FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to ____________
Commission file number: 1-13754
ALLMERICA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-3263626
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
440 Lincoln Street, Worcester, Massachusetts 01653
(Address of principal executive offices)
(Zip Code)
(508) 855-1000
(Registrant's telephone number, including area code)
_________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: 50,287,305 shares
of common stock outstanding, as of August 1, 1997.
41
Total Number of Pages Included in This Document
Exhibit Index is on page 36
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income 3
Consolidated Statements of Shareholders' Equity 4
Consolidated Balance Sheets 5
Consolidated Statements of Cash Flows 6
Notes to Interim Consolidated Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 32
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 6. Exhibits and Reports on Form 8-K 34
SIGNATURES 35
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
(In millions, except per
share data) 1997 1996 1997 1996
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 578.8 $ 553.7 $1,141.1 $1,101.3
Universal life and investment
product policy fees 57.1 48.5 113.4 95.0
Net investment income 170.6 166.8 334.0 327.9
Net realized investment
(losses) gains (2.0) 2.3 42.0 53.9
Other income 28.0 27.9 56.9 52.9
--------- --------- --------- ---------
Total revenues 832.5 799.2 1,687.4 1,631.0
--------- --------- --------- ---------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims,
losses and loss
adjustment expenses 508.7 487.1 1,001.0 982.7
Policy acquisition expenses 116.8 116.1 236.6 235.7
Loss from cession of
disability income business 0.0 0.0 53.9 0.0
Other operating expenses 130.8 127.1 265.7 247.5
--------- --------- --------- ---------
Total benefits, losses and
expenses 756.3 730.3 1,557.2 1,465.9
--------- --------- --------- ---------
Income before federal
income taxes 76.2 68.9 130.2 165.1
--------- --------- --------- ---------
Federal income tax expense
(benefit)
Current 26.4 25.7 32.4 44.3
Deferred (7.1) (13.1) (3.4) (7.5)
--------- --------- --------- ---------
Total federal income
tax expense 19.3 12.6 29.0 36.8
--------- --------- --------- ---------
Income before minority
interest 56.9 56.3 101.2 128.3
Minority interest:
Distributions on Company-
obligated mandatorily
redeemable preferred
securities of subsidiary
trust (4.0) 0.0 (6.4) 0.0
Equity in earnings (15.2) (13.7) (41.2) (38.4)
--------- --------- --------- ---------
(19.2) (13.7) (47.6) (38.4)
--------- --------- --------- ---------
Net income $ 37.7 $ 42.6 $ 53.6 $ 89.9
========= ========= ========= =========
PER SHARE DATA
Net income $ 0.75 $ 0.85 $ 1.07 $ 1.79
========= ========= ========= =========
Dividends declared to
shareholders $ 0.05 $ 0.05 $ 0.10 $ 0.10
========= ========= ========= =========
Weighted average shares
outstanding 50.3 50.1 50.3 50.1
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
Page 3
<PAGE>
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
June 30,
(In millions) 1997 1996
<S> <C> <C>
COMMON STOCK
Balance at beginning and end of period $ 0.5 $ 0.5
--------- ---------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period 1,382.5 1,382.5
Issuance of common stock 3.1 0.0
Issuance costs of Company-obligated
mandatorily redeemable preferred
securities of subsidiary trust (3.7) 0.0
--------- ---------
Balance at end of period 1,381.9 1,382.5
--------- ---------
RETAINED EARNINGS
Balance at beginning of period 210.1 38.2
Net income 53.6 89.9
Dividends to shareholders (5.1) (5.0)
--------- ---------
Balance at end of period 258.6 123.1
--------- ---------
NET UNREALIZED APPRECIATION ON INVESTMENTS
Balance at beginning of period 131.6 153.0
Net appreciation (depreciation) on
available-for-sale securities 24.8 (193.9)
(Provision) benefit for deferred federal
income taxes (8.7) 67.9
Minority interest (6.2) 30.4
--------- ---------
Balance at end of period 141.5 57.4
--------- ---------
Total shareholders' equity $1,782.5 $1,563.5
========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
Page 4
<PAGE>
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
(In millions, except per share data) 1997 1996
<S> <C> <C>
ASSETS
Investments:
Fixed maturities-at fair value (amortized
cost of $7,213.9 and $7,305.5) $ 7,397.8 $ 7,487.8
Equity securities-at fair value (cost of
$266.4 and $328.2) 441.3 473.6
Mortgage loans 597.4 650.1
Real estate 90.5 120.7
Policy loans 137.9 132.4
Other long-term investments 143.5 128.8
---------- ----------
Total investments 8,808.4 8,993.4
---------- ----------
Cash and cash equivalents 527.0 178.5
Accrued investment income 149.1 149.0
Deferred policy acquisition costs 847.5 822.7
Reinsurance receivable on paid and unpaid losses,
benefits and unearned premiums 855.3 875.6
Deferred federal income taxes 84.8 93.2
Premiums, accounts and notes receivable, net 533.4 533.0
Other assets 317.8 307.5
Closed Block assets 803.9 811.8
Separate account assets 8,036.3 6,233.0
---------- ----------
Total assets $20,963.5 $18,997.7
========== ==========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits $ 2,605.7 $ 2,613.7
Outstanding claims, losses and loss
adjustment expenses 2,873.5 2,944.1
Unearned premiums 839.8 822.5
Contractholder deposit funds and other
policy liabilities 1,877.0 2,060.4
---------- ----------
Total policy liabilities and accruals 8,196.0 8,440.7
---------- ----------
Expenses and taxes payable 631.8 622.3
Reinsurance premiums payable 34.0 31.4
Short-term debt 34.4 38.4
Deferred federal income taxes 37.2 34.7
Long-term debt 202.2 202.2
Closed Block liabilities 883.9 892.1
Separate account liabilities 8,030.8 6,227.2
---------- ----------
Total liabilities 18,050.3 16,489.0
---------- ----------
Minority interest:
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust 300.0 0.0
Common stock 830.7 784.0
---------- ----------
Total minority interest 1,130.7 784.0
---------- ----------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, $0.01 par value, 20.0 million
shares authorized, none issued 0.0 0.0
Common stock, $0.01 par value, 300.0 million
shares authorized, 50.3 million and 50.1 million
shares issued and outstanding, respectively 0.5 0.5
Additional paid-in capital 1,381.9 1,382.5
Unrealized appreciation on investments, net 141.5 131.6
Retained earnings 258.6 210.1
---------- ----------
Total shareholders' equity 1,782.5 1,724.7
---------- ----------
Total liabilities and shareholders' equity $20,963.5 $18,997.7
========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
Page 5
<PAGE>
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
June 30,
(In millions) 1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 53.6 $ 89.9
Adjustments to reconcile net income to
net cash (used in) provided by
operating activities:
Minority interest 47.6 38.4
Net realized gains (43.0) (54.3)
Net amortization and depreciation 13.7 25.1
Deferred federal income taxes (3.5) (7.5)
Change in deferred acquisition costs (25.3) (33.7)
Change in premiums and notes receivable,
net of reinsurance payable 2.9 2.7
Change in accrued investment income 0.1 (1.7)
Change in policy liabilities and accruals, net (71.1) (50.4)
Change in reinsurance receivable 20.3 28.1
Change in expenses and taxes payable 7.8 (13.4)
Separate account activity, net 0.3 (6.1)
Other, net (28.4) 13.5
--------- ---------
Net cash (used in) provided by
operating activities (25.0) 30.6
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities of
available-for-sale fixed maturities 1,491.8 2,205.2
Proceeds from disposals of equity securities 121.0 212.4
Proceeds from disposals of other investments 42.9 34.0
Proceeds from mortgages matured or collected 107.9 74.2
Purchase of available-for-sale fixed maturities (1,413.2) (2,661.7)
Purchase of equity securities (22.0) (50.5)
Purchase of other investments (70.6) (27.5)
Capital expenditures (2.8) (4.9)
Other investing activities, net 0.6 4.3
--------- ---------
Net cash provided by (used in)
investing activities 255.6 (214.5)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds 125.4 181.8
Withdrawals from contractholder deposit funds (302.1) (587.2)
Change in short-term debt (4.0) 470.5
Net proceeds from issuance of Company-obligated
mandatorily redeemable preferred securities
of subsidiary trust 296.3 0.0
Proceeds from issuance of common stock 2.4 0.0
Dividends paid to shareholders (6.0) (7.0)
Subsidiary treasury stock purchased, at cost 0.0 (41.8)
--------- ---------
Net cash provided by financing activities 112.0 16.3
--------- ---------
Net change in cash and cash equivalents 342.6 (167.6)
Net change in cash held in the Closed Block 5.9 6.3
Cash and cash equivalents, beginning of period 178.5 289.5
--------- ---------
Cash and cash equivalents, end of period $ 527.0 $ 128.2
========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
Page 6
<PAGE>
ALLMERICA FINANCIAL CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Allmerica
Financial Corporation ("AFC" or the "Company") have been prepared in
accordance with generally accepted accounting principles for stock life
insurance companies for interim financial information and with the
requirements of Form 10-Q.
The interim consolidated financial statements of AFC include the accounts
of AFC, First Allmerica Financial Life Insurance Company ("FAFLIC"), its
wholly-owned life insurance subsidiary, Allmerica Financial Life Insurance
and Annuity Company ("AFLIAC"), non-insurance subsidiaries (principally
brokerage and investment advisory subsidiaries), and Allmerica Property &
Casualty Companies, Inc. ("Allmerica P&C", a 59.5%-owned non-insurance
holding company). The Closed Block assets and liabilities at June 30, 1997
and December 31, 1996 are presented in the consolidated financial statements
as single line items. Results of operations for the Closed Block for the
six month and three month periods ended June 30, 1997 and June 30, 1996 are
included in other income in the consolidated financial statements. All
significant intercompany accounts and transactions have been eliminated.
Minority interest relates to the Company's investment in Allmerica P&C and
its subsidiary, The Hanover Insurance Company ("Hanover"). Hanover's
82.5%-owned subsidiary is Citizens Corporation, the holding company for
Citizens Insurance Company of America ("Citizens"). Minority interest also
includes an amount related to the minority interest in Citizens Corporation.
The accompanying interim consolidated financial statements reflect, in the
opinion of the Company's management, all adjustments, consisting of only
normal and recurring adjustments, necessary for a fair presentation of the
financial position and results of operations. Certain reclassifications
have been made to the 1996 consolidated statements of income in order to
conform to the 1997 presentation. The results of operations for the six
months ended and quarter ended June 30, 1997 are not necessarily indicative
of the results to be expected for the full year. These financial statements
should be read in conjunction with the Company's 1996 Annual Report to
Shareholders, as filed on Form 10-K with the Securities and Exchange
Commission.
2. Significant Transactions
In June 1997, the Company entered into a credit agreement with The Chase
Manhattan Bank ("Chase") providing for a $225 million revolving line of
credit that expires on December 15, 1997. Borrowings under the line of
credit will be unsecured and will bear interest at a rate per annum equal
to, at the Company's option, Chase's base rate or the eurodollar rate plus
an applicable margin. The credit agreement requires the Company to comply
with certain financial ratios. As of June 30, 1997, the Company had not
closed under, or borrowed against, the line of credit provided by this
credit agreement.
In late July 1997, a lawsuit was instituted in Louisiana against AFC and
certain of its subsidiaries by individual plaintiffs alleging fraud, unfair
or deceptive acts, breach of contract, misrepresentation and related claims
in the sale of life insurance policies. The plaintiffs seek to be
certified as a class. The Company intends to defend the lawsuit vigorously.
In July 1997, Hanover reached an agreement with Travelers Property Casualty
to facilitate Travelers' writing of certain Hanover Insurance policies, as
they expire, in Alabama, California, Kansas, Mississippi, Missouri, and
Texas. In these six states, Hanover has approximately 250 agents generating
approximately $90 million in premium annually. Hanover intends to cease
writing personal and commercial policies in these states except for employer
and association-sponsored group property and casualty business, surety bonds
and specialty program commercial policies. The plan is conditioned upon the
appropriate regulatory approval in each state.
On July 16, 1997, AFC announced the closing of the merger (the "Merger") of
Allmerica P&C and a wholly-owned subsidiary of AFC. Through the
transaction, AFC acquired the approximately 24.2 million shares of
Allmerica P&C that it did not already own for approximately $426 million in
cash and 9.7 million shares of AFC common stock. On July 15, 1997, the
Certificate of Incorporation of Allmerica P&C was amended and restated to
authorize a Class B Common Stock of Allmerica P&C, $5.00 par value.
Immediately prior to the consummation of the Merger, each share of
Allmerica P&C Common Stock owned by AFC and its subsidiaries was exchanged
for one share of Class B Common Stock.
In June 1997, the Company entered into a binding letter of intent for the
100% coinsurance of its disability income line of business. The
consummation of the transaction is subject to the receipt of regulatory
approvals. The proposed transaction resulted in the recognition
of a $53.9 million pre-tax loss in the first quarter of 1997.
Page 7
<PAGE>
On February 3, 1997, AFC Capital Trust (the "Trust"), a wholly-owned
subsidiary business trust of AFC, issued $300.0 million Series A Capital
Securities ("Capital Securities"), which pay cumulative dividends at a rate
of 8.207% semiannually commencing August 15, 1997. The Trust exists for
the sole purpose of issuing the Capital Securities and investing the
proceeds thereof in an equivalent amount of 8.207% Junior Subordinated
Deferrable Interest Debentures due 2027 of AFC (the "Subordinated
Debentures"). Through certain guarantees, the Subordinated Debentures and
the terms of related agreements, AFC has irrevocably and unconditionally
guaranteed the obligations of the Trust under the Capital Securities. Net
proceeds from the offering of approximately $296.3 million will fund a
portion of the acquisition of the 24.2 million publicly held shares of
Allmerica P&C pursuant to the Merger on July 16, 1997. On August 7, 1997,
AFC and the Trust closed an exchange offer to exchange the Series A
Capital Securities to a like amount of Series B Capital Securities and
related guarantees which are registered under the Securities Act of 1933
as required under the terms of the initial transaction.
3. Federal Income Taxes
Federal income tax expense for the periods ended June 30, 1997 and 1996,
has been computed using estimated effective tax rates for the AFC and
Allmerica P&C tax-paying groups. These rates are revised, if necessary, at
the end of each successive interim period to reflect the current estimates
of the annual effective tax rates.
4. Closed Block
Included in other income in the Consolidated Statements of Income in the
second quarter and first six months of 1997 and 1996 is a net pre-tax
contribution from the Closed Block of $0.5 million and $6.0 million, and
$2.6 million and $6.0 million, respectively. Summarized financial
information of the Closed Block is as follows:
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
(In millions) 1997 1996
<S> <C> <C>
ASSETS
Fixed maturities-at fair value (amortized cost
of $410.0 and $397.2) $ 411.7 $ 403.9
Mortgage loans 102.2 114.5
Policy loans 225.7 230.2
Cash and cash equivalents 18.2 24.1
Accrued investment income 14.2 14.3
Deferred policy acquisition costs 19.4 21.1
Other assets 12.5 3.7
--------- ---------
Total assets $ 803.9 $ 811.8
========= =========
LIABILITIES
Policy liabilities and accruals $ 876.9 $ 883.4
Other liabilities 7.0 8.7
--------- ---------
Total liabilities $ 883.9 $ 892.1
========= =========
(Unaudited) (Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
(In millions) 1997 1996 1997 1996
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 9.7 $ 10.9 $ 39.0 $ 40.5
Net investment income 13.2 13.0 26.7 26.1
Net realized investment
gains (losses) 0.1 (0.2) 1.0 0.4
--------- --------- --------- ---------
Total revenues 23.0 23.7 66.7 67.0
--------- --------- --------- ---------
BENEFITS AND EXPENSES
Policy benefits 21.8 20.4 59.1 59.1
Policy acquisition expenses 0.5 0.7 1.4 1.6
Other operating expenses 0.2 0.0 0.2 0.3
--------- --------- --------- ---------
Total benefits and expenses 22.5 21.1 60.7 61.0
--------- --------- --------- ---------
Contribution from the
Closed Block $ 0.5 $ 2.6 $ 6.0 $ 6.0
========= ========= ========= =========
</TABLE>
Many expenses related to Closed Block operations are charged to operations
outside the Closed Block; accordingly, the contribution from the Closed
Block does not represent the actual profitability of the Closed Block
operations. Operating costs and expenses outside of the Closed Block are,
therefore, disproportionate to the business outside the Closed Block.
Page 8
<PAGE>
5. Segment Information
The Company offers financial products and services in two major areas: Risk
Management and Retirement and Asset Management. Within these broad areas,
the Company conducts business principally in five operating segments.
The Risk Management group includes two segments: Regional Property and
Casualty and Corporate Risk Management Services. The Regional Property and
Casualty segment includes property and casualty insurance products, such as
automobile insurance, homeowners insurance, commercial multiple-peril
insurance, and workers' compensation insurance. These products are offered
by Allmerica P&C through its operating subsidiaries, Hanover and Citizens.
Substantially all of the Regional Property and Casualty segment's earnings
are generated in Michigan and the Northeast (Connecticut, Massachusetts,
New York, New Jersey, New Hampshire, Rhode Island, Vermont and Maine). The
Corporate Risk Management Services segment includes group life and health
insurance products and services which assist employers in administering
employee benefit programs and in managing the related risks.
The Retirement and Asset Management group includes three segments: Retail
Financial Services, Institutional Services and Allmerica Asset Management.
The Retail Financial Services segment includes variable annuities, variable
universal life, and traditional insurance products distributed via retail
channels to individuals across the country. The Institutional Services
segment primarily includes group retirement products such as 401(k) plans,
tax-sheltered annuities and GIC contracts which are distributed to
institutions across the country via worksite marketing and other
arrangements. Allmerica Asset Management is a Registered Investment
Advisor which provides investment advisory services, primarily to
affiliates, and to other institutions, such as insurance companies and
pension plans.
In addition to the five operating segments, the Company also has a
Corporate segment, which consists primarily of the proceeds from the
issuance of Company-obligated mandatorily redeemable preferred securities,
Senior Debentures and a portion of the net proceeds from the Company's
initial public offering.
Summarized below is financial information with respect to business segments
for the periods indicated.
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
(In millions) 1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Risk Management
Regional Property and
Casualty $ 553.2 $ 531.2 $1,129.8 $1,097.9
Corporate Risk Management
Services 100.2 89.6 194.1 176.4
--------- --------- --------- ---------
Subtotal 653.4 620.8 1,323.9 1,274.3
--------- --------- --------- ---------
Retirement and Asset
Management
Retail Financial Services 116.5 113.4 233.6 220.5
Institutional Services 58.6 65.3 122.6 137.1
Allmerica Asset Management 2.0 3.5 4.3 4.5
--------- --------- --------- ---------
Subtotal 177.1 182.2 360.5 362.1
--------- --------- --------- ---------
Corporate 4.5 0.8 8.3 1.3
Eliminations (2.5) (4.6) (5.3) (6.7)
--------- --------- --------- ---------
Total $ 832.5 $ 799.2 $1,687.4 $1,631.0
========= ========= ========= =========
Income (loss) from continuing
operations before income
taxes:
Risk Management
Regional Property and
Casualty $ 38.1 $ 37.1 $ 109.8 $ 104.6
Corporate Risk Management
Services 4.2 3.4 6.2 7.5
--------- --------- --------- ---------
Subtotal 42.3 40.5 116.0 112.1
--------- --------- --------- ---------
Retirement and Asset
Management
Retail Financial Services 21.3 20.2 (12.0) 35.1
Institutional Services 12.6 12.2 27.3 25.6
Allmerica Asset Management 0.5 0.2 0.6 0.5
--------- --------- --------- ---------
Subtotal 34.4 32.6 15.9 61.2
--------- --------- --------- ---------
Corporate (0.5) (4.2) (1.7) (8.2)
--------- --------- --------- ---------
Total $ 76.2 $ 68.9 $ 130.2 $ 165.1
========= ========= ========= =========
</TABLE>
Page 9
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
(In millions) 1997 1996
<S> <C> <C>
Identifiable assets:
Risk Management
Regional Property and Casualty $ 5,719.9 $ 5,703.9
Corporate Risk Management Services 529.6 506.0
---------- ----------
Subtotal 6,249.5 6,209.9
---------- ----------
Retirement and Asset Management
Retail Financial Services 10,400.8 8,873.5
Institutional Services 3,979.9 3,879.0
Allmerica Asset Management 3.4 2.4
---------- ----------
Subtotal 14,384.1 12,754.9
---------- ----------
Corporate 329.9 32.9
---------- ----------
Total $20,963.5 $18,997.7
========== ==========
</TABLE>
6. Earnings Per Share
Earnings per share are based the monthly weighted average number of common
shares and common share equivalents. The weighted average number of shares
of common stock and equivalents was 50.3 million and 50.1 million for the
second quarters ended as well as the six month periods ended June 30, 1997
and 1996, respectively.
Recently the FASB issued Statement of Financial Accounting Standards No.
128, Earnings Per Share, which supersedes APB Opinion No. 15, Earnings Per
Share. This standard replaces the primary EPS requirements with a basic
EPS computation and requires a dual presentation of basic and diluted EPS
for those companies with complex capital structures. The Company intends
to adopt the standards of Statement No. 128 for financial statements issued
after December 15, 1997. The impact of this statement is expected to be
immaterial on the Company's EPS calculation.
Page 10
<PAGE>
PART I
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the interim consolidated results of operations and
financial condition of the Company should be read in conjunction with the
interim Consolidated Financial Statements and related footnotes included
elsewhere herein.
INTRODUCTION
The results of operations for Allmerica Financial Corporation and
subsidiaries ("AFC" or "the Company") include the accounts of AFC, First
Allmerica Financial Life Insurance Company ("FAFLIC") its wholly-owned life
insurance subsidiary, Allmerica Financial Life Insurance and Annuity
Company("AFLIAC"), Allmerica Property & Casualty Companies, Inc. ("Allmerica
P&C", a 59.5%-owned non-insurance holding company), The Hanover Insurance
Company ("Hanover", a wholly-owned subsidiary of Allmerica P&C), Citizens
Corporation ("Citizens", an 82.5%-owned subsidiary of Hanover), Citizens
Insurance Company of America (a wholly-owned subsidiary of Citizens) and
certain other insurance and non-insurance subsidiaries.
CLOSED BLOCK
On completion of its demutualization, FAFLIC established a Closed Block for
the payment of future benefits, policyholders' dividends and certain
expenses and taxes relating to certain classes of policies. FAFLIC
allocated to the Closed Block an amount of assets expected to produce cash
flows which, together with anticipated revenues from the Closed Block
business, are reasonably expected to be sufficient to support the Closed
Block business. The Closed Block includes only those revenues, benefit
payments, dividends and premium taxes considered in funding the Closed Block
and excludes many costs and expenses associated with operating the Closed
Block and administering the policies included therein. Since many expenses
related to the Closed Block were excluded from the calculation of the Closed
Block contribution, the contribution from the Closed Block does not
represent the actual profitability of the Closed Block. As a result of such
exclusion, operating costs and expenses outside the Closed Block are
disproportionate to the business outside the Closed Block.
The contribution from the Closed Block is included in `Other income' in the
interim Consolidated Financial Statements. The pre-tax contribution from
the Closed Block was $0.5 million and $6.0 million for the quarter ended and
six months ended June 30, 1997, respectively and $2.6 million and $6.0
million for the quarter ended and six months ended June 30, 1996,
respectively.
Page 11
<PAGE>
FAFLIC's conversion to a stock life insurance company, which was completed
October 16, 1995, and the establishment of the Closed Block have affected
the presentation of the Company's interim Consolidated Financial Statements.
For comparability with prior periods, the following table presents the
results of operations of the Closed Block combined with the results of
operations outside the Closed Block for all period presented. Management's
discussion and analysis addresses the results of operations as combined
unless otherwise noted.
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
(In millions) 1997 1996 1997 1996
<S> <C> <C> <C> <C>
REVENUES
Premiums $588.5 $564.6 $1,180.1 $1,141.8
Universal life and
investment product policy fees 57.1 48.5 113.4 95.0
Net investment income 183.8 179.8 360.7 354.0
Net realized investment
(losses) gains (1.9) 2.1 43.0 54.3
Other income 27.5 25.3 50.9 46.9
------- ------- -------- -------
Total revenues 855.0 820.3 1,748.1 1,692.0
------- ------- -------- -------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims,
losses and loss adjustment
expenses 530.5 507.5 1,060.1 1,041.8
Policy acquisition
expenses 117.3 116.8 238.0 237.3
Loss from cession of
disability income business 0.0 0.0 53.9 0.0
Other operating
expenses 131.0 127.1 265.9 247.8
------- ------- -------- -------
Total benefits, losses
and expenses 778.8 751.4 1,617.9 1,526.9
------- ------- -------- -------
Income before federal
income taxes 76.2 68.9 130.2 165.1
------- ------- -------- -------
Federal income tax expense
(benefit)
Current 26.4 25.7 32.4 44.3
Deferred (7.1) (13.1) (3.4) (7.5)
------- ------- -------- -------
Total federal income tax
expense 19.3 12.6 29.0 36.8
------- ------- -------- -------
Income before minority
interest 56.9 56.3 101.2 128.3
Minority interest:
Distributions on Company-
obligated mandatorily
redeemable preferred
securities of subsidiary trust (4.0) 0.0 (6.4) 0.0
Equity in earnings (15.2) (13.7) (41.2) (38.4)
------- -------- -------- -------
(19.2) (13.7) (47.6) (38.4)
------- -------- -------- -------
Net income $37.7 $42.6 $53.6 $89.9
======= ======== ======== =======
</TABLE>
Page 12
<PAGE>
Results of Operations
Consolidated Overview
Quarter Ended June 30, 1997 Compared to Quarter Ended June 30, 1996
The Company's consolidated net income for the second quarter decreased $4.9
million, or 11.5%, to $37.7 million, compared to the same period in 1996.
Net income includes certain items which management believes are not
indicative of overall operating trends.
The following table reflects consolidated net income adjusted for these
items, all net of taxes and minority interest as applicable.
<TABLE>
<CAPTION>
(Unaudited)
Quarter Ended
June 30,
(In millions) 1997 1996
<S> <C> <C>
Net income $ 37.7 $ 42.6
Adjustments:
Net realized investment losses (gains) 1.0 (1.5)
Contingency payment from sale
of mutual fund processing business 0.0 (2.1)
Restructuring costs 1.0 0.0
Differential earnings tax adjustment 0.0 (5.9)
------- -------
Adjusted net income $ 39.7 $ 33.1
======= =======
</TABLE>
The Company's adjusted net income increased $6.6 million, or 19.9%, to $39.7
million in the second quarter of 1997. This increase is primarily
attributable to pre-tax increases of $4.0 million in the Regional Property
and Casualty segment, $3.6 million in the Retail Financial Services segment,
and $2.5 million in the Institutional Services segment. The increase in the
Regional Property and Casualty segment resulted primarily from increased net
investment income, while the increase in the Retail Financial Services
segment was primarily due to growth in variable products' fee income.
Additionally, the Institutional Services segment increased $2.5 million due
to increased net GIC margins and growth in telemarketing income. These
increases were partially offset by a decrease in the Corporate segment's
adjusted net income principally resulting from accrued distributions on the
Company-obligated mandatorily redeemable preferred securities of a
subsidiary trust ("Capital Securities") issued February 3, 1997.
Premium revenue increased $23.9 million, or 4.2%, to $588.5 million in the
second quarter of 1997. Premiums in the Regional Property and Casualty
segment increased $16.2 million, or 3.4%, to $485.9 million primarily due to
accounting effects of restructuring a reinsurance contract in the personal
automobile line and increased policies in force in the personal automobile
and homeowners' lines at Hanover. Additionally, Citizens' personal lines'
premiums increased due to expansion in Ohio and Indiana and an increase in
personal automobile and homeowners' rates. Premiums in the Corporate Risk
Management Services segment increased $9.2 million, or 12.3%, to $84.3
million due to increases in reinsurance, fully insured group dental, and
stop loss product lines totaling $12.3 million, partially offset by
decreases in the fully insured group medical and risk sharing product lines.
Universal life and investment product policy fees increased $8.6 million, or
17.7%, to $57.1 million during the second quarter of 1997. This increase
is primarily attributable to an $8.2 million increase in fees generated by
the Retail Financial Services segment due to additional deposits and
appreciation on variable products' account balances.
Net investment income increased $4.0 million, or 2.2%, to $183.8 million
during the second quarter of 1997. This increase resulted from increases in
the Regional Property and Casualty and Corporate segments, partially offset
by a decrease in the Institutional segment. Net investment income in the
Regional Property and Casualty segment increased $9.3 million, or 16.5%, to
$65.6 million due to an increase in average invested assets, a portfolio
shift to higher yielding debt securities, and increased partnership income.
Net investment income in the Corporate segment increased $3.8 million due to
the temporary investment of proceeds from the issuance of Capital Securities
in the first quarter of 1997. The $7.0 million decrease in the
Institutional Services segment resulted primarily from a reduction in
invested assets due to declining Guaranteed Investment Contracts ("GICs")
deposits related to a downgrading to A+ (Good) in March of 1995.
Page 13
<PAGE>
Net realized gains on investments decreased $4.0 million, or 190.5%, to net
realized losses of $1.9 million in the second quarter of 1997, primarily due
to 1997 losses of $1.9 million on the sale of fixed maturity investments
in the Regional Property and Casualty segment versus 1996 gains of $2.1
million on the sale of real estate properties.
Policy benefits, claims, losses and loss adjustment expenses increased $23.0
million, or 4.5% to $530.5 million during the second quarter of 1997. This
increase is primarily attributable to a $22.2 million, or 6.5% increase in
losses and loss adjustment expenses ("LAE") in the Company's Regional
Property and Casualty segment as a result of increased claims frequency and
severity in the personal and commercial automobile lines at Hanover and the
personal automobile line at Citizens, as well as a decrease in favorable
development on prior year reserves at Hanover. Additionally, an increase of
$6.7 million, or 12.5% in the Corporate Risk Management Services segment is
primarily related to increased premiums and the 1997 assumption of a block
of affinity group business. These increases were partially offset by
decreased policy benefits of $7.4 million, or 18.3% in the Institutional
Services segment primarily attributable to the continuing decline of GICs
during 1997.
Other operating expenses increased $3.9 million, or 3.1%, to $131.0 million
in the second quarter of 1997 compared to the same period in 1996 primarily
due to increased expenses in the Corporate Risk Management Services segment.
Other operating expenses in Corporate Risk Management Services increased
$3.0 million, or 9.4%, to $35.0 million in the second quarter of 1997 as a
result of increased premium taxes and commissions related to growth in
premiums and administrative services only ("ASO") fees.
Federal income tax expense increased $6.7 million in the second quarter of
1997, while the effective tax rate increased from 18.3% to 25.4% in the same
period. For the life insurance subsidiaries, a rate increase from 19.6% to
37.9% resulted primarily from the absence of a differential earnings
adjustment in 1997 compared to a $5.9 million differential earnings benefit
in 1996. The effective tax rates for the Regional Property and Casualty
subsidiaries were 12.9% and 17.3% during the second quarter of 1997 and
1996, respectively. This rate decrease reflects an increase in the
proportion of tax-exempt interest on bonds to pre-tax income anticipated for
the full year.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
The Company's consolidated net income for the six months ended June 30, 1997
decreased $36.3 million, or 40.4%, to $53.6 million, compared to the same
period in 1996. Net income includes certain items which management believes
are not indicative of overall operating trends.
The following table reflects consolidated net income adjusted for these
items, all net of taxes and minority interest as applicable.
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
June 30,
(In millions) 1997 1996
<S> <C> <C>
Net income $ 53.6 $ 89.9
Adjustments:
Net realized investment gains (16.7) (22.3)
Contingency payment from sale
of mutual fund processing business 0.0 (3.1)
Restructuring costs 1.0 0.0
Loss from cession of disability
income business 35.0 0.0
Differential earnings tax adjustment 0.0 (5.9)
------- -------
Adjusted net income $ 72.9 $ 58.6
======= =======
</TABLE>
The increase in adjusted net income of $14.3 million, or 24.4%, to $72.9
million is primarily attributable to pre-tax increases of $12.6 million and
$11.4 million in the Regional Property and Casualty segment and the Retail
Financial Services segment, respectively. The increase in the Regional
Property and Casualty segment resulted principally from increased net
investment income due to an increase in average invested assets, a portfolio
shift to higher yielding debt securities, and additional partnership income.
The Retail Financial Services segment increased due to growth in variable
products' fee income. Additionally, the Institutional Services segment
increased $3.8 million primarily from increased net GIC margins and growth
in telemarketing income. These increases were partially offset by a decline
in the Corporate segment's adjusted net income primarily resulting from
accrued distributions on the Capital Securities issued February 3, 1997.
Page 14
<PAGE>
Premium revenue increased $38.3 million, or 3.4%, to $1,180.1 million during
the first six months of 1997. Property and casualty premiums earned
increased $26.2 million, or 2.8%, to $961.0 million due to accounting
effects of restructuring a reinsurance contract in the personal automobile
line and increased policies in force in the personal automobile and
homeowners' lines at Hanover. Additionally, growth in Citizens' personal
lines premiums is attributable to increases of $6.6 million in Ohio and
Indiana resulting from expansion in these states, to a non-recurring $3.0
million decrease in premiums ceded to the Michigan Catastrophic Claims
association ("MCCA") in the first quarter of 1997, and to increases in
personal automobile and homeowners' rates. Premiums in the Corporate Risk
Management Services segment also increased $14.1 million, or 9.5%, to $163.0
million due to increases of $18.5 million in reinsurance, fully insured
group dental, and stop loss product lines, partially offset by decreases in
fully insured group medical and risk sharing product lines totaling $4.9
million.
Universal life and investment product policy fees increased $18.4 million,
or 19.4%, to $113.4 million during the first six months of 1997. This was
primarily the result of additional deposits and appreciation on variable
products' account balances within the Retail Financial Services segment.
Net investment income increased $6.7 million, or 1.9%, to $360.7 million
during the first six months of 1997. This slight increase primarily
reflects increases of $18.3 million and $6.4 million in the Regional
Property and Casualty and Corporate segments, respectively, partially offset
by an $18.1 decrease in the Institutional segment. Increases in the
Regional Property and Casualty segment are the result of an increase in
average invested assets, a portfolio shift to higher yielding securities,
and increased partnership income. The Corporate segment's growth in
investment income was derived from the temporary investment of proceeds from
the issuance of Capital Securities in February 1997. The decrease in the
Institutional segment resulted primarily from a reduction in invested assets
due to declining GIC deposits.
Net realized gains on investments decreased $11.3 million, or 20.8%, to
$43.0 million for the six months ended June 30, 1997. This decrease is
primarily attributable to the Regional Property and Casualty segment, where
reduced sales of equity securities decreased net realized gains by $11.6
million.
Other income increased $4.0 million, or 8.5%, to $50.9 million in the first
six months of 1997. Other income from the Retail Financial Services segment
increased $3.4 million, or 25.0%, to $17.0 million due to increased
investment management fee income resulting from increased assets under
management. Additionally, other income increased $2.5 million, or 14.5%, to
$19.7 million in the Corporate Risk Management Services segment due to
growth in ASO and contracts fees.
Policy benefits, claims, losses and loss adjustment expenses increased $18.3
million, or 1.8% to $1,060.1 million during the first six months of 1997.
This increase is primarily attributable to a $22.4 million, or 3.2% increase
in losses and LAE in the Company's Regional Property and Casualty segment
resulting from a $20.1 million reduction in favorable development on prior
year reserves at Hanover, as well as increased claims frequency and severity
in the current year in the personal automobile, commercial automobile and
commercial multiple peril lines at Hanover and the homeowners line at
Citizens. Additionally, a $13.3 million, or 12.6% increase in the Corporate
Risk Management Services segment was due to related growth in premiums,
increased policy benefits due to the 1997 assumption of a block of affinity
group business, and increased group life claims due to unfavorable claims
experience. These increases were partially offset by decreased policy
benefits of $18.1 million, or 21.2% in the Institutional Services segment
primarily resulting from the continuing decline of GICs during 1997.
Other operating expenses increased $18.1 million, or 7.3%, to $265.9 million
in the first six months of 1997. This increase is primarily attributable to
increased expenses of $5.5 million in the Corporate Risk Management Services
segment due to increased premium taxes and commissions related to growth in
premiums and ASO fees as well as increased expenses of $4.9 million in the
Regional Property and Casualty segment related to technology costs.
Additionally, other operating expenses increased in the Retail Financial
Services and Institutional segments due to product growth in each segment.
Federal income tax expense decreased $7.8 million in the first six months of
1997, while the effective tax rates remained consistent at
22.2% and 22.3% for the six months ended June 30, 1997 and 1996,
respectively. For the life insurance subsidiaries, the effective tax rate
increased from 27.7% in 1996 to 44.8% in 1997. Excluding the effect of an
$18.9 million tax benefit related to the agreement to cede the individual
disability income business, the 1997 effective tax rate for the
FAFLIC/AFLIAC consolidated group was 37.7%. This increase resulted
primarily from the absence of a differential earnings adjustment in 1997
compared to a $5.9 million differential earnings benefit in 1996. The
effective tax rates for the regional Property and Casualty subsidiaries
were 18.0% and 19.2% during the first six months of 1997 and 1996,
respectively.
Page 15
<PAGE>
Segment Results
The following is management's discussion and analysis of the Company's
results of operations by business segment. The Company offers financial
products and services in two major areas: Risk Management and Retirement and
Asset Management. Within these broad areas, the Company conducts business
principally in five operating segments. These segments are Regional
Property and Casualty; Corporate Risk Management Services; Retail Financial
Services; Institutional Services; and Allmerica Asset Management. The
Regional Property and Casualty segment consists of the Company's 59.5%
ownership of Allmerica P&C; however, all property and casualty results
presented include 100% of Allmerica P&C's pre-tax results of operations,
consistent with the presentation in the Company's consolidated financial
statements. The other segments are all owned and operated by FAFLIC and its
wholly-owned subsidiaries.
In addition to the five operating segments, the Company also has a Corporate
segment, which consists primarily of the proceeds from the issuance of
Company-obligated mandatorily redeemable preferred securities, Senior
debentures and a portion of the net proceeds from the Company's initial
public offering.
Risk Management
Regional Property and Casualty
The following table summarizes the results of operations for the Regional
Property and Casualty segment.
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
(In millions) 1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues
Net premiums earned $485.9 $469.7 $961.0 $934.8
Net investment income 65.6 56.3 126.9 108.6
Net realized gains (1.9) 2.0 35.9 47.5
Other income 3.6 3.2 6.0 7.0
------- ------- ------- -------
Total revenues 553.2 531.2 1,129.8 1,097.9
Losses and LAE (1) 364.4 342.2 712.6 690.2
Policy acquisition and
other operating expenses 150.7 151.9 307.4 303.1
------- ------- -------- -------
Income before taxes $ 38.1 $ 37.1 $ 109.8 $ 104.6
======= ======= ======== =======
<FN>
<fn1>
(1) Includes policyholders' dividends of $2.5 million, $1.9 million, $4.1
million and $5.0 million for the quarters ended June 30,1997 and 1996 and
the six months ended June 30, 1997 and 1996, respectively.
</FN>
</TABLE>
Quarter Ended June 30, 1997 Compared to Quarter Ended June 30,1996
INCOME BEFORE TAXES
Income before taxes increased $1.0 million, or 2.7%, to $38.1 million in the
second quarter of 1997. Net realized gains on investments before taxes were
$2.0 million during the second quarter of 1996 compared to losses of $1.9
million during the second quarter of 1997. Excluding realized gains and
losses and restructuring charges, income before taxes increased $5.7
million, to $40.8 million in the second quarter of 1997. This increase is
primarily attributable to a $9.3 million increase in net investment income,
to $65.6 million in the second quarter of 1997, partially offset by a $2.8
million increase in the underwriting loss. The growth in net investment
income resulted primarily from an increase in average invested assets, a
portfolio shift to higher yielding debt securities, including longer
duration and non-investment grade securities, and to an increase in
partnership income. The decline in underwriting results is primarily
attributable to less favorable current year claims experience in the
personal and commercial automobile lines at Hanover and the personal
automobile and other commercial lines at Citizens, as well as a decrease in
favorable development on prior year reserves at Hanover. This decline is
partially offset by a decrease in catastrophe losses of $17.0 million and
favorable workers' compensation claim activity in both current and prior
accident years.
Page 16
<PAGE>
LINES OF BUSINESS RESULTS
Personal Lines of Business
The personal lines of business represented 61.6% and 60.7% of total net
premiums earned in the second quarter of 1997 and 1996, respectively.
<TABLE>
<CAPTION>
Hanover Citizens Consolidated
For the Quarters Ended 1997 1996 1997 1996 1997 1996
June 30 (In millions)
<S> <C> <C> <C> <C> <C> <C>
Net premiums earned $156.2 $147.7 $143.3 $137.2 $299.5 $284.9
Losses and loss
adjustment expenses 121.1 97.3 107.9 103.4 229.0 200.7
Policy acquisition and
other underwriting
expenses 47.4 50.3 37.7 37.0 85.1 87.3
------- ------- ------- ------- ------- -------
Underwriting (loss)
profit $ (12.3) $ 0.1 $ (2.3) $ (3.2) $ (14.6) $ (3.1)
======= ======= ======= ======= ======= =======
</TABLE>
Revenues
Personal lines' net premiums earned increased $14.6 million, or 5.1%, to
$299.5 million during the second quarter of 1997, compared to $284.9 million
in the second quarter of 1996. Hanover's personal lines net premiums earned
increased $8.5 million, or 5.8%, to $156.2 million during the second quarter
of 1997. 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
approximately $4.0 million. A 5.6% increase in policies in force in the
personal automobile line as well as a 2.6% increase in policies in force in
the homeowners' line since June 30, 1996, also contributed to the increase
in net premiums earned. These increases were partially offset by the effect
of a mandated 6.2% decrease in Massachusetts personal automobile rates on
January 1, 1997. In March 1997, the Massachusetts Division of Insurance
approved Hanover's plan to offer a safe driver's discount of 10% on
automobile insurance premiums. Management believes these rate decreases may
unfavorably impact premium growth in Massachusetts. Approximately 37% of
Hanover's personal automobile business is currently written in
Massachusetts.
Citizens' personal lines net premiums earned increased $6.1 million, or
4.4%, to $143.3 million during the second quarter of 1997, compared to
$137.2 million during the second quarter of 1996. This increase is
primarily attributable to rate increases in personal automobile and
homeowners, partially offset by a 0.8% decrease in policies in force in the
personal automobile line since June 30, 1996, attributable to continued
strong competition in Michigan.
Underwriting results
The personal lines' underwriting loss increased $11.5 million, to a loss of
$14.6 million in the second quarter of 1997. Hanover's underwriting results
declined $12.4 million to a loss of $12.3 million, while Citizens'
underwriting results improved $0.9 million to a loss of $2.3 million.
The decline in Hanover's underwriting results is primarily attributable to
an $11.1 million reduction in favorable development on prior year reserves
in the personal automobile line and increased claims severity in the
personal automobile line. The improvement in Citizens' underwriting results
is primarily attributable to an $11.4 million decrease in catastrophe losses
over the prior year second quarter, primarily in the homeowners line. This
was partially offset by an increase in claim severity in the personal
automobile line for the current accident year.
Policy acquisition and other underwriting expenses in the personal lines
decreased $2.2 million, or 2.5%, to $85.1 million in the second quarter of
1997, reflecting reductions in contingent commissions and employee related
expenses, partially offset by increased technology expenses and the effect
of growth in net premiums earned.
Page 17
<PAGE>
Commercial Lines of Business
The commercial lines of business represented 38.4% and 39.3% of total net
premiums earned in the second quarter of 1997 and 1996, respectively.
<TABLE>
<CAPTION>
Hanover Citizens Consolidated
For the Quarters
Ended June 30,
(In millions) 1997 1996 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Net premiums earned $119.6 $110.9 $66.8 $73.9 $186.4 $184.8
Losses and loss
adjustment expenses 81.3 80.4 49.4 59.2 130.7 139.6
Policy acquisition and
other underwriting
expenses 44.8 44.4 17.6 16.8 62.4 61.2
Policyholders'
dividends 0.7 0.1 1.8 1.8 2.5 1.9
------ ------ ------ ------ ------ ------
Underwriting (loss) $(7.2) $(14.0) $(2.0) $(3.9) $(9.2) $(17.9)
====== ====== ====== ====== ====== ======
</TABLE>
Revenues
Commercial lines' net premiums earned increased $1.6 million, to $186.4
million in the second quarter of 1997. Hanover's commercial lines net
premiums earned increased $8.7 million, or 7.8%, to $119.6 million. This
increase is primarily attributable to a $3.1 million increase in assumed
premiums in Hanover's reinsurance division, as well as a 10.4% and 4.0%
increase in policies in force in Hanover's commercial automobile and
commercial multiple peril lines, respectively, since June 30, 1996. These
increases were significantly offset by average rate decreases of 9.9% since
January 1, 1997, in the workers' compensation line. Citizens' commercial
lines net premiums earned decreased $7.1 million, or 9.6%, to $66.8 million
in the second quarter of 1997. This decrease is primarily attributable to
rate decreases in workers' compensation, resulting from continued
competitive conditions in Michigan in this line. Rates in the workers'
compensation line were decreased 6.4% and 8.7% effective June 1, 1996 and
March 1, 1997, respectively. Management believes competitive conditions in
Michigan in the workers' compensation line may impact future growth in net
premiums earned.
Underwriting results
The commercial lines' underwriting results improved $8.7 million, or 48.6%,
to a loss of $9.2 million in the second quarter of 1997. Hanover's
underwriting loss decreased $6.8 million, or 48.6%, to a loss of $7.2
million, and Citizens' underwriting loss decreased $1.9 million, to a
loss of $2.0 million in the second quarter of 1997.
The improvement in Hanover's commercial lines underwriting results is
primarily attributable to an increase in favorable development on prior year
reserves in the workers' compensation line, as well as a decrease in
catastrophe losses of $3.7 million, partially offset by an increase in
current year claim frequency in the commercial automobile line. The
improvement in Citizens' commercial lines underwriting results is
attributable to a decrease in losses and LAE in the workers' compensation
line of $12.2 million, or 45.8%, to $10.3 million primarily as a result of
favorable claims activity in both current and prior accident years.
Policy acquisition and other underwriting expenses in the commercial lines
increased $1.2 million, or 2.0%, to $62.4 million in the second quarter of
1997, reflecting increased technology expenses partially offset by a
decrease in contingent commissions at Hanover.
Page 18
<PAGE>
INVESTMENT RESULTS
Net investment income before taxes increased $9.3 million, or 16.5%, to
$65.6 million in 1997 compared to $56.3 million in the comparable quarter of
1996. The increase is the result of an increase in average invested
assets, the Regional Property and Casualty segment's portfolio shift to
higher yielding debt securities, including longer duration and
non-investment grade securities, and to increased income from limited
partnership investments of $3.8 million. The average pre-tax yield on debt
securities was 6.8% and 6.3% for the quarters ended June 30,1997 and 1996,
respectively. Average invested assets increased $164.3 million, or 4.3%, to
$3,960.4 million at June 30, 1997 compared to $3,796.1 million at June 30,
1996.
Net realized losses on investments before taxes were $1.9 million during the
second quarter of 1997 compared to gains of $2.0 million during the second
quarter of 1996.
Six Months Ended June 30,1997 Compared to Six Months Ended June 30,1996
INCOME BEFORE TAXES
Income before taxes increased $5.2 million, or 5.0%, to $109.8 million in
the six months ended June 30, 1997. Net realized gains were $35.9 million
during the six months ended June 30,1997, versus $47.5 million during the
comparable period of 1996, reflecting a decrease in the sale of equity
securities by Hanover. Excluding realized gains and losses and
restructuring charges, income before taxes increased $17.6 million, to $74.4
million in the six months ended June 30,1997. This increase is primarily
attributable to an $18.3 million increase in net investment income, to
$126.9 million for the six months ended June 30, 1997. The growth in net
investment income resulted primarily from an increase in average invested
assets, a portfolio shift to higher yielding debt securities, including
longer duration and non-investment grade securities, and to an increase in
partnership income.
LINES OF BUSINESS RESULTS
Personal Lines of Business
The personal lines of business represented 61.9% and 60.5% of total net
premiums earned in the six months ended June 30, 1997 and 1996,
respectively.
<TABLE>
<CAPTION>
Hanover Citizens Consolidated
For the Six Months
Ended June 30,
(In millions) 1997 1996 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Net premiums earned $307.9 $292.8 $287.0 $272.3 $594.9 $565.1
Losses and loss
adjustment expenses 233.9 213.6 221.7 210.0 455.6 423.6
Policy acquisition and
other underwriting
expenses 98.4 99.3 77.2 74.2 175.6 173.5
------- ------- ------- ------- ------- -------
Underwriting (loss) $(24.4) $(20.1) $(11.9) $(11.9) $(36.3) $(32.0)
======= ======= ======= ======= ======= =======
</TABLE>
Revenues
Personal lines' net premiums earned increased $29.8 million, or 5.3%, to
$594.9 million during the six months ended June 30, 1997, compared to $565.1
million in the same period of 1996. Hanover's personal lines net premiums
earned increased $15.1 million, or 5.2%, to $307.9 million during the six
months ended June 30, 1997. This increase was primarily attributable to an
increase in the personal automobile line associated with the accounting
effects of restructuring a reinsurance contract, increasing both net
premiums earned and losses and LAE by approximately $8.0 million. A 5.6%
increase in policies in force in the personal automobile line as well as a
2.6% increase in policies in force in the homeowners line, since June 30,
1996, also contributed to the increase in net premiums earned. These
increases were partially offset by the effect of a mandated 6.2% decrease in
Massachusetts personal automobile rates on January 1, 1997.
Page 19
<PAGE>
Citizens' personal lines net premiums earned increased $14.7 million, or
5.4%, to $287.0 million in the six months ended June 30, 1997. This
increase is primarily attributable to a decrease in premiums ceded to the
MCCA and to rate increases in personal automobile and homeowners. The
non-recurring decreases in premiums ceded to MCCA was a result of a lower
surcharge effective January 1, 1997 for personal automobile policies
written. These factors were partially offset by a 0.8% decrease in policies
in force in the personal automobile line since June 30,1996, attributable to
continued strong competition in Michigan.
Underwriting Results
The personal lines' underwriting loss for the six months ended June 30, 1997
increased $4.3 million, to a loss of $36.3 million. Hanover's underwriting
loss increased $4.3 million, to a loss of $24.4 million. Citizens'
underwriting loss was unchanged at $11.9 million for the six months ended
June 30, 1997 and 1996.
The decline in Hanover's underwriting results is primarily attributable to a
$20.1 million reduction in favorable development on prior year reserves in
the personal automobile line, and an increase in current year claim severity
in the personal automobile line. These increases were partially offset by a
decrease in catastrophe losses in the homeowners line of $15.5 million, to
$5.0 million during the first six months of 1997. Citizens' underwriting
results were unchanged as a result of a decrease in catastrophe losses of
$10.2 million over the prior year, primarily in the homeowners line. This
was partially offset by an increase in claim severity in the homeowners
line for the current accident year, primarily in the first quarter.
Policy acquisition and other underwriting expenses in the personal lines
increased $2.1 million, or 1.2%, to $175.6 million in the six months ended
June 30, 1997, reflecting increased technology expenses and growth in net
premiums earned, partially offset by reductions in employee related
expenses.
Commercial Lines of Business
The commercial lines of business represented 38.1% and 39.5% of total net
premiums earned in the six months ended June 30, 1997 and 1996,
respectively.
<TABLE>
<CAPTION>
Hanover Citizens Consolidated
For the Six Months
Ended June 30
(In millions) 1997 1996 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Net premiums earned $233.1 $226.4 $133.0 $143.3 $366.1 $369.7
Losses and loss
adjustment expenses 156.6 154.8 94.1 106.8 250.7 261.6
Policy acquisition and
other underwriting
expenses 91.3 88.1 35.3 34.7 126.6 122.8
Policyholders'
dividends 0.7 1.4 3.4 3.6 4.1 5.0
------- ------- ------- ------- ------- -------
Underwriting (loss)
profit $(15.5) $(17.9) $0.2 $(1.8) $(15.3) $(19.7)
======= ======= ======= ======= ======= =======
</TABLE>
Revenues
Commercial lines' net premiums earned decreased $3.6 million, or 1.0%, to
$366.1 million in the six months ended June 30, 1997. Hanover's commercial
lines net premiums earned increased $6.7 million, or 3.0%, to $226.4
million. This increase is primarily attributable to a $4.1 million increase
in assumed premiums in Hanover's reinsurance division, as well as a 10.4%
and 4.0% increase in policies in force in Hanover's commercial automobile
and commercial multiple peril lines, respectively, since June 30, 1996.
These increases were partially offset by average rate decreases of 9.9%,
since January 1, 1997, in Hanover's workers' compensation line. Citizens'
commercial lines net premiums earned decreased $10.3 million, or 7.2%, to
$133.0 million in the six months ended June 30, 1997. This decrease is
attributable to rate decreases in workers' compensation, resulting from
continued competitive conditions in Michigan in this line. Rates in the
workers' compensation line were decreased 6.4% and 8.7% effective June 1,
1996 and March 1, 1997, respectively.
Page 20
<PAGE>
Underwriting Results
The commercial lines' underwriting loss decreased $4.4 million, or 22.3% to
a loss of $15.3 million for the six months ended June 30, 1997. Hanover's
underwriting results improved $2.4 million, or 13.4%, to a loss of $15.5
million and Citizens' underwriting loss decreased $2.0 million, to a profit
of $0.2 million in the six months ended June 30, 1997.
The improvement in Hanover's underwriting results reflects an increase of
$8.8 million in favorable development on prior accident years in the
commercial multiple peril line and a decrease in catastrophe losses of $5.6
million in the same line, partially offset by an increase in frequency and
severity in the commercial automobile line. The improvement in Citizens'
underwriting results is attributable to a decrease of $17.7 million, or
42.1%, to $24.3 million in losses and LAE in the workers' compensation line,
primarily as a result of favorable claims activity in both current and prior
accident years. Additionally, Citizens experienced less favorable claims
experience in the commercial multiple peril line in the first quarter of
1997.
Policy acquisition and other underwriting expenses in the commercial lines
increased $3.8 million, or 3.1%, to $126.6 million in the six months ended
June 30, 1997, primarily attributable to increased technology expenses in
1997.
INVESTMENT RESULTS
Net investment income before taxes increased $18.3 million, or 16.9%, to
$126.9 million during the six months ended June 30, 1997 compared to $108.6
million in the comparable period of 1996. The increase is primarily the
result of an increase in average invested assets, a portfolio shift to
higher yielding debt securities, including longer duration and
non-investment grade securities, and to increased income from limited
partnership investments of $3.8 million. The average pre-tax yield on debt
securities was 6.8% and 6.2% for the six months ended June 30, 1997 and
1996, respectively. Average invested assets increased $209.6 million, or
5.5%, to $3,990.7 million at June 30, 1997 compared to $3,781.1 million at
June 30, 1996.
Net realized gains on investments before taxes were $35.9 million and $47.5
million for the six months ended June 30, 1997 and 1996, respectively. The
decrease in net realized gains reflects a decrease in the sale of equity
securities at Hanover. In both periods, net realized investment gains
resulted primarily from the sale of appreciated equity securities, due to
the Regional Property and Casualty segment's strategy of shifting to a
higher proportion of debt securities.
Reserve for Losses and Loss Adjustment Expenses
The Regional Property and Casualty segment maintains reserves to provide for
its estimated ultimate liability for losses and loss adjustment expenses
with respect to reported and unreported claims incurred as of the end of
each accounting period. These reserves are estimates, involving actuarial
projections at a given point in time, of what management expects the
ultimate settlement and administration of claims will cost based on facts
and circumstances then known, predictions of future events, estimates of
future trends in claim severity and judicial theories of liability and other
factors. The inherent uncertainty of estimating insurance reserves is
greater for certain types of property and casualty insurance lines,
particularly workers' compensation and other liability lines, where a longer
period of time may elapse before a definitive determination of ultimate
liability may be made, where the technological, judicial and political
climates involving these types of claims are changing.
Page 21
<PAGE>
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 six months ended June 30, (In millions) 1997 1996
<S> <C> <C>
Reserve for losses and LAE, beginning of period $2,744.1 $2,896.0
Incurred losses and LAE, net of
reinsurance recoverable:
Provision for insured events of the current year 769.5 740.9
Decrease in provision for insured
events of prior years (61.0) (55.7)
--------- ---------
Total incurred losses and LAE 708.5 685.2
--------- ---------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to
insured events of current year 310.5 298.2
Losses and LAE attributable to
insured events of prior years 440.4 386.1
--------- ---------
Total payments 750.9 684.3
--------- ---------
Change in reinsurance recoverable on unpaid losses (38.0) (31.8)
Reserve for losses and LAE, end of period $2,663.7 $2,865.1
========= =========
</TABLE>
As part of an ongoing process, the reserves have been re-estimated for all
prior accident years and were decreased by $61.0 million and $55.7 million
for the six month periods ended June 30, 1997 and 1996, respectively. The
increase in favorable development on prior years' loss reserves of $5.3
million results from a $21.3 million increase in favorable development at
Citizens to $35.6 million. The favorable reserve development in both years
primarily reflects the initiatives taken by Citizens to manage medical
costs in the personal automobile and workers' compensation lines, as well
as the impact of the Michigan Supreme Court ruling on workers' compensation
indemnity payments, which decreases the maximum amount to be paid for
indemnity cases on all existing and future claims. Hanover's favorable
development decreased $16.0 million to $25.4 million during the six months
ended June 30, 1997. This decrease is primarily attributable to decreased
favorable development in the personal automobile line, partially offset by
an increase in favorable development in the commercial multiple peril line.
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 Company and the
industry, (iv) the relatively short-term nature of most policies, and
(v)internal estimates of required reserves, management believes that
adequate provision has been made for loss reserves. However, establishment
of appropriate reserves is an inherently uncertain process and there can be
no certainty that current established reserves will prove adequate in light
of subsequent actual experience. A significant change to the estimated
reserves could have a material impact on the results of operations.
Page 22
<PAGE>
Corporate Risk Management Services
The following table summarizes the results of operations for the Corporate
Risk Management Services ("CRMS") segment for the periods indicated.
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
(In millions) 1997 1996 1997 1996
<S> <C> <C> <C> <C>
Premiums and premium
equivalents
Premiums $ 84.3 $ 75.1 $163.0 $148.9
Premium equivalents 147.4 143.9 298.2 286.5
------- ------- ------- -------
Total premiums and
premium equivalents $231.7 $219.0 $461.2 $435.4
======= ======= ======= =======
Revenues
Premiums $84.3 $75.1 $163.0 $148.9
Net investment income 5.8 5.4 11.3 10.2
Net realized (losses)
gains (0.2) 0.2 0.1 0.1
Other income 10.3 8.9 19.7 17.2
------- -------- ------- -------
Total revenues 100.2 89.6 194.1 176.4
Policy benefits, claims
and losses 60.2 53.5 118.8 105.5
Policy acquisition
expenses 0.8 0.7 1.7 1.5
Other operating expenses 35.0 32.0 67.4 61.9
------- -------- ------- -------
Income before taxes $ 4.2 $ 3.4 $ 6.2 $ 7.5
======= ======== ======= =======
</TABLE>
Quarter Ended June 30, 1997 Compared to Quarter Ended June 30, 1996
Income before taxes increased $0.8 million, or 23.5%, to $4.2 million in the
second quarter of 1997. This increase was primarily due to growth in the
Company's reinsurance, fully insured group dental, stop loss and ASO product
lines, as well as an improvement in overall claims experience during the
second quarter of 1997. These increases were partially offset by additional
policy benefits, premium taxes, and commissions resulting from the growth in
premiums and ASO fees.
Premiums increased $9.2 million, or 12.3%, to $84.3 million in the second
quarter of 1997 primarily due to increases in reinsurance, fully insured
group dental, and stop loss product lines totaling $12.3 million. The
assumption of a block of affinity group business in the beginning of 1997
resulted in a $7.4 million increase in reinsurance premiums during the
quarter. These increases were partially offset by decreases in the fully
insured group medical and risk sharing product lines totaling $3.0 million.
The decline in risk sharing premiums primarily reflects the Company's
emphasis on stop loss coverage and ASO arrangements.
Other income increased $1.4 million, or 15.7%, to $10.3 million in the
second quarter of 1997 due to growth in ASO and contract fees.
Policy benefits, claims and losses increased $6.7 million, or 12.5%, to
$60.2 million in the second quarter of 1997. This increase is principally
attributable to the increased premiums, partially offset by favorable loss
experience overall. The 1997 assumption of a block of affinity group
business accounted for $5.1 million of the growth-related increase in policy
benefits during the quarter.
Other operating expenses increased $3.0 million, or 9.4%, to $35.0 million
in the second quarter of 1997 primarily due to increases in premium taxes
and commissions resulting from the growth in premiums and ASO fees.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Income before taxes decreased $1.3 million, or 17.3%, to $6.2 million in the
first half of 1997 compared to the same period in 1996. During the first
quarter of 1996, CRMS released reserves of $1.2 million related to a
litigation settlement. Excluding this item, income before taxes decreased
$0.1 million, or 1.3%. This decrease was primarily due to adverse claims
experience in the group life product line, partially offset by growth of the
Company's reinsurance, fully insured group dental, stop loss, and ASO
product lines, and to favorable long-term disability claims experience.
Page 23
<PAGE>
Premiums increased $14.1 million, or 9.5%, to $163.0 million in the first
six months of 1997 primarily due to increases in reinsurance, fully insured
group dental, and stop loss product lines totaling $18.5 million. The
aforementioned assumption of a block of affinity group business resulted in
a $9.0 million increase in reinsurance premiums during 1997. These
increases were partially offset by decreases in risk sharing and fully
insured group medical product lines of $4.9 million. The decline in risk
sharing premiums primarily reflects the Company's emphasis on stop loss
coverage and ASO arrangements.
Net investment income increased $1.1 million, or 10.8%, to $11.3 million in
the first half of 1997 due to increased yields on invested assets. This
increase primarily reflects the Company's continued shift to higher
yielding, longer duration investments.
Other income increased $2.5 million, or 14.5%, to $19.7 million in the first
six months of 1997 due to growth in ASO and contract fees.
Policy benefits, claims and losses increased $13.3 million, or 12.6%, to
$118.8 million in the first half of 1997 compared to the same period in
1996. Excluding the aforementioned reserve release, policy benefits, claims
and losses increased $12.1 million, or 11.5%. This increase is primarily
due to the 1997 assumption of a block of affinity group business which
contributed $6.1 million in policy benefits during the year. Additionally,
group life claims increased $5.3 million in 1997 due to unfavorable claims
experience in the first half of the year combined with unusually favorable
claims experience in the first half of 1996. Increased benefits due to
growth in the fully insured group dental product line were substantially
offset by decreased benefits due to cancellations in the fully insured
medical product line and favorable claims experience in the long-term
disability income product line.
Other operating expenses increased $5.5 million, or 8.9%, to $67.4 million
for the six months ended June 30, 1997 primarily due to increases in premium
taxes and commissions resulting from the growth in premiums and ASO fees.
Retirement and Asset Management
Retail Financial Services
The following table summarizes the results of operations for
the Retail Financial Services segment for the periods indicated.
<TABLE>
<CAPTION>
(Unaudited (Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
(In millions) 1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues
Premiums $ 18.3 $ 19.7 $ 56.1 $ 58.0
Fees 52.6 44.4 102.3 86.9
Net investment income 61.5 64.0 122.1 123.2
Net realized losses (1.9) (1.1) (3.2) (0.2)
Other income 8.5 7.5 17.0 13.6
------- -------- -------- -------
Total revenues 139.0 134.5 294.3 281.5
Policy benefits, claims
and losses 72.8 71.3 161.3 160.6
Policy acquisition
expenses 14.3 13.6 30.2 29.0
Loss from cession of
disability income business 0.0 0.0 53.9 0.0
Other operating expenses 30.6 29.4 60.9 56.8
-------- -------- -------- -------
Income (loss) before taxes $ 21.3 $ 20.2 $(12.0) $ 35.1
======= ======== ======== =======
</TABLE>
Quarter Ended June 30, 1997 Compared to Quarter Ended June 30, 1996
Income before taxes increased $1.1 million, or 5.4%, to $21.3 million in the
second quarter of 1997. This increase is primarily attributable to growth
in variable products' fee income, partially offset by decreased net
investment income due to a reduction in fixed maturities invested, and less
favorable mortality experience in variable universal life and traditional
products.
Premiums decreased $1.4 million, or 7.1%, to $18.3 million during the second
quarter of 1997. This decrease is due to the Company's continued shift in
focus from traditional life insurance products to variable life insurance
and annuity products.
Page 24
<PAGE>
Fee revenue increased $8.2 million, or 18.5%, to $52.6 million in the second
quarter of 1997 due to additional deposits and appreciation on variable
products' account balances. Fees from annuities increased $6.6 million, or
48.2%, to $20.3 million in the second quarter of 1997 compared to the same
period in 1996. Fees from variable universal life policies increased $3.0
million, or 29.4%, to $13.2 million in the second quarter of 1997. These
increases were partially offset by a continued decline in fees from non-
variable universal life of $1.4 million. The Company expects fees on this
product to decrease as policies in force and related contract values
decline.
Net investment income decreased $2.5 million, or 3.9%, to $61.5 million in
the second quarter of 1997. This decrease is primarily due to a reduction
in average fixed maturities invested, partially offset by increased
portfolio yields. The reduction in average fixed maturities invested is
primarily due to a reduction in the Company's general account, resulting
from a shift in focus from universal life insurance products to variable
life insurance and annuity products. Additionally, during 1996, the Company
temporarily increased its fixed maturity holdings by utilizing short-term
debt to finance additions to the investment portfolio. This strategy has
not been utilized in 1997. The increased yields were achieved through a
series of modest portfolio shifts, beginning in the second quarter of 1996,
to higher yielding debt securities, including longer duration and
non-investment grade securities. Related average yields rose from 7.5% in
1996 to 8.1% in 1997.
Policy benefits, claims, and losses increased $1.5 million, or 2.1%, to
$72.8 million in the second quarter of 1997. Variable universal life and
traditional product lines benefits increased $2.9 million due to less
favorable mortality experience in the second quarter of 1997. Partially
offsetting these increases were decreased benefits of $1.4 million in the
individual disability income line due to the Company's decision to
discontinue selling this product.
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 $1.2 million, or 4.1%, to $30.6
million for the quarter ended June 30, 1997 is primarily due to increases in
premium taxes and administrative expenses related to continued growth in the
variable product lines. These increases were partially offset by a reduction
in interest expense on short-term debt used to finance additions to the
investment portfolio in 1996.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Income before taxes decreased $47.1 million, or 134.2%, to a loss before
taxes of $12.0 million in the first half of 1997. This decrease is
attributable to a $53.9 million loss sustained in the first quarter of 1997
related to an agreement to cede the individual disability income business.
Excluding this non-recurring charge, income before taxes increased $6.8
million, or 19.4%, to $41.9 million in the first half of 1997. This
increase is primarily due to growth in variable products' fee income,
partially offset by losses from sales of real estate and less favorable
mortality experience.
Premiums decreased $1.9 million, or 3.3%, to $56.1 million during the first
six months of 1997. This decrease reflects the Company's continued shift in
focus from traditional life insurance products to variable life insurance
and annuity products and the decision in the first half of 1996 to
discontinue issuing new individual disability income policies.
Fee revenue increased $15.4 million, or 17.7%, to $102.3 million in the
first half of 1997 due to additional deposits and appreciation in variable
products' account balances. Fees from annuities increased $12.4
million, or 48.4%, to $38.0 million in the first half of 1997 compared to
the same period in 1996. Fees from variable universal life policies
increased $5.1 million, or 25.0%, to $25.5 million in the first half of
1997. These increases were partially offset by a continued decline in fees
from non-variable universal life of $2.1 million. The Company expects fees
on this product to decrease as policies in force and related contract values
decline.
Net realized losses increased $3.0 million, from $0.2 million in the first
half of 1996, to $3.2 million in the same period of 1997. This change is
primarily due to real estate losses of $0.9 million recorded in the
first half of 1997 as compared to real estate gains of $1.6 million on
the sale of three properties during 1996.
Other income increased $3.4 million, or 25.0%, to $17.0 million in 1997.
This increase is primarily attributable to increased investment management
fee income resulting from increased assets under management.
Policy benefits, claims, and losses increased $0.7 million, or 0.4%, to
$161.3 million in the first half of 1997. Universal life and variable
universal life product lines increased $4.5 million due to unfavorable
mortality experience during the first half of 1997. These increases were
partially offset by decreased benefits of $2.8 million in the individual
disability income line due to the Company's aforementioned decision to
discontinue selling this product and decreased benefits of $1.1 million
in the individual annuities product due to reduced crediting rates in 1997.
Page 25
<PAGE>
The increase in other operating expenses of $4.1 million, or 7.2%, to $60.9
million for the six months ended June 30, 1997 is primarily the result of
increased premium taxes and administrative expenses related to growth in the
variable product lines. Additionally, increases in sub-advisor fees and
brokerage commissions resulted from growth in investments under management.
These increases were partially offset by a reduction in interest expense on
short-term debt used to finance additions to the investment portfolio in
1996.
Interest Margins
The results of the Retail Financial Services segment depend, in part, on the
maintenance of profitable margins between investment results from investment
assets supporting universal life and general account annuity products and
the interest credited on those products. The following table sets forth
interest earned, interest credited and the related interest margin.
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
(In millions) 1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net investment income $37.1 $36.6 $73.2 $73.4
Less: Interest credited 24.6 24.0 49.2 49.0
------- ------- ------- -------
Interest margins (1) $12.5 $12.6 $24.0 $24.4
======= ======= ======= =======
<FN>
<fn1>
(1) Interest margins represent the difference between income earned on
investment assets and interest credited to customers' universal life
and general account annuity policies.
</FN>
</TABLE>
Interest margins were relatively consistent in 1997 as compared to 1996.
Institutional Services
The following table summarizes the results of operations for the
Institutional Services segment for the periods indicated.
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
(In millions) 1997 1996 1996 1997
<S> <C> <C> <C> <C>
Revenues
Fees, premiums, and
non-insurance income (1) $9.8 $10.7 $19.8 $18.9
Net investment income
GICs 21.4 25.7 43.0 55.2
Other 25.0 27.7 50.0 55.9
Net realized gains 2.4 1.2 9.8 7.1
----- ----- ----- -----
Total revenues 58.6 65.3 122.6 137.1
Policy benefits, claims and
losses
Interest credited to GICs 16.5 23.3 34.2 50.7
Other 16.6 17.2 33.2 34.8
Policy acquisition expenses 0.6 0.7 1.3 1.4
Other operating expenses 12.3 11.9 26.6 24.6
----- ----- ----- -----
Income before taxes $12.6 $12.2 $27.3 $25.6
===== ===== ===== =====
<FN>
<FN1>
(1) Fees, premiums, and non-insurance income includes fees from retirement
services, institutional 401(K) recordkeeping services, and other
miscellaneous non-insurance related fees.
<FN>
</TABLE>
Quarter Ended June 30, 1997 compared to Quarter Ended June 30, 1996
Income before taxes increased $0.4 million, or 3.3%, to $12.6 million in
the second quarter of 1997. During the second quarter of 1996,
Institutional Services recognized a contingency payment for the sale of the
mutual fund processing business of $3.3 million. Excluding this item,
income before taxes increased $3.7 million, or 41.6%. This change was
primarily attributable to an increase in the net GIC margins of
$2.5 million, increased realized gains of $1.2 million, and growth in
telemarketing and group variable life products of $0.7 million and $0.4
million, respectively. These increases were partially offset by a
$1.7 million reduction in the contribution from defined benefit
plans primarily resulting from cancellations and transfers of plan
assets to separate accounts.
Page 26
<PAGE>
Fees, premiums, and non-insurance income decreased $0.9 million, or 8.4%,
to $9.8 million in the first quarter of 1997. Excluding the aforementioned
contingency payment, fees, premiums, and non-insurance income increased
$2.4 million, or 32.4%. This increase was primarily due to growth in the
Company's telemarketing services line and group variable life product line
of $1.1 million and $0.8 million, respectively.
Net investment income related to GICs and interest credited to GIC
contractholders have declined as a result of declining GIC deposits due to
the downgrading in March 1995 of FAFLIC's S&P Rating to A+ (Good). As a
result, sales of traditional GICs have substantially ceased. Management
expects GIC deposits and related income to continue to decline. In the
second quarter of 1997, the interest margin on GICs increased $2.5 million
due to the combination of slightly higher investment yields and lower
average crediting rates on the remaining contracts.
Other net investment income decreased $2.7 million, or 9.7%, to $25.0
million in the second quarter of 1997. This decrease resulted from a
decline in average invested assets due to cancellations of defined benefit
plans, as well as transfers of certain plan assets to the separate
accounts.
Net realized gains increased $1.2 million, or 100%, to $2.4 million in
the second quarter of 1997 primarily as a result of sales of real estate
during the quarter.
Other policy benefits, claims and losses consist principally of benefits
provided by the Company's defined contribution and defined benefit plans,
including annuity benefits for certain defined benefit plan participants
electing that option. Other policy benefits, claims and losses decreased
$0.6 million, or 3.5%, to $16.6 million for the second quarter of 1997,
primarily due to reductions in interest credited to participants
resulting from the aforementioned cancellations, partially offset by
less favorable mortality in the defined benefit plan product line and
increased policy benefits in the group variable life product line.
Other operating expenses increased $0.4 million, or 3.4%, to $12.3
million in the second quarter of 1997. This increase was primarily
attributable to growth in telemarketing services.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Income before taxes increased $1.7 million, or 6.6%, to $27.3 million for
the six months ended June 30, 1997 compared to the six months ended
June 30, 1996. During the first half of 1996, Institutional Services
recognized a contingency payment for the sale of the mutual fund processing
business of $4.8 million. Excluding this item, income before taxes
increased $6.5 million, or 31.3%. This change was primarily attributable
to an increase in the net GIC margins of $4.3 million, increased realized
gains of $2.7 million, and growth in telemarketing and group variable life
product income of $1.1 million and $0.6 million, respectively. These
increases were partially offset by a $3.9 million reduction in the
contribution from defined benefit plans primarily resulting from
cancellations and transfers of plan assets to the separate accounts.
Fees, premiums, and non-insurance income increased $0.9 million, or 4.8%,
to $19.8 million in the first half of 1997. Excluding the aforementioned
contingency payment, fees, premiums, and non-insurance income increased
$5.7 million, or 40.4%. This increase was primarily due to growth in the
Company's group variable life product line and telemarketing services line
of $2.6 million and $2.4 million, respectively.
During the first six months of 1997, the interest margin on GICs increased
$4.3 million due to the combination of slightly higher investment yields
and lower average crediting rates on the remaining contracts.
Other net investment income decreased $5.9 million, or 10.6%, to $50.0
million in the first half of 1997. This decrease resulted from a decline
in average invested assets due to cancellations of defined benefit plans,
as well as transfers of certain plan assets to the separate accounts.
Net realized gains increased $2.7 million, or 38.0%, to $9.8 million in
the first six months of 1997. This change resulted primarily from
increased sales of real estate properties.
Other policy benefits, claims and losses for defined benefit plans,
defined contribution plans, and the group variable life product declined
from $34.8 million in 1996 to $33.2 million in 1997. This was primarily
due to reductions in the interest credited to participants resulting from
the aforementioned cancellations, partially offset by less favorable
mortality in the defined benefit plan product line and increased policy
benefits in the group variable life product line.
Other operating expenses increased $2.0 million, or 8.1%, to $26.6 million
in the first six months of 1997. This increase was primarily attributable
to growth in group variable life products and telemarketing services of
$1.6 million and $1.3 million, respectively.
Page 27
<PAGE>
Allmerica Asset Management
The following table summarizes the results of operations for the Allmerica
Asset Management segment for the periods indicated.
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
(In millions) 1997 1996 1996 1997
<S> <C> <C> <C> <C>
Fees and other income:
External $0.3 $0.3 $0.7 $0.5
Internal 1.7 3.2 3.6 4.0
----- ----- ----- -----
Total revenues 2.0 3.5 4.3 4.5
Other operating expenses 1.5 3.3 3.7 4.0
----- ----- ----- -----
Income before taxes $0.5 $0.2 $0.6 $0.5
===== ===== ===== =====
</TABLE>
Since 1994, the Company has provided investment advisory and sub-advisory
services, primarily to affiliates, through its registered investment
advisor, Allmerica Asset Management ("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 $0.8
million and $2.3 million for the quarters ended June 30, 1997 and 1996,
respectively and $1.9 million and $2.3 million for the six months ended
June 30, 1997 and 1996, respectively.
Corporate
The following table summarizes the results of operations for the Corporate
segment for the periods indicated.
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
(In millions) 1997 1996 1996 1997
<S> <C> <C> <C> <C>
Revenues
Investment and other
income $4.8 $1.0 $7.9 $1.5
Realized (losses) gains (0.3) (0.2) 0.4 (0.2)
----- ----- ----- -----
Total revenues 4.5 0.8 8.3 1.3
Other operating expenses 5.0 5.0 10.0 9.5
----- ----- ----- -----
Loss before taxes and
minority interest (0.5) (4.2) (1.7) (8.2)
Minority interest:
Distributions on Company-
obligated mandatorily
redeemable preferred
securities of subsidiary
trust (6.1) 0.0 (9.9) 0.0
----- ----- ----- -----
Loss before taxes $(6.6) $(4.2) $(11.6) $(8.2)
===== ===== ===== =====
</TABLE>
This segment consists primarily of $329.9 million of cash, investments,
and other assets financed by the $296.3 million in net proceeds from the
February 3, 1997 issuance of Company-obligated mandatorily redeemable
preferred securities of a subsidiary trust, AFC Capital Trust. Investment
and other income increased $3.8 million in the second quarter of 1997, and
$6.4 million in the first six months of 1997, primarily due to the net
proceeds from these securities. These proceeds were invested in the
short-term investment portfolio. For all periods presented, other
operating expenses principally reflect interest expense on the Company's
7 5/8% Senior Debentures. Additionally, the Series A Capital Securities,
issued by AFC Capital Trust, pay cumulative distributions at a rate of
8.207% semiannually commencing August 15, 1997. Minority interest
represents the accrual of these distributions from the date of issuance.
Page 28
<PAGE>
Investment Portfolio
The Company had investment assets diversified across several asset
classes, as follows:
<TABLE>
<CAPTION>
June 30,1997 (1)<FN1> December 31, 1996 (1)<FN1>
Carrying % of Total Carrying % of Total
Value Carrying Value Value Carrying Value
<C> <C> <C> <C>
(Dollars in millions)
<S>
Fixed maturities <FN2> $7,809.5 77.4% $7,891.7 79.4%
Equity securities <FN2> 441.3 4.4 473.6 4.8
Mortgages 699.6 6.9 764.6 7.7
Policy loans 363.6 3.6 362.6 3.6
Real estate 90.5 0.9 120.7 1.2
Cash and cash equivalents 545.2 5.4 202.6 2.0
Other invested assets 143.5 1.4 128.8 1.3
-------- ----- ------- -----
Total $10,093.2 100.0% $9,944.6 100.0%
======== ===== ======= =====
<FN>
<FN1>
Includes Closed Block invested assets with a carrying value of $757.8
million and $772.7 million at June 30, 1997 and December 31, 1996,
respectively.
<FN2>
The Company carries the fixed maturities and equity securities in its
investment portfolio at market value.
</FN>
</TABLE>
Total investment assets increased $148.6 million, or 1.5%, to $10.1 billion
during the first six months of 1997. This increase is primarily
attributable to the net proceeds from the issuance of Capital Securities
in the first quarter of 1997, partially offset by a decline in invested
assets related to the settlement of GIC contracts. Equity securities
decreased $32.3 million, or 6.8%, to $441.3 million, as a result of the
Regional Property and Casualty segment's continued shift in portfolio
holdings from equity securities to fixed maturity securities. Despite this
portfolio shift, fixed maturities decreased $82.2 million, or 1.0%,
primarily due to financing of net GIC withdrawals and transfers of general
account assets to separate account assets during the year. Mortgages
decreased $65.0 million, or 8.5%, to $699.6 million, due to loan repayments
during the period. Additionally, real estate decreased $30.2 million,
or 25.0%, to $90.5 million during the first six months of 1997 due to
sales of investment properties. The Company intends to sell its holdings
in this portfolio within the next several years. Cash and cash equivalents
increased $342.6 million, or 169.1%, to $545.2 million primarily due to
the investment of the net proceeds from the aforementioned Capital
Securities issuance. These proceeds were held in short term securities
during the first half of 1997.
The Company's fixed maturity portfolio is comprised of primarily investment
grade corporate securities, tax-exempt issues of state and local
governments, U.S. government and agency securities and other issues.
Based on ratings by the National Association of Insurance Commissioners,
investment grade securities comprised 80.5% and 84.8% of the Company's
total fixed maturity portfolio at June 30, 1997 and December 31, 1996,
respectively. In 1996 and continuing in the first half of 1997, there was
a modest shift to higher yielding debt securities, including longer duration
and non-investment grade securities. The average yield on debt securities
was 7.6% and 7.1% for the six months ended June 30, 1997 and 1996,
respectively. Although management expects that a substantial portion of new
funds will be invested in investment grade fixed maturities, the Company may
invest a portion of new funds in below investment grade fixed maturities
or equity interests.
The following table illustrates asset valuation allowances and additions
to or deductions from such allowances for the periods indicated.
<TABLE>
<CAPTION>
Other
Invested
(Dollars in millions) Mortgages Real Estate Assets Total
<S> <C> <C> <C> <C>
Year Ended December 31, 1996
Beginning balance $33.8 $19.6 $3.7 $57.1
Provision 5.5 0.0 0.0 5.5
Write-offs<FN1> (19.7) (4.7) (3.7) (28.1)
----- ----- ----- -----
Ending balance $19.6 $14.9 $0.0 $34.5
Valuation allowance as a
percentage of carrying
value before reserves 2.5% 11.0% 0.0% 3.8%
Six months ended June 30, 1997
Provision (benefits) 1.8 1.5 0.0 3.3
Write-offs <FN1> (1.2) (2.2) 0.0 (3.4)
----- ----- ----- -----
Ending balance $20.2 $14.2 $0.0 $34.4
Valuation allowance as a
percentage of carrying value
before reserves 2.8% 13.6% 0.0% 4.2%
<FN>
<FN1>
Write-offs reflect asset sales, foreclosures and forgiveness of debt upon
restructurings.
</FN>
</TABLE>
Page 29
<PAGE>
Income Taxes
AFC and its life insurance subsidiaries (including certain noninsurance
operations) file a consolidated United States federal income tax return.
Entities included within the consolidated group are segregated into either
a life insurance or a non-life insurance company subgroup. The
consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible non-life tax losses that can be
applied to offset life company taxable income. Allmerica P&C and its
subsidiaries file a separate United States federal income tax return.
FAFLIC, as a mutual insurance company until October 1995, was required to
adjust its deduction for policyholder dividends by the differential
earnings amount under Section 809 of the Internal Revenue Code. This
amount was computed, for each tax year, by multiplying the average equity
base of the FAFLIC/AFLIAC consolidated group, as determined for tax
purposes, by the estimate of an excess of an imputed earnings rate over
the average mutual life insurance companies' earnings rate. The
differential earnings amount for each tax year was subsequently recomputed
when actual earnings rates were published by the IRS. As a stock company,
AFC, including its life insurance subsidiaries, is no longer required
to reduce its policyholder dividend deduction by the differential earnings
amount. The differential earnings adjustment in the second quarter of
1996 related to an adjustment for the 1994 tax year based on the actual
average mutual life insurance companies' earnings estimated rate issued
by the IRS in 1996.
Provision for federal income taxes before minority interest was $19.3
million during the second quarter of 1997 compared to $12.6 million during
the same period in 1996. These provisions resulted in consolidated
effective federal tax rates of 25.4% and 18.3%, respectively. The
effective tax rates for AFLIAC and FAFLIC and its non-insurance
subsidiaries were 37.9% and 19.6% during the second quarter of 1997 and
1996, respectively. The effective tax rates for the Regional Property and
Casualty subsidiaries were 12.9% and 17.3% during the second quarter of
1997 and 1996, respectively. The increase in the rate for FAFLIC resulted
from the absence of a differential earnings adjustment in 1997 compared
to a $5.9 million differential earnings benefit in 1996. The decrease
in the rate for the Regional Property and Casualty subsidiaries reflects
an increase in the proportion of tax-exempt interest on bonds to pre-tax
income anticipated for the full year.
Provision for federal income taxes before minority interest was $29.0
million during the first six months of 1997 compared to $36.8 million
during the same period in 1996. These provisions resulted in consolidated
effective federal tax rates of 22.2% and 22.3%, respectively. The
effective tax rates for AFLIAC and FAFLIC and its non-insurance
subsidiaries were 44.8% and 27.7% during the first six months of 1997
and 1996, respectively. Excluding the effect of an $18.9 million tax
benefit related to the agreement to cede the individual disability income
business, the 1997 effective tax rate for the FAFLIC/AFLIAC
consolidated group was 37.7%. This increase resulted primarily from the
absence of a differential earnings adjustment in 1997 compared to a $5.9
million differential earnings benefit in 1996. The effective tax rates
for the Regional Property and Casualty subsidiaries were 18.0% and 19.2%
during the first six months of 1997 and 1996, respectively.
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 used in operating activities during the first six months of 1997
was $25.0 million, as compared to $30.6 million provided by operating
activities during the same period in 1996. This change resulted primarily
from increased commissions and other deferrable expenses related to the
growth in the annuity and variable universal life product lines of the
Retail Financial Services segment and an acceleration of claims payments
in the Regional Property and Casualty segment. In addition, 1996 cash
provided by operating activities was positively impacted by the receipt
of an $11.1 million litigation settlement in the Corporate Risk Management
Services segment.
Page 30
<PAGE>
Net cash provided by investing activities was $255.6 million during the
first six months of 1997, as compared to net cash used of $214.5 million in
1996. This increase primarily reflects fewer net purchases of fixed
maturities during 1997. In 1996, purchases of fixed maturities were
unusually high due to the investment of the remaining net proceeds of the
Company's initial public offering of stock and debt. Additionally, proceeds
from disposals and maturities were delayed in 1996 by financing new
investment purchases with repurchase agreements, thereby decreasing the
cash provided by investing activities during that period.
Net cash provided by financing activities increased from $16.3 million
for the first six months of 1996 to $112.0 million during the same period
of 1997. In 1997, cash provided by financing activities was positively
impacted by the Company's receipt of proceeds of $296.3 million from the
issuance of Company-obligated mandatorily redeemable preferred securities
of AFC Capital Trust (the "Trust"). In addition, cash payments on net
withdrawals from GICs decreased $228.7 million to $176.7 million in the
first six months of 1997. These items were partially offset by reduced
proceeds from short-term debt financing of $474.5 million. During 1996,
the Company increased its short-term debt in order to finance additions
to the investment portfolio and maximize investment earnings. Although
the Company expects the trend in negative financing cash flows from GIC
withdrawals to continue, the Company does not expect GIC withdrawals to
have a material impact on liquidity. Also, in the first six months of
1996, cash from financing activities was affected by the repurchase
of 1.8 million shares at a cost of $41.8 million.
In June 1997, the Company entered into a credit agreement with The Chase
Manhattan Bank ("Chase") providing for a $225 million revolving line of
credit that expires on December 15, 1997. Borrowings under the line of
credit will be unsecured and will bear interest at a rate per annum equal
to, at the Company's option, Chase's base rate or the eurodollar rate
plus an applicable margin. The credit agreement requires the Company to
comply with certain financial ratios. As of June 30, 1997, the Company
had not closed under, or borrowed against, the line of credit provided
by this credit agreement.
On February 3, 1997, the Trust, a wholly-owned subsidiary business trust
of AFC, issued $300 million Series A Capital Securities, which pay
cumulative distributions at a rate of 8.207% semiannually commencing
August 15, 1997. The Trust exists for the sole purpose of issuing the
Capital Securities and investing the proceeds thereof in an equivalent
amount of 8.207% Junior Subordinated Deferrable Interest Debentures due
2027 of AFC (the "Subordinated Debentures"). Through certain guarantees,
the Subordinated Debentures and the terms of related agreements, AFC has
irrevocably and unconditionally guaranteed the obligations of the Trust
under the Capital Securities. Net proceeds from the offering of
approximately $296.3 million will be used to fund a portion of the July 16,
1997 acquisition of the 24.2 million publicly held shares of Allmerica
P&C. On August 7, 1997, AFC and the Trust closed an exchange offer
to exchange the Series A Capital Securities to a like amount of Series B
Capital Securities and related guarantees which are registered under the
Securities Act of 1933 as required under the terms of the initial
transaction.
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 June 30, 1997, no amounts were outstanding and $95.0 million
and $10.8 million were available for borrowing by FAFLIC and Allmerica P&C,
respectively. FAFLIC and Allmerica P&C had $5.0 million and $29.2 million,
respectively, of commercial paper borrowings outstanding at June 30, 1997.
In addition, FAFLIC and AFLIAC had no repurchase agreements outstanding as
of June 30, 1997, as compared to $407.0 million outstanding at June 30,
1996. The repurchase agreements in 1996 were used to delay sales of
investments.
Recent Developments
In late July 1997, a lawsuit was instituted in Louisiana against AFC and
certain of its subsidiaries by individual plaintiffs alleging fraud, unfair
or deceptive acts, breach of contract, misrepresentation and related claims
in the sale of life insurance policies. The plaintiffs seek to be
certified as a class. The Company intends to defend the lawsuit vigorously.
In July 1997, Hanover reached an agreement with Travelers Property Casualty
to facilitate Travelers' writing of certain Hanover Insurance policies, as
they expire, in Alabama, California, Kansas, Mississippi, Missouri, and
Texas. In these six states, Hanover has approximately 250 agents generating
approximately $90 million in premium annually. Hanover intends to cease
writing personal and commercial policies in these states except for employer
and association-sponsored group property
Page 31
<PAGE>
and casualty business, surety bonds and specialty program commercial
policies. The plan is conditioned upon the appropriate regulatory approval
in each state.
On July 16, 1997, AFC announced the closing of the merger (the "Merger")
of Allmerica P&C and a wholly-owned subsidiary of AFC. Through the
transaction, AFC acquired the approximately 24.2 million shares of
Allmerica P&C that it did not already own for approximately $426 million
in cash and 9.7 million shares of AFC common stock. On July 15, 1997,
the Certificate of Incorporation of Allmerica P&C was amended and restated
to authorize a Class B Common Stock of Allmerica P&C, $5.00 par value.
Immediately prior to the consummation of the Merger, each share of Allmerica
P&C Common Stock owned by AFC and its subsidiaries was exchanged for one
share of Class B Common Stock.
In June 1997, the Company entered into a binding letter of intent for the
100% coinsurance of its disability income line of business. The
consummation of the transaction is subject to the receipt of regulatory
approvals. The proposed transaction resulted in the recognition
of a $53.9 million pre-tax loss in the first quarter of 1997.
Forward-Looking Statements
The Company wishes to caution readers that the following important factors,
among others, in some cases have affected and in the future could affect,
the Company's actual results and could cause the Company's actual results
for 1997 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company. When
used in the MD&A discussion, the words "believes," "anticipated,"
"expects" and similar expressions are intended to identify forward looking
statements. See "Important Factors Regarding Forward-Looking Statements"
filed as Exhibit 99-2 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, liabilities related to tobacco products, and tax treatment
of insurance products; (v) changes in interest rates causing a reduction of
investment income or in the market value of interest rate sensitive
investments; (vi) failure to obtain new customers, retain existing customers
or reductions in policies in force by existing customers; (vii) higher
service, administrative, or general expense due to the need for additional
advertising, marketing, administrative or management information systems
expenditures; (viii) loss or retirement of key executives; (ix) increases in
medical costs, including increases in utilization, costs of medical
services, pharmaceuticals, durable medical equipment and other covered
items; (x) termination of provider contracts or renegotiation at less
cost-effective rates or terms of payment; (xi) changes in the Company's
liquidity due to changes in asset and liability matching; (xii) restrictions
on insurance underwriting, based on genetic testing and other criteria;
(xiii) adverse changes in the ratings obtained from independent rating
agencies, such as Moody's, Standard and Poors, A.M. Best, and Duff & Phelps;
(xiv) lower appreciation on and decline in value of managed investments,
resulting in reduced variable products, assets and related fees; and (xv)
possible claims relating to sales practices for insurance products.
Page 32
<PAGE>
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
This registrant's annual shareholders' meeting was held on May 20, 1997.
All three directors nominated for reelection by the Board of Directors were
named in proxies for the meeting, which proxies were solicited pursuant to
Regulation 14A of the Securities and Exchange Act of 1934. The following
individuals were elected to serve a three year term, with the exception of
Mr. Barrett, who was elected to serve a one year term:
<TABLE>
<CAPTION>
VOTES FOR WITHHELD
<S> <C> <C>
David A. Barrett 35,192,825 428,448
Gail L. Harrison 35,193,570 427,703
Robert G. Stachler 35,187,688 433,585
</TABLE>
The other directors whose terms were continued after the Annual Meeting are
Mr. Michael P. Angelini, Mr. Robert P. Henderson, Mr. Terrence Murray,
Mr. Robert J. Murray, Mr. John F. O'Brien, Mr. John L. Sprague,
Mr. Herbert M. Varnum, and Mr. Richard M. Wall.
Shareholders ratified the appointment of Price Waterhouse LLP as the
Independent Public Accountants of the Company for 1997: for 35,339,092;
against 93,689; abstain 188,492.
Shareholders approved an amendment to the Long-Term Stock Incentive Plan to
increase the number of shares of common stock that may be issued under such
plan: for 21,695,672; against 9,105,011; abstain 689,888;
non-vote 4,130,702.
Page 33
<PAGE>
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits
EX - 10.21 Amended and Restated Form of Non-
Solicitation Agreement executed by substantially
all of the executive officers of AFC
EX - 10.22 Credit Agreement dated as of June 17, 1997 between
the Registrant and The Chase Manhattan Bank *
EX - 11 Statement regarding computation of per share
earnings
EX - 27 Financial Data Schedule
* Incorporated by reference to Exhibit 21 of Amendment No. 11 to
Schedule 13D filed by the Registrant relating to the shares of
Allmerica Property & Casualty Companies, Inc. common stock on June
19, 1997.
(b) Reports on Form 8K
On April 15, 1997, a report on Form 8-K was filed reporting
under item 5, Other Events, the announcement of the entering into a letter
of intent to cede its individual disability insurance business under a 100%
coinsurance arrangement with Metropolitan Life Insurance Company.
On June 16, 1997, a report on Form 8-K was filed reporting under
item 5, Other Events, the announcement that its merger with Allmerica
Property & Casualty Companies, Inc. ("Allmerica P&C") was expected to close
on or about July 16, 1997.
On July 9, 1997, a report on Form 8-K was filed reporting under
item 5, Other Events, information relating to the merger with Allmerica P&C.
On July 11, 1997, a report on Form 8-K was filed reporting under
item 5, Other Events, the announcement that an estimated $10 million in
pre-tax catastrophe losses impacted the third quarter results of Citizens
Corporation, a subsidiary of Allmerica Financial Corporation.
On July 16, 1997, a report on Form 8-K was filed reporting under
item 5, Other Events, the announcement of the closing of the merger (the
"Merger") of Allmerica P&C and a wholly-owned subsidiary of AFC. Through
the transaction, AFC acquired the approximately 24.2 million shares of
Allmerica P&C that is did not already own for approximately $426 million
in cash and 9.7 million shares of AFC common stock.
Page 34
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Allmerica Financial Corporation
Registrant
Dated August 13, 1997
/s/ John F. O'Brien
John F. O'Brien
President and Chief Executive
Officer
Dated August 13, 1997
/s/ Edward J. Parry III
Edward J. Parry III
Vice President, Chief Financial
Officer, and Treasurer
Page 35
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Exhibit Page
<C> <C> <C>
10.21 Amended and Restated Form of Non-
Solicitation Agreement executed by
substantially all of the executive
officers of AFC 37
11 Statement regarding computation of per
share earnings 41
27 Financial Data Schedule 0
</TABLE>
Page 36
<PAGE>
Exhibit 10.21
ALLMERICA FINANCIAL CORPORATION
AMENDED AND RESTATED FORM OF NON-SOLICITATION AGREEMENT
This Agreement is made this 4th day of April, 1997, between ALLMERICA
FINANCIAL CORPORATION, a Delaware corporation (hereinafter referred to
collectively with its subsidiaries, as the "Company"), and _______________
(the "Employee").
WHEREAS, Employee acknowledges that the Company could be significantly
harmed if the Employee solicits the Company's employees, agents, brokers, or
clients, or discloses any proprietary or confidential business information
of the Company.
NOW, THEREFORE, in consideration of the continued employment of the Employee
by the Company and the Employee being selected to be a participant in the
Company's Employment Continuity Plan and the receipt by the Employee of
restricted stock pursuant to the terms of a certain Restricted Stock
Agreement dated April 4, 1997, the Employee and the Company agree as
follows:
1. Non-Solicitation.
During the period that the Employee is employed by the Company and for a
period of two (2) years after the termination or expiration thereof, the
Employee will not directly or indirectly:
(a)recruit, solicit or induce, attempt to induce, or assist or encourage
a third party to solicit or recruit any employee(s), agent(s) or broker(s)
of the Company to terminate their employment with, or otherwise cease
their relationship with the Company; or
(b)solicit, divert or take away, attempt to divert or to take away, or
assist or encourage a third party to solicit or divert the business or
patronage of any of the policyholders, clients, customers or accounts of
the Company which were contacted, solicited or served while the Employee
was employed by the Company.
In addition, the restrictions set forth in this Section 1.(b) shall
apply to prospective clients, customers or accounts of the Company which
were contacted or solicited by the Employee or which the Employee has
specific knowledge that such prospective clients, customers, accounts were
solicited by the Company while the Employee was employed by the Company.
Any prospective client, customer or account, which does not, within a
one year period from the date of initial contact become a client,
customer or account of the Company, shall no longer be considered a
prospective client, customer or account of the Company, unless a new
contact or solicitation is instituted by the Employee or by the Company
with the Employee's knowledge.
2. Unenforceability.
(a) If any restriction set forth in Section 1 is found by any court of
competent jurisdiction to be unenforceable because it extends for too
long a period of time or over too great a range of activities or in too
broad a geographic area, it shall be interpreted to extend only over the
maximum period of time, range of activities or geographic area as to
which it may be enforceable.
(b) The restrictions contained in Section 1 are necessary for the
protection of the business and goodwill of the Company and are considered
by the Employee to be reasonable for such purpose. The Employee agrees that
any breach of Section 1 will cause the Company substantial and irrevocable
damage and therefore, in the event of any such breach, in addition to
such other remedies which may be available, the Company shall have the
right to seek specific performance and injunctive relief.
Page 37
<PAGE>
3. Proprietary Information and Developments.
3.1 Proprietary Information.
(a) Employee agrees that all information and know-how, whether or not in
writing, of a private, secret or confidential nature concerning the
Company's products, servicers, customers or business or financial
affairs (collectively, "Proprietary Information") is and shall be the
exclusive property of the Company. By way of illustration, but not
limitation, Proprietary Information may include products, processes,
methods, techniques, projects, plans, research data, financial data,
personnel data, computer programs, and policyholders, client, agent,
broker and supplier lists. Employee will not disclose any Proprietary
Information to others outside the Company or use the same for any
unauthorized purposes without written approval by a vice president of
the Company, either during or after his/her employment, unless and until
such Proprietary Information has become public knowledge without fault by
the Employee.
(b) Employee agrees that all files, letters, memoranda, reports, records,
data or other written, photographic, or other tangible material
containing Proprietary Information, whether created by the Employee or
others, which shall come into his/her custody or possession, shall be and
are the exclusive property of the Company to be used by the Employee only
in the performance of his/her duties for the Company.
(c) Employee agrees that his/her obligation not to disclose or use
information, know-how and records of the types set forth in paragraphs
(a) and (b) above, also extends to such types of information, know-how,
records and tangible property of clients of the Company or suppliers to
the Company or other third parties who may have disclosed or entrusted
the same to the Company or to the Employee in the course of the Company's
business.
3.2 Developments.
(a) Employee agrees that all inventions, improvements, discoveries,
methods, developments, software, and works of authorship, whether
patentable or not, which are created, made, conceived or reduced to
practice by the Employee or under his/her direction or jointly with others
during his/her employment by the Company, whether or not during normal
working hours or on the premises of the Company (all of which are
collectively referred to in this Agreement as "Developments") shall be
the sole property of the Company.
(b) Employee agrees to assign and does hereby assign to the Company (or
any person or entity designated by the Company) all his/her right, title
and interest in and to all Developments and all related patents, patent
applications, copyrights and copyright applications. However, this
Section 3(b) shall not apply to Developments which do not relate to the
present or planned business of the Company and which are made and
conceived by the Employee not during normal working hours, not on the
Company's premises and not using the Company's tools, devices, equipment
or Proprietary Information.
(c) Employee agrees to cooperate fully with the Company, both during and
after his/her employment with the Company, with respect to the
procurement, maintenance and enforcement of copyrights and patents (both
in the United States and foreign countries) relating to Developments.
Employee shall sign all papers, including, without limitation, copyright
applications, patent applications, declarations, oaths, formal
assignments, assignment of priority rights, and powers of attorney, which
the Company may deem are reasonably necessary or desirable in order to
protect its rights and interests in any Development.
4. Other Agreements.
Employee hereby represents that he/she is not bound by the terms of any
agreement with any previous employer or other party to refrain from using or
disclosing any trade secret or confidential or proprietary information in
the course of his/her employment with the Company or to refrain from
competing, directly or indirectly, with the business of such previous
employer or any other party. Employee further represents that his/her
performance of all the terms of this Agreement and as an employee of the
Company does not and will not breach any agreement to keep in confidence
proprietary information, knowledge or data acquired by him/her in confidence
or in trust prior to his/her employment with the Company.
Page 38
<PAGE>
5. Notices.
All notices required or permitted under this Agreement shall be in writing
and shall be deemed effective upon personal delivery or upon deposit in the
United States Post Office, by registered or certified mail, postage prepaid,
addressed to the other party at the address shown below, or
at such other address or addresses as either party shall designate to the
other in accordance with this Section.
The Company: Allmerica
Financial Corporation
440 Lincoln Street
Worcester, MA 01653
Attention: Law Department
The Employee: Home Address as
reflected on Company records.
6. Pronouns.
Whenever the context may require, any pronouns used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the
singular forms of nouns and pronouns shall include the plural, and vice
versa.
7. Entire Agreement.
This Agreement constitutes the entire agreement between the parties and
supersedes all prior agreements and understandings, whether written or oral,
relating to the subject this of this Agreement.
8. Amendment.
This Agreement may be amended or modified only by a written instrument
executed by both the Company and the Employee.
9. Employment Continuity Plan. The Employee's selection to be a participant
in the Company's Employment Continuity Plan (the "Plan") does not mean that
the Employee cannot be removed as a Participant in the Plan. Participation
in the Plan is in accordance with the Plan's provisions and as determined by
the Committee (as defined in the Plan). Removal as a Participant in the
Plan does not affect your obligations under this Agreement.
10. Governing Law.
This Agreement shall be construed, interpreted and enforced in accordance
with the laws of the Commonwealth of Massachusetts.
11. Successors and Assigns.
This Agreement shall be binding upon and inure to the benefit of both
parties and their respective successors and assigns, including any
corporation with which or into which the Company may be merged or which may
succeed to its assets or business, provided, however, that the obligations
of the Employee are personal and shall not be assigned by him.
12. Miscellaneous.
12.1 No delay or omission by the Company in exercising any right under this
Agreement shall operate as a waiver of that or any other right. A waiver or
consent given by the Company on any one occasion shall be effective only
in that instance and shall not be construed as a bar or waiver of any
right on any other occasion.
12.2 The captions of the sections of this Agreement are for convenience of
reference only and in no way define, limit or affect the scope or substance
of any section of this Agreement.
12.3 In case any provision of this Agreement shall be invalid, illegal or
otherwise unenforceable, the validity, legality and enforceability of the
remaining provisions shall in no way be affected or impaired thereby.
Page 39
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year set forth above.
ALLMERICA FINANCIAL CORPORATION
By:
Bruce C. Anderson
Vice President
EMPLOYEE
Printed Name:
Page 40
<PAGE>
Exhibit 11
ALLMERICA FINANCIAL CORPORATION
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
For the Periods Ended June 30, 1997 and 1996
(In millions, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
1997 1996 1996 1997
<S> <C> <C> <C> <C>
Primary:
Average shares outstanding 50.2 50.1 50.2 50.1
Net effect of dilutive stock
options based on the treasury
stock method using average
market price 0.1 0.0 0.1 0.0
----- ----- ----- -----
TOTALS 50.3 50.1 50.3 50.1
===== ===== ===== =====
Net income $37.7 $42.6 $53.6 $89.9
===== ===== ===== =====
Per share amount $0.75 $0.85 $1.07 $1.79
Fully diluted:
Average shares outstanding 50.2 50.1 50.2 50.1
Net effect of dilutive stock
options based on the treasury
stock method using the higher
of period end or average
market price 0.1 0.0 0.1 0.0
----- ----- ----- -----
TOTALS 50.3 50.1 50.3 50.1
Net income $37.7 $42.6 $53.6 $89.9
===== ===== ===== =====
Per share amount $0.75 $0.85 $1.07 $1.79
</TABLE>
Page 41
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
interim consolidated balance sheet and income statement of Allmerica
Financial Corporation as of June 30, 1997 and for the period then ended, and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 7398
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 441
<MORTGAGE> 597
<REAL-ESTATE> 91
<TOTAL-INVEST> 8808
<CASH> 527
<RECOVER-REINSURE> 855
<DEFERRED-ACQUISITION> 848
<TOTAL-ASSETS> 20964
<POLICY-LOSSES> 2874
<UNEARNED-PREMIUMS> 840
<POLICY-OTHER> 1877
<POLICY-HOLDER-FUNDS> 2606
<NOTES-PAYABLE> 237
0
0
<COMMON> 1
<OTHER-SE> 1782
<TOTAL-LIABILITY-AND-EQUITY> 20964
1141
<INVESTMENT-INCOME> 334
<INVESTMENT-GAINS> 42
<OTHER-INCOME> 57
<BENEFITS> 1001
<UNDERWRITING-AMORTIZATION> 237
<UNDERWRITING-OTHER> 320
<INCOME-PRETAX> 130
<INCOME-TAX> 29
<INCOME-CONTINUING> 101
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.07
<RESERVE-OPEN> 2744
<PROVISION-CURRENT> 770
<PROVISION-PRIOR> (61)
<PAYMENTS-CURRENT> 311
<PAYMENTS-PRIOR> 440
<RESERVE-CLOSE> 2664
<CUMULATIVE-DEFICIENCY> (38)
</TABLE>
