature on October
16, 2025. Interest is payable semiannually on October 15 and April 15 of each
year. The Senior Debentures are subject to certain restrictive covenants,
including limitations on issuance of or disposition of stock of restricted
subsidiaries and limitations on liens. The Company is in compliance with all
covenants.
38
<PAGE>
- --------------------------------------------------------------------------------
Interest expense was $32.1 million, $7.3 million and $4.3 million in 1996,
1995 and 1994, respectively. Interest expense in 1996 included $15.3 million
related to the Company's Senior Debentures and $11.0 million related to interest
payments on repurchase agreements. Interest expense in 1995 included $3.2
million related to the Company's Senior Debentures. All interest expense is
recorded in other operating expenses.
8. Federal Income Taxes
--------------------
Provisions for federal income taxes have been calculated in accordance with the
provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) in the consolidated statements of income is shown below:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1996 1995 1994
================================================================================
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current $ 90.9 $119.7 $45.4
Deferred (15.7) (37.0) 8.0
- --------------------------------------------------------------------------------
Total $ 75.2 $ 82.7 $53.4
================================================================================
</TABLE>
The federal income taxes attributable to the consolidated results of
operations are different from the amounts determined by multiplying income
before federal income taxes by the expected federal income tax rate. The sources
of the difference and the tax effects of each were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31
(In millions) 1996 1995 1994
================================================================================
<S> <C> <C> <C>
Expected federal income tax expense $116.1 $105.6 $ 53.7
Tax-exempt interest (35.3) (32.2) (35.9)
Differential earnings amount (10.2) (7.6) 35.0
Dividend received deduction (1.6) (4.0) (2.5)
Changes in tax reserve estimates 4.7 19.3 4.0
Other, net 1.5 1.6 (0.9)
- --------------------------------------------------------------------------------
Federal income tax expense $ 75.2 $ 82.7 $ 53.4
================================================================================
</TABLE>
Until conversion to a stock life insurance company, FAFLIC, as a mutual
company, reduced its deduction for policyholder dividends by the differential
earnings amount. This amount was computed, for each tax year, by multiplying the
average equity base of the FAFLIC/AFLIAC consolidated group, as determined for
tax purposes, by the estimate of an excess of an imputed earnings rate over the
average mutual life insurance companies' earnings rate. The differential
earnings amount for each tax year was subsequently recomputed when actual
earnings rates were published by the Internal Revenue Service (IRS). The
differential earnings amount included in 1996 related to an adjustment for the
1994 tax year based on the actual average mutual life insurance companies'
earnings rate issued by the IRS in 1996. As a stock life company, FAFLIC is no
longer required to reduce its policyholder dividend deduction by the
differential earnings amount.
The deferred income tax asset represents the tax effects of temporary
differences attributable to Allmerica P&C, a separate consolidated group for
federal tax return purposes. Its components were as follows:
<TABLE>
<CAPTION>
December 31
(In millions) 1996 1995
================================================================================
<S> <C> <C>
Deferred tax (assets) liabilities
AMT carryforwards $ (16.3) $ (9.8)
Loss reserve discounting (182.1) (178.3)
Deferred acquisition costs 57.5 55.1
Employee benefit plans (25.1) (25.5)
Investments, net 73.4 77.4
Bad debt reserve (1.7) (1.8)
Other, net 1.1 1.7
- --------------------------------------------------------------------------------
Deferred tax asset, net $ (93.2) $ (81.2)
================================================================================
</TABLE>
The deferred income tax liability represents the tax effects of temporary
differences attributable to the FAFLIC/AFLIAC consolidated federal tax return
group. Its components were as follows:
<TABLE>
<CAPTION>
December 31
(In millions) 1996 1995
================================================================================
<S> <C> <C>
Deferred tax (assets) liabilities
Loss reserve discounting $(153.7) $(129.1)
Deferred acquisition costs 189.6 169.7
Employee benefit plans (16.3) (14.6)
Investments, net 55.2 67.0
Bad debt reserve (24.5) (26.3)
Other, net (15.6) (18.9)
- --------------------------------------------------------------------------------
Deferred tax liability, net $ 34.7 $ 47.8
================================================================================
</TABLE>
Gross deferred income tax assets totaled $435.3 million and $405.1 million
at December 31, 1996 and 1995, respectively. Gross deferred income tax
liabilities totaled $376.8 million and $371.7 million at December 31, 1996 and
1995, respectively.
39
<PAGE>
Management believes, based on the Company's recent earnings history and its
future expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary. At December 31, 1996, there are available non-life
net operating loss carryforwards of $0.8 million, and alternative minimum tax
credit carryforwards of $16.3 million.
The Company's federal income tax returns are routinely audited by the IRS,
and provisions are routinely made in the financial statements in anticipation of
the results of these audits. The IRS has examined the FAFLIC/AFLIAC consolidated
group's federal income tax returns through 1991. The IRS has also examined the
Allmerica P&C consolidated group's federal income tax returns through 1991. The
Company is currently considering its response to certain adjustments proposed by
the IRS with respect to the federal income tax returns for 1989, 1990, and 1991
for both the FAFLIC/AFLIAC consolidated group as well as the Allmerica P&C
consolidated group. Also, certain adjustments proposed by the IRS with respect
to FAFLIC/AFLIAC's federal income tax returns for 1982 and 1983 remain
unresolved. If upheld, these adjustments would result in additional payments;
however, the Company will vigorously defend its position with respect to these
adjustments. In management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these tax liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.
9. PENSION PLANS
-------------
AFC provides retirement benefits to substantially all of its employees under
three separate defined benefit pension plans. Through December 31, 1994,
retirement benefits were based primarily on employees' years of service and
compensation during the highest five consecutive plan years of employment.
Benefits under this defined benefit formula were frozen for most employees (but
not for eligible agents) effective December 31, 1994. In their place, the
Company adopted a defined benefit cash balance formula, under which the Company
annually provides an allocation to each eligible employee as a percentage of
that employee's salary, similar to a defined contribution plan arrangement. The
1996 and 1995 allocations were based on 7.0% of each eligible employee's salary.
The Company's policy for the plans is to fund at least the minimum amount
required by the Employee Retirement Income Security Act of 1974.
Components of net pension expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
================================================================================
<S> <C> <C> <C>
Service cost - benefits
earned during the year $ 19.0 $ 19.7 $ 13.0
Interest accrued on projected
benefit obligations 21.9 21.1 20.0
Actual return on assets (42.2) (89.3) (2.6)
Net amortization and deferral 9.3 66.1 (16.3)
- --------------------------------------------------------------------------------
Net pension expense $ 8.0 $ 17.6 $ 14.1
================================================================================
</TABLE>
The following table summarizes the combined status of the three pension
plans. At December 31, 1996 the plans' assets exceeded their projected benefit
obligations and in 1995 the plans' projected benefit obligation exceeded their
assets.
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996 1995
================================================================================
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $308.9 $325.6
Unvested benefit obligation 6.6 5.0
- --------------------------------------------------------------------------------
Accumulated benefit obligation $315.5 $330.6
================================================================================
Pension liability included in
Consolidated Balance Sheets:
Projected benefit obligation $344.2 $367.1
Plan assets at fair value 347.8 321.2
- --------------------------------------------------------------------------------
Plan assets greater (less) than
projected benefit obligation 3.6 (45.9)
Unrecognized net (gain) loss from
past experience (9.1) 48.8
Unrecognized prior service benefit (11.5) (13.8)
Unamortized transition asset (24.7) (26.5)
- --------------------------------------------------------------------------------
Net pension liability $(41.7) $(37.4)
================================================================================
</TABLE>
Determination of the projected benefit obligations was based on a weighted
average discount rate of 7.0% in 1996 and 1995, and the assumed long-term rate
of return on plan assets was 9.0%. The actuarial present value of the projected
benefit obligations was determined using assumed rates of increase in future
compensation levels ranging from 5.5% to 6.5%. Plan assets are invested
primarily in various separate accounts and the general account of FAFLIC. Plan
assets also include 973,262 shares of AFC common stock at both December 31, 1996
and 1995, with a market value of $32.6 million and $26.3 million at December 31,
1996 and 1995, respectively.
The Company has a profit sharing and 401(k) plan for its employees.
Effective for plan years beginning after 1994, the profit sharing formula for
employees has been discontinued and a 401(k) match feature has been added to the
continuing 401(k)
40
<PAGE>
- --------------------------------------------------------------------------------
plan for the employees. Total plan expense in 1996, 1995 and 1994 was $5.5
million, $5.2 million and $12.6 million, respectively. In addition to this Plan,
the Company has a defined contribution plan for substantially all of its agents.
The Plan expense in 1996, 1995 and 1994 was $2.0 million, $3.5 million and $2.7
million, respectively.
10. OTHER POSTRETIREMENT BENEFIT PLANS
----------------------------------
In addition to the Company's pension plans, the Company currently provides
postretirement medical and death benefits to certain full-time employees and
dependents, under several plans sponsored by FAFLIC, Hanover and Citizens.
Generally, employees become eligible at age 55 with at least 15 years of
service. Spousal coverage is generally provided for up to two years after death
of the retiree. Benefits include hospital, major medical and a payment at death
equal to retirees' final compensation up to certain limits. Effective January 1,
1996, the Company revised these benefits so as to establish limits on future
benefit payments and to restrict eligibility to current employees. The medical
plans have varying copayments and deductibles, depending on the plan. These
plans are unfunded.
The plan changes effective January 1, 1996 resulted in a negative plan
amendment (change in eligibility and medical benefits) of $26.8 million and
curtailment (no future increases in life insurance) of $5.3 million. The
negative plan amendment will be amortized as prior service cost over the average
number of years to full eligibility (approximately 9 years or $3.0 million per
year). Of the $5.3 million curtailment gain, $3.3 million has been deducted from
unrecognized loss and $2.0 million has been recorded as a reduction of the net
periodic postretirement benefit expense.
The plans' funded status reconciled with amounts recognized in the
Company's consolidated balance sheet were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996 1995
================================================================================
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $40.4 $ 44.9
Fully eligible active plan participants 7.5 14.0
Other active plan participants 24.4 45.9
- --------------------------------------------------------------------------------
72.3 104.8
Plan assets at fair value -- --
- --------------------------------------------------------------------------------
Accumulated postretirement benefit
obligation in excess of plan assets 72.3 104.8
Unrecognized prior service benefit 23.8 --
Unrecognized loss (5.0) (13.4)
- --------------------------------------------------------------------------------
Accrued postretirement benefit costs $91.1 $ 91.4
================================================================================
</TABLE>
The components of net periodic postretirement benefit expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
================================================================================
<S> <C> <C> <C>
Service cost $ 3.2 $ 4.2 $ 6.6
Interest cost 4.6 6.9 6.9
Amortization of (gain) loss (2.8) (0.5) 1.4
- --------------------------------------------------------------------------------
Net periodic postretirement
benefit expense $ 5.0 $10.6 $14.9
================================================================================
</TABLE>
For purposes of measuring the accumulated postretirement benefit obligation
at December 31, 1996, health care costs were assumed to increase 9.0% in 1997,
declining thereafter until the ultimate rate of 5.5% is reached in 2001 and
remains at that level thereafter. The health care cost trend rate assumption has
a significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement benefit obligation at December 31, 1996
by $5.3 million, and the aggregate of the service and interest cost components
of net periodic postretirement benefit expense for 1996 by $0.7 million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% at December 31, 1996 and 1995.
11. POSTEMPLOYMENT BENEFITS
-----------------------
Effective January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 112, (SFAS No. 112), "Employers' Accounting
for Postemployment Benefits", which requires employers to recognize the costs
and obligations of severance, disability and related life insurance and health
care benefits to be paid to inactive or former employees after employment but
before retirement. Prior to adoption, the Company had recognized the cost of
these benefits on an accrual or paid basis, depending on the plan.
Implementation of SFAS No. 112 resulted in a transition obligation of $1.9
million, net of federal income taxes and minority interest, and is reported as a
cumulative effect of a change in accounting principle in the consolidated
statement of income. The impact of this accounting change, after recognition of
the cumulative effect, was not significant.
41
<PAGE>
- --------------------------------------------------------------------------------
12. STOCK-BASED COMPENSATION PLANS
In October 1995 the FASB issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation"("SFAS 123"). The Standard is
effective for fiscal years beginning after December 15, 1995, and requires the
Company either to apply a fair value measure to any stock-based compensation
granted by the Company, or continue to apply the valuation provisions of
existing accounting standards, but with pro-forma net income and earnings per
share disclosures using a fair value methodology to value the stock-based
compensation. Beginning for the year ended December 31, 1996, the Company has
elected to continue to apply the valuation provisions of existing accounting
standards (APB 25). The pro forma effect of applying SFAS 123 is not material.
Effective June 17, 1996, The Company adopted a Long Term Stock Incentive Plan
for employees of the Company (the "Employees' Plan"). Key employees of the
Company and its subsidiaries are eligible for awards pursuant to the Plan
administered by the Compensation Committee of the Board of Directors (the
"Committee") of the Company. Under the terms of the Employees' Plan, options may
be granted to eligible employees at a price not less than the market price of
the Company's common stock on the date of grant. Option shares may be exercised
subject to the terms prescribed by the Committee at the time of grant, otherwise
options vest at the rate of 20% annually for five consecutive years and must be
exercised not later than ten years from the date of grant. At June 17, 1996,
231,500 option shares were granted at an option price of $27.50. During 1996,
22,000 option shares were forfeited leaving 209,500 option shares outstanding at
December 31, 1996. There were no options exercised during 1996. At December 31,
1996, there were no options exercisable and 2,140,500 option shares were
available for future grant.
13. DIVIDEND RESTRICTIONS
Massachusetts, Delaware, New Hampshire and Michigan have enacted laws governing
the payment of dividends to stockholders by insurers. These laws affect the
dividend paying ability of FAFLIC, AFLIAC, Hanover and Citizens, respectively.
Massachusetts' statute limits the dividends an insurer may pay in any
twelve month period, without the prior permission of the Commonwealth of
Massachusetts Insurance Commissioner, to the greater of (i) 10% of its statutory
policyholder surplus as of the preceding December 31 or (ii) the individual
company's statutory net gain from operations for the preceding calendar year (if
such insurer is a life company), or its net income for the preceding calendar
year (if such insurer is not a life company). In addition, under Massachusetts
law, no domestic insurer shall pay a dividend or make any distribution to its
shareholders from other than unassigned funds unless the Commissioner shall have
approved such dividend or distribution. At January 1, 1997, FAFLIC could pay
dividends of $151.8 million to AFC without prior approval of the Commissioner.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a life company) or its net income
(not including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance. At January 1, 1997, AFLIAC could pay dividends of
$11.9 million to FAFLIC without prior approval.
Pursuant to New Hampshire's statute, the maximum dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the New Hampshire Insurance Commissioner, is limited to 10% of
such insurer's statutory policyholder surplus as of the preceding December 31.
At January 1, 1997, the maximum dividend and other distributions that could be
paid to Allmerica P&C by Hanover, without prior approval of the Insurance
Commissioner, was approximately $15.4 million, which considers dividends
declared to Allmerica P&C of $105.0 million during 1996, including $80.0 million
which was declared in December. On January 2, 1997, Hanover declared an
extraordinary dividend in the amount of $120.0 million, payable on or after
January 21, 1997 to Allmerica P&C. The dividend which was approved by the New
Hampshire Insurance Department on January 9, 1997 is to be paid in a lump sum or
in such installments as Allmerica P&C, in its discretion, may determine.
Pursuant to Michigan's statute, the maximum dividends and other
distributions that an insurer may pay in any twelve month period, without prior
approval of the Michigan Insurance Commissioner, is limited to the greater of
10% of policyholders' surplus as of December 31 of the immediately preceding
year or the statutory net income less realized gains, for the immediately
preceding calendar year. At January 1, 1997, Citizens Insurance could pay
dividends of $39.9 million to Citizens Corporation without prior approval.
42
<PAGE>
- -------------------------------------------------------------------------------
14. 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-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 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 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 years ended and as of December 31.
<TABLE>
<CAPTION>
(IN MILLIONS) 1996 1995 1994
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Risk Management
Regional Property and
Casualty $ 2,193.7 $ 2,095.1 $ 2,004.8
Corporate Risk Management 361.5 328.5 302.4
- ---------------------------------------------------------------------
Subtotal 2,555.2 2,423.6 2,307.2
- ---------------------------------------------------------------------
Retirement and Asset
Management
Retail Financial Services 450.9 486.7 507.9
Institutional Services 266.7 330.2 397.9
Allmerica Asset Management 8.8 4.4 4.0
- ---------------------------------------------------------------------
Subtotal 726.4 821.3 909.8
- ---------------------------------------------------------------------
Corporate 1.8 0.4 --
Eliminations (8.7) (4.4) (21.9)
- ---------------------------------------------------------------------
Total $ 3,274.7 $ 3,240.9 $ 3,195.1
=====================================================================
Income from continuing
operations before income taxes:
Risk Management
Regional Property and
Casualty $ 197.7 $ 206.3 $ 113.1
Corporate Risk Management 20.7 18.3 19.9
- ---------------------------------------------------------------------
Subtotal 218.4 224.6 133.0
- ---------------------------------------------------------------------
Retirement and Asset
Management
Retail Financial Services 76.2 35.2 14.2
Institutional Services 52.8 42.8 4.4
Allmerica Asset Management 1.1 2.3 1.9
- ---------------------------------------------------------------------
Subtotal 130.1 80.3 20.5
- ---------------------------------------------------------------------
Corporate (16.8) (3.1) --
- ---------------------------------------------------------------------
Total $ 331.7 $ 301.8 $ 153.5
=====================================================================
Identifiable assets:
Risk Management
Regional Property and
Casualty $ 5,703.9 $ 5,741.8 $ 5,408.7
Corporate Risk Management 506.0 458.9 386.3
- ---------------------------------------------------------------------
Subtotal 6,209.9 6,200.7 5,795.0
- ---------------------------------------------------------------------
Retirement and Asset
Management
Retail Financial Services 8,873.5 7,218.6 5,639.8
Institutional Services 3,879.0 4,280.9 4,484.5
Allmerica Asset Management 2.4 2.1 2.2
- ---------------------------------------------------------------------
Subtotal 12,754.9 11,501.6 10,126.5
- ---------------------------------------------------------------------
Corporate 32.9 55.4 --
- ---------------------------------------------------------------------
Total $18,997.7 $17,757.7 $15,921.5
=====================================================================
</TABLE>
43
<PAGE>
- --------------------------------------------------------------------------------
15. LEASE COMMITMENTS
-----------------
Rental expenses for operating leases, principally with respect to buildings,
amounted to $33.6 million, $36.4 million and $35.2 million in 1996, 1995 and
1994, respectively. At December 31, 1996, future minimum rental payments under
non-cancellable operating leases were approximately $71.7 million, payable as
follows: 1997 - $26.4 million; 1998 - $19.6 million; 1999 - $12.8 million; 2000
- - $8.0 million; and $5.0 million thereafter. It is expected that, in the normal
course of business, leases that expire will be renewed or replaced by leases on
other property and equipment; thus, it is anticipated that future minimum lease
commitments will not be less than the amounts shown for 1997.
16. REINSURANCE
-----------
In the normal course of business, the Company seeks to reduce the loss that may
arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risk in various areas of exposure with
other insurance enterprises or reinsurers. Reinsurance transactions are
accounted for in accordance with the provisions of SFAS No. 113.
Amounts recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with the reinsured policy. Reinsurance
contracts do not relieve the Company from its obligations to policyholders.
Failure of reinsurers to honor their obligations could result in losses to the
Company; consequently, allowances are established for amounts deemed
uncollectible. The Company determines the appropriate amount of reinsurance
based on evaluation of the risks accepted and analyses prepared by consultants
and reinsurers and on market conditions (including the availability and pricing
of reinsurance). The Company also believes that the terms of its reinsurance
contracts are consistent with industry practice in that they contain standard
terms with respect to lines of business covered, limit and retention,
arbitration and occurrence. Based on its review of its reinsurers' financial
statements and reputations in the reinsurance marketplace, the Company believes
that its reinsurers are financially sound.
The Company is subject to concentration of risk with respect to reinsurance
ceded to various residual market mechanisms. As a condition to the ability to
conduct certain business in various states, the Company is required to
participate in various residual market mechanisms and pooling arrangements which
provide various insurance coverages to individuals or other entities that are
otherwise unable to purchase such coverage voluntarily provided by private
insurers. These market mechanisms and pooling arrangements include the
Massachusetts Commonwealth Automobile Reinsurers ("CAR"), the Maine Workers'
Compensation Residual Market Pool ("MWCRP") and the Michigan Catastrophic Claims
Association ("MCCA"). At December 31, 1996, the MCCA and CAR were the only two
reinsurers which represented 10% or more of the Company's reinsurance business.
As a servicing carrier in Massachusetts, the Company cedes a significant portion
of its private passenger and commercial automobile premiums to CAR. Net premiums
earned and losses and loss adjustment expenses ceded to CAR in 1996, 1995 and
1994 were $38.0 million and $21.8 million, $49.1 million and $33.7 million, and
$50.0 million and $29.8 million, respectively.
From 1988 through 1992, the Company was a servicing carrier in Maine, and
ceded a significant portion of its workers' compensation premiums to the Maine
Workers' Compensation Residual Market Pool, which is administered by The
National Council on Compensation Insurance ("NCCI"). The Company is currently
involved in legal proceedings regarding the MWCRP's deficit which through a
legislated settlement issued on June 23, 1995 provided for an initial funding of
$220.0 million, of which the insurance carriers were responsible for $65.0
million. Hanover paid its allocation of $4.2 million in December 1995. Some of
the small carriers appealed this decision. The Company's right to recover
reinsurance balances for claims properly paid is not at issue in any such
proceedings. The Company expects to collect its reinsurance balance; however,
funding of the cash flow needs of the MWCRP may in the future be affected by
issues related to certain litigation, the outcome of which the Company cannot
predict. The Company ceded to MCCA premiums earned and losses and loss
adjustment expenses in 1996, 1995 and 1994 of $50.5 million and $(52.9) million,
$66.8 million and $62.9 million, and $80.0 million and $24.2 million,
respectively. Because the MCCA is supported by assessments permitted by statute,
and all amounts billed by the Company to CAR, MWCRP and MCCA have been paid when
due, the Company believes that it has no significant exposure to uncollectible
reinsurance balances.
44
<PAGE>
- --------------------------------------------------------------------------------
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
======================================================================
<S> <C> <C> <C>
Life insurance premiums:
Direct $ 389.1 $ 438.9 $ 447.2
Assumed 87.8 71.0 54.3
Ceded (138.9) (150.3) (111.0)
- ----------------------------------------------------------------------
Net premiums $ 338.0 $ 359.6 $ 390.5
======================================================================
Property and casualty premiums
written:
Direct $2,039.7 $2,039.4 $1,992.4
Assumed 108.7 125.0 128.6
Ceded (234.0) (279.1) (298.1)
- ----------------------------------------------------------------------
Net premiums $1,914.4 $1,885.3 $1,822.9
======================================================================
Property and casualty premiums
earned:
Direct $2,018.5 $2,021.7 $1,967.1
Assumed 112.4 137.7 116.1
Ceded (232.6) (296.2) (291.9)
- ----------------------------------------------------------------------
Net premiums $1,898.3 $1,863.2 $1,791.3
======================================================================
Life insurance and other individual
policy benefits, claims, losses
and loss adjustment expenses:
Direct $ 618.0 $ 749.6 $ 773.0
Assumed 44.9 38.5 28.9
Ceded (77.8) (69.5) (61.6)
- ----------------------------------------------------------------------
Net policy benefits, claims, losses
and loss adjustment expenses $ 585.1 $ 718.6 $ 740.3
======================================================================
Property and casualty benefits,
claims,losses and loss
adjustment expenses:
Direct $1,288.3 $1,372.7 $1,364.4
Assumed 85.8 146.1 102.7
Ceded (2.2) (229.1) (160.4)
- ----------------------------------------------------------------------
Net policy benefits, claims, losses
and loss adjustment expenses $1,371.9 $1,289.7 $1,306.7
======================================================================
</TABLE>
17. DEFERRED POLICY ACQUISITION COSTS
---------------------------------
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
================================================================
<S> <C> <C> <C>
Balance at beginning of year $ 735.7 $ 802.8 $ 746.9
Acquisition expenses deferred 560.8 504.8 510.3
Amortized to expense during
the year (483.5) (470.3) (475.7)
Adjustment to equity during
the year 9.7 (50.4) 21.3
Transferred to the Closed Block -- (24.8) --
Adjustment for cession of term
life insurance -- (26.4) --
- ----------------------------------------------------------------
Balance at end of year $ 822.7 $ 735.7 $ 802.8
================================================================
</TABLE>
18. LIABILITIES FOR OUTSTANDING CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES
-----------------------------------------------------------------------
The Company regularly updates its estimates of liabilities for outstanding
claims, losses and loss adjustment expenses as new information becomes available
and further events occur which may impact the resolution of unsettled claims for
its property and casualty and its accident and health lines of business. Changes
in prior estimates are reflected in results of operations in the year such
changes are determined to be needed and recorded.
The liability for future policy benefits and outstanding claims, losses and
loss adjustment expenses related to the Company's accident and health business
was $471.7 million, $446.9 million and $371.4 million at December 31, 1996, 1995
and 1994, respectively. Accident and health claim liabilities have been re-
estimated for all prior years and were decreased by $0.6 million and $2.2
million in 1996 and 1994, respectively, and increased by $17.6 million in 1995.
Unfavorable development in the accident and health business during 1995 was
primarily due to reserve strengthening and adverse experience in the Company's
individual disability line of business.
45
<PAGE>
- --------------------------------------------------------------------------------
The following table provides a reconciliation of the beginning and ending
property and casualty reserve for unpaid losses and loss adjustment expenses
(LAE):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1996 1995 1994
=======================================================================
<S> <C> <C> <C>
Reserve for losses and LAE,
beginning of year $2,896.0 $2,821.7 $2,717.3
Incurred losses and LAE, net
of reinsurance recoverable:
Provision for insured events
of current year 1,513.3 1,427.3 1,434.8
Decrease in provision for
insured events of prior years (141.4) (137.6) (128.1)
- -----------------------------------------------------------------------
Total incurred losses and LAE 1,371.9 1,289.7 1,306.7
- -----------------------------------------------------------------------
Payments, net of reinsurance
recoverable:
Losses and LAE attributable to
insured events of current year 759.6 652.2 650.2
Losses and LAE attributable to
insured events of prior years 627.6 614.3 566.9
- -----------------------------------------------------------------------
Total payments 1,387.2 1,266.5 1,217.1
- -----------------------------------------------------------------------
Change in reinsurance
recoverable on unpaid losses (136.6) 51.1 14.8
- -----------------------------------------------------------------------
Reserve for losses and LAE,
end of year $2,744.1 $2,896.0 $2,821.7
=======================================================================
</TABLE>
As part of an ongoing process, the property and casualty reserves have been
re-estimated for all prior accident years and were decreased by $141.4 million,
$137.6 million and $128.1 million in 1996, 1995 and 1994, respectively. The
increase in favorable development on prior years' reserves of $3.8 million in
1996 results primarily from an $11.4 million increase in favorable development
at Citizens.
The increase in Citizens' favorable development of $11.4 million in 1996
reflects improved severity in the personal automobile line, where favorable
development increased $28.6 million to $33.0 million in 1996, partially offset
by less favorable development in the workers' compensation line. In 1995, the
workers' compensation line had favorable development of $32.7 million, primarily
as a result of Citizens re-estimating reserves to reflect the new claims cost
management programs and the Michigan Supreme Court ruling, which decreases the
maximum to be paid for indemnity cases on all existing and future claims. In
1996, the favorable development in the workers' compensation line of $21.8
million also reflected these developments. Hanover's favorable development,
including voluntary and involuntary pools, decreased $7.7 million in 1996 to
$82.9 million, primarily attributable to a decrease in favorable development in
the workers' compensation line of $19.8 million. This decrease is primarily
attributable to a re-estimate of reserves with respect to certain types of
workers' compensation policies including large deductibles and excess of loss
policies. In addition, during 1995 the Regional Property and Casualty
subsidiaries refined their estimation of unallocated loss adjustment expenses
which increased favorable development in that year. Favorable development in the
personal automobile line also decreased $4.7 million, to $42.4 million in 1996.
These decreases were offset by increases in favorable development of $1.9
million and $5.6 million, to $12.6 million and $5.7 million, in the commercial
automobile and commercial multiple peril lines, respectively. Favorable
development in other lines increased by $8.8 million, primarily as a result of
environmental reserve strengthening in 1995. Favorable development in Hanover's
voluntary and involuntary pools increased $3.7 million to $4.1 million during
1996.
The increase in favorable development on prior years' reserves of $9.5
million in 1995 results primarily from a $34.6 million increase in favorable
development at Citizens. Favorable development in Citizens' personal automobile
and workers' compensation lines increased $16.6 million and $15.5 million, to
favorable development of $4.4 million and $32.7 million, respectively, due to
the aforementioned change in claims cost management and the Michigan Supreme
Court ruling. Hanover's favorable development, not including the effect of
voluntary and involuntary pools, was relatively unchanged at $90.2 million in
1995 compared to $91.7 million in 1994. Favorable development in Hanover's
workers' compensation line increased $27.7 million to $31.0 million during 1995.
This was offset by decreases of $14.6 million and $12.6 million, to $45.5
million and $0.1 million, in the personal automobile and commercial multiple
peril lines, respectively. Favorable development in Hanover's voluntary and
involuntary pools decreased $23.6 million to $0.4 million during 1995.
This favorable development reflects the Regional Property and Casualty
subsidiaries' reserving philosophy consistently applied over these periods.
Conditions and trends that have affected development of the loss and LAE
reserves in the past may not necessarily occur in the future.
Due to the nature of business written by the Regional Property and Casualty
subsidiaries, the exposure to environmental liabilities is relatively small and
therefore their reserves are relatively small compared to other types of
46
<PAGE>
- --------------------------------------------------------------------------------
liabilities. Losses and LAE reserves related to environmental damage and toxic
tort liability, included in the total reserve for losses and LAE, were $50.8
million and $43.2 million, net of reinsurance of $20.2 million and $8.4 million,
at the end of 1996 and 1995, respectively. During 1995, the Regional Property
and Casualty subsidiaries redefined their environmental liabilities in
conformity with new guidelines issued by the NAIC. This had no impact on results
of operations. The Regional Property and Casualty subsidiaries do not
specifically underwrite policies that include this coverage, but as case law
expands policy provisions and insurers' liability beyond the intended coverage,
the Regional Property and Casualty subsidiaries may be required to defend such
claims. During 1995, Hanover performed an actuarial review of its environmental
reserves. This resulted in Hanover's providing additional reserves for "IBNR"
(incurred but not reported) claims in addition to existing reserves for reported
claims. Although these claims are not material, their existence gives rise to
uncertainty and is discussed because of the possibility, however remote, that
they may become material. Management believes that, notwithstanding the
evolution of case law expanding liability in environmental claims, recorded
reserves related to these claims for environmental liability are adequate. In
addition, management is not aware of any litigation or pending claims that may
result in additional material liabilities in excess of recorded reserves. The
environmental liability could be revised in the near term if the estimates used
in determining the liability are revised.
19. MINORITY INTEREST
-----------------
The Company's interest in Allmerica P&C, through its wholly-owned subsidiary
FAFLIC, is represented by ownership of 59.5%, 58.3% and 57.4% of the outstanding
shares of common stock at December 31, 1996, 1995 and 1994, respectively.
Earnings and shareholders' equity attributable to minority shareholders are
included in minority interest in the consolidated financial statements.
20. CONTINGENCIES
-------------
Regulatory and Industry Developments
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by, solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially recovered through a reduction in future premium taxes
in some states. The Company is not able to reasonably estimate the potential
effect on it of any such future assessments or voluntary payments.
Litigation
On June 23, 1995, the governor of Maine approved a legislative settlement for
the Maine Workers' Compensation Residual Market Pool deficit for the years 1988
through 1992. The settlement provides for an initial funding of $220.0 million
toward the deficit. The insurance carriers were liable for $65.0 million and
employers would contribute $110.0 million payable through surcharges on premiums
over the course of the next ten years. The major insurers are responsible for
90% of the $65.0 million. Hanover's allocated share of the settlement is
approximately $4.2 million, which was paid in December 1995. The remainder of
the deficit of $45.0 million will be paid by the Maine Guaranty Fund, payable in
quarterly contributions over ten years. A group of smaller carriers filed
litigation to appeal the settlement. The Company believes that adequate reserves
have been established for any additional liability.
The Company has been named a defendant in various other legal
proceedings arising in the normal course of business. In the opinion of
management, based on the advice of legal counsel, the ultimate resolution of
these proceedings will not have a material effect on the Company's consolidated
financial statements. However, liabilities related to these proceedings could be
established in the near term if estimates of the ultimate resolution of these
proceedings are revised.
Residual Markets
The Company is required to participate in residual markets in various states.
The results of the residual markets are not subject to the predictability
associated with the Company's own managed business, and are significant to the
workers' compensation line of business and both the private passenger and
commercial automobile lines of business.
47
<PAGE>
- --------------------------------------------------------------------------------
21. Statutory Financial Information
-------------------------------
The insurance subsidiaries are required to file annual statements with state
regulatory authorities prepared on an accounting basis prescribed or permitted
by such authorities (statutory basis). Statutory surplus differs from
shareholders' equity reported in accordance with generally accepted accounting
principles for stock life insurance companies primarily because policy
acquisition costs are expensed when incurred, investment reserves are based on
different assumptions, postretirement benefit costs are based on different
assumptions and reflect a different method of adoption, life insurance reserves
are based on different assumptions and income tax expense reflects only taxes
paid or currently payable.
Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(In millions) 1996 1995 1994
===========================================================
<S> <C> <C> <C>
Statutory net income
- --------------------
(combined)
----------
Property and Casualty
Companies $ 155.3 $ 155.3 $ 79.9
Life and Health Companies 133.3 134.3 40.7
- -----------------------------------------------------------
Statutory Shareholders'
- -----------------------
Surplus (combined)
------------------
Property and Casualty
Companies $1,201.6 $1,128.4 $974.3
Life and Health Companies 1,120.1 965.6 465.3
- -----------------------------------------------------------
</TABLE>
22. Quarterly Results of Operations (unaudited)
-------------------------------------------
The quarterly results of operations for 1996 and 1995 are summarized below:
<TABLE>
<CAPTION>
For the Three Months Ended
(In millions)
================================================================================
1996 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ----
<S> <C> <C> <C> <C>
Total revenues $828.4 $800.3 $806.3 $839.7
================================================================================
Net income $ 47.3 $ 42.6 $ 46.7 $ 45.3
================================================================================
Net income per share $ 0.94 $ 0.85 $ 0.93 $ 0.91
================================================================================
Dividends declared per share $ 0.05 $ 0.05 $ 0.05 $ 0.05
================================================================================
1995
- ----
Total revenues $841.4 $791.9 $822.8 $784.8
================================================================================
Income before extraordinary
item $ 39.2 $ 29.9 $ 34.8 $ 42.1
Extraordinary item -
demutualization expense (2.5) (3.5) (4.7) (1.4)
- --------------------------------------------------------------------------------
Net income $ 36.7 $ 26.4 $ 30.1 $ 40.7
================================================================================
Net income after
demutualization per share $ -- $ -- $ -- $ 0.82
================================================================================
Dividends declared per share $ -- $ -- $ -- $ 0.05
================================================================================
</TABLE>
48
<PAGE>
PART IV
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
The consolidated financial statements are listed under Item 8 of this Form
10-K/A.
(A)(2) FINANCIAL STATEMENT SCHEDULES
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
Allmerica Financial Corporation
Our audits of the consolidated financial statements referred to in our report
dated February 3, 1997, except as to Note 1, which is as of February 19, 1997,
and Note 2, which is as of April 14, 1997, appearing in this Form 10-K/A also
included an audit of the Financial Statement Schedules listed in Item 14(a) of
this Form 10-K/A. In our opinion, these Financial Statement Schedules present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
As discussed in the accompanying notes to the consolidated financial
statements, the Company changed its method of accounting for investments (Note
1) and postemployment benefits (Note 11) in 1994.
/s/ Price Waterhouse LLP
- --------------------------------------
Price Waterhouse LLP
Boston, Massachusetts
February 3, 1997, except as to Note 1,
which is as of February 19, 1997
and Note 2, which is as of April 14, 1997
49
<PAGE>
SCHEDULE I
ALLMERICA FINANCIAL CORPORATION
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
AMOUNT AT
WHICH SHOWN
IN THE BALANCE
TYPE OF INVESTMENT COST (1) VALUE SHEET
- ------------------ -------- ------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States Government and government
agencies and authorities.................. $ 520.8 $ 530.7 $ 530.7
States, municipalities and political subdi-
visions................................... 2,228.8 2,269.6 2,269.6
Foreign governments........................ 108.8 116.2 116.2
Public utilities........................... 495.7 508.3 508.3
Convertibles and bonds with warrants at-
tached.................................... 1.1 1.3 1.3
All other corporate bonds.................. 3,844.8 3,952.8 3,952.8
Redeemable preferred stocks.................. 105.5 108.9 108.9
-------- ------- --------
Total fixed maturities..................... 7,305.5 7,487.8 7,487.8
-------- ------- --------
Equity securities:
Common stocks:
Public utilities........................... 4.9 5.5 5.5
Banks, trust and insurance companies....... 30.6 55.1 55.1
Industrial, miscellaneous and all other.... 281.4 401.5 401.5
Nonredeemable preferred stocks............... 11.3 11.5 11.5
-------- ------- --------
Total equity securities.................... 328.2 473.6 473.6
-------- ------- --------
Mortgage loans on real estate.................. 650.1 XXXXXX 650.1
Real estate (2)................................ 120.7 XXXXXX 120.7
Policy loans................................... 132.4 XXXXXX 132.4
Other long-term investments.................... 128.8 XXXXXX 128.8
-------- --------
Total investments.......................... $8,665.7 XXXXXX $8,993.4
======== ========
</TABLE>
- --------
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums and
accretion of discounts.
(2) Includes $106.6 million of real estate acquired through foreclosure.
50
<PAGE>
SCHEDULE II
ALLMERICA FINANCIAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
Revenues
Net investment income................................. $ 2.7 $ 0.4 $ --
Net realized investment losses........................ (0.9) -- --
------ ------ -----
Total revenues...................................... 1.8 0.4 --
------ ------ -----
Expenses
Interest expense...................................... 15.3 3.2 --
Operating expenses.................................... 3.3 0.3 --
------ ------ -----
Total expenses...................................... 18.6 3.5 --
------ ------ -----
Net income before federal income taxes and equity in net
income of unconsolidated subsidiaries.................. (16.8) (3.1) --
Federal income tax benefit.............................. 5.9 -- --
Equity in net income of unconsolidated subsidiaries
prior to demutualization............................... -- 93.2 38.0
Equity in net income of unconsolidated subsidiaries
subsequent to demutualization.......................... 192.8 43.8 --
------ ------ -----
Net income.............................................. $181.9 $133.9 $38.0
====== ====== =====
</TABLE>
The condensed financial information should be read in conjunction with the
consolidated financial statements and notes thereto. Allmerica Financial
Corporation ("AFC") was incorporated under Delaware law on January 12, 1995,
for the purpose of becoming the parent holding company of First Allmerica
Financial Insurance Company ("FAFLIC"). Accordingly, the financial information
reflects the equity in the financial position and results of operations of
FAFLIC for the periods prior to the date of demutualization as if AFC had been
the parent of FAFLIC at that time.
51
<PAGE>
SCHEDULE II
(CONTINUED)
ALLMERICA FINANCIAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
------------- -------------
(IN MILLIONS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C>
ASSETS
Fixed maturities-at fair value (amortized cost of
$26.4).......................................... $ 26.2 $ --
Equity securities-at fair value (amortized cost
of $0.4)........................................ 0.6 --
Cash............................................. 2.5 52.9
Investment in unconsolidated subsidiaries........ 1,896.3 1,724.2
Accrued investment income........................ 0.4 0.2
Other assets..................................... 5.2 2.3
------------- -------------
Total assets................................... $1,931.2 $1,779.6
============= =============
LIABILITIES
Expenses and taxes payable....................... $ 1.1 $ 0.2
Deferred income taxes............................ 0.1 --
Dividends payable................................ 2.5 2.5
Interest payable................................. 3.3 3.2
Long-term debt................................... 199.5 199.5
------------- -------------
Total liabilities.............................. 206.5 205.4
------------- -------------
Shareholders' Equity
Preferred stock, par value $0.01 per share, 20.0
million shares authorized, none issued.......... -- --
Common stock, par value $0.01 per share, 300.0
million shares authorized, 50.1 million shares
issued and outstanding at December 31, 1996 and
December 31, 1995............................... 0.5 0.5
Additional paid-in-capital....................... 1,382.5 1,382.5
Unrealized appreciation on investments, net...... 131.6 153.0
Retained earnings................................ 210.1 38.2
------------- -------------
Total shareholders' equity..................... 1,724.7 1,574.2
------------- -------------
Total liabilities and shareholders' equity..... $1,931.2 $1,779.6
============= =============
</TABLE>
The condensed financial information should be read in conjunction with the
consolidated financial statements and notes thereto. Allmerica Financial
Corporation ("AFC") was incorporated under Delaware law on January 12, 1995,
for the purpose of becoming the parent holding company of First Allmerica
Financial Insurance Company ("FAFLIC"). Accordingly, the financial information
reflects the equity in the financial position and results of operations of
FAFLIC for the periods prior to the date of demutualization as if AFC had been
the parent of FAFLIC at that time.
52
<PAGE>
SCHEDULE II (CONTINUED)
ALLMERICA FINANCIAL CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- ------
(IN MILLIONS)
<S> <C> <C> <C>
Cash flows from operating activities
Net income, including net income prior to
demutualization................................... $ 181.9 $ 133.9 $ 38.0
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of First Allmerica
Financial Life Insurance Company................. (192.8) (137.0) (38.0)
Net realized investment losses.................... 0.9 -- --
Change in accrued investment income............... (0.2) (0.2) --
Change in expenses and taxes payable.............. 0.9 0.2 --
Change in dividends payable....................... -- 2.5 --
Change in debt interest payable................... 0.1 3.2 --
Other, net........................................ (3.6) (2.5)
------- ------- ------
Net cash (used in) provided by operating
activities......................................... (12.8) 0.1 --
------- ------- ------
Cash flows from investing activities Capital
contributed to unconsolidated subsidiaries......... -- (392.4) --
Proceeds from disposals and maturities of
available-for- sale fixed maturities.............. 32.7 -- --
Purchase of available-for-sale fixed maturities.... (59.6) -- --
Purchase of equity securities...................... (0.7) -- --
------- ------- ------
Net cash used in investing activities............... (27.6) (392.4) --
------- ------- ------
Cash flow from financing activities Net proceeds
from issuance of common stock...................... -- 248.0 --
Net proceeds from issuance of debt securities...... -- 197.2 --
Dividends paid to shareholders..................... (10.0) -- --
------- ------- ------
Net cash (used in) provided by financing
activities......................................... (10.0) 445.2 --
------- ------- ------
Net change in cash and cash equivalents............. (50.4) 52.9 --
Cash and cash equivalents at beginning of the
period............................................. 52.9 -- --
------- ------- ------
Cash and cash equivalents at end of the period...... $ 2.5 $ 52.9 $ --
======= ======= ======
</TABLE>
The condensed financial information should be read in conjunction with the
consolidated financial statements and notes thereto. Allmerica Financial
Corporation ("AFC") was incorporated under Delaware law on January 12, 1995,
for the purpose of becoming the parent holding company of First Allmerica
Financial Insurance Company ("FAFLIC"). Accordingly, the financial information
reflects the equity in the financial position and results of operations of
FAFLIC for the periods prior to the date of demutualization as if AFC had been
the parent of FAFLIC at that time.
53
<PAGE>
SCHEDULE III
ALLMERICA FINANCIAL CORPORATION
SUPPLEMENTARY INSURANCE INFORMATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
FUTURE
POLICY AMORTIZA-
BENEFITS, OTHER BENEFITS, TION OF
DEFERRED LOSSES, POLICY CLAIMS, DEFERRED
POLICY CLAIMS AND CLAIMS AND NET INVEST- LOSSES AND POLICY OTHER PREM-
ACQUISI- LOSS UNEARNED BENEFITS PREMIUM MENT SETTLEMENT ACQUISI- OPERATING IUMS
TION COSTS EXPENSES PREMIUMS PAYABLE REVENUE INCOME EXPENSES TION COSTS EXPENSES WRITTEN
---------- ---------- -------- ---------- -------- ----------- ---------- ---------- --------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
RISK MANAGEMENT
Regional Property
and Casualty.... $164.2 $2,744.1 $815.1 $12.8 $1,898.3 $235.4 $1,383.4 $422.6 $190.0 $1,914.4
Corporate Risk
Management
Services........ 2.9 299.0 4.7 11.1 302.9 21.7 211.3 3.1 126.4 --
RETIREMENT AND
ASSET MANAGEMENT
Retail Financial
Services........ 649.0 2,225.5 2.7 120.1 34.0 198.7 202.2 54.9 117.6 --
Institutional
Services........ 6.6 289.2 -- 1,916.4 1.1 214.0 160.1 2.9 50.9 --
Allmerica Asset
Management...... -- -- -- -- -- 0.1 -- -- 7.7 --
Corporate........ -- -- -- -- -- 2.7 -- -- 18.6 --
Eliminations..... -- -- -- -- -- -- -- -- (8.7) --
------ -------- ------ -------- -------- ------ -------- ------ ------ --------
Total........... $822.7 $5,557.8 $822.5 $2,060.4 $2,236.3 $672.6 $1,957.0 $483.5 $502.5 $1,914.4
====== ======== ====== ======== ======== ====== ======== ====== ====== ========
</TABLE>
54
<PAGE>
SCHEDULE III (CONTINUED)
ALLMERICA FINANCIAL CORPORATION
SUPPLEMENTARY INSURANCE INFORMATION
DECEMBER 31, 1995
<TABLE>
<CAPTION>
FUTURE
POLICY AMORTIZA-
BENEFITS, OTHER BENEFITS, TION OF
DEFERRED LOSSES, POLICY CLAIMS, DEFERRED
POLICY CLAIMS AND CLAIMS AND NET INVEST- LOSSES AND POLICY OTHER PREM-
ACQUISI- LOSS UNEARNED BENEFITS PREMIUM MENT SETTLEMENT ACQUISI- OPERATING IUMS
TION COSTS EXPENSES PREMIUMS PAYABLE REVENUE INCOME EXPENSES TION COSTS EXPENSES WRITTEN
---------- ---------- -------- ---------- -------- ----------- ---------- ---------- --------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
RISK MANAGEMENT
Regional Property
and Casualty.... $157.5 $2,896.0 $797.3 $ 12.8 $1,863.2 $209.6 $1,300.3 $409.1 $179.4 $1,885.3
Corporate Risk
Management
Services........ 2.3 282.4 0.8 9.4 272.7 17.6 197.2 2.7 110.3 --
RETIREMENT AND
ASSET MANAGEMENT
Retail Financial
Services........ 569.4 2,248.2 2.8 148.7 86.6 216.3 295.0 55.3 101.2 --
Institutional
Services........ 6.5 294.0 -- 2,566.5 0.3 266.4 217.8 3.2 66.4 --
Allmerica Asset
Management...... -- -- -- -- -- 0.2 -- -- 2.1 --
Corporate........ -- -- -- -- -- 0.4 -- -- 3.5 --
Eliminations..... -- -- -- -- -- -- -- -- (4.4) --
------ -------- ------ -------- -------- ------ -------- ------ ------ --------
Total........... $735.7 $5,720.6 $800.9 $2,737.4 $2,222.8 $710.5 $2,010.3 $470.3 $458.5 $1,885.3
====== ======== ====== ======== ======== ====== ======== ====== ====== ========
</TABLE>
55
<PAGE>
SCHEDULE III (CONTINUED)
ALLMERICA FINANCIAL CORPORATION
SUPPLEMENTARY INSURANCE INFORMATION
DECEMBER 31, 1994
<TABLE>
<CAPTION>
FUTURE
POLICY AMORTIZA-
BENEFITS, OTHER BENEFITS, TION OF
DEFERRED LOSSES, POLICY CLAIMS, DEFERRED
POLICY CLAIMS AND CLAIMS AND NET INVEST- LOSSES AND POLICY OTHER PREM-
ACQUISI- LOSS UNEARNED BENEFITS PREMIUM MENT SETTLEMENT ACQUISI- OPERATING IUMS
TION COSTS EXPENSES PREMIUMS PAYABLE REVENUE INCOME EXPENSES TION COSTS EXPENSES WRITTEN
---------- ---------- -------- ---------- -------- ----------- ---------- ---------- --------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
RISK MANAGEMENT
Regional Property
and Casualty.... $155.0 $2,821.7 $793.2 $11.9 $1,791.3 $202.4 $1,315.5 $390.3 $185.9 $1,822.9
Corporate Risk
Management
Services........ 2.2 248.1 0.6 10.0 268.0 14.0 182.6 2.5 97.4 --
RETIREMENT AND
ASSET MANAGEMENT
Retail Financial
Services........ 637.5 3,037.2 2.8 260.5 121.6 223.9 300.8 79.5 113.4 --
Institutional
Services........ 8.1 300.9 -- 3,153.3 0.9 302.8 248.1 3.4 142.0 --
Allmerica Asset
Management...... -- -- -- -- -- -- -- -- 2.1 --
Eliminations..... -- -- -- -- -- -- -- -- (21.9) --
------ -------- ------ -------- -------- ------ -------- ------ ------ --------
Total........... $802.8 $6,407.9 $796.6 $3,435.7 $2,181.8 $743.1 $2,047.0 $475.7 $518.9 $1,822.9
====== ======== ====== ======== ======== ====== ======== ====== ====== ========
</TABLE>
56
<PAGE>
SCHEDULE IV
ALLMERICA FINANCIAL CORPORATION
REINSURANCE
DECEMBER 31,
<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
--------- --------- ---------- --------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1996
Life insurance in force... $41,943.1 $7,135.8 $559.2 $35,366.5 1.58%
========= ======== ====== ========= =====
Premiums:
Life insurance.......... $ 72.0 $ 18.1 $ 5.9 $ 59.8 9.87%
Accident and health
insurance.............. 317.1 120.8 81.9 278.2 29.44%
Property and casualty
insurance.............. 2,018.5 232.6 112.4 1,898.3 5.92%
--------- -------- ------ ---------
Total premiums............ $ 2,407.6 $ 371.5 $200.2 $ 2,236.3 8.95%
========= ======== ====== ========= =====
1995
Life insurance in force... $40,274.2 $8,003.1 $585.6 $32,856.7 1.78%
========= ======== ====== ========= =====
Premiums:
Life insurance.......... $ 131.4 $ 33.8 $ 1.8 $ 99.4 1.80%
Accident and health
insurance.............. 307.5 116.5 69.2 260.2 26.59%
Property and casualty
insurance.............. 2,021.7 296.2 137.7 1,863.2 7.39%
--------- -------- ------ ---------
Total premiums............ $ 2,460.6 $ 446.5 $208.7 $ 2,222.8 9.39%
========= ======== ====== ========= =====
1994
Life insurance in force... $41,812.5 $2,301.2 $649.1 $40,160.4 1.62%
Premiums:
Life insurance.......... $ 144.4 $ 9.5 $ 2.5 $ 137.4 1.80%
Accident and health
insurance.............. 302.8 101.5 51.8 253.1 20.47%
Property and casualty
insurance.............. 1,967.1 291.9 116.1 1,791.3 6.48%
--------- -------- ------ ---------
Total premiums............ $ 2,414.3 $ 402.9 $170.4 $ 2,181.8 7.81%
========= ======== ====== ========= =====
</TABLE>
57
<PAGE>
SCHEDULE V
ALLMERICA FINANCIAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31,
<TABLE>
<CAPTION>
ADDITIONS
---------------------
DEDUCTIONS
BALANCE AT CHARGED TO CHARGED TO FROM BALANCE AT
BEGINNING OF COSTS AND OTHER ALLOWANCE END OF
PERIOD EXPENSE ACCOUNTS ACCOUNT PERIOD
------------ ---------- ---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1996
Mortgage loans.......... $33.8 $ 5.5 $-- $19.7 $19.6
Real estate............. 19.6 -- -- 4.7 14.9
Allowance for doubtful
accounts............... 4.6 6.8 -- 6.9 4.5
----- ----- ---- ----- -----
$58.0 $12.3 $-- $31.3 $39.0
===== ===== ==== ===== =====
1995
Mortgage loans.......... $47.2 $ 1.5 $-- $14.9 $33.8
Real estate............. 22.9 (0.6) -- 2.7 19.6
Allowance for doubtful
accounts............... 4.7 5.3 -- 5.4 4.6
----- ----- ---- ----- -----
$74.8 $ 6.2 $-- $23.0 $58.0
===== ===== ==== ===== =====
1994
Mortgage loans.......... $73.8 $14.6 $-- $41.2 $47.2
Real estate............. 21.0 3.2 -- 1.3 22.9
Allowance for doubtful
accounts............... 3.5 4.1 -- 2.9 4.7
----- ----- ---- ----- -----
$98.3 $21.9 $-- $45.4 $74.8
===== ===== ==== ===== =====
</TABLE>
58
<PAGE>
SCHEDULE VI
ALLMERICA FINANCIAL CORPORATION
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
DISCOUNT, IF
RESERVES FOR ANY,
DEFERRED LOSSES AND DEDUCTED
POLICY LOSS FROM NET NET
ACQUISITION ADJUSTMENT PREVIOUS UNEARNED PREMIUMS INVESTMENT
AFFILIATION WITH REGISTRANT COSTS EXPENSES(2) COLUMN(1) PREMIUMS(2) EARNED INCOME
--------------------------- ----------- ------------ ------------ ----------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Property and
Casualty Subsidiaries
1996................... $164.2 $2,744.1 $-- $815.1 $1,898.3 $235.4
====== ======== ==== ====== ======== ======
1995................... $157.5 $2,896.0 $-- $797.3 $1,863.2 $209.6
====== ======== ==== ====== ======== ======
1994................... $155.0 $2,821.7 $-- $793.2 $1,791.3 $202.4
====== ======== ==== ====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
LOSSES AND LOSS
ADJUSTMENT EXPENSES
------------------------
AMORTIZATION
OF DEFERRED PAID LOSSES
POLICY AND LOSS
ACQUISITION ADJUSTMENT NET PREMIUMS
CURRENT YEAR PRIOR YEARS EXPENSES EXPENSES WRITTEN
------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
1996......... $1,513.3 $(141.4) $422.6 $1,387.2 $1,914.4
======== ======= ====== ======== ========
1995......... $1,427.3 $(137.6) $409.1 $1,266.5 $1,885.3
======== ======= ====== ======== ========
1994......... $1,434.8 $(128.1) $390.3 $1,217.1 $1,822.9
======== ======= ====== ======== ========
</TABLE>
- --------
(1) The Company does not employ any discounting techniques.
(2) Reserves for losses and loss adjustment expenses are shown gross of $626.9
million, $763.5 million and $712.5 million of reinsurance recoverable on
unpaid losses in 1996, 1995 and 1994, respectively. Unearned premiums are
shown gross of prepaid premiums of $45.5 million, $43.8 million and $61.9
million in 1996, 1995 and 1994, respectively.
59
<PAGE>
(A)(3) EXHIBIT INDEX
The Exhibits listed in the Exhibit Index immediately preceding such Exhibits
are filed as part of this Annual Report on Form 10-K/A.
(B) REPORTS ON FORM 8-K
On December 18, 1996, a report on Form 8-K was filed reporting under item 5,
Other Events, the announcement by the Registrant that AFC's Board of Directors
had made a proposal to the Board of Directors of Allmerica P&C to acquire the
shares of Common Stock of Allmerica P&C that AFC and its subsidiaries do not
already own.
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.
60
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Allmerica Financial Corporation
-------------------------------------
REGISTRANT
Date: June 12, 1997
By: /s/ Edward J. Parry, III
---------------------------------
EDWARD J. PARRY III,
VICE PRESIDENT, CHIEF FINANCIAL
OFFICER AND PRINCIPAL ACCOUNTING
OFFICER
61
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRITPION
- -- -----------
<C> <S>
2.1 Plan of Reorganization.+
2.2 Stock and Asset Purchase Agreement by an among State Mutual Life
Assurance Company of America, 440 Financial Group of Worcester, Inc.,
and The Shareholder Services Group, Inc. dated as of March 9, 1995.+
2.3 Agreement and Plan of Merger, dated as of February 19, 1997, among AFC,
Allmerica Property and Casualty Companies, Inc. and APY Acquisition,
Inc.++++
3.1 Certificate of Incorporation of AFC.+
3.2 By-Laws of AFC.+
4 Specimen Certificate of Common Stock.+
4.1 Form of Indenture relating to the Debentures between the Registrant and
State Street Bank & Trust Company, as trustee.++
4.2 Form of Global Debenture.++
4.3 Amended and Restated Declaration of Trust of AFC Capital Trust I dated
February 3, 1997.+++++
4.4 Indenture dated February 3, 1997 relating to the Junior Subordinated
Debentures of AFC.+++++
4.5 Series A Capital Securities Guarantee Agreement dated February 3,
1997.+++++
4.6 Common Securities Guarantee Agreement dated February 3, 1997.+++++
4.7 Registration Rights Agreement dated February 3, 1997.+++++
10.1 Consolidated Income Tax Agreement between Allmerica Financial
Corporation and certain subsidiaries dated January 1, 1996.+++
10.2 Consolidated Service Agreement between State Mutual Life Assurance
Company of America and its subsidiaries, dated September 30, 1993.+
10.2.1 Addendum to the Consolidated Service Agreement between State Mutual
Life Assurance Company of America and its subsidiaries, dated October
9, 1995.+++
10.2.2 Addendum to the Consolidated Service Agreement between State Mutual
Life Assurance Company of America and its subsidiaries, dated November
30, 1995.+++
10.3 Administrative Services Agreement between State Mutual Life Assurance
Company of America and The Hanover Insurance Company, dated July 19,
1989.+
10.4 First Allmerica Financial Life Insurance Company Employees' 401(k)
Matched Savings Plan incorporated by reference to Exhibit 10.1 to the
Allmerica Financial Corporation Registration Statement on Form 8-K (No.
333-576) and incorporated herein by reference originally filed with the
Commission on January 24, 1996.
10.5 State Mutual Life Assurance Company of America Excess Benefit
Retirement Plan.+
10.6 State Mutual Life Assurance Company of America Supplemental Executive
Retirement Plan.+
10.7 State Mutual Incentive Compensation Plan.+
10.8 State Mutual Companies Long-Term Performance Unit Plan.+
10.9 Indenture of Lease between State Mutual Life Assurance Company of
America and the Hanover Insurance Company dated July 3, 1984 and
corrected First Amendment to Indenture of Lease dated December 20,
1993.+
10.11 Lease dated November 1993 by and between Connecticut General Life
Insurance Company and State Mutual Life Assurance Company of America,
including amendments thereto, relating to property in Marlborough,
Massachusetts.+
10.12 Lease dated March 23, 1993 by and between Aetna Life Insurance Company
and State Mutual Life Assurance Company of America, including
amendments thereto, relating to property in Atlanta, Georgia.+
10.13 Stockholder Services Agreement dated as of January 1, 1992 between
Private Healthcare Systems, Inc. and Group Healthcare Network, Inc., a
wholly-owned subsidiary of State Mutual Life Assurance Company of
America.+
10.14 Lease dated January 26, 1995 by and between Citizens Insurance and
Upper Peninsula Commission for Area Progress, Inc., including
amendments thereto, relating to property in Escanaba, Michigan.+
10.15 Compensation Agreement between State Mutual Life Assurance of America
and Larry E. Renfro.+
10.16 Trust Indenture for the State Mutual Life Assurance Company of America
Employees' 401(k) Matched Savings Plan between State Mutual Life
Assurance Company of America and Bank of Boston/Worcester.+
10.17 State Mutual Life Assurance Company of America Non-Qualified Executive
Retirement Plan.+
10.18 State Mutual Life Assurance Company of America Non-Qualified Executive
Deferred Compensation Plan.+
10.19 The Allmerica Financial Cash Balance Pension Plan incorporated by
reference to Exhibit 10.19 to the Allmerica Financial Corporation
September 30, 1995 report on Form 10-Q and incorporated herein by
reference.
10.20 The Allmerica Financial Corporation Employment Continuity Plan*
10.21 Form of Non-Solicitation Agreement executed by substantially all of the
executive officers of AFC.*
11 Statement regarding computation of per share earnings.*
13 Annual Report to Shareholders for 1996.*
21 Subsidiaries of AFC.*
23 Consent of Price Waterhouse LLP.
24 Power of Attorney.*
27 Financial Data Schedule.*
99.1 Internal Revenue Service Ruling dated April 15, 1995.+
99.2 Important Factors Regarding Forward Looking Statements.*
</TABLE>
- --------
+ Incorporated herein by reference to the correspondingly numbered exhibit
contained in the Registrant's Registration Statement on Form S-1 (No.
33-91766) originally filed with the Commission on May 1, 1995.
++ Incorporated herein by reference to the correspondingly numbered exhibit
contained in the Registrant's Registration Statement on Form S-1 (No.
33-96764) originally filed with the Commission on September 11, 1995.
+++ Incorporated herein by reference to the correspondingly numbered exhibit
contained in the Registrant's 1995 Annual Report on Form 10-K originally
filed with the Commission on March 28, 1996.
++++ Incorporated by herein by reference to Exhibit I of the Current Report
of the Registrant (Commission File No. 1-13754) filed February 20, 1997.
+++++ Incorporated herein by reference to Exhibits 2, 3, 4, 5 and 6,
respectively, contained in the Registrant's Current Report on Form 8-K
filed on February 5, 1997.
* Previously filed in the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996, filed on March 24, 1997.
61
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-576, No. 333-578, No. 333-580, No. 333-582, and
No. 333-24929) of Allmerica Financial Corporation of our report dated February
3, 1997, except as to Note 1, which is as of February 19, 1997, and Note 2,
which is as of April 14, 1997, appearing in this Form 10-K/A. We also consent to
the incorporation by reference of our report on the Financial Statement
Schedules, which also appears in this Form 10-K/A.
/s/ Price Waterhouse LLP
- -------------------------------
Price Waterhouse LLP
Boston, Massachusetts
June 11, 1997
