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, 2000
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: 53,065,530 shares
of common stock outstanding, as of August 1, 2000.
34
Total Number of Pages Included in This Document
Exhibit Index is on Page 35
Page 1
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Shareholders' Equity 5
Consolidated Statements of Comprehensive Income 6
Consolidated Statements of Cash Flows 7
Notes to Interim Consolidated Financial Statements 8-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-31
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 6. Exhibits and Reports on Form 8-K 33
SIGNATURES 34
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
[CAPTION]
<TABLE>
(Unaudited) (Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
(In millions, except per share data) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
REVENUES
Premiums $520.1 $494.7 $1,017.6 $ 953.0
Universal life and investment
product policy fees 102.7 88.6 205.2 171.5
Net investment income 146.6 158.2 288.9 312.5
Net realized investment (losses)
gains (20.4) (5.5) (67.2) 126.3
Other income 36.8 28.8 73.5 57.7
--------------- -------------------
Total revenues 785.8 764.8 1,518.0 1,621.0
--------------- -------------------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and
loss adjustment expenses 462.2 440.2 915.6 883.4
Policy acquisition expenses 115.0 111.9 232.1 204.6
Other operating expenses 128.3 119.9 248.3 237.7
Restructuring costs 20.3 0.0 20.3 0.0
--------------- -------------------
Total benefits, losses and expenses 725.8 672.0 1,416.3 1,325.7
--------------- -------------------
Income from continuing operations
before federal income taxes 60.0 92.8 101.7 295.3
--------------- -------------------
Federal income tax expense (benefit)
Current 1.5 19.0 (5.2) 73.2
Deferred 6.9 3.0 21.1 (3.5)
--------------- -------------------
Total federal income tax expense 8.4 22.0 15.9 69.7
--------------- -------------------
Income from continuing operations
before minority interest 51.6 70.8 85.8 225.6
Minority interest:
Distributions on mandatorily
redeemable preferred securities
of a subsidiary trust holding
solely junior subordinated
debentures of the Company (4.0) (4.0) (8.0) (8.0)
--------------- -------------------
Income from continuing operations 47.6 66.8 77.8 217.6
Loss from operations of discontinued
business (less applicable income
tax benefit of $3.5 for the quarter
ended June 30, 1999 and $1.8 for the
six months ended June 30, 1999) 0.0 (6.6) 0.0 (3.3)
--------------- -------------------
Net income $ 47.6 $ 60.2 $ 77.8 $ 214.3
=============== ===================
PER SHARE DATA
Basic
Income from continuing operations $ 0.89 $ 1.22 $ 1.45 $ 3.89
Loss from operations of discontinued
business (less applicable income
tax benefit of $0.06 for the quarter
ended June 30, 1999 and $0.03 for
the six months ended June 30, 1999) 0.00 (0.12) 0.00 (0.06)
--------------- -------------------
Net income $ 0.89 $ 1.10 $ 1.45 $ 3.83
=============== ===================
Weighted average shares outstanding 53.4 54.5 53.7 55.9
=============== ===================
Diluted
Income from continuing operations $ 0.88 $ 1.21 $ 1.43 $ 3.86
Loss from operations of discontinued
business (less applicable income tax
benefit of $0.06 for the quarter
ended June 30, 1999 and $0.03 for
the six months ended June 30, 1999) 0.00 (0.12) 0.00 (0.06)
--------------- -------------------
Net income $ 0.88 $ 1.09 $ 1.43 $ 3.80
=============== ===================
Weighted average shares outstanding 54.1 55.1 54.2 56.4
=============== ===================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 3
<PAGE>
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
(In millions, except per share data) 2000 1999
<S> <C> <C>
ASSETS
Investments:
Fixed maturities-at fair value (amortized
cost of $7,540.5 and $7,095.0) $ 7,396.2 $ 6,933.8
Equity securities-at fair value (cost of
$41.3 and $49.5) 69.1 83.2
Mortgage loans 500.3 521.2
Policy loans 181.1 170.5
Other long-term investments 174.7 180.0
---------- ----------
Total investments 8,321.4 7,888.7
---------- ----------
Cash and cash equivalents 327.2 442.2
Accrued investment income 131.5 134.7
Premiums, accounts and notes receivable, net 628.8 583.5
Reinsurance receivable on paid and unpaid
losses, benefits and unearned premiums 1,303.3 1,279.9
Deferred policy acquisition costs 1,505.9 1,386.8
Deferred federal income taxes 113.7 141.7
Other assets 510.8 510.2
Closed Block assets 768.5 772.3
Separate account assets 18,477.5 17,629.6
---------- ----------
Total assets $32,088.6 $30,769.6
========== ==========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits $ 2,685.1 $ 2,825.0
Outstanding claims, losses and loss
adjustment expenses 2,825.1 2,838.6
Unearned premiums 964.4 890.2
Contractholder deposit funds and other
policy liabilities 2,196.3 2,041.0
---------- ----------
Total policy liabilities and accruals 8,670.9 8,594.8
---------- ----------
Expenses and taxes payable 783.5 795.5
Reinsurance premiums payable 89.8 73.0
Trust instruments supported by funding
obligations 403.5 50.6
Short-term debt 51.4 45.0
Long-term debt 199.5 199.5
Closed Block liabilities 824.9 842.1
Separate account liabilities 18,476.5 17,628.9
---------- ----------
Total liabilities 29,500.0 28,229.4
---------- ----------
Minority interest:
Mandatorily redeemable preferred securities
of a subsidiary trust holding solely junior
subordinated debentures of the Company 300.0 300.0
---------- ----------
Commitments and contingencies (Note 10)
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,
60.4 million shares issued 0.6 0.6
Additional paid-in capital 1,762.3 1,770.5
Accumulated other comprehensive income (63.7) (75.3)
Retained earnings 960.0 882.2
Treasury stock at cost (7.1 million and
6.2 million shares) (370.6) (337.8)
---------- ----------
Total shareholders' equity 2,288.6 2,240.2
---------- ----------
Total liabilities and shareholders' equity $32,088.6 $30,769.6
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 4
<PAGE>
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
June 30,
(In millions) 2000 1999
<S> <C> <C>
PREFERRED STOCK
Balance at beginning and end of period $ 0.0 $ 0.0
---------- ----------
COMMON STOCK
Balance at beginning and end of period 0.6 0.6
---------- ----------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period 1,770.5 1,768.8
Issuance of common stock 0.0 4.8
Unearned compensation related to restricted
stock (8.2) (2.5)
---------- ----------
Balance at end of period 1,762.3 1,771.1
---------- ----------
ACCUMULATED OTHER COMPREHENSIVE INCOME
NET UNREALIZED (DEPPRECIATION) APPRECIATION ON
INVESTMENTS
Balance at beginning of period (75.3) 180.5
Net appreciation (depreciation) on
available-for-sale securities 17.6 (274.0)
(Provision) benefit for deferred federal
income taxes (6.0) 95.8
---------- ----------
Other comprehensive gain (loss) 11.6 (178.2)
---------- ----------
Balance at end of period (63.7) 2.3
---------- ----------
RETAINED EARNINGS
Balance at beginning of period 882.2 599.9
Net income 77.8 214.3
Dividends to shareholders 0.0 0.0
---------- ----------
Balance at end of period 960.0 814.2
---------- ----------
TREASURY STOCK
Balance at beginning of period (337.8) (91.2)
Shares purchased at cost (46.8) (250.2)
Shares reissued at cost 14.0 1.9
---------- ----------
Balance at end of period (370.6) (339.5)
---------- ----------
Total shareholders' equity $ 2,288.6 $ 2,248.7
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 5
<PAGE>
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
(In millions) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net income $ 47.6 $ 60.2 $ 77.8 $ 214.3
Other comprehensive income:
Net (depreciation) appreciation on
available-for-sale securities (22.3) (112.4) 17.6 (274.0)
Benefit (provision) for deferred
federal income taxes 8.0 39.4 (6.0) 95.8
-------- -------- -------- --------
Other comprehensive (loss) income (14.3) (73.0) 11.6 (178.2)
-------- -------- -------- --------
Comprehensive income (loss) $ 33.3 $ (12.8) $ 89.4 $ 36.1
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 6
<PAGE>
ALLMERICA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
June 30,
(In millions) 2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 77.8 $ 214.3
Adjustments to reconcile net income to net
cash (used in) provided by operating
activities:
Net realized losses (gains) 70.8 (126.9)
Net amortization and depreciation 13.9 17.8
Deferred federal income taxes 22.0 (0.3)
Change in deferred acquisition costs (116.7) (97.4)
Change in premiums and notes receivable,
net of reinsurance payable (28.2) (55.9)
Change in accrued investment income 2.7 1.3
Change in policy liabilities and
accruals, net (98.9) 63.8
Change in reinsurance receivable (23.5) (16.6)
Change in expenses and taxes payable (39.7) (10.9)
Separate account activity, net (0.3) 53.5
Other, net (8.2) (10.2)
--------- ---------
Net cash (used in) provided by
operating activities (128.3) 32.5
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities of
available-for-sale fixed maturities 1,504.9 1,390.5
Proceeds from disposals of equity securities 11.8 371.4
Proceeds from disposals of other investments 27.9 20.6
Proceeds from mortgages matured or collected 40.5 49.3
Purchase of available-for-sale fixed
maturities (2,001.8) (1,854.7)
Purchase of equity securities (0.8) (67.1)
Purchase of other investments (58.7) (71.8)
Capital expenditures (6.3) (15.9)
--------- ---------
Net cash used in investing activities (482.5) (177.7)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds 629.9 1,246.6
Withdrawals from contractholder deposit
funds (469.5) (668.5)
Change in trust instruments supported by
funding obligations 352.9 0.0
Change in short-term debt 6.4 (171.1)
Proceeds from issuance of common stock 0.0 0.2
Treasury stock purchased at cost (46.8) (250.2)
Treasury stock reissued at cost 14.0 1.9
--------- ---------
Net cash provided by financing activities 486.9 158.9
--------- ---------
Net change in cash and cash equivalents (123.9) 13.7
Net change in cash held in the Closed Block 8.9 14.0
Cash and cash equivalents, beginning of period 442.2 550.3
--------- ---------
Cash and cash equivalents, end of period $ 327.2 $ 578.0
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 7
<PAGE>
ALLMERICA FINANCIAL CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Principles of Consolidation
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 interim
financial information and with the requirements of Form 10-Q.
The interim consolidated financial statements of AFC include the accounts
of 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 services); Allmerica Asset Management,
Inc. ("AAM", a wholly-owned non-insurance subsidiary of AFC); Allmerica
Property & Casualty Companies, Inc. ("Allmerica P&C", a wholly-owned non-
insurance subsidiary of AAM); The Hanover Insurance Company ("Hanover", a
wholly-owned subsidiary of Allmerica P&C); Citizens Corporation (a wholly-
owned subsidiary of Hanover); and Citizens Insurance Company of America
("Citizens", a wholly-owned subsidiary of Citizens Corporation). The
Closed Block assets and liabilities and its results of operations are
presented in the consolidated financial statements as single line items.
Unless specifically stated, all disclosures contained herein supporting the
consolidated financial statements exclude the Closed Block related amounts.
All significant intercompany accounts and transactions have been eliminated.
The accompanying interim consolidated financial statements reflect, in the
opinion of the Company's management, all adjustments necessary for a fair
presentation of the financial position and results of operations. The
results of operations for the six months ended June 30, 2000, 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
1999 Annual Report to Shareholders, as filed on Form 10-K with the
Securities and Exchange Commission.
2. New Accounting Pronouncements
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation - an interpretation of APB
Opinion No. 25" ("FIN44"). FIN 44 clarifies the application of APB Opinion
No. 25 regarding the definition of employee, the criteria for determining a
noncompensatory plan, the accounting for changes to the terms of a
previously fixed stock option or award, the accounting for an exchange of
stock compensation awards in a business combination, and other stock
compensation related issues. FIN 44 is effective July 1, 2000, but to the
extent that it covers certain events occurring during the period after
December 15, 1998, or January 12, 2000 but before the effective date of
July 1, 2000, the effects of applying the Interpretation are recognized on
a prospective basis from July 1, 2000. The Company does not expect the
application of FIN 44 to have a material impact on the Company's financial
position or results of operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("Statement No. 133"), which
establishes accounting and reporting standards for derivative instruments.
Statement No. 133 requires that an entity recognize all derivatives as
either assets or liabilities at fair value in the statement of financial
position, and establishes special accounting for the following three types
of hedges: fair value hedges, cash flow hedges, and hedges of foreign
currency exposures. In June 2000, the FASB issued Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments
and Hedging Activities - an amendment of FASB Statement No. 133 ("Statement
No. 138"), which further addresses the accounting for hedges and the
application of certain exceptions to Statement No. 133. These statements
are effective for fiscal years beginning after June 15, 2000. The Company is
currently assessing the impact of the adoption of Statement No. 133 and
Statement No. 138.
3. Discontinued Operations
During the second quarter of 1999, the Company approved a plan to exit its
group life and health insurance business, consisting of its Employee
Benefit Services ("EBS") business, its Affinity Group Underwriters ("AGU")
business and its accident and health assumed reinsurance pool business
("reinsurance pool business"). During the third quarter of 1998, the Company
ceased writing new premiums in the reinsurance pool business, subject to
certain contractual obligations. Prior to 1999, these businesses comprised
substantially all of the former Corporate Risk Management Services segment.
Accordingly, the operating results of the discontinued segment, including
its reinsurance pool business, have been reported in the Consolidated
Statements of Income as discontinued operations in accordance with
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB Opinion No. 30"). In the third quarter
Page 8
<PAGE>
of 1999, the operating results from the discontinued segment were adjusted
to reflect the recording of additional reserves related to accident claims
from prior years. The Company also recorded a $30.5 million loss, net of
taxes, on the disposal of this segment, including $23.0 million of after
tax losses generated after the June 30, 1999 measurement date.
In March of 2000, the Company transferred its EBS business to Great-West
Life and Annuity Insurance Company of Denver and received consideration of
approximately $22 million, based on renewal rights for existing policies.
Additional consideration may be received in 2001, based on premium in force
as of March, 2001. However, the Company retained policy liabilities
estimated at $193.6 million at June 30, 2000 related to this business.
As permitted by APB Opinion No. 30, the Consolidated Balance Sheets have not
been segregated between continuing and discontinued operations. At June 30,
2000, the discontinued segment had assets of approximately $534.4 million
consisting primarily of invested assets, premiums and fees receivable, and
reinsurance recoverables, and liabilities of approximately $470.8 million
consisting primarily of policy liabilities. Revenues for the discontinued
operations were $58.2 million and $89.7 million for the quarters ended June
30, 2000 and 1999, respectively, and $135.7 million and $187.1 million for
the six months ended June 30, 2000 and 1999, respectively.
4. Significant Transactions
As of June 30, 2000, the Company has repurchased approximately $377.9
million, or approximately 7.0 million shares, of its common stock under
programs authorized by the Board of Directors (the "Board"). As of June 30,
2000, the Board had authorized total stock repurchases of $500.0 million,
leaving approximately $122.1 million available to the Company for future
repurchases.
During the second quarter of 2000, the Company adopted a formal company-wide
restructuring plan. This plan is the result of a corporate initiative that
began in the fall of 1999, intended to reduce expenses and enhance revenues.
As a result of the Company's restructuring plan, it recognized a pre-tax
charge of $21.0 million for the quarter ended June 30, 2000 as reflected in
restructuring costs in the Consolidated Statements of Income. Approximately
$4.6 million of this charge relates to severance and other employee
related costs resulting from the elimination of approximately 360 positions,
of which 97 have been eliminated as of June 30, 2000. All levels of
employees, from staff to senior management, were affected by the
restructuring. In addition, approximately $16.4 million of this charge
relates to other restructuring costs, consisting of one-time project costs,
lease cancellations and the present value of idle leased space. As of
June 30, 2000, the Company has made payments of approximately $9.1 million
related to this restructuring plan, of which approximately $0.6 million
relates to severance and other employee related costs.
Effective January 1, 1999, the Company entered into a Whole Account
Aggregate Excess of Loss reinsurance agreement. The reinsurance agreement
provided accident year coverage for the three years 1999 to 2001 for the
Company's property and casualty business, and was subject to cancellation
or commutation annually at the Company's option. In accordance with the
provisions of this contract, the Company exercised its option to cancel
this contract effective January 1, 2000. The program covered losses and
allocated loss adjustment expenses ("LAE"), including those incurred but
not yet reported, in excess of a specified whole account loss and allocated
LAE ratio. The annual and aggregate coverage limits for losses and
allocated LAE are $150.0 million and $300.0 million, respectively. The
effect of this agreement on results of operations in each reporting period
is based on losses and allocated LAE ceded, reduced by a sliding scale
premium of 50-67.5% depending on the size of the loss, and increased by a
ceding commission of 20% of ceded premium. In addition, net investment
income is reduced for amounts credited to the reinsurer. As a result of
this agreement, the Company recognized a net (benefit) expense of $(3.0)
million and $16.9 million, for the quarter and six months ended June 30,
1999, and a net benefit of $15.9 million for the year ended December 31,
1999, based on annual estimates of losses and allocated loss adjustment
expenses for accident year 1999. No significant benefit or loss was
recognized in the first six months of 2000 related to accident year 1999.
The effect of this agreement on the results of operations in future periods
is not currently determinable, as it will be based both on future losses
and allocated LAE for accident year 1999.
On October 29, 1998, the Company announced that it had adopted a formal
restructuring plan for its Risk Management segment. As a result of this
restructuring initiative, the Company recognized a pre-tax loss of $9.0
million in 1998. This loss was reduced by $1.9 million and $0.7 million
during the fourth quarter of 1999 and the second quarter of 2000,
respectively. The $1.9 million reduction resulted from the reinstatement of
66 positions, whereas the $0.7 million reduction resulted from anticipated
idle lease space subsequently utilized. Payments of approximately $0.5
million, $4.8 million and $0.1 million have been made by the Company in
2000, 1999 and 1998, respectively.
Page 9
<PAGE>
5. Federal Income Taxes
Federal income tax expense for the six months ended June 30, 2000 and 1999,
has been computed using estimated effective tax rates. 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.
6. Other Comprehensive Income
The following table provides a reconciliation of gross unrealized (losses)
gains to the net balance shown in the Statements of Comprehensive Income:
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarter Ended Six Months Ended
June 30 June 30
(In millions) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Unrealized (losses) gains on securities:
Unrealized holding losses arising
during period (net of income tax
benefit of $17.9 million and $34.8
million for the quarters ended
June 30, 2000 and 1999 and $16.9
million and $61.0 million for the six
months ended June 30, 2000 and 1999) $(35.7) $(77.7) $(46.9) $(89.0)
Less: reclassification adjustment
for (losses) gains included in net
income (net of income tax (benefit) of
$(9.9) million and $(4.6) million for
the quarters ended June 30, 2000 and
1999 and $(22.9) million and $34.8
million for the six months ended June
30, 2000 and 1999) (21.4) (4.7) (58.5) 89.2
------- ------- ------ -------
Other comprehensive (loss) income $(14.3) $(73.0) $ 11.6 $(178.2)
======= ======= ====== =======
</TABLE>
Page 10
<PAGE>
7. Closed Block
Included in other income in the Consolidated Statements of Income is a net
pre-tax contribution from the Closed Block of $1.6 million and $4.8 million
for the second quarter and six months ended June 30, 2000, respectively,
compared to $2.5 million and $7.1 million for the second quarter and six
months ended June 30, 1999, respectively. Summarized financial information
of the Closed Block is as follows:
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
(In millions) 2000 1999
<S> <C> <C>
ASSETS
Fixed maturities-at fair value
(amortized cost of $391.4 and $387.4) $374.9 $372.9
Mortgage loans 150.4 136.3
Policy loans 196.4 201.1
Cash and cash equivalents 13.7 22.6
Accrued investment income 14.5 14.0
Deferred policy acquisition costs 11.8 13.1
Other assets 6.8 12.3
------- -------
Total assets $768.5 $772.3
======= =======
LIABILITIES
Policy liabilities and accruals $821.7 $835.2
Other liabilities 3.2 6.9
------- -------
Total liabilities $824.9 $842.1
======= =======
</TABLE>
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
(In millions) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 8.3 $ 8.4 $34.3 $35.6
Net investment income 13.8 13.5 27.0 26.6
Net realized investment (losses) gains (3.3) (0.3) (3.6) 0.5
------ ------ ------ -----
Total revenues 18.8 21.6 57.7 62.7
------ ------ ------ -----
BENEFITS AND EXPENSES
Policy benefits 16.9 18.9 51.7 54.4
Policy acquisition expenses 0.4 0.6 1.0 1.1
Other operating expenses (0.1) (0.4) 0.2 0.1
------ ------ ------ -----
Total benefits and expenses 17.2 19.1 52.9 55.6
------ ------ ------ -----
Contribution from the Closed Block $ 1.6 $ 2.5 $ 4.8 $ 7.1
====== ====== ====== =====
</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.
8. Segment Information
The Company offers financial products and services in two major areas: Risk
Management and Asset Accumulation. Within these broad areas, the Company
conducts business principally in three operating segments. These segments
are Risk Management, Allmerica Financial Services and Allmerica Asset
Management. The separate financial information of each segment is presented
consistent with the way results are regularly evaluated by the chief
operating decision maker in decidiing how to allocate resources and in
assessing performance. A summary of the Company's reportable segments is
included below.
The Risk Management Segment manages its products through three distribution
channels identified as Standard Markets, Sponsored Markets, and Specialty
Markets. Standard Markets consists of the aggregate operating results for
the three channels previously characterized as Hanover North, Hanover South
and Citizens Midwest. Maintaining a strong regional focus, Standard
Markets sells property and casualty insurance products through independent
agents and brokers primarily in the Northeast, Midwest and Southeast United
States. Sponsored Markets offers property and casualty products to members
of affinity groups and other organizations. This distribution channel also
focuses on worksite distribution, which offers
Page 11
<PAGE>
discounted property and casualty (automobile and homeowners) insurance
through employer sponsored programs. Specialty Markets offers specialty
or program property and casualty business nationwide. This channel focuses
on niche classes of risks and leverages specific underwriting processes.
During the second quarter of 1999, the Company approved a plan to exit its
group life and health business, consisting of its EBS business, its AGU
business and its reinsurance pool business. Results of operations from this
business, relating to both the current and the prior periods, have been
segregated and reported as a component of discontinued operations in the
Consolidated Statements of Income. Operating results from this business
were previously reported in the Sponsored Markets and Specialty Markets
distribution channels. Prior to 1999, results of the group life and health
business were included in the Corporate Risk Management Services segment,
while all other Risk Management business was reflected in the Property and
Casualty segment.
The Asset Accumulation group includes two segments: Allmerica Financial
Services and Allmerica Asset Management. The Allmerica Financial Services
segment includes variable annuities, variable universal life and traditional
life insurance products distributed via retail channels, as well as group
retirement products, such as defined benefit and 401(k) plans and tax-
sheltered annuities distributed to institutions. Through its Allmerica Asset
Management segment, the Company offers its customers the option of investing
in Guaranteed Investment Contracts ("GICs"), such as short term and long
term funding agreements. Short term funding agreements are investment
contracts issued to institutional buyers, such as money market funds,
corporate cash management programs and securities lending collateral
programs, which typically have short maturities and periodic interest rate
resets based on an index such as LIBOR. Long term funding agreements are
investment contracts issued to various businesses or charitable trusts,
which are used to support debt issued by the trust to foreign and domestic
institutional buyers, such as banks, insurance companies, and pension
plans. These funding agreements have long maturities and may be issued with
a fixed or variable interest rate based on an index such as LIBOR. This
segment is also a Registered Investment Advisor providing investment
advisory services, primarily to affiliates and to third parties, such as
money market and other fixed income clients. Income in the Allmerica Asset
Management segment is generated by interest margins earned on the Company's
GICs, as well as investment advisory fees earned on assets under management.
In addition to the three operating segments, the Company has a Corporate
segment, which consists primarily of cash, investments, corporate debt,
Capital Securities and corporate overhead expenses. Corporate overhead
expenses reflect costs not attributable to a particular segment, such as
those generated by certain officers and directors, technology, finance,
human resources and legal.
Management evaluates the results of the aforementioned segments based on a
pre-tax and minority interest basis. Segment income is determined by
adjusting net income for net realized investment gains and losses, net gains
and losses on disposals of businesses, discontinued operations,
extraordinary items, the cumulative effect of accounting changes and certain
other items which management believes are not indicative of overall
operating trends. While these items may be significant components in
understanding and assessing the Company's financial performance, management
believes that the presentation of segment income, which excludes these
items, enhances understanding of the Company's results of operations by
highlighting net income attributable to the normal, recurring operations of
the business. However, segment income should not be construed as a
substitute for net income determined in accordance with generally accepted
accounting principles.
Page 12
<PAGE>
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) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Segment revenues:
Risk Management $579.4 $554.5 $1,136.9 $1,075.8
------ ------ -------- --------
Asset Accumulation:
Allmerica Financial Services 212.2 193.9 440.5 398.6
Allmerica Asset Management 34.9 40.5 64.2 74.8
------ ------ -------- --------
Subtotal 247.1 234.4 504.7 473.4
------ ------ -------- --------
Corporate 1.7 2.4 2.7 3.6
Intersegment revenues (1.5) (1.9) (2.6) (2.5)
------ ------ -------- --------
Total segment revenues including
Closed Block 826.7 789.4 1,641.7 1,550.3
Adjustments to segment revenues:
Adjustment for Closed Block (20.5) (19.1) (56.5) (55.6)
Net realized (losses) gains (20.4) (5.5) (67.2) 126.3
------ ------ -------- --------
Total revenues $785.8 $764.8 $1,518.0 $1,621.0
====== ====== ======== ========
Segment income (loss) before federal
income taxes and minority interest:
Risk Management $ 53.9 $ 55.3 $ 97.0 $ 85.1
------ ------ -------- --------
Asset Accumulation:
Allmerica Financial Services 55.5 47.7 109.9 96.6
Allmerica Asset Management 4.6 6.8 9.7 12.5
------ ------ -------- --------
Subtotal 60.1 54.5 119.6 109.1
------ ------ -------- --------
Corporate (12.2) (13.5) (26.7) (29.5)
------ ------ -------- --------
Segment income before federal income
taxes and minority interest 101.8 96.3 189.9 164.7
Adjustments to segment income:
Net realized investment (losses) gains,
net of amortization (21.5) (3.5) (67.9) 130.6
Restructuring costs (20.3) 0.0 (20.3) 0.0
------ ------ -------- --------
Income from continuing operations
before federal income taxes and
minority interest $ 60.0 $ 92.8 $ 101.7 $ 295.3
====== ====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Identifiable Assets Deferred Acquisition
Costs
(Unaudited) (Unaudited)
June 30, December 31, June 30, December 31,
(In millions) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Risk Management $ 5,897.1 $ 5,869.0 $ 183.5 $ 173.3
--------- --------- -------- ---------
Asset Accumulation
Allmerica Financial
Services 24,147.8 23,435.7 1,322.1 1,213.1
Allmerica Asset
Management 1,915.3 1,387.6 0.3 0.4
--------- --------- -------- ---------
Subtotal 26,063.1 24,823.3 1,322.4 1,213.5
Corporate 128.4 77.3 0.0 0.0
--------- --------- -------- ---------
Total $32,088.6 $30,769.6 $1,505.9 $1,386.8
========= ========= ======== =========
</TABLE>
Page 13
<PAGE>
9. Earnings Per Share
The following table provides share information used in the calculation of
the Company's basic and diluted earnings per share:
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
(In millions, except per share data) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Basic shares used in the calculation of
earnings per share 53.4 54.5 53.7 55.9
Dilutive effect of securities:
Employee stock options 0.4 0.4 0.3 0.3
Non-vested stock grants 0.3 0.2 0.2 0.2
------ ------ ------- -------
Diluted shares used in the calculation
of earnings per share 54.1 55.1 54.2 56.4
====== ====== ======= =======
Per share effect of dilutive securities
on income from continuing operations
and net income $ 0.01 $ 0.01 $ 0.02 $ 0.03
====== ====== ====== ======
</TABLE>
10. Commitments and Contingencies
Litigation
In 1997, a lawsuit on behalf of a putative class was instituted against the
Company alleging fraud, unfair or deceptive acts, breach of contract,
misrepresentation, and related claims in the sale of life insurance
policies. In November 1998, the Company and the plaintiffs entered into a
settlement agreement and in May 1999, the Federal District Court in
Worcester, Massachusetts approved the settlement agreement and certified the
class for this purpose. AFC recognized a $31.0 million pre-tax expense in
1998 related to this litigation. Although the Company believes that this
expense reflects appropriate recognition of its obligation under the
settlement, this estimate assumes the availability of insurance coverage for
certain claims, and the estimate may be revised based on the amount of
reimbursement actually tendered by AFC's insurance carriers, and based on
changes in the Company's estimate of the ultimate cost of the benefits to be
provided to members of the class.
The Company has been named a defendant in various other legal proceedings
arising in the normal course of business. In the Company's opinion, based
on the advice of legal counsel, the ultimate resolution of these
proceedings will not have a material effect on the Company's consolidated
financial statements. However, liabilities related to these proceedings
could be established in the near term if estimates of the ultimate
resolution of these proceedings are revised.
Page 14
<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 and the Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the 1999 Annual Report to
Shareholders, as filed on Form 10-K with the Securities and Exchange
Commission.
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 Asset Management, Inc. ("AAM," a wholly-owned non-
insurance subsidiary of AFC); Allmerica Property & Casualty Companies, Inc.
("Allmerica P&C," a wholly-owned non-insurance subsidiary of AAM); The
Hanover Insurance Company ("Hanover," a wholly-owned subsidiary of Allmerica
P&C); Citizens Corporation (a wholly-owned non-insurance subsidiary of
Hanover); Citizens Insurance Company of America ("Citizens," a wholly-owned
subsidiary of Citizens Corporation) and certain other insurance
and non-insurance subsidiaries.
Description of Operating Segments
The Company offers financial products and services in two major areas: Risk
Management and Asset Accumulation. Within these broad areas, the Company
conducts business principally in three operating segments. These segments
are Risk Management, Allmerica Financial Services, and Allmerica Asset
Management. The separate financial information of each segment is presented
consistent with the way results are regularly evaluated by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. A summary of the Company's reportable segments is
included below.
The Risk Management Segment manages its products through three distribution
channels identified as Standard Markets, Sponsored Markets, and Specialty
Markets. Standard Markets consists of the aggregate operating results for
the three channels previously characterized as Hanover North, Hanover South
and Citizens Midwest. Maintaining a strong regional focus, Standard Markets
sells property and casualty insurance products through independent agents
and brokers primarily in the Northeast, Midwest and Southeast United States.
Sponsored Markets offers property and casualty products to members of
affinity groups and other organizations. This distribution channel also
focuses on worksite distribution, which offers discounted property and
casualty (automobile and homeowners) insurance through employer sponsored
programs. Specialty Markets offers specialty or program property and
casualty business nationwide. This channel focuses on niche classes of
risks and leverages specific underwriting processes.
The Asset Accumulation group includes two segments: Allmerica Financial
Services and Allmerica Asset Management. The Allmerica Financial Services
segment includes variable annuities, variable universal life and traditional
life insurance products distributed via retail channels, as well as group
retirement products, such as defined benefit and 401(k) plans and tax-
sheltered annuities distributed to institutions. Through its Allmerica
Asset Management segment, the Company offers its customers the option of
investing in Guaranteed Investment Contracts ("GICs"), such as short term
and long term funding agreements. Short term funding agreements are
investment contracts issued to institutional buyers, such as money market
funds, corporate cash management programs and securities lending collateral
programs, which typically have short maturities and periodic interest rate
resets based on an index such as LIBOR. Long term funding agreements are
investment contracts issued to various business or charitable trusts, which
are used to support debt issued by the trust to foreign and domestic
institutional buyers, such as banks, insurance companies, and pension plans.
These funding agreements have long maturities and may be issued with a fixed
or variable interest rate based on an index such as LIBOR. This segment is
also a Registered Investment Advisor providing investment advisory services,
primarily to affiliates and to third parties, such as money market and other
fixed income clients.
In addition to the three operating segments, the Company has a Corporate
segment, which consists primarily of cash, investments, corporate debt,
Capital Securities and corporate overhead expenses. Corporate overhead
expenses reflect costs not attributable to a particular segment, such as
those generated by certain officers and directors, technology, finance,
human resources and legal.
Page 15
<PAGE>
Results of Operations
Consolidated Overview
The Company's consolidated net income for the second quarter decreased $12.6
million, or 20.9%, to $47.6 million, compared to the same period in 1999.
The reduction in net income in the second quarter resulted primarily from
$13.2 million of restructuring costs. Consolidated net income for the first
six months decreased $136.5 million, or 63.7%, to $77.8 million, compared to
$214.3 million for the first six months of 1999. The reduction in net
income resulted primarily from net realized investment losses, net of taxes,
of $49.9 million during the first six months of 2000, compared to net
realized investment gains, net of taxes, of $93.3 million during the first
six months of 1999. Net income includes certain items which management
believes are not indicative of overall operating trends, such as net
realized investment gains and losses, net gains and losses on disposals of
businesses, discontinued operations, extraordinary items, the cumulative
effect of accounting changes and certain other items. While these items may
be significant components in understanding and assessing the Company's
financial performance, management believes that the presentation of "Adjusted
Net Income", which excludes these items, enhances understanding of the
Company's results of operations by highlighting net income attributable to
the normal, recurring operations of the business. However, adjusted net
income should not be construed as a substitute for net income determined in
accordance with generally accepted accounting principles.
For purposes of assessing each segment's contribution to adjusted net income,
management evaluates the results of these segments on a pre-tax and minority
interest basis. The following table reflects each segment's contribution to
adjusted net income and reconciliation to consolidated net income as adjusted
for these items.
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
(In millions) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Segment income (loss) before federal
income taxes and minority interest:
Risk Management $ 53.9 $ 55.3 $ 97.0 $ 85.1
------- ------- ------- -------
Asset Accumulation
Allmerica Financial Services 55.5 47.7 109.9 96.6
Allmerica Asset Management 4.6 6.8 9.7 12.5
------- ------- ------- -------
Subtotal 60.1 54.5 119.6 109.1
Corporate (12.2) (13.5) (26.7) (29.5)
------- ------- ------- -------
Segment income before federal income
taxes and minority interest 101.8 96.3 189.9 164.7
Federal income taxes on segment income (23.3) (19.3) (41.0) (32.4)
Minority interest on preferred dividends (4.0) (4.0) (8.0) (8.0)
------- ------- ------- -------
Adjusted net income 74.5 73.0 140.9 124.3
Adjustments (net of taxes, minority
interest and amortization, as
applicable):
Net realized investment (losses) gains (13.7) (6.2) (49.9) 93.3
Restructuring costs (13.2) 0.0 (13.2) 0.0
------- ------- ------- -------
Income from continuing operations 47.6 66.8 77.8 217.6
Discontinued operations:
Loss from operations of discontinued
group life and health business (net
of applicable taxes) 0.0 (6.6) 0.0 (3.3)
------- ------- ------- -------
Net income $ 47.6 $ 60.2 $ 77.8 $214.3
======= ======= ======= =======
</TABLE>
Page 16
<PAGE>
Quarter Ended June 30, 2000 Compared to Quarter Ended June 30, 1999
The Company's segment income before taxes and minority interest increased
$5.5 million, or 5.7%, to $101.8 million in the second quarter of 2000.
This increase is attributable to increased income from the Asset Accumulation
group of $5.6 million and a decreased loss of $1.3 million in the Corporate
segment, partially offset by decreased income of $1.4 million from the Risk
Management segment. Allmerica Financial Services' segment income increased
$7.8 million, principally due to higher asset-based fee income driven by
additional deposits and market appreciation in the variable product lines,
partially offset by higher policy acquisition and other operating expenses.
The operating loss in the Corporate segment decreased primarily due to lower
corporate overhead costs, partially offset by a reduction in net investment
income. These items were partially offset by a decrease in the Allmerica
Asset Management segment income of $2.2 million principally due to decreased
earnings on GICs resulting from short-term funding agreement withdrawals
during the fourth quarter of 1999 and a shift to lower yielding long-term
funding agreements in 2000. In addition, the decrease in the Risk
Management segment was primarily attributable to increased catastrophe
losses of $8.6 million, partially offset by a decrease in other operating
expenses of $6.3 million.
The effective tax rate for segment income was 22.9% for the second quarter
of 2000 compared to 20.2% for the second quarter of 1999. The increase in
the tax rate was driven, in part, by a decrease in tax-exempt investment
income.
Net realized losses on investments, after taxes, were $13.7 million in the
second quarter of 2000, resulting primarily from $10.4 million in after tax
realized losses due to impairments of fixed maturities. In addition, the
Company recognized losses of approximately $6.0 million on sales of $407.0
million of fixed maturities. During the second quarter of 1999, net realized
losses on investments after taxes of $6.2 million resulted primarily from
net realized losses of $7.4 million on sales of fixed maturities.
During the second quarter of 2000, the Company recognized a one-time
after-tax restructuring charge of $13.2 million. This charge is the result
of a formal company-wide restructuring plan, intended to reduce expenses and
enhance revenues.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
The Company's segment income before taxes and minority interest increased
$25.2 million, or 15.3%, to $189.9 million in the first six months of 2000.
This increase is attributable to increased income of $11.9 million from the
Risk Management segment, $10.5 million from the Asset Accumulation group and
a decreased loss of $2.8 million in the Corporate segment. The increase in
the Allmerica Financial Services segment of $13.3 million is primarily
attributable to higher asset-based fee income driven by additional deposits
and market appreciation in the variable product lines, partially offset by
higher policy acquisition and other operating expenses. Included in Risk
Management's 1999 segment income is a net benefit of $16.9 million related
to the aggregate excess of loss reinsurance treaty. Excluding the impact
from this treaty, Risk Management segment income increased $28.8 million,
primarily attributable to a $19.9 million decrease in catastrophe losses, as
well as decreased operating expenses of $4.7 million. The operating loss
in the Corporate segment decreased primarily due to lower corporate overhead
costs, partially offset by a reduction in net investment income. These
items were partially offset by a decrease in the Allmerica Asset Management
segment of $2.8 million principally due to decreased earnings on GICs. This
decline resulted from short-term funding agreement withdrawals during the
fourth quarter of 1999 and a shift to lower yielding long-term funding
agreements in 2000.
The effective tax rate for segment income was 21.6% for the first six months
of 2000 compared to 19.7% for the first six months of 1999. The increase in
the tax rate was, in part, driven by a decrease in tax-exempt investment
income.
Net realized losses on investments after taxes were $49.9 million in the
first six months of 2000, primarily attributable to after tax net realized
losses of $38.1 million resulting from the sale of $1,052.2 million of
fixed income securities. In addition, the Company recognized $14.7 million
in after tax realized losses due to impairments of fixed maturities. During
the first six months of 1999, net realized gains on investments after taxes
of $93.3 million resulted primarily from net realized gains on equity
securities and partnership investments of $99.1 million and $4.1 million,
respectively, partially offset by $16.4 million of after-tax realized losses
from impairments recognized on fixed maturities.
Segment Results
The following is management's discussion and analysis of the Company's
results of operations by business segment. The segment results are
presented before taxes and minority interest and other items which
management believes are not indicative of overall operating trends,
including realized gains and losses.
Page 17
<PAGE>
Risk Management
The following table summarizes the results of operations for the Risk
Management segment:
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
(In millions) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Segment revenues
Net premiums earned $519.6 $494.6 $1,016.6 $ 952.2
Net investment income 54.4 55.1 109.6 113.5
Other income 5.4 4.8 10.7 10.1
------- ------- --------- ---------
Total segment revenues 579.4 554.5 1,136.9 1,075.8
Losses and operating expenses
Policy benefits, claims, losses and
loss adjustment expenses <FN1> 383.6 351.8 759.3 705.5
Policy acquisition expenses 93.9 93.1 186.0 181.6
Other operating expenses 48.0 54.3 94.6 103.6
------- ------- --------- ---------
Total losses and operating expenses 525.5 499.2 1,039.9 990.7
------- ------- --------- ---------
Segment income $ 53.9 $ 55.3 $ 97.0 $ 85.1
======= ======= ========= =========
<FN>
<FN1>
Includes policyholders' dividends of $3.7 million and $1.9 million for the
quarters ended June 30, 2000 and 1999, respectively, and $6.4 million and
$6.1 million for the six months ended June 30, 2000 and 1999, respectively.
</FN>
</TABLE>
Quarter Ended June 30, 2000 Compared to Quarter Ended June 30, 1999
Premium
Risk Management's net premiums earned increased $25.0 million, or 5.1%, to
$519.6 million during the quarter ended June 30, 2000. This is primarily
attributable to increases of $7.8 million, or 3.5%, $7.2 million, or 15.2%,
$7.2 million, or 14.6% and $4.1 million, or 5.8%, in the personal automobile,
commercial automobile, workers' compensation and commercial multiple peril
lines, respectively. The increase in personal automobile net premiums earned
is primarily the result of a 2.8% increase in policies in force since
June 30,1999. The increase in the commercial automobile line is the result
of a 7.9% rate increase over prior year and an increase of 1.8% in policies
in force since June 30, 1999. In addition, workers' compensation rates
increased 7.3% over prior year and policies in force increased 2.8% since
June 30, 1999. The increase in the commercial multiple peril line is
primarily the result of an increase of 3.0% in policies in force since
June 30, 1999 and a 2.1% rate increase over prior year.
Segment Income
Risk Management's segment income deteriorated $1.4 million, or 2.5%, to
$53.9 million for the quarter ended June 30, 2000. The deterioration in
segment income is primarily attributable to an $8.6 million increase in
catastrophe losses to $17.8 million for the second quarter of 2000,
resulting from windstorms in the Midwest. Partially offsetting the
increased catastrophe losses, other operating expenses decreased $6.3
million, or 11.6%. This decrease is primarily the result of continued
efficiencies gained through consolidation of underwriting processes. Second
quarter 2000 results also reflect a decrease in favorable development on
prior years' loss reserves, primarily in the personal lines, offset by
improved current year claims activity in the commercial lines.
The following table summarizes the results of operations for the
distribution channels of the Risk Management segment. Operating results for
the distribution channels represent statutory underwriting profit (loss).
Statutory underwriting results differ from GAAP underwriting results
primarily due to the deferral and amortization of certain expenses. Segment
income represents the aggregate of statutory underwriting results, GAAP net
investment income, other income and expenses, and other statutory to
GAAP adjustments.
Page 18
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
Quarter Ended June 30, 2000
Standard Sponsored Specialty
(In millions) Markets Markets Markets Other Total
<S> <C> <C> <C> <C> <C>
Statutory underwriting
(loss) profit $ (14.5) $ 0.4 $ 1.5 $ (0.8) $ (13.4)
-----------------------------------------
Reconciliation to segment
income:
Net investment income 54.4
Other income and
expenses, net 2.8
Other Statutory to GAAP
adjustments 10.1
--------
Segment income $ 53.9
========
Statutory net premiums
written $ 393.0 $ 151.1 $ 11.9 $ 2.4 $ 558.4
-------------------------------------------------
Statutory combined ratio
<FN1> 101.5 98.5 79.5 N/M 100.4
-------------------------------------------------
<FN>
<FN1>
Statutory combined ratio is a common industry measurement of the results of
property and casualty insurance underwriting. This ratio is the sum of the
ratio of incurred claims and claim expenses to premiums earned and the ratio
of underwriting expenses incurred to premiums written. Federal income taxes,
net investment income and other non-underwriting expenses are not reflected
in the statutory combined ratio.
</FN>
</TABLE>
N/M - Not meaningful
<TABLE>
<CAPTION>
(Unaudited)
Quarter Ended June 30, 1999
Standard Sponsored Specialty
(In millions) Markets Markets Markets Other Total
<S> <C> <C> <C> <C> <C>
Statutory underwriting
(loss) $ (1.2) $ (2.5) $ 0.0 $ 0.0 $ (3.7)
-----------------------------------------
Reconciliation to segment
income:
Net investment income 55.1
Other income and
expenses, net 1.4
Other Statutory to GAAP
adjustments 2.5
--------
Segment income $ 55.3
========
Statutory net premiums
written $ 355.9 $ 138.4 $ 10.0 $ (0.1) $ 504.2
-------------------------------------------------
Statutory combined ratio
<FN1> 100.1 100.1 106.4 N/M 100.1
-------------------------------------------------
<FN>
<FN1>
Statutory combined ratio is a common industry measurement of the results of
property and casualty insurance underwriting. This ratio is the sum of the
ratio of incurred claims and claim expenses to premiums earned and the ratio
of underwriting expenses incurred to premiums written. Federal income taxes,
net investment income and other non-underwriting expenses are not reflected
in the statutory combined ratio.
</FN>
</TABLE>
N/M - Not meaningful
Standard Markets
Standard Markets' net premiums written increased $37.1 million, or 10.4%,
to $393.0 million for the quarter ended June 30, 2000. This improvement is
primarily attributable to increases of $11.0 million, or 9.6%, $10.1 million,
or 20.6%, $9.9 million, or 14.3%, and $6.0 million, or 12.6%, in the personal
automobile, commercial automobile, commercial multiple peril, and workers'
compensation lines, respectively. The increase in the personal automobile
line is primarily the result of a 7.5% increase in policies in force in the
Northeast since June 30, 1999 and a 1.0% rate increase in Massachusetts.
These favorable items are partially offset by an 8.8% decrease in policies
in force in the Midwest over prior year. The increase in commercial
automobile net premiums written is primarily the result of rate increases
of 9.4% and 2.0% in Michigan and Massachusetts, respectively. Commercial
multiple peril net premiums written increased primarily due to rate increases
of 13.5% and 12.4% in Michigan and New York, respectively, and a 2.6%
increase in policies in force since June 30, 1999. In addition, rate
increases of 14.8% and 9.4% in the states of Maine and Michigan,
respectively, contributed to increased workers' compensation net premiums
written for the quarter ended June 30, 2000. Also, workers' compensation
policies in force increased 2.6% since June 30, 1999.
Page 19
<PAGE>
Standard Markets' underwriting results deteriorated $13.3 million to an
underwriting loss of $14.5 million for the quarter ended June 30, 2000
compared to the same period in 1999. This is primarily attributable to a
decrease in favorable development on prior years' loss reserves in the
personal automobile, workers compensation, and homeowners lines. An
increase in current year claims frequency in the personal automobile line
also contributed to the deterioration in underwriting results. In
addition, as a result of windstorms in the Midwest, catastrophe losses
increased $3.6 million to $8.1 million for the second quarter of 2000,
compared to $4.5 million for the same period in 1999. Partially offsetting
these unfavorable items are an increase in favorable development on prior
years' loss reserves in the commercial multiple peril line and a decrease
in underwriting expenses over the same period in 1999.
Sponsored Markets
Sponsored Markets' net premiums written increased $12.7 million, or 9.2%, to
$151.1 million for the quarter ended June 30, 2000. This increase is
primarily attributable to a $9.3 million, or 8.8%, increase in the personal
automobile line primarily resulting from an increase of 4.1% in policies in
force over the same period in 1999 and the aforementioned Massachusetts rate
increase. In addition, homeowners' net premiums written increased $3.5
million, or 11.9%, primarily attributable to a 4.8% rate increase in
Michigan and a 4.0% increase in policies in force since June 30, 1999.
Sponsored Markets' underwriting results improved $2.9 million to an
underwriting profit of $0.4 million for the quarter ended June 30, 2000.
The improvement in underwriting results is primarily attributable to an
improvement in current year claims frequency in the homeowners line. In
addition, underwriting expenses decreased $3.2 million for the second
quarter of 2000. Partially offsetting these favorable items is a $5.0
million increase in catastrophes to $9.7 million in the second quarter of
2000, compared to $4.7 million for the same period in 1999.
Specialty Markets
Specialty Markets' net premiums written increased $1.9 million, or 19.0%,
to $11.9 million for the quarter ended June 30, 2000. This increase is
primarily attributable to an increase in policies in force, partially
offset by greater utilization of reinsurance. The Company continually
assesses the profitability of each individual program and seeks to exit
programs that do not meet established Company underwriting guidelines.
Specialty Markets' underwriting results improved $1.5 million to an
underwriting profit of $1.5 million for the quarter ended June 30, 2000.
The improvement in underwriting results is primarily the result of a
decrease in underwriting and loss adjustment expenses compared to the same
period in 1999.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Premium
Risk Management's net premiums earned increased $64.4 million, or 6.8%, to
$1,016.6 million for the six months ended June 30, 2000. The 1999 results
reflected ceded premiums of $21.9 million under the aggregate excess of loss
reinsurance treaty. Excluding the impact of this treaty, net premiums earned
increased $42.5 million, or 4.4%. This is primarily attributable to increases
of $13.0 million, or 13.7%, $10.7 million, or 11.3%, and $7.6 million, or
5.4%, in the workers' compensation, commercial automobile, and commercial
multiple peril lines, respectively. The increase in the workers' compensation
line is the result of the aforementioned 14.8% and 9.4% rate increases over
prior year in the states of Maine and Michigan, respectively, and an increase
of 2.8% in policies in force since June 30, 1999. The increase in commercial
automobile net premiums earned is primarily the result of a 7.9% rate
increase since June 30, 1999. The increase in the commercial multiple peril
line is primarily the result of a 6.9% rate increase over prior year and a
3.0% increase in policies in force since June 30, 1999. Personal
automobile net premiums earned increased as well, by $6.5 million, or 1.5%,
attributable to a 7.5% increase in policies in force in the Northeast since
June 30, 1999 and a 1.0% Massachusetts rate increase, partially offset by a
7.3% rate decrease in Michigan. In addition, homeowners' earned premium
increased $4.6 million, or 3.6%, resulting primarily from a 4.8% rate
increase in Michigan since June 30, 1999.
Segment Income
Risk Management's segment income increased $11.9 million, or 14.0%, to $97.0
million for the six months ended June 30, 2000. A net benefit of $16.9
million is included in 1999 segment income as a result of the aggregate
excess of loss reinsurance treaty. Excluding the impact from this treaty,
the total improvement of $28.8 million in segment income is primarily
attributable to a $19.9 million decrease in catastrophe losses to $33.0
million for the six months ended June 30, 2000, compared to $52.9 million
for the same period in 1999. In addition, other operating expenses decreased
$4.7 million, excluding a $4.3 million favorable impact in 1999 from the
aforementioned aggregate excess of loss treaty. This decrease is primarily
the result of continued efficiencies gained through consolidation of
underwriting processes. Also, improvement in
Page 20
<PAGE>
current year claims frequency and an increase in favorable development on
prior years' loss reserves in the commercial multiple peril line contributed
to the improvement in segment income over prior year. Partially offsetting
these favorable items are a decrease in favorable development on prior
years' loss reserves in the personal lines and a $3.9 million decrease in
net investment income to $109.6 million, primarily due to a decrease in
average invested assets.
The following table summarizes the results of operations for the
distribution channels of the Risk Management segment. Operating results
for the distribution channels represent statutory underwriting profit (loss).
Statutory underwriting results differ from GAAP underwriting results
primarily due to the deferral and amortization of certain expenses.
Segment income represents the aggregate of statutory underwriting results,
GAAP net investment income, other income and expenses, and other statutory
to GAAP adjustments.
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended June 30, 2000
Standard Sponsored Specialty
(In millions) Markets Markets Markets Other Total
<S> <C> <C> <C> <C> <C>
Statutory underwriting
(loss) profit $ (32.8) $ 2.4 $ 0.2 $ (3.2) $ (33.4)
-----------------------------------------
Reconciliation to segment
income:
Net investment income 109.6
Other income and
expenses, net 5.4
Other Statutory to GAAP
adjustments 15.4
---------
Segment income $ 97.0
=========
Statutory net premiums
written $ 762.2 $ 302.7 $ 18.3 $ 2.7 $1,085.9
-------------------------------------------------
Statutory combined ratio
<FN1> 102.6 97.7 95.6 N/M 101.4
-------------------------------------------------
<FN>
<FN1>
Statutory combined ratio is a common industry measurement of the results of
property and casualty insurance underwriting. This ratio is the sum of the
ratio of incurred claims and claim expenses to premiums earned and the ratio
of underwriting expenses incurred to premiums written. Federal income taxes,
net investment income and other non-underwriting expenses are not reflected
in the statutory combined ratio.
</FN>
</TABLE>
N/M - Not meaningful
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended June 30, 1999
Standard Sponsored Specialty
(In millions) Markets Markets Markets Other Total
<S> <C> <C> <C> <C> <C>
Statutory underwriting
(loss) $ (23.9) $ (7.6) $ (0.1) $ (1.1) $ (32.7)
-----------------------------------------
Reconciliation to segment
income:
Net investment income 113.5
Other income and
expenses, net 3.3
Other Statutory to GAAP
adjustments 1.0
---------
Segment income $ 85.1
=========
Statutory net premiums
written $ 694.0 $ 266.1 $ 21.4 $ 0.3 $ 981.8
-------------------------------------------------
Statutory combined ratio
<FN1> 102.6 101.5 107.5 N/M 102.5
-------------------------------------------------
<FN>
<FN1>
Statutory combined ratio is a common industry measurement of the results of
property and casualty insurance underwriting. This ratio is the sum of the
ratio of incurred claims and claim expenses to premiums earned and the ratio
of underwriting expenses incurred to premiums written. Federal income taxes,
net investment income and other non-underwriting expenses are not reflected
in the statutory combined ratio.
</FN>
</TABLE>
N/M - Not meaningful
Standard Markets
Standard Markets' net premiums written increased $68.2 million, or 9.8%, to
$762.2 million for the six months ended June 30, 2000. The 1999 results
reflected ceded premiums of $9.3 million under the aforementioned aggregate
excess of loss agreement. Excluding the impact from this treaty, net
premiums written increased $58.9 million, or 8.4%, resulting from increases
of $15.9 million, or 16.6%, $15.0 million, or 10.8%, $11.7 million, or 4.8%,
and $10.2 million, or 10.4%, in the commercial automobile, commercial
multiple peril, personal automobile, and workers' compensation lines,
respectively. The increase in the commercial automobile line is primarily
the result of rate increases of 9.4% and 2.0% in the states of Michigan and
Massachusetts, respectively, since June 30, 1999. In addition, the
commercial multiple peril line experienced a
Page 21
<PAGE>
10.9% rate increase in Michigan over prior year and policies in force
increased 2.6% since June 30, 1999. Increases in rate and policies in force
of 7.3% and 2.0%, respectively, over prior year contributed to increased
workers' compensation net premiums written for the six months ended June 30,
2000. Also, net premiums written increased $11.7 million, or 4.8%, for the
six months ended June 30, 2000 in the personal automobile lines. The
increase in the personal automobile line is primarily the result of a 1.0%
rate increase in Massachusetts over the same period in 1999 and a 1.5%
policies in force increase since June 30, 1999.
Standard Markets' underwriting results deteriorated $8.9 million, or 37.2%,
to an underwriting loss of $32.8 million for the six months ended
June 30, 2000. A net benefit of $7.5 million is included in 1999
underwriting results relating to the aggregate excess of loss reinsurance
treaty. Excluding the impact from this treaty, the total deterioration of
$1.4 million in underwriting results is primarily attributable to a
decrease in favorable development on prior years' loss reserves in the
personal automobile line, partially offset by improved current year claims
frequency in the commercial multiple peril line. In addition, catastrophe
losses decreased $6.2 million to $22.8 million for the six months ended
June 30, 2000, compared to $29.0 million for the same period in 1999.
Sponsored Markets
Sponsored Markets' net premiums written increased $36.6 million, or 13.8%,
to $302.7 million for the six months ended June 30, 2000. The 1999 results
reflected ceded premiums of $12.6 million under the aforementioned aggregate
excess of loss agreement. Excluding the impact of this treaty, net premiums
written increased $24.0 million, or 8.6%, primarily attributable to a $17.3
million, or 7.6%, increase in the personal automobile line. This is
primarily the result of a 4.1% increase in policies in force over the same
period in 1999 and the aforementioned 1.0% rate increase in Massachusetts.
In addition, homeowners' net premiums written increased $5.0 million, or
10.2%, primarily attributable to the aforementioned 4.8% rate
increase in Michigan and a 4.0% increase in policies in force.
Sponsored Markets' underwriting results improved $10.0 million to an
underwriting profit of $2.4 million for the six months ended June 30, 2000.
A net benefit of $9.9 million is included in 1999 underwriting results as a
result of the aggregate excess of loss reinsurance treaty. Excluding the
impact from this treaty, the total improvement of $19.9 million in
underwriting results is primarily attributable to an $13.7 million decrease
in catastrophe losses to $10.2 million for the six months ended June 30,
2000,compared to $23.9 million for the same period in 1999. In addition,
improved current year claims frequency in the personal automobile line and
decreased underwriting expenses contributed to the improvement in
underwriting results. Partially offsetting these favorable items is a
decrease in favorable development on prior years' loss reserves in the
homeowners line.
Specialty Markets
Specialty Markets' net premiums written decreased $3.1 million, or 14.5%,
to $18.3 million for the six months ended June 30, 2000. This decrease is
primarily attributable to an increase in ceded premiums written as a result
of greater utilization of reinsurance. The Company continually assesses
the profitability of each individual program and seeks to exit programs that
do not meet established Company underwriting guidelines.
Specialty Markets' underwriting results improved $0.3 million to an
underwriting profit of $0.2 million for the six months ended June 30, 2000.
The improvement in underwriting results is primarily the result of a
decrease in current year claims activity in a specialty commercial
automobile line.
Investment Results
Net investment income before tax was $109.6 million and $113.5 million for
the six months ended June 30, 2000 and 1999, respectively. This primarily
reflects a reduction in average invested assets of $244.7 million, or 6.3%,
to $3,655.8 million in 2000, compared to $3,900.5 million in 1999. This
reduction in average invested assets is due to transfers of cash and
securities of $108.0 million and $350.0 million to the corporate segment
during the second quarter of 2000 and 1999. Average pre-tax yields on debt
securities remained constant at 6.7% in 2000 and 1999.
Reserve for Losses and Loss Adjustment Expenses
The Risk Management segment maintains reserves for its property & casualty
products to provide for the Company's ultimate liability for losses and loss
adjustment expenses ("LAE") with respect to reported and unreported claims
incurred as of the end of each accounting period. These reserves are
estimates, involving actuarial projections at a given point in time, of
what management expects the ultimate settlement and administration of claims
will cost based on facts and circumstances then known, predictions of future
events, estimates of future trends in claim severity and judicial theories
of liability and other factors. The inherent uncertainty of estimating
insurance reserves is greater for certain types of property and casualty
insurance lines, particularly workers' compensation and other liability
lines, where a longer period of time may elapse before a definitive
determination of ultimate liability may be made, and where the technological,
judicial and political climates involving these types of claims are changing.
Page 22
<PAGE>
The Company 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 period 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>
(Unaudited)
Six Months Ended
June 30,
(In millions) 2000 1999
<S> <C> <C>
Reserve for losses and LAE, beginning of period $ 2,615.9 $ 2,597.3
Incurred losses and LAE, net of reinsurance
recoverable:
Provision for insured events of current year 821.5 795.6
Decrease in provision for insured events
of prior years (69.6) (96.1)
---------- ----------
Total incurred losses and LAE 751.9 699.5
---------- ----------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events
of current year 341.8 342.1
Losses and LAE attributable to insured events
of prior years 421.8 424.2
---------- ----------
Total payments 763.6 766.3
---------- ----------
Change in reinsurance recoverable on unpaid
losses 18.0 44.3
---------- ----------
Reserve for losses and LAE, end of period $ 2,622.2 $ 2,574.8
========== ==========
</TABLE>
As part of an ongoing process, the reserves have been re-estimated for all
prior accident years and were decreased by $69.6 million and $96.1 million
for the six months ended June 30, 2000 and 1999, respectively, reflecting
favorable development on reserves for both losses and loss adjustment
expenses.
Favorable development on prior years' loss reserves was $38.2 million and
$52.0 million for the six months ended June 30, 2000 and 1999, respectively.
This decrease of $13.8 million is primarily due to decreased personal
automobile favorable development in the Northeast. Favorable development on
prior years' loss adjustment expense reserves was $31.4 million and $44.1
million for the six months ended June 30, 2000 and 1999, respectively. The
favorable development in both periods is primarily attributable to claims
process improvement initiatives taken by the Company over the past two years.
This favorable development reflects the Company's reserving philosophy
consistently applied over these periods. Conditions and trends that have
affected development of the loss and LAE reserves in the past may not
necessarily occur in the future.
Inflation generally increases the cost of losses covered by insurance
contracts. The effect of inflation on the Company varies by product.
Property and casualty insurance premiums are established before the amount
of losses and LAE, and the extent to which inflation may affect such
expenses, are known. Consequently, the Company attempts, in establishing
rates, to anticipate the potential impact of inflation in the projection of
ultimate costs. The impact of inflation has been relatively insignificant
in recent years. However, inflation could contribute to increased losses
and LAE in the future.
The Company 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 23
<PAGE>
Reinsurance
The Risk Management segment maintains a reinsurance program designed to
protect against large or unusual losses and allocated LAE activity. This
includes excess of loss reinsurance and catastrophe reinsurance. The
Company determines the appropriate amount of reinsurance based on the
Company's evaluation of the risks accepted and analyses prepared by
consultants and reinsurers and on market conditions including the
availability and pricing of reinsurance. Reinsurance contracts do not
relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company.
The Company also believes that the terms of its reinsurance contracts are
consistent with industry practice in that they contain standard terms with
respect to lines of business covered, limit and retention, arbitration and
occurrence. Based on its review of its reinsurers' financial statements
and reputations in the reinsurance marketplace, the Company believes that
its reinsurers are financially sound.
Catastrophe reinsurance serves to protect the ceding insurer from
significant aggregate losses arising from a single event such as
windstorm, hail, hurricane, tornado, riot or other extraordinary events.
Effective January 1, 2000, the Company modified its catastrophe program.
Under this new program, AFC retains $45.0 million of loss per hurricane
occurrence and $25.0 million of loss per occurrence for all other
exposures, 10% of all aggregate loss amounts in excess of $45.0 million,
or $25.0 million for non-hurricane losses, up to $65.0 million, 20% of
all aggregate loss amounts in excess of $65.0 million up to $230.0 million
and all amounts in excess of $230.0 million. Additionally, effective
January 1, 2000, the Company purchased a property catastrophe aggregate
treaty which provides for annual aggregate coverage totaling 80% of $50.0
million in excess of $60.0 million for catastrophe losses as defined by
the Company. The Company's retention will be calculated cumulatively, in
the aggregate, on a quarterly basis with the aggregate losses comprised of
all catastrophe losses that exceed $0.5 million each loss occurrence. The
maximum contribution from the Company for any one-loss occurrence for the
purposes of calculating the aggregate retention will be $25.0 million.
In 1999, the Company retained $45.0 million of loss per occurrence, 10% of
all aggregate loss amounts in excess of $45.0 million up to $230.0 million
and all amounts in excess of $230.0 million under its catastrophe
reinsurance program.
Under the Company's casualty reinsurance program, the reinsurers are
responsible for 43% of the amount of each loss in excess of $0.5 million
per occurrence up to $0.5 million and 100% of the amount of each loss in
excess of $1.0 million per occurrence up to $30.5 million for general
liability and workers' compensation. Additionally, this reinsurance covers
workers' compensation losses in excess of $30.5 million to $60.5 million per
occurrence. Amounts in excess of $60.5 million, in the workers'
compensation line, are retained 100% by the Company, while amounts in excess
of $30.5 million, in the general liability line, are retained 100% by the
Company.
Effective January 1, 1999, the Company entered into a Whole Account
Aggregate Excess of Loss reinsurance agreement. The reinsurance agreement
provided accident year coverage for the three years 1999 to 2001 for the
Company's property and casualty business, and was subject to cancellation or
commutation annually at the Company's option. In accordance with the
provisions of this contract, the Company exercised its option to cancel this
contract effective January 1, 2000. The program covered losses and
allocated loss adjustment expenses, including those incurred but not
yet reported, in excess of a specified whole account loss and allocated LAE
ratio. The annual and aggregate coverage limits for losses and allocated
LAE are $150.0 million and $300.0 million, respectively. The effect of this
agreement on results of operations in each reporting period is based on
losses and allocated LAE ceded, reduced by a sliding scale premium of
50-67.5% depending on the size of the loss, and increased by a ceding
commission of 20% of ceded premium. In addition, net investment income is
reduced for amounts credited to the reinsurer. As a result of this
agreement, the Company recognized a net (benefit) expense of $(3.0) million
and $16.9 million, for the quarter and six months ended June 30, 1999, and
a net benefit of $15.9 million for the year ended December 31, 1999, based
on annual estimates of losses and allocated loss adjustment expenses for
accident year 1999 No significant benefit or loss was recognized in the
first six months of 2000 related to accident year 1999. The effect of
this agreement on the results of operations in future periods is not
currently determinable, as it will be based both on future losses and
allocated LAE for accident year 1999.
The Company, in the Risk Management segment, is subject to concentration
of risk with respect to reinsurance ceded to various residual market
mechanisms. As a condition to the ability to conduct certain business in
various states, the Company is required to participate in various residual
market mechanisms and pooling arrangements which provide various insurance
coverage to individuals or other entities that are otherwise unable to
purchase such coverage voluntarily provided by private insurers. These
market mechanisms and pooling arrangement include the Massachusetts
Commonwealth Automobile Reinsurers and the Michigan Catastrophic Claims
Association.
Page 24
<PAGE>
Asset Accumulation
Allmerica Financial Services
The following table summarizes the results of operations, including the
Closed Block, for the Allmerica Financial Services segment for the periods
indicated.
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
(In millions) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Segment revenues
Premiums $ 8.8 $ 8.5 $ 35.3 $ 36.4
Fees 102.7 88.6 205.2 171.5
Investment and other income 100.7 96.8 200.0 190.7
------- ------- ------- -------
Total segment revenues 212.2 193.9 440.5 398.6
Policy benefits, claims and losses 70.0 75.8 160.7 174.2
Policy acquisition and other
operating expenses 86.7 70.4 169.9 127.8
------- ------- ------- -------
Segment income $ 55.5 $ 47.7 $ 109.9 $ 96.6
======= ======= ======= =======
</TABLE>
Quarter Ended June 30, 2000 Compared to Quarter Ended June 30, 1999
Segment income increased $7.8 million, or 16.4%, to $55.5 million during the
second quarter of 2000. This increase is primarily attributable to higher
asset-based fee income driven by additional deposits and market appreciation
in the variable annuity and variable universal life product lines, partially
offset by higher policy acquisition and other operating expenses.
Segment revenues increased $18.3 million, or 9.4%, in the second quarter of
2000 primarily due to increased fees and other income. Fee income from
variable annuity and individual variable universal life policies increased
$13.7 million, or 20.7%, in the second quarter of 2000 due to additional
deposits and market appreciation. New deposits generated approximately $7.0
million of this growth, while market appreciation generated approximately
$6.7 million. The growth in annuity deposits resulted from the introduction
of a "bonus" product in the fourth quarter of 1999, which provides cash back
to the policyholder in the form of a credit applied to the policyholder's
account value. Sales of bonus annuities, which totaled $333.8 million in
the second quarter of 2000 were partially offset by a $54.8 million decline
in traditional annuity sales at three specific third party mutual fund
advisors within the broker-dealer and financial planner distribution
channels. In addition, investment and other income increased $3.9 million
principally due to higher investment management fees and brokerage income
resulting from appreciation and additional deposits in variable product
assets under management. These increases were partially offset by a decline
in net investment income due to a reduction in average assets primarily
resulting from transfers to the separate accounts in the annuity and group
retirement product lines, as well as cancellations of certain accounts in
the group retirement business.
Policy benefits, claims and losses decreased $5.8 million, or 7.7%, to $70.0
million in the second quarter of 2000. This decrease was due to improved
mortality experience in the Closed Block in the current period and lower
participation in the annuity program introduced in 1998 which provided,
for a limited time, enhanced crediting rates on general account deposits.
In addition, there was a reduction in interest credited on group retirement
products due to runoff and asset transfers from the general account to the
separate account.
Policy acquisition and other operating expenses increased $16.3 million, or
23.2%, in the second quarter of 2000. This increase primarily results from
ongoing growth in the individual variable annuity, variable universal life,
and brokerage and investment management product lines.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Segment income increased $13.3 million, or 13.8%, to $109.9 million in the
first half of 2000. This increase is primarily attributable to higher
asset-based fee income driven by market appreciation and additional deposits
in the variable annuity and life product lines, partially offset by higher
policy acquisition and other operating expenses.
Page 25
<PAGE>
Segment revenues increased $41.9 million, or 10.5%, in 2000 primarily due
to increased fees and other income. Fee income from annuities and variable
life policies increased $32.1 million, or 25.5%, in the first six months of
2000, primarily due to market appreciation and additional deposits. Market
appreciation generated approximately $16.5 million of this growth, while
new deposits generated approximately $15.6 million. The growth in annuity
deposits resulted from the introduction of the aforementioned "bonus"
product. Sales of bonus annuities, which totaled $673.7 million in the
first six months of 2000, were partially offset by a $135.3 million decrease
in traditional annuity sales at three specific third party mutual fund
advisors within the broker-dealer and financial planner distribution
channels. In addition, investment and other income increased $9.3 million
primarily due to higher investment management fees and brokerage income
resulting from appreciation and additional deposits in variable product
assets under management. These increases were partially offset by an $8.8
million decline in net investment income primarily due to decreased average
invested assets resulting from transfers to the separate accounts in the
annuity and group retirement product lines. In addition, the decline in
net investment income reflects lower income from bonds due to defaults in
2000.
Policy benefits, claims and losses decreased $13.5 million, or 7.7%, to
$160.7 million in the first six months of 2000. This decrease is primarily
attributable to the absence of a $5.4 million mortality reserve established
in the variable annuity line of business during the first quarter of 1999.
In addition, lower policy benefits resulted from improved mortality in the
Closed Block, as well as decreased interest credited due to the
aforementioned transfers to the separate accounts and cancellations in the
group retirement business.
Policy acquisition and other operating expenses increased $42.1 million, or
32.9%, in the first six months of 2000. This increase primarily reflects
the absence of a one-time increase to the deferred acquisition cost
asset of $13.5 million in 1999 resulting from the implementation of an
enhanced valuation system for the annuity line of business. Also, the
increase in policy acquisition and other operating expenses reflects
growth in the individual variable annuity, variable universal life, and
brokerage and investment management product lines. Policy acquisition
costs in 2000 include additional amortization of approximately $3.5 million
related to increased surrenders.
Statutory Premiums and Deposits
The following table sets forth statutory premiums and deposits by product for
the Allmerica Financial Services segment.
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Quarter Ended Six Months Ended
June 30, June 30,
(In millions) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Insurance
Traditional life $ 13.9 $ 17.3 $ 43.7 $ 48.7
Universal life 15.5 15.9 33.4 32.6
Variable universal life 51.5 43.8 102.7 89.1
Individual health 0.0 0.0 0.1 0.1
Group variable universal life 18.6 7.2 30.1 17.6
------- ------- --------- ---------
Total insurance 99.5 84.2 210.0 188.1
------- ------- --------- ---------
Annuities:
Separate account annuities 676.5 510.5 1,355.4 1,009.1
General account annuities 125.4 251.5 264.1 461.8
Retirement investment accounts 2.6 3.6 6.1 9.5
------- ------- --------- ---------
Total individual annuities 804.5 765.6 1,625.6 1,480.4
Group annuities 90.7 112.2 259.3 194.3
------- ------- --------- ---------
Total annuities 895.2 877.8 1,884.9 1,674.7
------- ------- --------- ---------
Total premiums and deposits $994.7 $962.0 $2,094.9 $1,862.8
======= ======= ========= =========
</TABLE>
Page 26
<PAGE>
Quarter Ended June 30, 2000 Compared to Quarter Ended June 30, 1999
Total premiums and deposits increased $32.7 million, or 3.4%, to $994.7
million. These increases are primarily due to higher separate account
annuity deposits, partially offset by a decline in general account and group
annuity deposits. The growth in individual separate account annuity
deposits results from the aforementioned introduction of a bonus product in
the fourth quarter of 1999, partially offset by a decrease in traditional
annuity sales at three specific third party mutual fund advisors within the
broker-dealer and financial planner distribution channels. The bonus annuity
product is primarily distributed through third party mutual fund advisors
and the broker-dealer distribution channels. These increases were partially
offset by lower deposits from general account annuities due to the decreased
utilization of an annuity program introduced in 1998, which provided for a
limited time, enhanced crediting rates on deposits made into the Company's
general account and transferred ratably over a period of time into the
Company's separate accounts.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
For the six months ended June 30, 2000, total premiums and deposits
increased $232.1 million, or 12.5%, to $2,094.9 million. These increases
are primarily due to higher separate account and group annuity deposits,
partially offset by a decline in general account annuity deposits. The
growth in individual separate account annuity deposits results from the
introduction of the aforementioned bonus product, partially offset by the
decrease in traditional annuity sales at three specific third party mutual
fund advisors. In addition, group annuity deposits increased in 2000 due to
new sales and additional business from existing contracts. These increases
were partially offset by lower deposits from general account annuities
due to the decreased utilization of the aforementioned annuity program with
enhanced crediting rates.
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) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Interest margins on GICs
Net investment income $ 32.1 $ 36.9 $ 58.5 $ 68.3
Interest credited 28.5 31.5 50.9 58.1
------ ------ ------ ------
Net interest margin 3.6 5.4 7.6 10.2
------ ------ ------ ------
Other income and expenses
External fees and other income 1.5 1.6 3.1 3.0
Internal fees and other income 1.3 2.0 2.6 3.5
Other operating expenses 1.8 2.2 3.6 4.2
------ ------ ------ ------
Segment income $ 4.6 $ 6.8 $ 9.7 $ 12.5
====== ====== ====== ======
</TABLE>
Quarter Ended June 30, 2000 Compared to Quarter Ended June 30, 1999
Segment income decreased $2.2 million, or 32.4%, to $4.6 million during the
second quarter of 2000. This decline is primarily due to decreased earnings
on GICs resulting from short-term funding agreement withdrawals during the
fourth quarter of 1999 and a shift to lower yielding long-term funding
agreements in 2000. The withdrawals reflected uncertainties in the market
resulting in greater redemptions for the industry overall. Management
expects income from the GIC product line to be unfavorably impacted in
future periods due to withdrawals experienced during the fourth quarter of
1999 and a diminished market for short-term funding agreement products.
Page 27
<PAGE>
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Segment income decreased $2.8 million, or 22.4%, to $9.7 million in the
first six months of 2000. This decline primarily reflects decreased
earnings on GICs. Earnings on GICs decreased $2.6 million primarily due to
the aforementioned short-
term funding agreement withdrawals during the fourth quarter of 1999 and a
shift to lower yielding long-term funding agreements in 2000.
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) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Segment revenues
Net investment income $ 1.7 $ 2.4 $ 2.7 $ 3.6
Interest expense 3.8 3.8 7.6 7.6
Other operating expenses 10.1 12.1 21.8 25.5
------- ------- ------- -------
Segment loss $(12.2) $(13.5) $(26.7) $(29.5)
======= ======= ======= =======
</TABLE>
Quarter Ended June 30, 2000 Compared to Quarter Ended June 30, 1999
Segment loss decreased $1.3 million, or 9.6%, to $12.2 million in the second
quarter of 2000 primarily due to lower corporate overhead costs, partially
offset by a reduction in net investment income. Other operating expenses
declined $2.0 million, primarily due to lower finance, technology and other
corporate overhead costs. Investment income decreased $0.7 million during
the second quarter of 2000 due to lower average invested assets. This
decline primarily reflects the sale of investments which were used to fund
the Company's stock repurchase program, as well as a decrease in assets
transferred from the Risk Management segment. Assets transferred from the
Risk Management segment totaled $108.0 million and $350.0 million during
the second quarter of 2000 and 1999, respectively.
Interest expense for both periods relates solely to the interest paid on the
Senior Debentures of the Company.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Segment loss decreased $2.8 million, or 9.5%, to $26.7 million in the first
six months of 2000 primarily due to lower corporate overhead costs,
partially offset by a reduction in net investment income. Other operating
expenses declined $3.7 million primarily due to lower finance, technology and
other corporate overhead costs. Investment income decreased $0.9 million
during the first six months of 2000 due to lower average invested assets.
This decline primarily reflects the aforementioned sale of investments which
were used to fund the Company's stock repurchase program, as well as the
aforementioned decrease in assets transferred from the Risk Management
segment.
Interest expense for both periods relates solely to the interest paid on the
Senior Debentures of the Company.
Page 28
<PAGE>
Investment Portfolio
The Company had investment assets diversified across several asset classes,
as follows:
<TABLE>
<CAPTION>
(Unaudited)
June 30, 2000 <FN1> December 31, 1999 <FN1>
Carrying % of Total Carrying % of Total
Value Carrying Value Carrying
(Dollars in millions) Value Value
<S> <C> <C> <C> <C>
Fixed maturities <FN2> $ 7,771.1 82.8% $ 7,306.7 80.6%
Equity securities <FN2> 69.1 0.7 83.2 0.9
Mortgages 650.7 6.9 657.5 7.3
Policy loans 377.5 4.0 371.6 4.1
Cash and cash equivalents 340.9 3.6 464.8 5.1
Other invested assets 174.7 2.0 180.0 2.0
------------------ ------------------
Total $ 9,384.0 100.0% $ 9,063.8 100.0%
================== ==================
<FN>
<FN1>
Includes Closed Block invested assets with a carrying value of $735.4
million and $732.9 million at June 30, 2000 and December 31, 1999,
respectively.
<FN2>
The Company carries the fixed maturities and equity securities in its
investment portfolio at market value.
</FN>
</TABLE>
Total investment assets increased $320.2 million, or 3.5%, to $9.4 billion
during the second quarter of 2000. This increase resulted primarily from
increased fixed maturities of $464.4 million, partially offset by
decreases of $123.9 million of cash and cash equivalents and $14.1 million
of equity securities. The increase in fixed maturities is principally due
to the investment of new long term funding agreement deposits. The decrease
in cash and cash equivalents is primarily due to reduced cash flow from
operations and the repurchase of AFC common stock under the stock
repurchase program.
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 86.4% and 84.4% of the Company's
total fixed maturity portfolio at June 30, 2000 and December 31, 1999,
respectively. The average yield on debt securities was 7.3% and 7.1% for
the six months ended June 30, 2000 and 1999, respectively. Although
management expects that new funds will be invested primarily in investment
grade fixed maturities, the Company may invest a portion of new funds in
below investment grade fixed maturities or equity interests.
Income Taxes
AFC and its domestic subsidiaries (including certain non-insurance
operations) file a consolidated United States federal income tax return.
Entities included within the consolidated group are segregated into either
a life insurance or a non-life insurance company subgroup. The
consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible non-life tax losses that can be
applied to offset life company taxable income.
Quarter Ended June 30, 2000 Compared to Quarter Ended June 30, 1999
Provision for federal income taxes before minority interest and discontinued
operations was $8.4 million during the second quarter of 2000 compared to
$22.0 million during the same period in 1999. These provisions resulted in
consolidated effective federal tax rates of 14.0% and 23.7% for the quarters
ended June 30, 2000 and 1999, respectively. The decrease in the rate is
primarily due to increased realized losses in the second quarter of 2000 and
to an increase in the proportion of tax-exempt interest income to pre-tax
income. Although total tax-exempt interest income declined in the second
quarter of 2000 as compared to the second quarter of 1999, its percentage of
anticipated pre-tax income increased as a result of the aforementioned
realized losses.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
The provision for federal income taxes before minority interest and
discontinued operations was $15.9 million during the first six months of
2000 compared to $69.7 million during the same period in 1999. These
provisions resulted in consolidated effective federal tax rates of 15.6% and
23.6% for the six months ended June 30, 2000 and 1999, respectively. The
decrease in the rate is primarily due to realized losses in the first six
months of 2000 as compared to gains in the same period of 1999 and to an
increase in the proportion of tax-exempt interest income to pre-tax income.
Although total tax-exempt interest income decreased in the first six months
of 2000, its percentage of anticipated pre-tax income increased as a result
of the aforementioned realized losses.
Page 29
<PAGE>
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. During the first six months of
2000, AFC received $108.0 million of dividends from its property and
casualty businesses. Additional dividends from the Company's insurance
subsidiaries in 2000 would be considered "extraordinary" and would require
prior approval from the respective state regulators.
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, claims, 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 was $128.3 million during the first
six months of 2000, compared to cash provided by operating activities of
$32.5 million for the same period of 1999. The increased use of cash year
over year is primarily the result of decreased net deposits from the
aforementioned enhanced crediting annuity program and payments related to
the Company's aforementioned new bonus annuity product. In addition,
timing of cash receipts from the Company's separate accounts contributed to
the decline.
Net cash used in investing activities was $482.5 million during the first
six months of 2000, compared to $177.7 million during the same period in
1999. This change is primarily due to the absence in 2000 of $310.0 million
of equity securities sales that occurred in January 1999.
Net cash provided by financing activities was $486.9 million during the
first six months of 2000, compared to $158.9 million during the comparable
prior year period. The increase in 2000 is due primarily to a $203.4 million
year over year reduction in cash used for the Company's share repurchase
program and the absence of a $150.0 million repayment of short-term debt
which occurred during the first quarter of 1999. These changes were
partially offset by a decreease in net funding agreement deposits, including
trust instruments supported by funding obligations, of $64.8 million during
the first six months of 2000.
AFC has sufficient funds at the holding company or available through
dividends from FAFLIC and Allmerica P&C to meet its obligations to pay
interest on the Senior Debentures, Capital Securities and dividends, when
and if declared by the Board of Directors, on the common stock. On July 25,
2000, the Board of Directors declared an annual dividend of $0.25 per share
on the issued and outstanding common stock of the Company, payable November
15, 2000 to shareholders of record at the close of business November 1,
2000. 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. AFC has $150.0 million available under a committed
syndicated credit agreement, which expires on May 28, 2001. Borrowings
under this agreement are unsecured and incur interest at a rate per annum
equal to, at the Company's option, a designated base rate or the eurodollar
rate plus applicable margin. At June 30, 2000, no amounts were outstanding
under this agreement. The Company had $51.4 million of commercial
paper borrowings outstanding at June 30, 2000. AFC had no repurchase
agreements outstanding as of June 30, 2000.
Contingencies
The Company's insurance subsidiaries are routinely engaged in various legal
proceedings arising in the normal course of business, including claims for
punitive damages. Additional information on other litigation and claims may
be found in Note 10 "Commitments and Contingencies - Litigation" to the
consolidated financial statements. In the opinion of management, none of
such contingencies are expected to have a material effect on the Company's
consolidated financial position, although it is possible that the results of
operations in a particular quarter or annual period would be materially
affected by an unfavorable outcome.
Page 30
<PAGE>
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 2000 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, 1999.
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, or as the
result of consolidation within the financial services industry and the entry
of additional financial institutions into the insurance industry; (iv)
adverse state and federal legislation or regulation, including decreases in
rates, limitations on premium levels, increases in minimum capital and
reserve requirements, benefit mandates, limitations on the ability to
manage care and utilization, and tax treatment of insurance and annuity
products, as well as continued compliance with state and federal
regulations;(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 renegotiations 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 Poor's, A.M. Best, and Duff &
Phelps;(xiv) lower appreciation on or decline in value of the Company's
managed investments or the investment markets in general, resulting
in reduced variable products sales, assets and related fees; (xv) possible
claims relating to sales practices for insurance products; (xvi) failure
of a reinsurer of the Company's policies to pay its liabilities under
reinsurance contracts; (xvii) earlier than expected withdrawals from the
Company's general account annuities, GICs (including funding agreements),
and other insurance products; (xviii) changes in the mix of assets
comprising the Company's investment portfolio and the fluctuation of the
market value of such assets; (xix) losses resulting from the Company's
participation in certain reinsurance pools; (xx) adverse results of
regulatory audits related to the Company's prior years' federal income tax
filings, and (xxi) losses due to foreign currency fluctuations.
Page 31
<PAGE>
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
This registrant's annual shareholder's meeting was held on May 16, 2000.
All three directors nominated for reelection by the Board of Directors were
named in proxies for the meeting, which proxies were solicited pursuant to
Regulations 14A of the Securities and Exchange Act of 1934.
<TABLE>
<CAPTION>
VOTES FOR WITHHELD
<S> <C> <C>
E. Gordon Gee 39,582,537 226,106
Gail L. Harrison 39,591,839 216,804
M Howard Jacobson 39,589,565 219,078
</TABLE>
The other directors whose terms were continued after the Annual Meeting
are Mr. Michael P. Angelini, Mr. Samuel J. Gerson, Mr. Robert P. Henderson,
Mr. Wendell J. Knox, Mr. Terrence Murray, Mr. Robert J. Murray, Mr. John F.
O'Brien, and Mr. Herbert M. Varnum.
Shareholders ratified the appointment of PricewaterhouseCoopers LLP as the
Independent Public Accountants of the Company for 2000: for 39,612,550;
against 73,439; abstain 122,954.
Page 32
<PAGE>
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits
EX - 27 Financial Data Schedule
(b) Reports on Form 8K
On April 28, 2000, Allmerica Financial Corporation announced its
financial results for the three months ended March 31, 2000.
Page 33
<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 11, 2000
/S/ John F. O'Brien
-----------------------------------------
John F. O'Brien
President and Chief Executive Officer
Dated August 11, 2000
/S/ Edward J. Parry III
-----------------------------------------
Edward J. Parry III
Vice President and Chief Financial Officer
Page 34
<PAGE>
EXHIBIT INDEX
Exhibit Number Exhibit
27 Financial Data Schedule
Page 35
<PAGE>
