<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
ALLMERICA FINANCIAL CORPORATION
(Name of Registrant as Specified in Its Charter)
ALLMERICA FINANCIAL CORPORATION
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[_] Fee paid previously by written materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE>
ALLMERICA FINANCIAL CORPORATION
Notice of Annual Meeting
and Proxy Statement
Annual Meeting
of Shareholders
Allmerica Financial Headquarters
440 Lincoln Street
Worcester, Massachusetts
May 11, 1999
<PAGE>
ALLMERICA FINANCIAL CORPORATION
440 Lincoln Street
Worcester, Massachusetts 01653
March 31, 1999
TO OUR SHAREHOLDERS:
You are cordially invited to attend the Annual Meeting of Shareholders of
Allmerica Financial Corporation to be held on Tuesday, May 11, 1999, at 9:00
a.m. local time, at the Company's headquarters in Worcester, Massachusetts.
The accompanying Notice and Proxy Statement describe in detail the matters
to be acted on at the meeting. At your earliest convenience, please sign and
return the enclosed proxy card in the envelope provided. Your cooperation will
assure that your shares are voted and will also greatly assist our officers in
preparing for the meeting.
Sincerely,
/s/ John F. O'Brien
John F. O'Brien
President and Chief Executive
Officer
<PAGE>
ALLMERICA FINANCIAL CORPORATION
----------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 11, 1999
----------------
To the Shareholders of
Allmerica Financial Corporation:
The Annual Meeting of Shareholders of Allmerica Financial Corporation ("AFC"
or the "Company") will be held in Bullock Hall on the first floor of AFC's
headquarters, 440 Lincoln Street, Worcester, Massachusetts on Tuesday, May 11,
1999, at 9:00 a.m. local time, for the purpose of considering and voting on:
1. Election of four individuals to the Board of Directors;
2. Ratification of the appointment of PricewaterhouseCoopers LLP as the
independent public accountants of AFC for 1999;
3. Approval of the Short-Term Incentive Compensation Plan; and
4. Such other business as may properly come before the Annual Meeting or
any adjournment thereof.
The Board of Directors has fixed March 15, 1999 as the record date for
determining the shareholders of AFC entitled to notice of and to vote at the
Annual Meeting and any adjournment thereof.
The Company's 1998 Annual Report to Shareholders is enclosed with the
mailing of this Notice of Annual Meeting of Shareholders, Proxy Statement and
proxy card.
By Order of the Board of Directors
Charles F. Cronin
Secretary and Counsel
Worcester, Massachusetts
March 31, 1999
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED TO SIGN,
DATE AND MAIL PROMPTLY THE ENCLOSED PROXY. A RETURN ENVELOPE, WHICH REQUIRES
NO POSTAGE IF MAILED IN THE UNITED STATES, IS ENCLOSED FOR THAT PURPOSE. IF
YOU DO ATTEND THE ANNUAL MEETING AND DESIRE TO WITHDRAW YOUR PROXY AND VOTE IN
PERSON, YOU MAY DO SO.
<PAGE>
ALLMERICA FINANCIAL CORPORATION
440 Lincoln Street
Worcester, Massachusetts 01653
----------------
PROXY STATEMENT
----------------
INTRODUCTION
This Proxy Statement, with the accompanying proxy card, is being mailed to
shareholders on or about March 31, 1999, and is furnished in connection with
the solicitation of proxies by the Board of Directors of Allmerica Financial
Corporation ("AFC" or the "Company") for use at the Annual Meeting of
Shareholders of AFC to be held on May 11, 1999 (the "Annual Meeting").
The record date and hour for determining shareholders entitled to vote at
the Annual Meeting has been fixed at the close of business on March 15, 1999
(the "Record Date"). As of the Record Date, 57,306,523 shares of AFC's common
stock, par value $.01 per share (the "Common Stock"), were outstanding and
entitled to be voted. Each share of Common Stock entitles its holder to one
vote.
The shares of Common Stock represented by the enclosed proxy will be voted
as directed by the shareholder or, in the absence of such direction, in favor
of the election of the nominees for Director designated herein, in favor of
the ratification of PricewaterhouseCoopers LLP as AFC's independent public
accountants for 1999 and in favor of approval of the Short-Term Incentive
Compensation Plan. The enclosed proxy confers discretionary authority with
respect to any other proposals that may properly be brought before the Annual
Meeting. As of the date hereof, management is not aware of any other matters
to be presented for action at the Annual Meeting. If any other matters
properly come before the Annual Meeting, however, the proxies solicited hereby
will be voted in accordance with the recommendation of the Board of Directors.
As long as a quorum (a majority of issued and outstanding shares of Common
Stock entitled to vote at the Annual Meeting) is present at the Annual Meeting
either in person or by proxy, a plurality of the votes properly cast is
required to elect the Director nominees, and the affirmative vote of a
majority of the votes properly cast is required to ratify the appointment of
PricewaterhouseCoopers LLP and to approve the Short-Term Incentive
Compensation Plan. Votes withheld from a Director nominee, abstentions and
broker non-votes will be treated as present at the Annual Meeting for the
purpose of determining a quorum but will not be counted as votes cast.
Insofar as management is advised, no executive officer, Director or Director
nominee of AFC, nor any person who has been an executive officer, Director or
Director nominee of AFC at any time since the beginning of its last fiscal
year, nor any associate of any such executive officer, Director or Director
nominee, has any substantial interest in the matters to be acted upon at the
Annual Meeting.
Any shareholder giving a proxy may revoke it at any time before it is
exercised by delivering written notice thereof to the Secretary. Any
shareholder attending the Annual Meeting may vote in person whether or not the
shareholder has previously filed a proxy. Presence at the Annual Meeting by a
shareholder who has signed a proxy, however, does not in itself revoke the
proxy.
The enclosed proxy is being solicited by the Board of Directors of AFC. The
cost of soliciting proxies will be borne by AFC, and will consist primarily of
preparing and mailing the proxies and Proxy Statements. AFC will also
reimburse brokerage houses and other custodians, nominees and fiduciaries for
their expenses in sending proxy materials to the beneficial owners.
<PAGE>
AFC's Annual Report to Shareholders for the fiscal year ended December 31,
1998, including financial statements for AFC and its subsidiaries and the
report of PricewaterhouseCoopers LLP thereon, accompanies this Proxy
Statement. The Annual Report to Shareholders is neither a part of this Proxy
Statement nor incorporated herein by reference.
ITEM I
ELECTION OF DIRECTORS
The Board of Directors consists of three classes of approximately equal
size. At a regularly scheduled meeting in July 1998, the Board of Directors
elected Samuel J. Gerson and E. Gordon Gee to the Board for terms to expire at
the 1999 and 2000 Annual Meetings of Shareholders, respectively. Of the class
of five Directors whose term will expire at this year's Annual Meeting, Samuel
J. Gerson and Robert J. Murray have been nominated for re-election to a three-
year term ending at the 2002 Annual Meeting of Shareholders, Robert P.
Henderson has been nominated for re-election to a two-year term ending at the
2001 Annual Meeting of Shareholders and John L. Sprague has been nominated for
re-election to a one-year term ending at the 2000 Annual Meeting of
Shareholders. Richard M. Wall has announced his retirement from the Board
effective as of this year's Annual Meeting. The remaining eight Directors will
continue to serve in accordance with their previous appointment.
The Board of Directors recommends a vote FOR all nominees. All nominees have
indicated their willingness to serve and unless otherwise directed, it is
intended that proxies received in response to this solicitation will be voted
in favor of the election of the nominees.
In the event that any of the nominees should be unavailable to serve as a
Director, it is intended that the proxies will be voted for the election of
such substitute nominees, if any, as shall be designated by the Board of
Directors. Management has no reason to believe that any nominee will be
unavailable to serve.
Information as to each nominee and as to Directors continuing in office
follows:
Nominees for Director
Samuel J. Gerson, 57, has been a Director of AFC since July 1998. Mr. Gerson
has been Chairman and Chief Executive Officer of Filenes Basement, Inc. since
1984. Mr. Gerson is also a director of Bon Ton Stores, Inc. and Asahi America
Inc.
Mr. Gerson is a member of the Audit Committee of AFC's Board of Directors.
Robert P. Henderson, 67, has been a Director of AFC since September 1996.
Mr. Henderson has been a general partner of Greylock Management Corporation, a
venture capital firm, since 1983, and served as its Chairman until 1997. Mr.
Henderson is also a Director of Cabot Corporation and Filenes Basement, Inc.,
Chairman of the Board of Trustees of the Museum of Fine Arts in Boston,
Massachusetts, and a Member of Corporation of Beth Israel Deaconess Hospital.
Mr. Henderson is a former Chairman of the Federal Reserve Bank of Boston.
Mr. Henderson is a member of the Compensation Committee of AFC's Board of
Directors.
Robert J. Murray, 57, has been a Director of AFC since May 1996. He has been
Chairman and Chief Executive Officer of New England Business Service, Inc.
("NEBS"), a business-to-business direct marketing
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<PAGE>
company, since December 1995 and has served on the Board of Directors of NEBS
since 1991. Prior to joining NEBS, Mr. Murray was employed by The Gillette
Company, Inc. ("Gillette"), beginning in 1961. He served as a Corporate Vice
President of Gillette beginning in 1987 and as the Executive Vice President of
Gillette's North Atlantic Group from January 1991 to December 1995. Mr. Murray
is also a Director of Hannaford Bros. Co., LoJack Corporation and Fleet
National Bank.
Mr. Murray is a member of the Committee on Directors of AFC's Board of
Directors.
John L. Sprague, 68, has been a Director of AFC since February 1995 and was
a Director of First Allmerica Financial Life Insurance Company ("FAFLIC") from
September 1972 to April 1996. Dr. Sprague has been President of John L.
Sprague Associates, Inc., a consulting company for technology companies, since
January 1988, and a partner with The CEO Perspective Group, an executive
coaching group, since December 1998. He served as President and Chief
Executive Officer of Sprague Electric Company, an electronic components
company, from December 1980 to January 1988. Dr. Sprague is also a Director of
Aerovox Corp., a manufacturing company, Sipex Corporation, a designer and
manufacturer of integrated circuits, and California MicroDevices Corporation,
an electronic components manufacturer.
Mr. Sprague is a member of the Audit Committee of AFC's Board of Directors.
Directors Continuing in Office
Michael P. Angelini, 56, has been a Director of AFC since February 1995 and
was a Director of FAFLIC from August 1984 to April 1996, and of Allmerica
Property & Casualty Companies, Inc. ("Allmerica P&C") from August 1992 to July
1997. He served as a Director of The Hanover Insurance Company ("Hanover")
from December 1991 through December 1992. Mr. Angelini is a partner at the law
firm of Bowditch & Dewey LLP, with which he has been associated since 1968,
and is a Director of Flagship Bank & Trust Company.
Mr. Angelini is Chairman of the Audit Committee of AFC's Board of Directors.
His term of office as a Director of AFC expires in 2001.
E. Gordon Gee, 55, has been a Director of AFC since July 1998. Mr. Gee has
been President of Brown University since January 1998 and was President of
Ohio State University from September 1990 to January 1998.
Mr. Gee is a member of the Audit Committee of AFC's Board of Directors. His
term of office as a Director of AFC expires in 2000.
Gail L. Harrison, 51, has been a Director of AFC since February 1995 and was
a Director of FAFLIC from March 1986 to April 1996, of Allmerica P&C from
August 1992 to July 1997, and of Hanover from December 1991 through December
1992. Since February 1981, Ms. Harrison has been affiliated with The Wexler
Group (formerly Wexler, Reynolds, Harrison & Shule, Inc.), a government
relations consulting firm, where she is a Founding Principal.
Ms. Harrison is Chairwoman of the Committee on Directors of AFC's Board of
Directors. Her term of office as a Director of AFC expires in 2000.
M Howard Jacobson, 66, has been a Director of AFC since July 1997. He has
been a Senior Advisor and Consultant to Bankers Trust Co. since 1991. Mr.
Jacobson was for many years President and Treasurer and a Director of Idle
Wild Foods, Inc., a Fortune 500 company, until that company was sold in 1986.
Mr. Jacobson is also a Director of Wyman-Gordon Company, an aerospace
technology company, Storyfield Farm, Inc. and Boston Chicken, Inc., and was a
Director of Allmerica P&C from August 1992 to July 1997.
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Mr. Jacobson is a member of the Audit Committee of AFC's Board of Directors.
His term of office as a Director of AFC expires in 2000.
J. Terrence Murray, 59, has been a Director of AFC since February 1995 and
was a Director of FAFLIC from January 1992 to April 1996. Mr. Murray is the
Chairman and Chief Executive Officer of Fleet Financial Group, Inc., a bank
holding company, where he has been employed since July 1962. Mr. Murray is
also a Director of A.T. Cross Co., a writing instrument company, CVS
Corporation, a drugstore chain, and the Federal Reserve Bank of Boston.
Mr. Murray is a member of the Committee on Directors of AFC's Board of
Directors. His term of office as a Director of AFC expires in 2001.
John F. O'Brien, 55, has been a Director, Chief Executive Officer and
President of AFC since February 1995. He has also served as a Director, Chief
Executive Officer and President of FAFLIC since August 1989. In addition to
his positions with AFC and FAFLIC, Mr. O'Brien has served as a Director,
President and Chief Executive Officer of Allmerica P&C since August 1992, and
has been a Director of Hanover since September 1989, of Citizens Insurance
Company of America ("Citizens Insurance") since March 1992 and Citizens
Corporation ("Citizens"), for which he also serves as Chief Executive Officer,
from December 1992 to December 1998. Citizens is a wholly-owned subsidiary of
Hanover, and Citizens Insurance is a wholly-owned subsidiary of Citizens. Mr.
O'Brien is also a trustee or director and executive officer of Allmerica
Investment Trust, Allmerica Securities Trust, and Allmerica Funds.
Additionally, Mr. O'Brien is a director and/or holds offices at various other
non-public FAFLIC affiliates including SMA Financial Corp. and Allmerica
Financial Life Insurance and Annuity Company ("AFLIAC"). Mr. O'Brien also
currently serves as a Director of The TJX Companies, Inc., an off-price family
apparel retailer, ABIOMED, Inc., a medical device company, Cabot Corporation,
a diversified specialty chemicals and materials and energy company, and The
Life Insurance Association of Massachusetts. He also currently serves as a
member of the Steering Committee on Financial Services of The American Council
of Life Insurance and as a member of the executive committee of the Mass
Capital Resource Company, a Massachusetts investment partnership. Prior to
joining FAFLIC, Mr. O'Brien served as an officer of FMR Corp., the parent
company of various financial services companies in the Fidelity Group, and a
director and/or an executive officer at various other of FMR Corp.'s
affiliates.
Mr. O'Brien's term of office as a Director of AFC expires in 2001.
Robert G. Stachler, 69, has been a Director of AFC since February 1995, and
was a Director of FAFLIC from March 1978 to April 1996, of Allmerica P&C from
August 1992 to July 1997, and of Hanover from April 1990 to December 1992. Mr.
Stachler has been a partner at the law firm of Taft, Stettinius & Hollister
LLP since 1964.
Mr. Stachler is a member of the Compensation Committee of AFC's Board of
Directors. His term in office as a Director of AFC expires in 2000.
Herbert M. Varnum, 61, has been a Director of AFC since February 1995 and
was a Director of FAFLIC from March 1979 to April 1996, of Allmerica P&C from
August 1992 to July 1997, and of Hanover from December 1991 through December
1992. Mr. Varnum was employed by Quabaug Corporation, a manufacturing company,
beginning in 1960 and served as President and Chief Executive Officer from
1982 to 1989, and as Chairman and Chief Executive Officer from January 1990
until his retirement in June 1995.
Mr. Varnum is Chairman of the Compensation Committee of AFC's Board of
Directors. His term of office as a Director expires in 2001.
4
<PAGE>
Certain Information Regarding Directors
General
During the last fiscal year, the Board of Directors held five regularly
scheduled meetings and one special meeting. All of the incumbent Directors,
with the exception of Mr. J. T. Murray, attended at least 75% of the Board and
committee meetings held while they were members during 1998. The Board of
Directors has an Audit Committee, a Compensation Committee and a Committee on
Directors.
Board Committees
The Audit Committee of the Board of Directors is comprised of Messrs.
Angelini (Chair), Gee, Gerson, Jacobson and Dr. Sprague. The committee reviews
the professional services to be provided by AFC's independent auditors and the
independence of such auditors from management of AFC. The committee also
reviews the scope of the audit by AFC's independent auditors, the annual
financial statements of AFC, AFC's system of internal accounting controls and
such other matters with respect to the accounting, auditing and financial
reporting practices and procedures of AFC as it may find appropriate or as may
be brought to its attention, and meets from time to time with members of AFC's
internal audit staff. The committee met twice during 1998.
The Compensation Committee of the Board of Directors is comprised of Messrs.
Varnum (Chair), Henderson, Stachler and, until this year's Annual Meeting, Mr.
Wall. The Compensation Committee has oversight responsibility with respect to
compensation matters involving Directors and executive officers of AFC. No
member of this committee has any interlocking or other relationships with AFC
and its subsidiaries that would call into question his independence as a
member of the committee. The committee met three times in 1998.
The Committee on Directors is comprised of Ms. Harrison (Chair), Mr. J. T.
Murray and Mr. R. Murray. The Committee on Directors advises and makes
recommendations to the Board on all matters concerning directorship and
corporate governance practices and the selection of candidates as nominees for
election as directors. The committee held one meeting in 1998. The committee
recommended this year's candidates and recommended Board member committee
assignments to the full Board of Directors. The committee is authorized to
consider nominees recommended by shareholders. Shareholders who wish to
suggest qualified candidates for consideration by the committee may do so by
writing to the Secretary of the Company, giving the candidate's name,
biographical data and qualifications.
For the period from the 1998 Annual Meeting of Shareholders to this year's
Annual Meeting, Non- employee Directors received an annual retainer consisting
of 1,000 shares of AFC Common Stock issued pursuant to the 1996 Non-Employee
Director Stock Ownership Plan. For the period from this year's Annual Meeting
to the 2000 Annual Meeting, Non-employee Directors will receive an annual
retainer consisting of 1,300 shares of AFC Common Stock. The Board of
Directors has decided that its total compensation, including the annual stock
retainer and meeting fees, will be assessed each year in comparison to the
total compensation paid to directors of other insurance and financial services
companies. Based on this assessment, the Board of Directors will modify the
retainer as necessary to maintain a total compensation level near the median
of the range for the comparison group. In addition to the annual retainer,
Chairpersons of committees also receive a $4,000 annual retainer, and Non-
employee Directors of AFC receive $1,500 per meeting of the Board of Directors
and $1,000 for each meeting of a committee thereof that they attend. Mr.
O'Brien, the only Director who is also an employee of the Company, is not paid
any fees or additional compensation for service as a member of the Board of
Directors or any of its committees. All Directors are reimbursed for
reasonable travel and other expenses of attending meetings of the Board of
Directors and committees of the Board of Directors.
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Directors may defer receipt of their cash and stock compensation until the
earlier of a specified date or the time they leave the Board of Directors.
Deferred cash amounts are accrued in a memorandum account and were credited
with interest at six percent per annum in 1998. The Board voted to increase
the interest rate to eight percent for 1999.
There are no family relationships among any of the Directors or executive
officers of AFC and its subsidiaries.
ITEM II
RATIFICATION OF INDEPENDENT ACCOUNTANTS
The firm of PricewaterhouseCoopers LLP has been selected by the Board of
Directors, subject to ratification by the shareholders, to be AFC's
independent public accountants for 1999. Representatives of
PricewaterhouseCoopers LLP will be present at the Annual Meeting, will have
the opportunity to make a statement if they desire to do so, and will be
available to respond to appropriate questions from shareholders.
The Board of Directors recommends that you vote FOR the proposal to ratify
the selection of the firm of PricewaterhouseCoopers LLP as independent public
accountants for AFC for 1999. If ratification is not obtained, the Board of
Directors will reconsider the appointment.
ITEM III
APPROVAL OF SHORT-TERM INCENTIVE COMPENSATION PLAN
General
Under Section 162(m) of the Internal Revenue Code of 1986, as amended
("Section 162(m)"), a publicly-held corporation is generally not entitled to a
tax deduction with respect to any fiscal year for compensation in excess of $1
million (the "Cap") paid to its chief executive officer and its next four most
highly paid executives in office at the end of such year unless such
compensation is "qualified performance- based compensation." Qualified
performance-based compensation is compensation that is payable solely upon the
attainment of one or more performance goals established by a committee of
"outside directors," as defined in Section 162(m). Moreover, the material
terms of the performance goal(s), including the maximum amount payable to an
individual (or the formula for determining that amount) must be approved by
the corporation's stockholders.
On February 21, 1999, the Compensation Committee of the Company's Board of
Directors, which consists entirely of outside directors, approved the Short-
Term Incentive Compensation Plan (the "STIC Plan"). The STIC Plan is intended
to satisfy the applicable provisions of, and is being submitted to
stockholders pursuant to, Section 162(m). Unless the STIC Plan is approved at
the Annual Meeting, no more persons will be designated as participants in the
STIC Plan and no more Potential Awards (as defined below) will be determined
after the Annual Meeting, and any Potential Awards made under the STIC Plan
prior to the Annual Meeting will lapse.
The STIC Plan will provide incentives for certain senior executives of the
Company to achieve a sustained, high level of financial performance for the
Company, while enhancing the Company's ability to deduct the cost of such
incentives for tax purposes. Accordingly, the Board of Directors believes that
approval of the STIC Plan is in the best interests of the Company and its
stockholders and recommends that the stockholders approve its adoption.
The Board of Directors recommends a vote FOR Item 3.
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Summary of Short-Term Incentive Compensation Plan
The full text of the STIC Plan is set forth in Exhibit A, attached hereto.
The following description of certain features of the STIC Plan is qualified in
its entirety by reference to the full text of the plan. Capitalized terms used
in this description have the same meaning as defined in the STIC Plan.
Administration; Eligible Employees. The STIC Plan is administered by the
Compensation Committee of the Board of Directors or, if any member of the
Compensation Committee is not an outside director, by a subcommittee of the
Compensation Committee consisting of those members of the Compensation
Committee who are outside directors (such committee or subcommittee referred
to in this description as the "Committee"). The Committee shall interpret the
STIC Plan, although it may delegate to management non-discretionary
administrative functions. Only executive officers of the Company (as defined
under Rule 3b-7 of the Securities Exchange Act of 1934) are eligible to
participate in the STIC Plan.
Performance Criteria. The Committee will select the performance criterion or
criteria for any individual position for any fiscal year during the first
fiscal quarter of such year and the formula or formulas for determining the
amount of payment that the Committee may award for performance during such
year. The performance criteria that the Committee may use are: net income,
adjusted net income, operating income, earnings per share, adjusted net income
per share, operating income per share, profit returns and margins, revenues,
shareholder return and/or value, stock price, working capital, premiums, net
investment income, statutory loss ratio, statutory LAE ratio, return on
equity, unit cost and risk-based capital. Performance criteria may be measured
solely on a corporate, subsidiary or business unit basis, or a combination
thereof. Further, performance criteria may reflect absolute entity performance
or a relative comparison of entity performance to the performance of a peer
group of entities or other external measure of the selected performance
criteria. Income, earnings and revenues used for any performance criteria
measurements may be defined by the Compensation Committee, when establishing
the performance criteria, to exclude: gains or losses on sales or disposition
of investments and operating assets; asset write-downs; litigation or claim
judgments or settlements; accruals for historic environmental obligations;
effect of changes in tax law or rate on deferred tax liabilities; accruals for
reorganization and restructuring programs; uninsured catastrophic property
losses; any catastrophic loss in excess of planned or budgeted catastrophic
losses; the cumulative effect of change in accounting principles; results of
discontinued operations; and any extraordinary non-recurring items as
described in Accounting Principles Board Opinion No. 30 and other relevant
authoritative literature.
Determination of Awards. Within 90 days of the beginning of each fiscal year
(an "Award Year"), the Committee will select, from among the Company's
officers, those persons who will participate in the STIC Plan for the Award
Year and designate for each such participant a specific percentage of the
participant's base salary as such participant's potential award (a "Potential
Award"). An individual participant's Potential Award in any Award Year is
limited to the lesser of $2,500,000 or 250% of the participant's base salary.
When the Company's financial results for a given Award Year have been
determined, the Committee will determine, and certify in writing, the dollar
amount of the Potential Award for each participant and the actual award, if
any, for each participant. In determining the actual award for a given
participant, the Committee may exercise discretion to reduce (but not
increase) the award from the dollar amount of the Potential Award for such
participant. The Committee may base such reduction on the company's financial
performance, the participant's performance, and competitive compensation
levels. No such reduction may be used to increase any other participant's
award. All awards will be paid in cash.
Awards under other Plans. Except in those circumstances described in the
following sentence, nothing in the STIC Plan limits the Company's ability to
make any award to any person (including a participant in the STIC
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Plan) under any other plan or arrangement or on an ad hoc basis. The Company
may not make an award under another plan or arrangement or on an ad hoc basis
to a participant in the STIC Plan where such other award is designed to
compensate a participant in the STIC Plan if, and to the extent that, as a
result of the Company's performance, his or her Potential Award or actual
award does not reach a particular level.
Termination of Employment. If a participant in the STIC Plan is not employed
by Company on December 31 of an Award Year, he or she will not receive an
award for that Award Year, except that if the participant's employment
terminated because of death or disability, the Committee has the discretion to
authorize payment of an award to such participant or such participant's estate
at the time the other awards are paid for that Award Year.
Plan Benefits
At this point it is impossible to determine those people who will be
participants in the STIC Plan beyond the 1999 Award Year, and the amounts that
will be received by participants in the 1999 Award Year and future Award
Years.
Tax Aspects Under the U.S. Internal Revenue Code
A participant in the STIC Plan generally will be subject to tax at ordinary
income rates on the amount of the award at the time the award is paid, and the
Company will be entitled to a tax deduction for the amount of the award. The
Company will deduct any required withholding taxes from the payments made
under the STIC Plan. The foregoing summary of the principal current Federal
income tax consequences relating to awards under the STIC Plan does not
describe all Federal tax consequences, or any local, state or foreign tax
consequences, associated with the STIC Plan.
The Board of Directors of the Company recommends a vote FOR the approval of
the Short-Term Incentive Compensation Plan. Proxies solicited on behalf of the
Board of Directors will be voted in accordance with the specifications made on
the form of proxy. Where no specification is made, proxies will be voted FOR
the approval of the Short-Term Incentive Compensation Plan.
An affirmative vote of a majority of the votes properly cast is required for
approval of the STIC Plan.
8
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SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
The following table sets forth information regarding the number of shares of
AFC's Common Stock owned as of March 15, 1999 by (i) each Director of AFC,
(ii) the named executive officers in the Summary Compensation Table appearing
later in this Proxy Statement, (iii) all executive officers and directors of
AFC as a group and (iv) each person who is known by AFC to be the beneficial
owner of more than five percent of AFC's Common Stock as of such date. This
information has been furnished by the persons listed in the table.
<TABLE>
<CAPTION>
Name of
Beneficial Owner Shares Owned*
---------------- -------------
<S> <C> <C>
Michael P. Angelini..................... 4,444
E. Gordon Gee........................... 1,000
Samuel J. Gerson........................ 1,000
Gail L. Harrison........................ 2,668
Robert P. Henderson..................... 3,400
M Howard Jacobson....................... 1,800
John F. Kelly........................... 21,701(1)
J. Terrence Murray...................... 2,469
Robert J. Murray........................ 3,400
John F. O'Brien......................... 107,194(2)
Richard M. Reilly....................... 31,389(3)
Robert P. Restrepo...................... 12,000
Eric A. Simonsen........................ 50,522(4)
John L. Sprague......................... 2,620
Robert G. Stachler...................... 3,371
Herbert M. Varnum....................... 5,100
Richard M. Wall......................... 2,580
Directors and executive officers as a
group (24 persons)..................... 365,027(5)
Holders of Greater Than Five Percent of
Common Stock
FMR Corp. .............................. 7,845,750(6) 13.7% of shares
82 Devonshire Street of AFC Common
Boston MA 02109 Stock outstanding
Boston Partners Asset Management, L.P... 5,156,112(7) 9.0% of shares
28 State Street, of AFC Common Stock
20th Floor outstanding
Boston, MA 02109
</TABLE>
- --------
* With the exception of AFC Common Stock held by FMR Corp. and Boston
Partners Asset Management, L.P., each of the amounts represents less than
1% of the outstanding shares of Common Stock as of March 15, 1999. As to
shares beneficially owned, each person has sole voting and investment
power, except as indicated in other footnotes to this table. The named
executive officers have deferred receipt of certain shares of restricted
stock underlying awards reported in the Executive Compensation Table. Those
shares are not reported in this table because the named executive officers
have neither voting nor investment power with respect to such shares.
(1) Includes 11,247 shares held for the benefit of Mr. Kelly by the trustees
of the First Allmerica Financial Life Insurance Company's Employees'
401(k) Matched Savings Plan (the "FAFLIC Plan"), 122 shares held as
custodian under the Uniform Gifts to Minors Act, 2,930 shares of
restricted stock over which Mr. Kelly has no investment power and 3,400
shares underlying options exercisable within 60 days.
9
<PAGE>
(2) Includes 200 shares held for the benefit of Mr. O'Brien by the trustees of
the FAFLIC Plan and 10,000 shares underlying options exercisable within 60
days.
(3) Includes 99 shares held for the benefit of Mr. Reilly by the trustees of
the FAFLIC Plan, 4,395 shares of restricted stock over which Mr. Reilly
has no investment power and 4,000 shares underlying options exercisable
within 60 days.
(4) Includes 7,589 shares held for the benefit of Mr. Simonsen by the trustees
of the FAFLIC Plan, 4,281 shares held in trust for the benefit of Mr.
Simonsen's immediate family, for which trusts Mr. Simonsen acts as
trustee, 7,326 shares of restricted stock over which Mr. Simonsen has no
investment power and 6,000 shares underlying options exercisable within 60
days.
(5) Includes 27,781 shares held by the trustees of the FAFLIC Plan, 32,231
shares of restricted stock over which the executive officers have no
investment power and 57,129 shares underlying options exercisable within
60 days. See notes 1-4 above.
(6) Based on a Schedule 13G dated February 12, 1999 filed by FMR Corp., Edward
C. Johnson 3rd and Abigail P. Johnson, each of whom has sole dispositive
power over 7,845,750 shares and sole voting power over 426,806 shares,
426,806 shares and no shares, respectively.
(7) Based on a Schedule 13G dated February 12, 1999 filed by Boston Partners
Asset Management, L.P., Boston Partners, Inc. and Desmond John Heathwood,
none of whom has sole voting or dispositive power. Each of Boston
Partners, Inc. and Mr. Heathwood expressly disclaims beneficial ownership
of any shares.
As of March 15, 1999, there were no persons other than FMR Corp. and Boston
Partners Asset Management, L.P. known to AFC to be the beneficial owners of
more than 5% of the outstanding shares of Common Stock.
10
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth all plan and non-plan compensation awarded
to, earned by, or paid to the Chief Executive Officer of AFC and the four
other most highly compensated executive officers of AFC (collectively, the
"Named Executive Officers"). Because AFC is a holding company, it does not pay
any compensation to its executive officers. The Named Executive Officers,
unless otherwise indicated, receive compensation in their capacities as
executive officers of FAFLIC, which is then reimbursed, in accordance with
AFC's policy and intercompany service agreements, by its various subsidiaries
for services rendered to such subsidiaries.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
--------------------------------- -----------------------------
Other
Annual Restricted Securities All Other
Compen- Stock Underlying LTIP Compen-
Name and Principal Bonus sation Awards Options Payouts sation
Position Year Salary ($) ($) (1) ($) (2) ($) (3) (#) ($) (4) ($) (5)
------------------ ---- ---------- --------- ------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John F. O'Brien ............. 1998 924,231 486,000 140,322 2,975,207 -- -- 124,651
President and Chief 1997 850,000 700,000 124,422 1,003,662 50,000 800,000 120,477
Executive Officer 1996 850,000 1,816,000 109,422 -- -- 500,000 120,227
Robert P. Restrepo, Jr. (6).. 1998 268,077 462,500 -- 1,024,000 50,000 -- --
Vice President
Eric A. Simonsen ............ 1998 441,577 169,312 9,888 1,058,236 -- -- 4,800
Vice President 1997 410,000 176,628 4,800 250,916 30,000 280,000 4,750
1996 370,000 406,436 12,215 -- -- 160,000 4,500
Richard M. Reilly............ 1998 338,885 136,126 6,180 885,574 -- -- 5,553
Vice President 1997 310,000 148,800 3,000 150,529 20,000 200,000 4,750
1996 270,000 256,893 7,517 -- -- 120,000 4,500
John F. Kelly ............... 1998 318,346 82,150 6,180 503,253 -- -- 4,800
Vice President and 1997 300,000 95,160 3,000 100,353 17,000 170,000 4,750
General Counsel 1996 285,000 196,159 6,577 -- -- 110,000 4,500
</TABLE>
- --------
(1) Amounts represent bonuses earned pursuant to FAFLIC's Incentive
Compensation Plan, except that amounts shown for 1996 include the
following special bonus payments of $1,000,000 for Mr. O'Brien, $250,000
for Mr. Simonsen, $150,000 for Mr. Reilly and $100,000 for Mr. Kelly, and
the amount reported for Mr. Restrepo in 1998 includes payment of $250,000
as a hiring bonus.
(2) The amounts shown reflect the payment of taxes in the amount of $109,422
in 1998, 1997 and 1996 in connection with the payment by FAFLIC of a life
insurance premium on behalf of Mr. O'Brien. All other amounts shown
include interest earned on long-term incentive compensation paid, or
deferred at the election of the Named Executive Officer, in the respective
year.
(3) Amounts reflect the market value of the restricted stock awards on the
date of grant. Amounts shown for 1998 include the value of restricted
stock awarded under the Long-Term Stock Incentive Plan upon the
acquisition by the Named Executive Officer of an equal number of shares of
Common Stock. With the exception of Mr. Restrepo, amounts shown for 1998
also include the value of restricted stock granted in exchange for the
surrender of all vested future payments under FAFLIC's Long-Term
Performance Unit Plan. The amount shown for Mr. Restrepo includes the
value of 6,000 shares of restricted stock granted pursuant to his
employment agreement described later in this Proxy Statement. The number
of shares of restricted stock and market value of the shares granted to
each individual for the surrender of the vested
11
<PAGE>
future payments are: Mr. O'Brien, 21,536 shares/$1,133,332; Mr. Simonson,
8,109 shares/$426,736; Mr. Reilly, 5,828 shares/$306,699; Mr. Kelly, 4,563
shares/$240,128. The receipt of restricted stock granted to the Named
Executive Officers in 1998 is deferred until it is determined that they may
take receipt in accordance with AFC's objectives for compliance with
Internal Revenue Code Section 162(m). The aggregate holdings (including for
the purposes of this footnote, restricted shares that have been deferred)
and market value of restricted stock as of December 31, 1998, for each
individual are: Mr. O'Brien, 85,840 shares/$4,967,990; Mr. Restrepo, 16,000
shares/$926,000; Mr. Simonsen, 27,435 shares/$1,587,801; Mr. Reilly, 21,223
shares/$1,228,281; and Mr. Kelly, 12,493 shares/$723,032. Dividends will be
paid on restricted stock reported in this column to the extent dividends are
paid to other shareholders of AFC. Dividends on deferred restricted stock
will also be deferred.
(4) Amounts shown include installment payments vesting and received by the
Named Executive Officers in the respective year pursuant to awards earned
in 1995, 1996 and 1997 under FAFLIC's Long-Term Performance Unit Plan (the
"Long-Term Performance Plan").
(5) Amounts shown include $4,800 paid to each of the eligible Named Executive
Officers by FAFLIC during 1998 in the form of employer contributions to
each Named Executive Officer's 401(k) and related post-retirement accounts
pursuant to FAFLIC's 401(k) Matched Savings Plan ("Matched Savings Plan")
(in effect beginning in 1995) (except amounts contributed on behalf of
Messrs. O'Brien and Reilly in 1998, which are attributable to the
Executive Non-Qualified Retirement Plan) as described more fully below.
The amount shown for Mr. O'Brien in 1998 also reflects the payment by
FAFLIC of a life insurance premium of $115,727. The amounts shown for
Messrs. O'Brien and Reilly also include $4,124 and $753, respectively, for
payroll tax accounting errors in the prior year.
(6) Mr. Restrepo commenced employment effective May 26, 1998.
Option Grants in Last Fiscal Year
The following table contains information concerning stock options granted to
the Named Executive Officers in 1998. The Company has not granted SARs.
Individual Grants
<TABLE>
<CAPTION>
Grant Date Value
Exercise
Number of Securities Percent of Total or Grant Date
Underlying Options Options Granted to Base Price Expiration Present
Name Granted (#)(1) Employees in 1998 ($ per share) Date Value ($) (2)
---- -------------------- ------------------ ------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Robert P. Restrepo,
Jr..................... 50,000 6.2 $64.00 5/26/08 $1,435,804
</TABLE>
- --------
(1) The securities underlying the options granted were shares of the Company's
Common Stock. The options granted become exercisable in 20% increments on
the first, second, third, fourth and fifth anniversaries of the date of
grant.
(2) In accordance with Securities and Exchange Commission rules, the Black-
Scholes option pricing model was chosen to estimate the grant date present
value of the options set forth in the table. The Company's use of the
model should not be construed as an endorsement of its accuracy at valuing
options. All stock option valuation models, including the Black-Scholes
model, require a prediction about the future movement of the stock price.
The following assumptions were made for purposes of calculating the Grant
Date Present Value: options exercised from 2.5 to 7 years, stock price
volatility of 47.49%, dividend yield of 0.4%, risk-free interest rate of
4.84% and no adjustment made for forfeitures or transferability. The real
value of the options depends upon the actual performance of the Company's
Common Stock during the applicable period.
12
<PAGE>
Year-End 1998 Option Value Table
The following table sets forth information for the Named Executive Officers
regarding unexercised options to acquire shares of the Company's Common Stock
held as of December 31, 1998. No options were exercised by the Named Executive
Officers in 1998.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities Underlying In- the-
Unexercised Options at Year- Money Options at Year-
End 1998 (#) End 1998 ($)(1)
------------------------------- ----------------------
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
---- ------------------------------- ----------------------
<S> <C> <C>
John F. O'Brien......... 10,000/40,000 225,000/900,000
Robert P. Restrepo,
Jr..................... 0/50,000 0/0
Eric A. Simonsen........ 6,000/24,000 135,000/540,000
Richard M. Reilly....... 4,000/16,000 90,000/360,000
John F. Kelly........... 3,400/13,600 76,500/306,000
</TABLE>
- --------
(1) Calculated based on the difference between the option exercise price and
$57.875, the closing price per share of the Company's Common Stock on the
New York Stock Exchange Composite Tape on December 31, 1998.
Long-Term Incentive Awards
Neither the Company nor FAFLIC made any awards to Named Executive Officers
under the Long-Term Performance Plan in 1998. All vested future payments to be
made to Named Executive Officers pursuant to awards made in prior years were
converted into restricted stock, which will only vest upon three years of
continuous employment from the date of conversion.
Employment Agreements and Non-Solicitation Agreements
The Company entered into an employment agreement with Mr. Restrepo effective
as of May 26, 1998 pursuant to which Mr. Restrepo's annual base salary was set
at $425,000, subject to salary increase as of January 1, 1999. In addition,
Mr. Restrepo receives an allowance of $25,000 per year for ground
transportation expenses. He received a one-time sign-on bonus of $250,000 on
the date of hire, and a minimum bonus of $212,500 for 1998. Mr. Restrepo
received consideration for the compensation relinquished when joining the
Company, in the form of 6,000 shares of restricted stock with three year cliff
vesting, an additional 10,000 shares of restricted stock with three year cliff
vesting granted upon the purchase of an equal number of shares in the open
market and held for the same three year period, and 50,000 stock options
subject to terms and conditions applicable to all participants in the
Company's Long-Term Stock Incentive Plan. If Mr. O'Brien ceases to be the
President and Chief Executive Office of the Company, for whatever reason,
within three years from the date Mr. Restrepo commences employment, he has the
option, within 90 days of Mr. O'Brien's leaving, to terminate his employment
and be eligible to receive a payment equal to his annualized base salary,
projected average annualized incentive compensation and the premium cost of
his medical benefits for twelve months. In addition, if Mr. Restrepo
terminated his employment, restricted stock granted pursuant to this agreement
would be deemed to have vested monthly at the rate of 1/36 per month, and the
vested amount would be converted to cash at the rate of $65.00 per share.
Also, all stock options would be fully vested concurrent with termination.
Upon termination, Mr. Restrepo would be obligated to execute a severance
agreement with the Company. In the event Mr. Restrepo relocates to the greater
Worcester area within the first five years of employment, he is eligible to
receive reimbursement for any losses equal to one half of his out-of-pocket
losses on the sale of his home. He is also entitled to join a country club or
other club at the Company's expense.
13
<PAGE>
As of April 30, 1997 or upon hire thereafter, all of the Company's executive
officers had entered into non- solicitation agreements ("Non-Solicitation
Agreements") with the Company. The Non-Solicitation Agreements provide that,
during employment and for a period of two years after termination, the
executive officer will not recruit or solicit, attempt to induce, or assist or
encourage others to recruit or solicit, any employee, agent or broker of the
Company to terminate employment with the Company. The Non- Solicitation
Agreements prohibit the executive officers from soliciting the business or
patronage of any policyholders or existing or prospective clients, customers
or accounts of the Company that were contacted, solicited or served while the
executive officer was employed by the Company. Finally, the Non-Solicitation
Agreements provide that all proprietary information relating to the Company's
business and all software, works of authorship and other developments created
during employment by the Company are the sole property of the Company.
Employment Continuity Plan
In December 1996 the AFC Board of Directors voted to adopt the Allmerica
Financial Corporation Employment Continuity Plan (the "Employment Continuity
Plan"). The purposes of the Employment Continuity Plan are (i) to secure
senior management's objectivity and ensure focus on behalf of shareholder
interest in the event of actions or occurrences that could lead to a Change of
Control, and (ii) to ensure, in the event of a Change in Control resulting in
payment under the Employment Continuity Plan, that senior management does not
compete in the business of the Company, solicit Company employees or disclose
any confidential or propriety information of the Company. The Employment
Continuity Plan is administered by the AFC Board of Directors. Messrs.
O'Brien, Simonsen, Reilly and Kelly were named as participants in the
Employment Continuity Plan at its adoption. Mr. Restrepo was included as a
participant when he joined the Company in May 1998.
In the event of a Change in Control (defined below) of the Company and
subsequent involuntary termination of a participant within a two-year period
after the Change in Control, or voluntary termination of an Executive Officer
participant (defined below) in the 13th month after a Change in Control, the
Employment Continuity Plan authorizes the payment of specified benefits to
eligible participants. These include a lump-sum cash payment equal to a
Multiplier (defined below) times a participant's base salary, average bonus
for the preceding three years, and the amount that would be credited under a
cash balance pension plan sponsored by the Company or its affiliates. The
Multiplier is three (3) for the Chief Executive Officer, two (2) for all other
Executive Officers and one (1) for certain other key employees. Additionally,
the Employment Continuity Plan provides for continued coverage under the
health and welfare benefit plans sponsored by the Company and its affiliates,
the lump-sum actuarial equivalent for grandfathered benefits earned under the
retirement plan for "transition group" employees for the number of years
commensurate with the Multiplier, 75% of a participant's maximum bonus
potential pro-rated for service performed in the year of termination, and
outplacement services. The Chief Executive Officer is also entitled to a
gross-up payment when the Change in Control payment or other benefit under the
plan is subject to the excise tax imposed by section 4999 of the Internal
Revenue Code. An Executive Officer is defined as a member of the Operating
Committee of the Company, consistent with the definition of Executive Officer
in Rule 3b-7 of the Securities Exchange Act of 1934.
For purposes of the Employment Continuity Plan, a Change in Control is
defined as follows: (i) a change in the composition of the Board of Directors
such that the Incumbent Directors (as defined in the Employment Continuity
Plan) at the beginning of any consecutive twenty-four month period cease to
constitute a majority of the Board; (ii) any person or group is or becomes the
beneficial owner of 35% or more of the Company's voting stock outstanding;
(iii) a merger or consolidation of the Company or any affiliate that requires
shareholder approval, unless the shareholders immediately prior to the merger
or consolidation own more than 50% of the total voting stock of the successor
corporation or a majority of the board of directors of the successor
corporation were
14
<PAGE>
Incumbent Directors immediately prior to the merger or consolidation; or (iv)
the approval by shareholders of a plan of liquidation or dissolution of the
Company or the sale of all or substantially all of the Company's assets.
In the event of a Change of Control, for all stock awards and stock options
granted to a participant pursuant to the Company's Long-Term Stock Incentive
Plan that do not otherwise vest immediately after the Change of Control, the
participant will be paid a lump sum amount equal to (i) the fair market value
of all stock awards as of the date of the Change of Control (excluding stock
options) and (ii) with respect to stock options, the excess of the fair market
value of the Company's common stock as of the date of the Change of Control
over the stock option exercise price.
The payment of benefits under the Employment Continuity Plan is contingent
upon the Company's receipt of a signed waiver and release from the participant
that release certain claims the participant may have and precludes the
participant from competing with the Company for a period of two years.
Pension Benefits
FAFLIC maintains a tax-qualified, non-contributory defined benefit pension
plan (the "Pension Plan") for the benefit of eligible employees.
Prior to January 1, 1995, the Pension Plan benefit formula (the "Prior Plan
Formula") was based upon a percentage of the participant's final average
compensation multiplied by years of credited service, to a maximum of 35
years. Final average compensation was defined as the average of the highest
consecutive five years of eligible compensation or last 60 months, if greater.
Benefits under this formula were frozen for all employees as of December 31,
1994, with the exception of a certain grandfathered group (the "Transition
Group"), including Mr. Kelly. This Transition Group continues to accrue
benefits under the Prior Plan Formula.
Effective January 1, 1995, FAFLIC adopted a cash balance plan formula (the
"Cash Balance Formula"). Each year, FAFLIC allocates a percentage of a
participant's eligible compensation to a separate memorandum account
established for the participant. At the end of the year the Company sets the
allocation percentage based on Company performance, with a minimum of 0.5% of
eligible compensation. Participants may elect hypothetical investment options
from choices provided by the Company. Upon termination of employment,
participants may elect to receive a monthly annuity payment or an immediate
lump sum payment.
FAFLIC also maintains several unfunded, non-qualified retirement
arrangements. The Excess Benefit Plan provides eligible individuals with the
difference between the benefits calculated under the Pension Plan formula
without regard to Federal limitations and the maximum amount that may be paid
from the Pension Plan under Federal tax laws. The Non-Qualified Executive
Deferred Compensation Plan allows certain employees to defer up to 12.5% of
their base salary.
FAFLIC has also adopted the unfunded Non-Qualified Executive Retirement
Plan, designed to mirror FAFLIC's qualified plan formulas, under which Messrs.
O'Brien and Reilly participate. Effective January 1, 1995, participants
irrevocably forfeited future participation in FAFLIC's qualified Pension Plan
and 401(k) Matched Savings Plan. Under the Non-Qualified Executive Retirement
Plan, participants may (i) elect to defer compensation equal to the maximum
401(k) Matched Savings Plan annual contribution, (ii) receive and defer an
amount equal to the Company's matching contribution, (iii) receive and defer
an amount equal to the Pension Plan annual Cash Balance Formula allocation
without regard to Federal limitations and (iv) defer up to 12.5% of base
salary.
15
<PAGE>
The estimated annual retirement benefits payable at the normal retirement
age of 65 for the Named Executive Officers is as follows: Mr. O'Brien,
$277,782; Mr. Restrepo, $113,393; Mr. Simonsen, $117,603; Mr. Reilly, $46,343;
and Mr. Kelly, $294,434.
These include amounts calculated under the Prior Plan Formula and the Cash
Balance Formula, including Excess Plan benefits. As a member of the Transition
Group, Mr. Kelly's Prior Plan Formula amount was projected to age 65. Amounts
in the Cash Balance memorandum accounts, including the accounts calculated for
Messrs. O'Brien and Reilly under the Non-Qualified Executive Retirement Plan,
were projected to age 65 assuming: (i) each individual's eligible compensation
until retirement equals base salary plus bonus as shown in the Executive
Compensation Table for 1998, (ii) an annual allocation of 7% of eligible
compensation and (iii) investment income of 6% per year.
Compensation Committee Report
The Compensation Committee ("Committee") of the Board of Directors is
comprised of the Directors whose names appear at the end of this report, none
of whom is an employee of AFC or of any affiliate or subsidiary of AFC. Among
other duties, the Committee has oversight responsibility with respect to
compensation matters involving Directors and executive officers of AFC. As a
holding company, AFC has no employees of its own and does not pay any
compensation to its executive officers. The Company's executive officers are
employees of FAFLIC and are compensated directly by FAFLIC.
Compensation Philosophy.
The objectives of the executive compensation program are to attract and
retain individuals key to the future success of AFC and its subsidiaries, to
motivate executives to achieve the business objectives of AFC, and to align
the long-term interests of executives with those of shareholders.
The principal components of the executive compensation program are base
salary, performance-based annual incentive compensation and long-term
incentive compensation. Annual base salaries of the Named Executive Officers
and other key executives are set at levels considered to be competitive with
amounts paid to executive officers with comparable qualifications, experience
and responsibilities at competing companies, based on published surveys and
proxy information. Annual incentive compensation in 1998 was tied to the
achievement of significant financial performance goals. During 1998, FAFLIC,
maintained an incentive plan which provides supplementary cash compensation as
an incentive to key employees who, through exceptional performance, contribute
materially to the success of the companies. The incentive plan had two
components: (a) corporate earnings per share, and (b) business unit
performance modified by the individual's contribution. Grants under AFC's
Long-Term Stock Incentive Plan (the "Plan") are intended to promote superior
future performance. The Plan is intended to attract and retain executives and
to satisfy the objective of linking executives' long-term interests with those
of the shareholders. Factors considered in determining the grant of awards
under the Plan include the contribution of each executive to the long-term
performance of AFC and the importance of such executive's responsibilities
within the organization.
Compensation of the Chief Executive Officer.
In approving the 1998 compensation package for Mr. O'Brien, the Committee
compared Mr. O'Brien's compensation against the comparative base salaries,
annual and long-term incentives and other compensation of chief executives of
a peer group of life and property and casualty insurance companies of similar
size
16
<PAGE>
offering similar products and services. The Committee's review also included,
but was not limited to, an assessment of the performance of the Company and
its subsidiaries in terms of profitability and growth in the various business
lines, an evaluation of the capital positions of the companies and the
implementation of significant cost controls and recent corporate
restructurings. In comparison to the peer group of companies, Mr. O'Brien's
base salary and his potential for incentive compensation as a percentage of
base salary was within the median market range.
Mr. O'Brien's 1998 incentive compensation performance measures included a
corporate goal based upon earnings per share and individual performance goals,
such as the achievement of certain financial targets including revenue,
expenses and the appreciation of AFC's stock price. Achievement of individual
performance goals and other initiatives undertaken by Mr. O'Brien in 1998
resulted in performance that exceeded expectations.
The Committee believes that the executive compensation policies of AFC and
its subsidiaries are appropriate both to attract and retain corporate officers
and other key employees with outstanding abilities and to motivate them to
perform to the full extent of their abilities.
Compliance with Internal Revenue Code Section 162(m).
Section 162(m) of the Internal Revenue Code, enacted in 1993, generally
disallows a tax deduction to public companies for compensation over $1 million
paid to the corporation's Chief Executive Officer and its four other most
highly compensated executive officers. Qualifying performance-based
compensation will not be subject to the deduction limit if certain
requirements are met. In 1998, the compensation paid to the Chief Executive
Officer exceeded the limit imposed by Section 162(m) by approximately $90,000.
The Committee monitors the impact of Section 162(m) in order to balance the
benefits of favorable tax treatment with a need to apply prudent judgment in
carrying out AFC's compensation philosophy, recognizing that under certain
circumstances it may be appropriate to exceed the deduction limit. The
Committee has submitted the Short-Term Incentive Compensation Plan for
consideration by shareholders in 1999 in recognition that payment of
qualifying performance-based compensation will benefit AFC's efforts to manage
its compensation philosophy under the Section 162(m) deduction limitations.
Members of the Compensation Committee:
Herbert M. Varnum, Chair
Robert P. Henderson
Robert G. Stachler
Richard M. Wall
17
<PAGE>
COMMON STOCK PERFORMANCE CHART
The following graph compares the performance of the Company's Common Stock
since its initial public offering on October 11, 1995 with the performance of
the S&P 500 Index and with the performance of an industry peer group comprised
of a composite of two published indices--the S&P Property-Casualty Insurance
Index and the S&P Life/Health Insurance Index. Returns of the latter two
indices have been weighted according to their respective aggregate market
capitalization at the beginning of each period shown on the graph. The graph
plots the changes in the value of an initial $100 investment over the
indicated time periods, assuming reinvestment of all dividends.
COMPARISON OF 38 MONTH CUMULATIVE TOTAL RETURN *
AMONG ALLMERICA FINANCIAL CORPORATION,
THE S&P 500 INDEX AND A PEER GROUP
[ALLMERICA CHART]
- --------
* $100 invested on 10/11/95 in stock or index--including reinvestment of
dividends. Fiscal year ending December 31.
18
<PAGE>
The insurance composite is a market value weighted composite of the S&P
Property-Casualty Insurance and the S&P Life/Health Insurance indices. The
components of the insurance composite have been weighted in accordance with
the respective aggregate market capitalization of the companies in each index
as of the date of Allmerica Financial Corporation's public offering and at the
beginning of each period shown on the graph, as indicated below:
<TABLE>
<CAPTION>
10/11/95 12/95 12/96 12/97 12/98
-------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
S&P Property-Casualty.................. 59.60% 60.31% 60.37% 59.84% 56.46%
S&P Life-Health........................ 40.40% 39.69% 39.63% 40.16% 43.54%
------ ------ ------ ------ ------
Total.................................. 100.00% 100.00% 100.00% 100.00% 100.00%
</TABLE>
The Compensation Committee Report and Stock Price Performance Graph above
shall not be deemed incorporated by reference by any general statement
incorporating by reference this Proxy Statement into any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934, except to the
extent that AFC specifically incorporates this information by reference, and
shall not otherwise be deemed filed under such Acts.
19
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires executive
officers and Directors, and persons who beneficially own more than ten percent
(10%) of the Common Stock, to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission (the "SEC")
and the New York Stock Exchange (the "NYSE"). Such persons are required by SEC
regulations to provide to AFC copies of all their Section 16(a) filings. Based
solely on a review of the forms furnished to AFC and written representations
from AFC's executive officers and Directors, AFC believes that during 1998
there was full compliance with all Section 16(a) filing requirements, except
that an open market purchase of 300 shares of AFC Common Stock by Mr. Stachler
was reported timely to the Company but inadvertently not reported timely to
the SEC. A corrective form has been filed with the SEC and the NYSE.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's subsidiaries or affiliates have, from time to time, retained
the services of Bowditch & Dewey LLP, a law firm in which Mr. Angelini is a
partner, and Taft, Stettinius & Hollister LLP, a law firm in which Mr.
Stachler is a partner.
ANNUAL REPORT ON FORM 10-K
Shareholders may obtain without charge a copy of AFC's Annual Report on Form
10-K, including financial statements and financial statement schedules,
required to be filed with the Securities and Exchange Commission pursuant to
the Securities Exchange Act of 1934 for the fiscal year ended December 31,
1998, by calling (800) 407-5222 or by writing to AFC at 440 Lincoln Street,
Worcester, Massachusetts 01653 (attention: Secretary).
OTHER MATTERS
Management knows of no business that will be presented for consideration at
the Annual Meeting other than as stated in the Notice of Meeting. If, however,
other matters are properly brought before the Annual Meeting, it is the
intention of the proxy holders to vote the shares represented thereby on such
matters in accordance with the recommendation of the Board of Directors and
authority to do so is included in the proxy.
SHAREHOLDER PROPOSALS
Proposals submitted by shareholders of AFC must be received at Allmerica
Financial Corporation, 440 Lincoln Street, Worcester, Massachusetts 01653 on
or before December 2, 1999, to be considered for inclusion in the proxy
materials relating to the 2000 Annual Meeting of Shareholders.
DATED at Worcester, Massachusetts this 31st day of March 1999.
By Order of the Board of Directors,
Charles F. Cronin
Secretary and Counsel
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EXHIBIT A
ALLMERICA FINANCIAL CORPORATION
SHORT-TERM INCENTIVE COMPENSATION PLAN
1. Purpose
The purpose of this Short-Term Compensation Plan (this "Plan") is to provide
incentives for certain senior executives of Allmerica Financial Corporation
(the "Company") to achieve a sustained, high level of financial success for
the Company. This Plan does that by placing a portion of the senior
executives' annual compensation at risk based on Company and individual
performance. This Plan is intended to comply with the requirements for tax
deductibility imposed by Internal Revenue Code Section 162(m) as in effect
from time to time ("Section 162(m)") with respect to Awards paid pursuant to
this Plan.
2. Administration
This Plan will be administered by the Compensation Committee of the Board of
Directors or, if any member of the Compensation Committee is not an "outside
director" for the purposes of Section 162(m), by a subcommittee of the
Compensation Committee consisting of those members of the Compensation
Committee who are "outside directors" for such purposes. The Compensation
Committee or subcommittee administering this Plan is referred to herein as the
"Committee." The Committee may delegate to management administrative functions
that do not involve discretion. The Committee shall have the authority to
interpret this Plan, and any interpretation or decision by the Committee with
regard to any questions arising under this Plan shall be final and conclusive
on all participants in this Plan.
3. Eligibility; Participants
Only Executive Officers of the Company (as defined under Rule 3b-7 of the
Securities Exchange Act of 1934) shall be eligible to participate in this Plan
for any fiscal year of the Company (an "Award Year"). Not later than 90 days
after the beginning of each Award Year, the Committee shall (a) select, from
among those eligible, the persons who shall participate in this Plan (the
"Participants") for the Award Year, and (b) designate for each Participant a
specific percentage of the Participant's Base Salary as the Participant's
potential award (the "Potential Award"). A Potential Award cannot exceed 250%
of a Participant's Base Salary or $2,500,000, whichever is less. Base Salary
means as to any Award Year a Participant's actual salary approved by the
Committee or the Board of Directors of the Company as of the start of the
Award Year. Such Base Salary shall be before (i) deductions for taxes or
benefits and (ii) deferrals of compensation.
4. Performance Criteria
The Committee shall select the performance criterion or criteria for any
individual position for any fiscal year during the first fiscal quarter of
such year and the formula or formulas for determining the amount of payment
that the Committee may award for performance during such year. The performance
criteria which the Committee may use are: net income, adjusted net income,
operating income, earnings per share, adjusted net income per share, operating
income per share, profit returns and margins, revenues, shareholder return
and/or value, stock price, working capital, premiums, net investment income,
statutory loss ratio, statutory LAE ratio, statutory OUE ratio, return on
equity, unit cost and risk-based capital. Performance criteria may be measured
solely on a corporate, subsidiary or business unit basis, or a combination
thereof. Further, performance criteria may reflect absolute entity performance
or a relative comparison of entity performance to the performance of a
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peer group of entities or other external measure of the selected performance
criteria. Income, earnings and revenues used for any performance criteria
measurements may be adjusted to exclude: gains or losses on sales or
disposition of investments and operating assets; asset write-downs; litigation
or claim judgments or settlements; accruals for historic environmental
obligations; effect of changes in tax law or rate on deferred tax liabilities;
accruals for reorganization and restructuring programs; uninsured catastrophic
property losses; any catastrophic loss in excess of planned or budgeted
catastrophic losses; the cumulative effect of change in accounting principles;
results of discontinued operations; and any extraordinary non-recurring items
as described in Accounting Principles Board Opinion No. 30 and other relevant
authoritative literature.
5. Performance Goals
Prior to the end of the first ninety days of each fiscal year the Plan is in
effect, the Committee shall establish in writing the performance goals, based
on one or more of the performance criteria set forth in Section 4, and payment
schedules or formulas tied to such goals for the individuals described in
Section 3.
6. Payments
When the Company's financial results for the Award Year have been
determined, the Committee will evaluate the Company's financial results,
determine the dollar amounts of the Potential Award and the actual Award, if
any, for each Participant, and shall certify its determinations in writing
(the "Certification").
In determining the actual Award to be paid to each Participant, the
Committee may exercise discretion to reduce or eliminate (but not increase)
the Award from the amount of the Participant's Potential Award, after taking
into account the Company's financial performance, performance of the
Participant, and competitive compensation levels. It is expected that the
Committee will use its discretion carefully and apply good and rigorous
judgment in appraising the performance of the Company and the contributions of
each Participant to the Company's performance.
A reduction in the Award paid to a Participant shall not be available to
increase the Award of any other Participant.
Awards will be paid in cash as soon as practical after the Certification or
may, at the election of the Participant and under procedures adopted by the
Committee or any deferred compensation plans from time to time in effect and
in accordance with the regulations promulgated under Section 162(m), be
deferred.
7. Tax Withholding
The Company will deduct any required withholding taxes from the payments
under this Plan.
8. Termination of Employment
Any Participant who is not an employee of the Company on December 31 of an
Award Year will not receive any Award for that Award Year, except that if a
Participant's employment terminates due to death or disability the Committee
may at its discretion authorize payment of an Award to such Participant (or
his or her estate) at the time other Awards are paid in respect of that Award
Year.
9. No Right to Awards or Continued Employment
No person shall have any claim or right to be granted an Award, nor shall
the selection for participation in the Plan for any Award Year be construed as
giving a Participant the right to be retained in the employ of the Company for
that Award Year or for any other period.
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10. Interpretation and Amendments
This Plan is designed to comply with Section 162(m), and all provisions in
this Plan shall be construed in a manner consistent with that intent. The
Company's Board of Directors may amend or terminate this Plan at any time, but
no amendment shall expand the class of eligible employees or increase the
maximum Award to an individual Participant without the approval of the
Company's shareholders. Subject to the foregoing restrictions, this Plan may
be amended to add conditions or provisions required, or to remove conditions
or provisions no longer required or permitted, by Section 162(m).
Nothing in this Plan shall be deemed in any way to limit or restrict the
Company from making any award to any person (including a Participant in this
Plan) under any other plan, arrangement or understanding, whether now existing
or hereafter arising, or on an ad hoc basis, except as follows. No award to
any Participant in this Plan shall be made under any other plan, arrangement
or understanding, or on an ad hoc basis, where the amount of such other award
is designed to compensate the Participant if, and to the extent that, as a
result of the Company's performance, his or her Potential Award or actual
Award under this Plan does not reach a particular level.
11. Plan Term
This Plan shall be effective as of the date adopted, for the Award Year
ending December 31, 1999, subject to receiving shareholder approval at the
1999 Annual Shareholders Meeting, and shall remain in effect for subsequent
Award Years until terminated by the Company's Board of Directors.
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09668 (Rev.3/99)
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ALLMERICA FINANCIAL CORPORATION
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD May 11, 1999
The undersigned, having received the Notice of Annual Meeting of
Shareholders and the Board of Directors' Proxy Statement (the "Proxy
Statement"), hereby appoint(s) John F. O'Brien and John F. Kelly, and each of
them, Proxies of the undersigned (with full power of substitution) to attend the
Annual Meeting of Shareholders of Allmerica Financial Corporation to be held May
11, 1999, and all adjournments thereof (the "Meeting"), and there to vote all
shares of Common Stock of Allmerica Financial Corporation that the undersigned
would be entitled to vote, if personally present, in regard to all matters that
may come before the Meeting.
The undersigned hereby confer(s) upon the Proxies, and each of them,
discretionary authority (i) to consider and act upon such business, matters or
proposals other than the business set forth below as may properly come before
the Meeting and (ii) with respect to the election of Directors in the event that
any of the nominees is unwilling to serve. The Proxy when properly executed will
be voted in the manner specified herein. If no specification is made, the
Proxies intend to vote FOR each proposal and FOR all nominees for director.
Please mark vote as in this example. / X /
-
1. For the election of all nominees listed below (except as otherwise
indicated).
Nominees: Samuel J. Gerson, Robert P. Henderson, Robert J. Murray and John L.
Sprague
/__/ FOR all nominees /__/ WITHHOLD from all nominees
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FOR all nominees, except those listed on the line above
2. Ratification of the appointment of PricewaterhouseCoopers LLP as the
independent public accountants of Allmerica Financial Corporation.
/__/ FOR /__/ AGAINST /__/ ABSTAIN
3. Approval of Short-Term Incentive Compensation Plan as described in the Proxy
Statement.
/__/ FOR /__/ AGAINST /__/ ABSTAIN
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS,
WHICH RECOMMENDS APPROVAL OF THE FOREGOING PROPOSALS
(Form of Proxy continued)
<PAGE>
Mark here for address change and note below. /__/
- ------------------------------ ---------
Signature Date
- ------------------------------ ---------
Signature Date
In signing, please write name(s) exactly as appearing in the imprint on this
card. For shares held jointly, each joint owner should sign. If signing as
executor, or in any other representative capacity, or as an officer of a
corporation, please indicate your full title as such.
[End of Proxy]
