-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FcNEwu0aSezwYAhwXo4NlM/ZD0QoTQ6ST/KLNCGN7Cn9sQgg72CCE2vaR90yLZth nT3dmNRHpSZl1BD5hiQcmw== 0000944695-96-000025.txt : 19960816 0000944695-96-000025.hdr.sgml : 19960816 ACCESSION NUMBER: 0000944695-96-000025 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLMERICA FINANCIAL CORP CENTRAL INDEX KEY: 0000944695 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 043263626 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13754 FILM NUMBER: 96614914 BUSINESS ADDRESS: STREET 1: 440 LINCOLN ST CITY: WORCESTER STATE: MA ZIP: 01653 BUSINESS PHONE: 5088551000 MAIL ADDRESS: STREET 1: 440 LINCOLN ST CITY: WORCESTER STATE: MA ZIP: 01653 10-Q 1 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, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from: to Commission file number: 1-13754 ALLMERICA FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 04-3263626 (State or other jurisdiction of (I.R.S. Employer 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 ommon stock as of the latest practicable date: 50,134,651 shares of common stock outstanding, as of August 1, 1996. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Statements of Income 3 Consolidated Statements of Shareholders' Equity 4 Consolidated Balance Sheets 5 Consolidated Statements of Cash Flows 6 Notes to Interim Consolidated Financial Statements 7 - 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 29 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 30 Item 6. Exhibits and Reports on Form 8-K 31 SIGNATURES PART I - FINANCIAL INFORMATION ITEM I - FINANCIAL STATEMENTS ALLMERICA FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (Unaudited) Quarter Ended Six Months Ended June 30, June 30, (In millions, except per share data) 1996 1995 1996 1995 REVENUES Premiums $ 553.7 $ 546.1 $1,101.3 $1,112.9 Universal life and investment product policy fees 48.5 42.6 95.0 83.7 Net investment income 166.8 178.7 327.9 361.2 Net realized investment gains 2.3 7.9 53.9 5.7 Realized gain on sale of mutual fund processing business 0.0 0.0 0.0 20.7 Other income 29.0 18.1 50.6 50.6 -------- -------- -------- -------- Total revenues 800.3 793.4 1,628.7 1,634.8 -------- -------- -------- -------- BENEFITS, LOSSES AND EXPENSES Policy benefits, claims, losses and loss adjustment expense 488.5 494.1 985.4 1,017.3 Policy acquisition expenses 121.1 120.1 240.8 235.4 Other operating expenses 121.8 111.1 237.4 234.8 -------- -------- -------- -------- Total benefits, losses and expenses 731.4 725.3 1,463.6 1,487.5 -------- -------- -------- -------- Income before federal income taxes 68.9 68.1 165.1 147.3 -------- -------- -------- -------- Federal income tax expense (benefit) Current 25.7 33.9 44.3 51.5 Deferred (13.1) (15.6) (7.5) (9.1) -------- -------- -------- -------- Total federal income tax expense 12.6 18.3 36.8 42.4 -------- -------- -------- -------- Income before minority interest and extraordinary item 56.3 49.8 128.3 104.9 Minority interest (13.7) (19.9) (38.4) (35.8) -------- -------- -------- -------- Income before extraordinary item 42.6 29.9 89.9 69.1 Extraordinary item - demutualization expenses 0.0 (3.5) 0.0 (6.0) -------- -------- -------- -------- Net income $ 42.6 $ 26.4 $ 89.9 $ 63.1 ======== ======== ======== ======== PER SHARE DATA Net income $ 0.85 $ 1.79 ======== ======== Dividends declared to shareholders $ 0.05 $ 0.10 ======== ======== Weighted average shares outstanding 50.1 50.1 ======== ======== The accompanying notes are an integral part of these consolidated financial statements.
ALLMERICA FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited) Six Months Ended June 30, (In millions) 1996 1995 COMMON STOCK Balance at beginning and end of period $ 0.5 $ 0.0 ---------- ---------- ADDITIONAL PAID-IN-CAPITAL Balance at beginning and end of period 1,382.5 0.0 ---------- ---------- RETAINED EARNINGS Balance at beginning of period 38.2 1,071.4 Net income 89.9 63.1 Dividends to shareholders (5.0) 0.0 ---------- ---------- Balance at end of period 123.1 1,134.5 ---------- ---------- NET UNREALIZED APPRECIATION ON INVESTMENTS Balance at beginning of period 153.0 (79.0) Net (depreciation) appreciation on available-for-sale securities (193.9) 347.2 Benefit (provision) for deferred federal income taxes 67.9 (121.8) Minority interest 30.4 (50.8) ---------- ---------- Balance at end of period 57.4 95.6 ---------- ---------- Total shareholders' equity $ 1,563.5 $ 1,230.1 ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
ALLMERICA FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) June 30, December 31, (In millions, except per share data) 1996 1995 ASSETS Investments: Fixed maturities-at fair value(amortized cost of $7,908.0 and $7,467.9) $ 7,958.4 $ 7,739.3 Equity securities-at fair value (cost of $299.2 and $410.6) 399.3 517.2 Mortgage loans 716.7 799.5 Real estate 157.5 179.6 Policy loans 129.4 123.2 Other long-term investments 78.3 71.9 ---------- ---------- Total investments 9,439.6 9,430.7 ---------- ---------- Cash and cash equivalents 128.2 289.5 Accrued investment income 166.0 163.2 Deferred policy acquisition costs 792.3 735.7 Reinsurance receivables: Future policy benefits 102.4 97.1 Outstanding claims, losses and loss adjustment expenses 762.7 799.6 Unearned premiums 45.8 43.8 Other 60.4 58.9 ---------- ---------- Total reinsurance receivables 971.3 999.4 ---------- ----------- Deferred federal income taxes 121.5 81.2 Premiums, accounts and notes receivable 534.0 526.7 Other assets 343.9 363.6 Closed Block assets 811.4 818.9 Separate account assets 5,197.9 4,348.8 ---------- ---------- Total assets $18,506.1 $17,757.7 ========== ========== LIABILITIES Policy liabilities and accruals: Future policy benefits $ 2,640.4 $ 2,639.3 Outstanding claims, losses and loss adjustment expenses 3,051.3 3,081.3 Unearned premiums 816.3 800.9 Contractholder deposit funds and other policy liabilities 2,290.2 2,737.4 ---------- ---------- Total policy liabilities and accruals 8,798.2 9,258.9 Expenses and taxes payable 573.5 603.0 Reinsurance premiums payable 51.0 42.0 Short-term debt 501.7 31.2 Deferred federal income taxes 15.0 47.8 Long-term debt 202.2 202.3 Closed Block liabilities 896.3 902.0 Separate account liabilities 5,180.9 4,337.8 ---------- ---------- Total liabilities 16,218.8 15,425.0 ---------- ---------- Minority interest 723.8 758.5 Commitments and contingencies SHAREHOLDERS' EQUITY Preferred stock, $0.01 par value, 20.0 million shares authorized, none issued 0.0 0.0 Common stock, $0.01 par value, 300.0 million shares authorized, 50.1 million shares issued and outstanding 0.5 0.5 Additional paid-in-capital 1,382.5 1,382.5 Unrealized appreciation on investments, net 57.4 153.0 Retained earnings 123.1 38.2 ---------- ---------- Total shareholders' equity 1,563.5 1,574.2 ---------- ---------- Total liabilities and shareholders' equity $18,506.1 $17,757.7 ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
ALLMERICA FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, (In millions) 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 89.9 $ 63.1 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest 38.4 35.8 Net realized gains (54.3) (26.4) Deferred federal income taxes (7.5) (9.1) Changes in assets and liabilities: Deferred policy acquisition costs (33.7) (7.1) Premiums and notes receivable, net of reinsurance payable 2.7 (50.5) Accrued investment income (1.7) (1.5) Policy liabilities and accruals, net (50.4) (3.5) Reinsurance receivable 28.1 9.4 Expenses and taxes payable (13.4) 86.2 Separate account activity, net (6.1) 0.8 Other, net 38.6 3.8 ---------- ---------- Net cash provided by operating activities 30.6 101.0 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from disposals of available-for-sale fixed maturities 517.3 580.3 Proceeds from maturities of available-for-sale fixed maturities 1,687.9 524.4 Proceeds from maturities of held-to-maturity fixed maturities 0.0 153.8 Proceeds from disposals of equity securities 212.4 60.4 Proceeds from disposals of other investments 34.0 5.0 Proceeds from mortgages matured or collected 74.2 92.1 Purchase of available-for-sale fixed maturities (2,661.7) (1,316.4) Purchase of held-to-maturity fixed maturities 0.0 (49.3) Purchase of equity securities (50.5) (125.2) Purchase of other investments (27.5) (2.4) Proceeds from sale of mutual fund processing business 0.0 32.8 Capital expenditures (4.9) (6.9) Other activities, net 4.3 1.8 ---------- ---------- Net cash used in investing activities (214.5) (49.6) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Deposits and interest credited to contractholder deposit funds 181.8 187.5 Withdrawals from contractholder deposit funds (587.2) (438.3) Change in short-term debt 470.5 (8.0) Dividends paid to shareholders (7.0) (2.1) Purchases of subsidiary common stock (41.8) (11.0) ---------- ---------- Net cash provided by (used in) financing activities 16.3 (271.9) ---------- ---------- Net decrease in cash and cash equivalents (167.6) (220.5) Net change in cash held in the Closed Block 6.3 0.0 Cash and cash equivalents, beginning of period 289.5 539.7 ---------- ---------- Cash and cash equivalents, end of period $ 128.2 $ 319.2 ========== ========== The accompanying notes are an integral part of these consolidated financial statements
ALLMERICA FINANCIAL CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation First Allmerica Financial Life Insurance Company ("FAFLIC", formerly State Mutual Life Assurance Company of America ["State Mutual"]) was organized as a mutual life insurance company until October 16, 1995. FAFLIC converted to a stock life insurance company pursuant to a plan of reorganization effective October 16, 1995 and became a wholly owned subsidiary of Allmerica Financial Corporation ("AFC" or the "Company"). The consolidated financial statements have been prepared as if FAFLIC were organized as a stock life insurance company for all periods presented. Thus, generally accepted accounting principles for stock life insurance companies have been applied for all periods presented. The interim consolidated financial statements of AFC include the accounts of AFC, FAFLIC, its wholly owned life insurance subsidiary, Allmerica Financial Life Insurance and Annuity Company ("AFLIAC", formerly SMA Life Assurance Company), non-insurance subsidiaries (principally brokerage and investment advisory subsidiaries), and Allmerica Property & Casualty Companies, Inc. ("Allmerica P&C", a 59.5%-owned non-insurance holding company). The Closed Block assets and liabilities at June 30, 1996 and December 31, 1995 are presented in the consolidated financial statements as single line items. Results of operations for the Closed Block for the six month and three month periods ended June 30, 1996 are included in other income in the consolidated financial statements. Prior to demutualization such amounts are presented line by line in the consolidated financial statements. All significant intercompany accounts and transactions have been eliminated. Minority interest relates to the Company's investment in Allmerica P&C and its subsidiary, The Hanover Insurance Company ("Hanover"). Hanover's 82.5%-owned subsidiary is Citizens Corporation, the holding company for Citizens Insurance Company of America ("Citizens"). Minority interest also includes an amount related to the minority interest in Citizens Corporation. The accompanying interim consolidated financial statements reflect, in the opinion of the Company's management, all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the financial position and results of operations. Certain reclassifications have been made to the 1995 consolidated statements of income in order to conform to the 1996 presentation. The results of operations for the six months and quarter ended June 30, 1996 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 1995 Annual Report to Shareholders, as filed on Form 10-K to the Securities and Exchange Commission. 2. Federal Income Taxes Federal income tax expense for the periods ended June 30, 1996 and 1995, has been computed using estimated effective tax rates for the AFC and Allmerica P&C tax-paying groups. These rates are revised, if necessary, at the end of each successive interim period to reflect the current estimates of the annual effective tax rates. 3. Closed Block Included in other income in the Consolidated Statements of Income in the second quarter and first six months of 1996 is a net pre-tax contribution from the Closed Block of $2.6 million and $6.0 million, respectively. Summarized financial information of the Closed Block is as follows:
(Unaudited) June 30, December 31, (In millions) 1996 1995 ASSETS Fixed maturities, at fair value (amortized cost of $445.6 and $447.4) $ 444.3 $ 458.0 Mortgage loans 79.6 57.1 Policy loans 235.6 242.4 Cash and cash equivalents 11.3 17.6 Accrued investment income 15.5 16.6 Deferred policy acquisition costs 22.3 24.5 Other assets 2.8 2.7 ---------- ---------- Total assets $ 811.4 $ 818.9 ========== ========== LIABILITIES Policy liabilities and accruals $ 879.3 $ 899.2 Other liabilities 17.0 2.8 ---------- ---------- Total liabilities $ 896.3 $ 902.0 ========== ========== (Unaudited) (Unaudited) Quarter Six Months Ended Ended June 30, 1996 June 30, 1996 REVENUES Premiums $ 10.9 $ 40.5 Net investment income 13.0 26.1 Net realized investment (losses)gains (0.2) 0.4 ---------- ---------- Total revenues 23.7 67.0 ---------- ---------- BENEFITS AND EXPENSES Policy benefits 20.4 59.1 Policy acquisition expenses 0.7 1.6 Other operating expenses 0.0 0.3 ---------- ---------- Total benefits and expenses 21.1 61.0 ---------- ---------- Contribution from the Closed Block $ 2.6 $ 6.0 ========== ==========
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. 4. Segment Information The Company offers financial products and services in two major areas: Risk Management and Retirement and Asset Management. Within these broad areas, the Company operates principally in five segments. The Risk Management group includes two segments: Regional Property and Casualty and Corporate Risk Management Services. The Regional Property and Casualty segment includes property and casualty insurance products, such as automobile insurance, homeowners' insurance, commercial multiple peril insurance, and workers' compensation insurance. These products are offered by Allmerica P&C through its operating subsidiaries, Hanover and Citizens. Substantially all of the Regional Property and Casualty segment's earnings are generated in Michigan and the Northeast (Connecticut, Massachusetts, New York, New Jersey, New Hampshire, Rhode Island, Vermont and Maine). The Corporate Risk Management Services segment, formerly known as the Employee Benefit Services segment, includes group life and health insurance products and services which assist employers in administering employee benefit programs and in managing the related risks. The Retirement and Asset Management group includes three segments: Retail Financial Services, Institutional Services and Allmerica Asset Management. The Retail Financial Services segment, formerly known as the Individual Financial Services segment, includes variable annuities, variable universal life, traditional and health insurance products distributed via retail channels to individuals across the country. The Institutional Services segment includes primarily group retirement products such as 401(k) plans, tax-sheltered annuities and GIC contracts which are distributed to institutions across the country via worksite marketing and other arrangements. Allmerica Asset Management, formerly included in the results of the Institutional Services segment, is a Registered Investment Advisor which provides investment advisory services to other institutions, such as insurance companies and pension plans. In addition to the five operating segments, the Company also has a Corporate segment, which consists primarily of Senior Debentures and a portion of the net proceeds from the Company's initial public offering. Summarized below is financial information with respect to business segments for the periods indicated.
(Unaudited) (Unaudited) Quarter Ended Six Months June 30, June 30, (In millions) 1996 1995 1996 1995 Revenues: Risk Management Regional Property and Casualty $ 532.3 $ 516.8 $1,095.6 $1,029.6 Corporate Risk Management Services 89.6 78.1 176.4 153.8 --------- --------- --------- --------- Subtotal 621.9 594.9 1,272.0 1,183.4 --------- --------- --------- --------- Retirement and Asset Management Retail Financial Services 113.4 118.3 220.5 260.3 Institutional Services 64.1 83.0 134.8 197.8 Allmerica Asset Management 3.5 1.2 4.5 2.1 --------- --------- --------- --------- Subtotal 181.0 202.5 359.8 460.2 --------- --------- --------- -------- Corporate 0.8 0.0 1.3 0.0 Eliminations (3.4) (4.0) (4.4) (8.8) --------- --------- --------- --------- Total $ 800.3 $ 793.4 $1,628.7 $1,634.8 ========= ========= ========= ========= Income (loss) from continuing operations before income taxes: Risk Management Regional Property and Casualty $ 37.1 $ 50.9 $ 104.6 $ 94.6 Corporate Risk Management Services 3.4 2.2 7.5 4.8 --------- --------- --------- --------- Subtotal 40.5 53.1 112.1 99.4 Retirement and Asset Management Retail Financial Services 20.2 7.9 35.1 15.8 Institutional Services 12.2 6.5 25.6 31.0 Allmerica Asset Management 0.2 0.6 0.5 1.1 --------- --------- --------- --------- Subtotal 32.6 15.0 61.2 47.9 --------- --------- --------- --------- Corporate (4.2) 0.0 (8.2) 0.0 --------- --------- --------- --------- Total $ 68.9 $ 68.1 $ 165.1 $ 147.3 ========= ========= ========= ========= (Unaudited) As of As of June 30, December 31, 1996 1995 Identifiable assets: Risk Management Regional Property and Casualty $ 5,643.6 $ 5,741.8 Corporate Risk Management Services 510.8 458.9 ---------- ---------- Subtotal 6,154.4 6,200.7 ---------- ---------- Retirement and Asset Management Retail Financial Services 8,292.8 7,218.6 Institutional Services 4,015.2 4,280.9 Allmerica Asset Management 2.5 2.1 ---------- ---------- Subtotal 12,310.5 11,501.6 ---------- ---------- Corporate 41.2 55.4 ---------- ---------- Total $18,506.1 $17,757.7 ========== ==========
PART I ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis of the interim consolidated results of operations and financial condition of the Company should be read in conjunction with the interim Consolidated Financial Statements and related footnotes included elsewhere herein. INTRODUCTION The results of operations for Allmerica Financial Corporation and subsidiaries ("AFC" or "the Company") include the accounts of AFC, First Allmerica Financial Life Insurance Company ("FAFLIC", formerly State Mutual Life Assurance Company of America ["State Mutual"]), its wholly owned life insurance subsidiary, Allmerica Financial Life Insurance and Annuity Company ("AFLIAC", formerly SMA Life), Allmerica Property & Casualty Companies, Inc. ("Allmerica P&C", a 59.5%-owned non-insurance holding company), The Hanover Insurance Company ("Hanover", a wholly owned subsidiary of Allmerica P&C), Citizens Corporation ("Citizens", an 82.5%-owned subsidiary of Hanover), Citizens Insurance Company of America (a wholly owned subsidiary of Citizens) and certain other insurance and non-insurance subsidiaries. CLOSED BLOCK On completion of its demutualization, FAFLIC established a Closed Block for the payment of future benefits, policyholders' dividends and certain expenses and taxes relating to certain classes of policies. FAFLIC allocated to the Closed Block an amount of assets expected to produce cash flows which, together with anticipated revenues from the Closed Block business, are reasonably expected to be sufficient to support the Closed Block business. The Closed Block includes only those revenues, benefit payments, dividends and premium taxes considered in funding the Closed Block and excludes many costs and expenses associated with operating the Closed Block and administering the policies included therein. Since many expenses related to the Closed Block were excluded from the calculation of the Closed Block contribution, the contribution from the Closed Block does not represent the actual profitability of the Closed Block. As a result of such exclusion, operating costs and expenses outside the Closed Block are disproportionate to the business outside the Closed Block. The contribution from the Closed Block is included in 'Other income' in the interim Consolidated Financial Statements. The pre-tax contribution from the Closed Block was $2.6 million for the quarter ended and $6.0 million for the six months ended June 30,1996. FAFLIC's conversion to a stock life insurance company, which was completed October 16, 1995, and the establishment of the Closed Block have affected the presentation of the Company's interim Consolidated Financial Statements. For comparability with the prior period, the following table presents the results of operations of the Closed Block combined with the results of operations outside the Closed Block for the quarter ended and the six months ended June 30, 1996. Management's discussion and analysis addresses the results of operations as combined unless otherwise noted.
(Unaudited) (Unaudited) Quarter Ended Six Months Ended June 30, June 30, (In millions) 1996 1995 1996 1995 REVENUES Premiums $ 564.5 $ 546.1 $1,141.7 $1,112.9 Universal life and investment product policy fees 48.5 42.6 95.0 83.7 Net investment income 179.8 178.7 354.0 361.2 Net realized investment gains 2.1 7.9 54.3 5.7 Realized gain on sale of mutual fund processing business 0.0 0.0 0.0 20.7 Other income 26.4 18.1 44.6 50.6 --------- --------- --------- --------- Total revenues 821.3 793.4 1,689.6 1,634.8 --------- --------- --------- --------- BENEFITS, LOSSES AND EXPENSES Policy benefits, claims, losses and loss adjustment expenses 508.9 494.1 1,044.5 1,017.3 Policy acquisition expenses 121.7 120.1 242.3 235.4 Other operating expenses 121.8 111.1 237.7 234.8 --------- --------- --------- --------- Total benefits, losses and expenses 752.4 725.3 1,524.5 1,487.5 --------- --------- --------- --------- Income before federal income taxes 68.9 68.1 165.1 147.3 --------- --------- --------- --------- Federal income tax expense (benefit) Current. 25.7 33.9 44.3 51.5 Deferred (13.1) (15.6) (7.5) (9.1) --------- --------- --------- --------- Total federal income tax expense 12.6 18.3 36.8 42.4 --------- --------- --------- --------- Income before minority interest and extraordinary item 56.3 49.8 128.3 104.9 Minority interest (13.7) (19.9) (38.4) (35.8) --------- --------- --------- --------- Income before extraordinary item 42.6 29.9 89.9 69.1 Extraordinary item - demutualization expenses 0.0 (3.5) 0.0 (6.0) --------- --------- --------- --------- Net Income $ 42.6 $ 26.4 $ 89.9 $ 63.1 ========= ========= ========= =========
Results of Operations Consolidated Overview Quarter Ended June 30, 1996 Compared to Quarter Ended June 30 ,1995 The Company's consolidated net income for the second quarter increased $16.2 million, or 61.4%, to $42.6 million, compared to the same period in 1995. Net income includes certain items which management believes are not indicative of overall operating trends. The following table reflects consolidated net income adjusted for these items, all net of taxes and minority interest.
(Unaudited) Quarter Ended June 30, (In millions) 1996 1995 Net income $ 42.6 $ 26.4 Adjustments: Net realized investment gains (1.5) (3.7) Contingency payment from sale of mutual fund processing business (2.1) 0.0 Extraordinary item - demutualization expenses 0.0 3.5 Differential earnings tax adjustment (5.9) 0.5 --------- --------- Adjusted net income $ 33.1 $ 26.7
The Company's adjusted net income increased $6.4 million, or 24.0%, to $33.1 million in the second quarter of 1996, compared to the same period in 1995. This increase is primarily attributable to an increase of $12.7 million in the Retail Financial Services segment, partially offset by a decrease of $3.3 million in the Regional Property and Casualty segment. Additionally, adjusted net losses in the Corporate segment were $4.0 million in the quarter ended June 30, 1996 primarily due to the interest expense on the Company's 7 5/8% Senior Debentures issued in October 1995. The increase in the Retail Financial Services segment relates primarily to increased variable products' fee revenue and income earned on proceeds from the Company's October, 1995 inital public offering. The decrease in the Regional Property and Casualty segment is primarily attributable to severe weather-related claims during the second quarter of 1996. Premium revenue increased $18.4 million, or 3.4%, to $564.5 million in the second quarter of 1996. Premiums in the Regional Property and Casualty segment increased $8.9 million, or 1.9%, to $469.7 million due to modest increases in policies in force in the personal automobile and homeowners' lines at Hanover and to price increases in various lines at both Hanover and Citizens. Additionally, premiums in the Corporate Risk Management Services segment increased $8.4 million, or 12.7%, to $75.1 million due to increases in group dental, group life, disability and reinsurance coverages totaling $6.4 million as well as increases of $1.8 in risk sharing and stop loss products. Universal life and investment-type product policy fees increased $5.9 million, or 13.8%, to $48.5 during the second quarter of 1996. This reflected additional deposits and appreciation on variable products account balances. Net realized gains on investments decreased $5.8 million, or 73.4%, to $2.1 million in the second quarter of 1996 primarily due to second quarter losses of $4.6 million on the sale of fixed maturity investments. Other income increased $8.3 million to $26.4 million for the quarter ended June 30, 1996. This increase was primarily attributable to $3.3 million related to the sale of the mutual fund processing business in 1996, a $2.0 million increase in retail investment management income and a $1.9 million increase from administrative services only ("ASO") fees. Policy benefits, claims, losses and loss adjustment expenses ("LAE") increased $14.8 million, or 3.0% to $508.9 million during the second quarter of 1996. This increase is primarily attributable to a $22.4 million, or 7.0%, increase in losses and LAE in the Company's Regional Property and Casualty segment as a result of catastrophe losses and severe weather during the second quarter of 1996, primarily at Citizens. Additionally, an increase of $5.8 million, or 9.0% in the Retail Financial Services segment is primarily attributable to a $4.8 million adjustment to the traditional life insurance product line in the second quarter of 1995 for the cession of substantially all of the Company's term life insurance business. Corporate Risk Management Services benefits increased $4.4 million, or 8.9% in the second quarter of 1996 principally due to product growth. These increases were partially offset by decreased policy benefits of $17.7 million, or 30.4%, in the Institutional Services segment primarily attributable to the continuing decline of Guaranteed Investment Contracts ("GICs") during 1996. Other operating expenses increased $10.7 million, or 9.6%, to $121.8 million in the second quarter of 1996 compared to the same period in 1995 primarily due to increased expenses in the Corporate Risk Management Services and Corporate segments. Other operating expenses in the Corporate Risk Management Services segment increased $5.9 million, or 22.6%, to $32.0 million in the second quarter of 1996 as a result of increased commissions and sales incentives, increased claims processing expenses to cover growth in claims volume and increased premium taxes. Additionally, the Company incurred $4.5 million of other operating expenses in the Corporate segment in the second quarter of 1996, principally related to interest paid on the Company's Senior Debentures. Federal income tax expense increased $5.7 million in the second quarter of 1996, while the effective tax rate decreased from 26.9% to 18.3% in the same period. For the life insurance subsidiaries, a decrease from 47.7% to 19.6% resulted primarily from a differential earnings charge of $0.5 million during the second quarter of 1995 compared to a differential earnings benefit of $5.9 million for the same period in 1996. For the Regional Property and Casualty subsidiaries, a slight decrease from 19.8% to 17.3% reflects a higher underwriting loss and a greater proportion of pre-tax income from tax-exempt bonds in 1996 than in the second quarter of 1995. Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995 The Company's consolidated net income for the six months ended June 30, 1996 increased $26.8 million, or 42.5%, to $89.9 million, compared to the same period in 1995. Net income includes certain items which management believes are not indicative of overall operating trends. The following table reflects consolidated net income adjusted for these items, all net of taxes and minority interest.
(Unaudited) Six Months Ended June 30, (In millions) 1996 1995 Net income $ 89.9 $ 63.1 Adjustments: Net realized investment gains (22.3) (2.4) Net gain on disposal of business 0.0 (13.4) Contingency payment from sale of mutual fund processing business (3.1) 0.0 Extraordinary item - demutualization expenses 0.0 6.0 Differential earnings tax adjustment (5.9) 1.3 --------- --------- Adjusted net income $ 58.6 $ 54.6 ========= =========
The increase in adjusted net income of $4.0 million is primarily attributable to an increase of $16.8 million in the Retail Financial Services segment, partially offset by a decrease of $9.3 million in the Regional Property and Casualty segment. The increase in the Retail Financial Services segment resulted primarily from increased fees from strong variable product growth and income earned on proceeds from the Company's October, 1995 inital public offering. These increases were partially offset by a decrease in the Regional Property and Casualty segment primarily due to severe weather-related claims during the first six months of 1996. Premium revenue increased $28.8 million, or 2.6%, to $1,141.7 million during the first six months of 1996. Property and casualty premiums earned increased $18.2 million, or 2.0%, to $934.8 million, as a result of modest increases in policies in force in the personal automobile and homeowners' lines at Hanover, and to price increases in Hanover's homeowners' line and Citizens' personal automobile and homeowners' lines. Premiums in the Corporate Risk Management Services segment increased $16.9 million, or 12.8%, to $148.9 million due to an $11.6 million increase in group life, group dental, and reinsurance coverages in addition to an increase of $5.1 million in risk sharing and stop loss products. Premiums in the Retail Financial Services segment decreased $6.2 million, or 9.7%, to $58.0 million, primarily reflecting the Company's shift in focus from traditional life insurance products to variable life insurance and annuity products. Universal life and investment product policy fees increased $11.3 million, or 13.5%, to $95.0 million during the first six months of 1996. This resulted from additional deposits and appreciation on variable products account balances. Net investment income before taxes decreased $7.2 million, or 2.0%, to $354.0 million during the first six months of 1996. This decrease primarily reflects a reduction in invested assets due to declining GIC deposits resulting in a decline in investment income of $27.2 million. Since March 1995, when S&P lowered the claims-paying ratings of FAFLIC and AFLIAC to A+ (Good), sales of traditional GICs have substantially ceased. This decrease was partially offset by approximately $10.5 million of income on proceeds from the Company's initial public offering and from the issuance of Senior Debentures in October 1995. The average gross yield of the fixed maturity investment portfolio decreased from 7.3% in the first six months of 1995 to 7.1% for the same period in 1996. Net realized gains on investments were $54.3 million and $5.7 million, before taxes and, $35.3 million and $3.7 million, after taxes in the first half of 1996 and 1995, respectively. In 1996, the Regional Property and Casualty segment revised its investment strategy, resulting in the sale of a substantial portion of its equity portfolio and the purchase of tax-exempt securities. Consequently, Regional Property and Casualty segment realized gains increased $28.6 million, to $30.9 million on an after-tax basis for the six months ended June 30, 1996. These sales are consistent with the segment's strategy to maximize after-tax net investment income. Results in the first six months of 1995 included a $20.7 million pre-tax gain from the March 1995 sale of the Company's mutual fund processing business. Other income decreased $6.0 million, or 11.9%, to $44.6 million in the first six months of 1996. This change was primarily attributable to a decrease of $13.5 million in the Institutional Services segment, partially offset by increases of $3.5 million and $3.6 million in the Retail Financial Services and Corporate Risk Management Services segments, respectively. The decrease in the Institutional Services segment's other income resulted primarily from the sale of the mutual fund processing business in March of 1995 which had contributed revenues of approximately $13.0 million in that year. This decrease was partially offset by the 1996 receipt of a non-recurring $4.8 million pre-tax contingent payment related to the sale. The increase in other income from the Retail Financial Services segment was primarily attributable to increased investment management income. The increase attributable to the Corporate Risk Management Services segment resulted primarily from increases in ASO contract fees. Policy benefits, claims, losses and loss adjustment expenses increased $27.2 million, or 2.7% to $1,044.5 million during the first six months of 1996. This increase is primarily attributable to a $48.3 million, or 7.5%, increase in losses and LAE in the Company's Regional Property and Casualty segment as a result of catastrophe losses and severe weather during the first six months of 1996. Additionally, a $9.4 million, or 9.8%, increase in the Corporate Risk Management Services segment resulted primarily from product growth, partially offset by favorable claims experience. These increases were partially offset by decreased policy benefits of $31.2 million, or 26.7%, in the Institutional Services segment primarily resulting from the continuing decline GICs during 1996. Policy acquisition expenses consist primarily of commissions, premium taxes and other policy issuance costs. Policy acquisition expenses increased $6.9 million, or 2.9%, to $242.3 million during the first six months of 1996. This was primarily due to an increase of $9.0 million, or 4.5%, to $210.5 million in the Regional Property and Casualty segment reflecting growth in net premiums earned. Other operating expenses increased $2.9 million, or 1.2%, to $237.7 million in the first six months of 1996 compared to the same period in 1995 primarily due to increased expenses in the Corporate Risk Management Services and Corporate segments. Other operating expenses in the Corporate Risk Management Services segment increased $10.3 million, or 20.0%, to $61.9 million in 1996 as a result of increased commissions and sales incentives, increased claims processing expenses to cover growth in claims volume and increased premium taxes. Additionally, the Company incurred $9.5 million of other operating expenses in the Corporate segment in the first six months of 1996, principally related to interest paid on the Company's Senior Debentures. These increases were partially offset by a decrease of $17.4 million in the Institutional services segment related to the sale of the mutual fund processing business in March 1995. Federal income tax expense decreased $5.6 million in the first six months of 1996, while the effective tax rate decreased from 28.8% to 22.31% in the same period. For the life insurance subsidiaries, a decrease from 44.3% to 27.7% resulted primarily from a differential earnings benefit of $5.9 million in the first half of 1996 versus a differential earnings charge in the first half of 1995. For the property and casualty subsidiaries, a slight decrease from 20.1% to 19.2% resulted from a higher underwriting loss and a greater proportion of pre-tax income from tax-exempt bonds in the first half of 1996. Segment Results The following is management's discussion and analysis of the Company's results of operations by business segment. The Company offers financial products and services in two major areas: Risk Management and Retirement and Asset Management. Within these broad areas, the Company conducts business principally in five operating segments. These segments are Regional Property and Casualty; Corporate Risk Management Services; Retail Financial Services; Institutional Services; and Allmerica Asset Management. The Regional Property and Casualty segment consists of the Company's 59.5% ownership of Allmerica P&C; however, all property and casualty results presented include 100% of Allmerica P&C's pre-tax results of operations, consistent with the presentation in the Company's consolidated financial statements. The other segments are all owned and operated by FAFLIC and its wholly owned subsidiaries. In addition to the five operating segments, the Company also has a Corporate segment, which consists primarily of Senior Debentures and a portion of the net proceeds from the Company's initial public offering. These proceeds are invested in fixed maturities at June 30, 1996. Risk Management Regional Property and Casualty The following table summarizes the results of operations for the Regional Property and Casualty segment for the periods indicated.
(Unaudited) (Unaudited) Quarter Ended Six Months Ended June 30, June 30, (In millions) 1996 1995 1996 1995 Revenues Net premiums earned...... $ 469.7 $ 460.8 $ 934.8 $ 916.6 Net investment income 56.3 51.0 108.6 104.0 Net realized gains 2.0 4.6 47.5 4.6 Other income 4.3 0.4 4.7 4.4 --------- --------- --------- --------- Total revenues 532.3 516.8 1,095.6 1,029.6 Losses and LAE 343.6 321.2 692.9 644.6 Policy acquisition and other operating expenses 151.6 144.7 298.1 290.4 --------- --------- --------- --------- Income before taxes $ 37.1 $ 50.9 $ 104.6 $ 94.6 ========= ========= ========= ========= Includes policyholders' dividends of $5.0 million and $4.4 million for the six months ended June 30, 1996 and 1995, respectively, and $1.9 million and $2.8 million for the quarters ended June 30, 1996 and 1995, respectively.
Quarter Ended June 30, 1996 Compared to Quarter Ended June 30, 1995 INCOME BEFORE TAXES Income before taxes decreased $13.8 million, to $37.1 million in the second quarter of 1996, compared to the same period in 1995. Excluding realized gains and losses, income before taxes decreased $11.2 million, to $35.1 million in the second quarter of 1996. The decrease in income before taxes is primarily attributable to a $23.3 million increase in losses and loss adjustment expenses to $341.7 million in the second quarter of 1996 as a result of increased catastrophes, primarily at Citizens. Catastrophe losses in the second quarter of 1996 were $24.3 million, compared to $14.3 million in the second quarter of 1995. Net investment income increased $5.3 million, or 10.4%, to $56.3 million. This increase resulted primarily from an increase in debt securities and higher average yields on these securities. The second quarter of 1995 was also impacted by a $2.4 million charge related to the pre-refunding of municipal bonds. LINES OF BUSINESS RESULTS Personal Lines of Business The personal lines of business represented 60.7% and 59.7% of total net premiums earned in the second quarter of 1996 and 1995, respectively.
Hanover Citizens Consolidated For the Quarters Ended 1996 1995 1996 1995 1996 1995 June 30 (In millions) Net premiums earned $147.7 $141.6 $137.2 $133.7 $284.9 $275.3 Losses and loss adjustment expenses 97.3 92.5 104.2 94.2 201.5 186.7 Policy acquisition and other underwriting expenses 50.3 42.7 36.2 36.5 86.5 79.2 ------- ------- ------- ------- ------- ------- Underwriting (loss) profit $ 0.1 $ 6.4 $ (3.2) $ 3.0 $ (3.1) $ 9.4 ======= ======= ======= ======= ======= =======
Revenues Personal lines of business net premiums earned increased $9.6 million, or 3.5%, to $284.9 million during the second quarter of 1996, compared to $275.3 million in the second quarter of 1995. Hanover's personal lines of business net premiums earned increased $6.1 million, or 4.3%, to $147.7 million during the second quarter of 1996. This increase is attributable to modest increases in policies in force in the personal automobile and homeowners lines, primarily as a result of growth in group business and in expansion states, and price increases in the homeowners line. Citizens' personal lines of business net premiums earned increased $3.5 million, or 2.6%, to $137.2 million in the second quarter of 1996. This increase is primarily attributable to price increases in the personal automobile and homeowners lines. Underwriting Results The personal lines of business underwriting profit decreased $12.5 million, to a loss of $3.1 million in the second quarter of 1996. Hanover's underwriting profit decreased $6.3 million, while Citizens' decreased $6.2 million to a loss of $3.2 million. The decrease in Hanover's underwriting profit resulted primarily from a $7.6 million, or 17.8%, increase in policy acquisition and other underwriting expenses to $50.3 million in the second quarter of 1996. This increase is primarily attributable to increases in net earned premium, a $1.5 million increase in group business expenses and a $1.7 million increase in expenses associated with the policy administration technology project. Citizens' decrease in underwriting profit is primarily attributable to a $13.6 million increase in catastrophe losses during the second quarter of 1996. This resulted in a $10.0 million, or 10.6% increase in losses and LAE to $104.2 million. This was partially offset by favorable claims activity in both the current and prior accident years in the personal automobile line attributable to improvements in severity. Citizens did not incur any catastrophe losses in the second quarter of 1995. Policy acquisition and other underwriting expenses at Citizens decreased $0.3 million, to $36.2 million in the second quarter of 1996. The decrease is primarily attributable to decreases in employee related expenses and contingent commissions, partially offset by the effect of increases in net earned premium. Commercial Lines of Business The commercial lines of business represented 39.3% and 40.3% of total net premiums earned in the second quarter of 1996 and 1995, respectively.
Hanover Citizens Consolidated For the Quarters Ended 1996 1995 1996 1995 1996 1995 June 30 (In millions) Net premiums earned $110.9 $116.0 $ 73.9 $ 69.5 $184.8 $185.5 Losses and loss adjustment expenses 80.4 85.5 59.8 46.2 140.2 131.7 Policy acquisition and other underwriting expenses 44.4 48.8 16.2 16.7 60.6 65.5 Policyholders' dividends 0.1 1.2 1.8 1.6 1.9 2.8 ------- ------- ------- ------- ------- ------- Underwriting (loss) profit $(14.0) $(19.5) $ (3.9) $ 5.0 $(17.9) $(14.5) ======= ======= ======= ======= ======= =======
Revenues Commercial lines of business net premiums earned decreased $0.7 million, to $184.8 million in the second quarter of 1996. Hanover's commercial lines of business net premiums earned decreased $5.1 million, or 4.4%, to $110.9 million. This decrease is primarily attributable to Hanover's withdrawal from a large voluntary pool on December 1, 1995 and to competitive market conditions in these lines of business. Rate decreases in all commercial lines and decreases in policies in force in the commercial multiple peril line also contributed to the decrease in net earned premium at Hanover. Citizens' commercial lines of business net premiums earned increased $4.4 million, or 6.3%, to $73.9 million in the second quarter of 1996. This increase is primarily attributable to a 5.8% increase in policies in force in the commercial multiple peril line since December 31, 1995. This increase was partially offset by rate decreases in the workers' compensation line as a result of continuing competition in this line in Michigan. Rates in the workers' compensation line were decreased 8.5%, 7.0% and 6.4% effective May 1, 1995, December 1, 1995, and June 1, 1996, respectively. Continued competitive conditions in the workers' compensation line at both Hanover and Citizens may result in future price decreases that will impact growth in this line. In addition, Hanover's premium growth in the commercial lines of business may be impacted by continued competitive pricing in 1996 as a result of soft market conditions combined with Hanover's effort to maintain its current underwriting standards. Underwriting Results The commercial lines of business underwriting loss increased $3.4 million, or 23.4%, to a loss of $17.9 million in the second quarter of 1996. Hanover's underwriting loss improved $5.5 million, or 28.2%, to a loss of $14.0 million, while Citizens' underwriting profit decreased $8.9 million, to a loss of $3.9 million in the second quarter of 1996. Hanover's commercial lines of business losses and LAE decreased $5.1 million, or 6.0%, to $80.4 million in the second quarter of 1996. This improvement is primarily attributable to a decrease of $8.3 million, resulting from the withdrawal of a major voluntary pool and a $5.3 million decrease in the commercial automobile line as a result of favorable claims experience on the current and prior years. This was partially offset by a $11.2 million increase in losses and LAE in the workers' compensation line reflecting increased claim frequency and severity. Citizens' underwriting loss resulted primarily from increased loss frequency in the commercial multiple peril line and a $2.3 million increase in catastrophe losses in this line. Losses and LAE in the commercial multiple peril line increased $6.0 million, or 44.4%, to $19.5 million. There were no catastrophe losses in the commercial lines of business in the second quarter of 1995. Policy acquisition and other underwriting expenses in the commercial lines of business decreased $4.9 million, or 7.5%, to $60.6 million in the second quarter of 1996. Hanover's policy acquisition and other underwriting expenses decreased $4.4 million, or 9.0%, to $44.4 million, primarily attributable to a $6.5 million decrease in expenses associated with a change in estimate in deferred expenses during the second quarter of 1996, and the effect of decreases in net earned premium. Hanover revised its estimate of deferred acquisition costs during the quarter to reflect changes in variable underwriting expenses. This was partially offset by a $1.2 million increase associated with the policy administration technology project. Citizens' policy acquisition and other underwriting expenses decreased $0.5 million, or 3.0%, to $16.2 million, resulting from decreases in employee related expenses and contingent commissions, partially offset by the effect of increases in net earned premium. Investment results Net investment income before taxes increased $5.3 million, to $56.3 million in 1996 compared to $51.0 million in the comparable quarter of 1995. This increase primarily reflects an increase in average invested assets and a higher level of debt securities in the portfolio. Net investment income in 1995 was adversely impacted by a $2.4 million charge related to the pre- refunding of municipal bond securities. Average yields on debt securities increased from 6.2% in the second quarter of 1995 to 6.4% in the comparable 1996 quarter. Net investment income after taxes increased $4.3 million, to $46.2 million. During the first quarter of 1996, the Company revised its investment strategy, resulting in the sale of a substantial portion of this segment's equity portfolio and the purchase of tax-exempt securities. This is consistent with the Company's strategy of maximizing after-tax net investment income. This segment had realized gains of $2.0 million during the second quarter of 1996 compared to realized gains of $4.6 million in the second quarter of 1995. Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995 INCOME BEFORE TAXES Income before taxes for the six months ended June 30, 1996 increased $10.0 million, or 10.6%, to $104.6 million, compared to the same period in 1995. The increase in income before taxes is primarily attributable to a $42.9 million increase in realized gains, primarily related to the sale of equity securities. This increase reflects the Company's decision during the first quarter of 1996 to increase the proportion of debt securities in the Regional Property and Casualty segment's portfolio. Excluding net realized gains, income before taxes decreased $32.9 million, to $57.1 million for the six months ended June 30, 1996. Income before taxes in the six month period of 1996 was significantly impacted by catastrophes and other severe weather related losses. This resulted in a $47.7 million increase in losses and loss adjustment expenses to $687.9 million in the six months ended June 30, 1996. Catastrophe losses in the six months ended June 30, 1996 were $54.3 million, compared to $16.3 million in the comparable 1995 period. This was partially offset by favorable claims experience on current and prior accident years, primarily at Citizens, primarily in the personal automobile and workers' compensation lines. Net investment income increased $4.6 million, or 4.4%, to $108.6 million. This increase reflects an increase in debt securities resulting from the Company's strategy to reduce the level of equity securities in the Regional Property and Casualty segment's portfolio, which was implemented during the first quarter of 1996. The six month results were also impacted by a $2.4 million charge related to the pre-refunding of municipal bonds. LINES OF BUSINESS RESULTS Personal Lines of Business The personal lines of business represented 60.5% and 59.3% of total net premiums earned in the six months ended June 30, 1996 and 1995, respectively.
Hanover Citizens Consolidated For the Six Months Ended 1996 1995 1996 1995 1996 1995 June 30 (In millions) Net premiums earned $292.8 $280.8 $272.3 $263.0 $565.1 $543.8 Losses and loss adjustment expenses 213.6 184.6 211.6 198.8 425.2 383.4 Policy acquisition and other underwriting expenses 99.3 88.1 72.6 72.8 171.9 160.9 ------- ------- ------- ------- ------- ------- Underwriting (loss) profit $(20.1) $ 8.1 $(11.9) $ (8.6) $(32.0) $ (0.5) ======= ======= ======= ======= ======= =======
Revenues Personal lines of business net premiums earned for the six months ended June 30, 1996 increased $21.3 million, or 3.9%, to $565.1 million, compared to $543.8 million in the same period of 1995. Hanover's personal lines of business net premiums earned increased $12.0 million, or 4.3%, to $292.8 million during the six months ended June 30, 1996. This increase is primarily attributable to modest increases in policies in force in the personal automobile and homeowners lines and price increases in the homeowners line. Citizens' personal lines of business net premiums earned increased $9.3 million, or 3.5%, to $272.3 million in the six months ended June 30, 1996. This increase is primarily attributable to price increases in the personal automobile and homeowners lines. Underwriting Results The personal lines of business underwriting loss for the six months ended June 30, 1996 increased $31.5 million, to a loss of $32.0 million. Hanover's underwriting loss increased $28.2 million, while Citizens' increased $3.3 million. Hanover's personal lines of business losses and LAE increased $29.0 million, or 15.7%, to $213.6 million in the six months ended June 30, 1996. This increase is primarily attributable to a $19.0 million increase in losses and LAE in the homeowners line, resulting from increased catastrophes during the period. Catastrophe losses in the personal lines of business increased $13.4 million, to $22.1 million in the six months ended June 30, 1996 from $8.7 million during the comparable 1995 period. Citizens' underwriting loss increased primarily as a result of a $17.7 million increase in catastrophe losses. This resulted in a $24.9 million increase in losses and LAE in the homeowners line. Favorable claims experience on current and prior years resulted in a $12.7 million decrease in losses and LAE in the personal automobile line. There were no catastrophe losses in the personal lines of business during the six month period ended June 30, 1995. Policy acquisition and other underwriting expenses in the personal lines of business increased $11.0 million, or 6.8%, to $171.9 million in the six months ended June 30, 1996. This increase is primarily attributable to an increase of $11.2 million, or 12.7%, to $99.3 million at Hanover for the six months ended June 30, 1996. This increase is due to the effect of increases in net earned premium, a $3.0 million increase in group business expenses, a $2.0 million increase in commissions and a $1.8 million increase in expenses associated with the policy administration technology project. Policy acquisition and other underwriting expenses in the personal lines of business at Citizens decreased $0.2 million, to $72.6 million for the six months ended June 30, 1996. This decrease is primarily attributable to decreases in employee related expenses and contingent commissions, partially offset by the effect of increases in net earned premium. Commercial Lines of Business The commercial lines of business represented 39.5% and 40.7% of total net premiums earned in the six months ended June 30, 1996 and 1995, respectively.
Hanover Citizens Consolidated For the Six Months Ended 1996 1995 1996 1995 1996 1995 June 30 (In millions) Net premiums earned $226.4 $237.6 $143.3 $135.2 $369.7 $372.8 Losses and loss adjustment expenses 154.8 169.5 107.9 87.3 262.7 256.8 Policy acquisition and other underwriting expenses 88.1 94.7 33.6 34.8 121.7 129.5 Policyholders' dividends 1.4 1.7 3.6 2.7 5.0 4.4 ------- ------- ------- ------- ------- ------- Underwriting (loss) profit $(17.9) $(28.3) $ (1.8) $ 10.4 $(19.7) $(17.9) ======= ======= ======= ======= ======= =======
Revenues Commercial lines of business net premiums earned for the six months ended June 30, 1996 decreased $3.1 million, or 1.0%, to $369.7 million. Hanover's commercial lines of business net premiums earned decreased $11.2 million, or 4.7%, to $226.4 million. This decrease is primarily attributable to Hanover's withdrawal from a large voluntary pool on December 1, 1995. Rate decreases in all commercial lines and decreases in policies in force in the commercial multiple peril line also contributed to the decrease in net earned premium at Hanover. Citizens' commercial lines of business net premiums earned increased $8.1 million, or 6.0%, to $143.3 million in the six months ended June 30, 1996. The increase is primarily attributable to a 5.8% increase in policies in force in the commercial multiple peril line since December 31, 1995. Rates in the workers' compensation line were decreased 8.5%, 7.0% and 6.4% effective May 1, 1995, December 1, 1995, and June 1, 1996, respectively. Underwriting Results The commercial lines of business underwriting loss for the six months ended June 30, 1996 increased $1.8 million, or 10.1% to a loss of $19.7 million. Hanover's underwriting loss improved $10.4 million, or 36.7%, to a loss of $17.9 million and Citizens' underwriting profit decreased $12.2 million, to a loss of $1.8 million in the six months ended June 30, 1996. Hanover's commercial lines of business losses and LAE decreased $14.7 million, or 8.7%, to $154.8 million in the six months ended June 30, 1996. This improvement is primarily attributable to a decrease of $12.1 million in the commercial automobile line as a result of favorable claims experience on the current and prior years and an $8.9 million decrease in losses in LAE resulting from the withdrawal of a large voluntary pool. However, losses and LAE in the commercial multiple peril lines increased $5.9 million, to $80.7 million, primarily due to an increase in catastrophes from $5.0 million in 1995 to $7.9 million in 1996, and to increased severity in this line. Citizens' underwriting profit decreased primarily due to increased claims activity in the commercial multiple peril line, resulting from severe weather and catastrophe losses which adversely impacted this line. Commercial multiple peril losses and LAE increased $12.5 million, or 63.1%, to $32.3 million in the six months ended June 30, 1996. Catastrophe losses were $3.0 million in these lines of business during the six months ended June 30, 1996. There were no catastrophe losses in this lines of business for the comparable period of 1995. Policy acquisition and other underwriting expenses in the commercial lines of business decreased $7.8 million, or 6.0%, to $121.7 million in the six months ended June 30, 1996. Hanover's policy acquisition expenses and other underwriting expenses decreased $6.6 million, or 7.0%, to $88.1 million, primarily attributable to a $5.2 million decrease in expenses associated with a change in estimate in deferred expenses during the second quarter of 1996, and by the effect of decreases in net earned premium. Hanover revised its estimate of deferred acquisition costs during the quarter to reflect changes in variable underwriting expenses. This was partially offset by a $1.2 million increase associated with the policy administration technology project. Citizens' policy acquisition and other underwriting expenses in the commercial lines of business decreased $1.2 million, or 3.4%, to $33.6 million, primarily attributable to decreases in employee related expenses and contingent commissions, partially offset by the effect of increases in net earned premium. INVESTMENT RESULTS Net investment income before taxes increased $4.6 million, or 4.4%, to $108.6 million during the first six months of 1996 compared to $104.0 million in the comparable period of 1995. This increase primarily reflects an increase in average invested assets and a higher level of debt securities in the portfolio. Net investment income in 1995 was adversely impacted by a $2.4 million charge related to the pre-refunding of municipal bond securities. Average yields on debt securities decreased from 6.3% in the six months ended June 30, 1995 to 6.2% in 1996. Net investment income after taxes increased $4.6 million, to $90.1 million, primarily attributable to the increase in tax-exempt debt securities. During the first quarter of 1996, the Company revised its investment strategy, resulting in the sale of a substantial portion of this segment's equity portfolio and the purchase of tax-exempt securities. This is consistent with the Company's strategy of maximizing after-tax net investment income. As a result of the sale of equity securities, the Regional Property and Casualty segment had realized gains of $47.5 million during the six months ended June 30, 1996, compared to realized gains of $4.6 million in 1995. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES The Regional Property and Casualty segment regularly updates its reserve estimates as new information becomes available and further events occur which may impact the resolution of unsettled claims. Changes in prior reserve estimates are reflected in results of operations in the year such changes are determined to be needed and recorded. The table below provides a reconciliation of the beginning and ending reserve for unpaid losses and LAE as follows:
For the six months ended June 30, (In millions) 1996 1995 Reserve for losses and LAE, beginning of period $ 2,896.0 $ 2,821.7 Incurred losses and LAE, net of reinsurance recoverable: Provision for insured events of the current year 743.6 685.6 Decrease in provision for insured events of prior years (55.7) (45.4) ---------- ---------- Total incurred losses and LAE 687.9 640.2 ---------- ---------- Payments, net of reinsurance recoverable: Losses and LAE attributable to insured events of current year 300.9 236.5 Losses and LAE attributable to insured events of prior years . 386.1 365.2 ---------- ---------- Total payments 687.0 601.7 ---------- ---------- Change in reinsurance recoverable on unpaid losses (31.8) (3.7) ---------- ---------- Reserve for losses and LAE, end of period $2,865.1 $ 2,856.5 ========== ==========
As part of an ongoing process, the reserves have been re-estimated for all prior accident years and were decreased by $55.7 million and $45.4 million for the six month periods ended June 30, 1996 and 1995, respectively. The increase in favorable development on prior years' loss reserves of $10.3 million results primarily from a $7.3 million increase in favorable development at Citizens to $14.3 million. The favorable reserve development at Citizens in 1996 primarily reflects reduced medical costs in the personal automobile line. Hanover's favorable development remained relatively stable at $41.4 million during the six months ended June 30, 1996. Hanover continues to experience favorable development in the personal automobile, workers' compensation and commercial automobile lines. However, the commercial multiple peril line continues to develop unfavorably. Corporate Risk Management Services The following table summarizes the results of operations for the Corporate Risk Management Services ("CRMS") lines of business for the periods indicated.
(Unaudited) (Unaudited) Quarter Ended Six Months Ended June 30, June 30, (In millions) 1996 1995 1996 1995 Premiums and premium equivalents Premiums $ 75.1 $ 66.7 $ 148.9 $ 132.0 Premium equivalents 143.9 124.0 286.5 249.1 --------- --------- --------- --------- Total premiums and premium equivalents $ 219.0 $ 190.7 $ 435.4 $ 381.1 ========= ========= ========= ========= Revenues Premiums $ 75.1 $ 66.7 $ 148.9 $ 132.0 Net investment income 5.4 4.2 10.2 7.9 Net realized (losses) gains 0.2 0.2 0.1 0.3 Other income 8.9 7.0 17.2 13.6 --------- --------- --------- --------- Total revenues 89.6 78.1 176.4 153.8 Policy benefits, claims and losses 53.5 49.2 105.5 96.1 Policy acquisition expenses 0.7 0.6 1.5 1.3 Other operating expenses 32.0 26.1 61.9 51.6 --------- --------- --------- --------- Income before taxes $ 3.4 $ 2.2 $ 7.5 $ 4.8 ========= ========= ========= =========
Quarter Ended June 30, 1996 Compared to Quarter Ended June 30, 1995 Income before taxes increased $1.2 million, or 54.5%, to $3.4 million in the second quarter of 1996 compared to the second quarter of 1995. This increase was primarily attributable to premium growth in the Company's risk sharing, non-medical, and administrative services only product lines, partially offset by increases in benefits and claims expenses and other operating expenses. Premiums increased $8.4 million, or 12.6%, to $75.1 million in the second quarter of 1996 primarily due to increases in group dental, group life, stop loss, reinsurance and risk sharing product lines totaling $7.2 million. Net investment income increased $1.2 million, or 28.6%, to $5.4 million in the second quarter of 1996 due to growth in invested assets. Other income increased $1.9 million, or 27.1%, to $8.9 million in the second quarter of 1996 due primarily to an increase in fees from ASO contracts. Policy benefits, claims and losses increased $4.3 million, or 8.7%, to $53.5 million in the second quarter of 1996 compared to the same period in 1995. This increase is principally attributable to the increased premium growth, partially offset by favorable loss experience. Other operating expenses increased $5.9 million, or 22.6%, to $32.0 million in the second quarter of 1996 primarily due to increases in commissions and sales incentives, increases in claims processing expenses to cover growth in claims volume and increased premium taxes. Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995 Income before taxes increased $2.7 million, or 56.3%, to $7.5 million in the first half of 1996 compared to the same period in 1995. This increase was primarily attributable to premium growth in the Company's risk sharing, non-medical, and administrative services only product lines, partially offset by increases in benefits and claims expenses and other operating expenses. Premiums increased $16.9 million, or 12.8%, to $148.9 million in the first six months of 1996 primarily due to increases in group life, group dental, reinsurance, risk sharing and stop loss product lines totaling $16.7 million. These increases were partially offset by decreases of $0.5 million in full indemnity medical products. The decrease in full indemnity health business is consistent with the Company's strategy to de-emphasize these products in favor of the more profitable risk sharing and non-medical arrangements. Net investment income increased $2.3 million, or 29.1%, to $10.2 million in the first half of 1996 due to growth in invested assets. Other income increased $3.6 million, or 26.5%, to $17.2 million in the first six months of 1996 due primarily to an increase in fees from ASO contracts. Policy benefits, claims and losses increased $9.4 million, or 9.8%, to $105.5 million in the first half of 1996 compared to the same period in 1995. This increase is principally related to the increased premium growth, partially offset by favorable claims experience. Other operating expenses increased $10.3 million, or 20.0%, to $61.9 million for the six months ended June 30, 1996 primarily due to increases in commissions and sales incentives, increases in claims processing expenses to cover growth in claims volume and increased premium taxes. Retirement and Asset Management Retail Financial Services The following table summarizes the results of operations for the Retail Financial Services lines of business for the periods indicated.
(Unaudited) (Unaudited) Quarter Ended Six Months Ended June 30, June 30, (In millions) 1996 1995 1996 1995 Revenues Premiums...... $ 19.7 $ 18.5 $ 58.0 $ 64.2 Fees.............. 44.4 39.3 86.9 77.0 Net investment income 64.0 54.7 123.2 110.9 Net realized gains (losses) (1.1) 0.3 (0.2) (1.9) Other income 7.5 5.5 13.6 10.1 --------- --------- --------- --------- Total revenues 134.5 118.3 281.5 260.3 Policy benefits, claims and losses 71.3 65.5 160.6 159.9 Policy acquisition expenses 13.6 18.6 29.0 31.0 Other operating expenses 29.4 26.3 56.8 53.6 --------- --------- --------- --------- Income before taxes $ 20.2 $ 7.9 $ 35.1 $ 15.8 ========= ========= ========= =========
Quarter Ended June 30, 1996 Compared to Quarter Ended June 30, 1995 Income before taxes increased $12.3 million, or 155.7%, to $20.2 million in the second quarter of 1996 compared to the second quarter of 1995. This increase was primarily attributable to growth in variable products' fee revenue, income earned on the proceeds from the October, 1995 initial public offerings and a decrease in policy acquisition expenses, partially offset by an increase in policy benefits. Premiums remained relatively flat, increasing $1.2 million, or 6.5%, to $19.7 million, during the second quarter of 1996. While the Company expects premiums from traditional life insurance products to decline, increases of approximately $1.7 million were recognized related to the cession of substantially all of the Company's term life insurance business in the second quarter 1995. The increase in fee revenue of $5.1 million, or 13.0%, to $44.4 million in the second quarter of 1996 is due to additional deposits and appreciation on variable products' account balances. Fees from variable universal life increased $1.4 million, or 15.9%, to $10.2 million for the second quarter of 1996. Fees from annuities increased $5.6 million, or 69.1%, to $13.7 million in the second quarter of 1996. These increases were partially offset by a continued decline in fees from non-variable universal life of $1.9 million. The Company expects fees on this product to decrease as policies in force and related contract values decline. Net investment income increased $9.3 million, or 17.0 %, to $64.0 million in the second quarter of 1996 compared to the second quarter of 1995 resulting primarily from $5.4 million in income earned on proceeds from the Company's October, 1995 initial public offerings. Additionally, increases in short-term debt used to finance additions to the investment portfolio have resulted in increased investment income. Policy benefits, claims, and losses increased $5.8 million, or 8.9%, to $71.3 million in the second quarter of 1996 compared to the same period in 1995. This resulted primarily from an adjustment reducing traditional life insurance policy benefits by approximately $4.8 million in the second quarter of 1995 resulting from the cession of substantially all of the Company's term life insurance business. Policy acquisition expenses decreased $5.0 million, or 26.9%, to $13.6 million in the second quarter of 1996 compared to the second quarter of 1995. This resulted primarily from an adjustment reducing traditional life insurance policy acquisition expenses by approximately $2.2 million in the second quarter of 1995 resulting from the cession of substantially all of the Company's term life insurance business. In addition, a change in mortality assumptions in variable universal life products during the second quarter of 1996 resulted in decreased amortization. Other operating expenses increased $3.1 million, or 11.8%, to $29.4 million for the quarter ended June 30, 1996. This increase was primarily attributable to additional interest expense in 1996 resulting from short-term debt. Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995 Income before taxes increased $19.3 million, or 122.2%, to $35.1 million in the first half of 1996 compared to the same period in 1995. This increase was primarily attributable to growth in variable products' fee revenue and income earned on the proceeds from the October, 1995 initial public offerings. These increases were partially offset by a decrease in premiums from traditional life and health products. The decrease in premiums of $6.2 million, or 9.7%, to $58.0 million in the first six months of 1996 is primarily due to the Company's shift in focus from traditional life insurance products to variable life insurance and annuity products. Premiums from traditional life products decreased $4.2 million, or 9.3%, to $40.8 million in the first half of 1996. Premiums from individual health products decreased $2.1 million, or 10.9%, to $17.1 million in 1996. The increase in fee revenue of $9.9 million, or 12.9%, to $86.9 million in the first half of 1996 is due to additional deposits and appreciation on variable products account balances. Fees from variable universal life increased $3.4 million, or 20.0%, to $20.4 million in the first six months of 1996. Fees from annuities increased $10.1 million, or 65.2%, to $25.6 million in 1996. These increases were partially offset by a continued decline in fees from non-variable universal life of $3.6 million. The Company expects fees on this product to decrease as policies in force and related contract values decline. Net investment income increased $12.3 million, or 11.1 %, to $123.2 million in the first half of 1996 primarily from $8.4 million in income earned on proceeds from the Company's October, 1995 initial public offerings. Additionally, increases in short-term debt used to finance additions to the investment portfolio have resulted in increased investment income. Policy benefits, claims, and losses remained relatively flat in the first six months of 1996 compared to the same period in 1995, increasing $0.7 million, or 0.4%, to $160.6 million. Increases in variable products' policy benefits, which related primarily to growth in the business, were partially offset by a decrease in non-variable universal life policy benefits as a result of more favorable mortality experience in 1996. Other operating expenses increased $3.2 million, or 6.0%, to $56.8 million for the six months ended June 30, 1996. This increase was primarily attributable to additional interest expense in 1996 resulting from short-term debt. Institutional Services The following table summarizes the results of operations for the Institutional Services segment for the periods indicated.
(Unaudited) (Unaudited) Quarter Ended Six Months Ended June 30, June 30, (In millions) 1996 1995 1996 1995 Revenues Fees, premiums, non-insurance and other income $ 9.8 $ 6.4 $ 17.2 $ 26.2 Net investment income GICs 25.7 40.6 55.2 82.4 Other 27.4 28.1 55.3 55.9 Net realized gains 1.2 3.9 7.1 3.8 Gain on sale of mutual fund processing business 0.0 0.0 0.0 20.7 --------- --------- --------- --------- Total revenues 64.1 79.0 134.8 189.0 Policy benefits, claims and losses GICs 23.3 36.2 50.7 74.6 Other 17.2 22.0 34.8 42.1 Policy acquisition expenses 0.7 0.9 1.4 1.6 Other operating expenses 10.7 13.4 22.3 39.7 --------- --------- --------- --------- Income before taxes $ 12.2 $ 6.5 $ 25.6 $ 31.0 ========= ========= ========= ========= Fees, premiums and non-insurance income includes fees from retirement services, mutual fund services, institutional 401(K) recordkeeping services, and other miscellaneous non-insurance related fees. In March 1995, the Company sold its mutual fund processing business.
Quarter Ended June 30, 1996 compared to Quarter Ended June 30, 1995 Income before taxes increased $5.7 million, or 87.7%, to $12.2 million for the second quarter of 1996 compared to the second quarter of 1995. This increase was primarily attributable to a non-recurring $3.3 million contingent payment from the sale of the mutual fund processing business included in other income, and a pre-tax operating loss in the second quarter of 1995 from that business of $2.5 million. Additionally, other policy benefits, claims and losses declined $4.8 million as a result of cancellations of defined benefit and defined contribution plans, and to favorable mortality experience in the group annuity line. These increases were partially offset by a $2.7 million decrease in realized investment gains as well as a decline in the interest margin on GICs of $2.0 million, due to declining GIC deposits. Fees, premiums, and non-insurance income increased $3.4 million, or 53.1%, to $9.8 million in 1996 primarily due to the non-recurring $3.3 million contingent payment related to the sale of the mutual fund processing business in 1995. Net realized gains decreased $2.7 million, to $1.2 million in the second quarter of 1996 primarily due to second quarter losses of $2.6 million on the sale of fixed maturity investments. Other policy benefits, claims and losses consist primarily of benefits provided by the Company's defined contribution and defined benefit plans, including annuity benefits for certain defined benefit plan participants electing that option. Other policy benefits, claims and losses decreased $4.8 million, or 21.8%, to $17.2 million for the second quarter of 1996, primarily due to reductions in interest credited to participants resulting from the aforementioned cancellations, and to favorable mortality experience in the group annuity line. Other operating expenses decreased $2.7 million, or 20.1%, to $10.7 million for the first six months of 1996. This decrease was primarily attributable to the sale of the mutual fund processing business, which incurred $2.5 million of operating expenses in the second quarter of 1995. Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995 Income before taxes decreased $5.4 million, or 17.4%, to $25.6 million for the six months ended June 30, 1996 compared to the six months ended June 30, 1995. This decrease was primarily attributable to the sale of the Company's mutual fund processing business in March 1995, resulting in a pre-tax gain of $20.7 million, partially offset by a pre-tax operating loss from that business of $4.5 million for the first six months of 1995. Also, a non-recurring $4.8 million contingent payment related to the sale was received in 1996 and included in other income. Additionally, other policy benefits, claims and losses declined $7.3 million as a result of defined benefit and defined contribution plan cancellations and favorable mortality experience in the group annuity line. An increase in realized investment gains of $3.3 million was offset by a decline in the interest margins on GICs of $3.3 million, due to declining GIC deposits. Fees, premiums, non-insurance and other income decreased $9.0 million, or 34.4%, to $17.2 million in the first half of 1996. As noted above, this decrease was primarily attributable to a $13.0 million decrease in revenues from the mutual fund processing business, partially offset by the 1996 receipt of a non-recurring $4.8 million contingent payment related to the sale. Additionally, decreases in fee income resulting from cancellations of defined benefit and defined contribution plans were more than offset by increases in fees due to the appreciation of related separate account balances. Net investment income related to GICs and interest credited to GIC contractholders have declined as a result of declining GIC deposits due to the downgrading in March 1995 of FAFLIC's and AFLIAC's S&P Rating to A+ (Good). As a result, sales of traditional GICs have substantially ceased. Management expects GIC deposits and related income to continue to decline. Net realized gains increased $3.3 million, to $7.1 million in the first six months of 1996. This change resulted primarily from increased sales of real estate properties of $2.6 million, as well as increases in mortgage loan prepayment fees and decreases in mortgage loan impairments totaling $1.5 million. These increases were partially offset by losses on the sale of bonds. Other policy benefits, claims and losses consist primarily of benefits provided by the Company's defined contribution and defined benefit plans, including annuity benefits for certain defined benefit plan participants electing that option. Policy benefits, claims and losses for defined benefit and defined contribution plans declined from $42.2 million in 1995 to $34.7 million in 1996. This was primarily due to reductions in the interest credited to participants resulting from the aforementioned cancellations, and to favorable mortality experience in the group annuity line. Other operating expenses decreased $17.4 million, or 43.8%, to $22.3 million in the first six months of 1996. This decrease was primarily attributable to the sale of the mutual fund processing business, which incurred $17.8 million of operating expenses in the first six months of 1995. Allmerica Asset Management The following table summarizes the results of operations for the Allmerica Asset Management segment for the periods indicated.
(Unaudited) (Unaudited) Quarter Ended Six Months Ended June 30, June 30, (In millions) 1996 1995 1996 1995 Fees and other income: External $ 0.3 $ 0.4 $ 0.5 $ 0.9 Internal 3.2 0.8 4.0 1.2 --------- --------- --------- --------- Total revenues 3.5 1.2 4.5 2.1 Other operating expenses 3.3 0.6 4.0 1.0 --------- --------- --------- --------- Income before taxes $ 0.2 $ 0.6 $ 0.5 $ 1.1 ========= ========= ========= =========
Since 1994, the Company has provided investment advisory and subadvisory services, primarily to affiliates, through its registered investment advisor, Allmerica Asset Management. In the second quarter of 1996, the Allmerica Asset Management segment finalized a contract with two related parties, FAFLIC and AFLIAC, to provide investment advisory services. Corporate The following table summarizes the results of operations for the Corporate segment for the periods indicated.
(Unaudited) (Unaudited) Quarter Ended Six Months Ended June 30, June 30, (In millions) 1996 1995 1996 1995 Revenues Investment and other income $ 1.0 $ 0.0 $ 1.5 $ 0.0 Realized loss (0.2) 0.0 (0.2) 0.0 --------- --------- --------- --------- Total revenues 0.8 0.0 1.3 0.0 Other operating expenses 5.0 0.0 9.5 0.0 --------- --------- --------- --------- Loss before taxes $ (4.2) $ 0.0 $ (8.2) $ 0.0
This segment consists primarily of $41.2 million of cash and investments remaining from the $52.9 million in net proceeds retained by the holding company in the Company's initial public offering. These investments earned $1.5 million in net investment income in the first six months of 1996. The segment incurred $9.5 million of other operating expenses in 1996 primarily reflecting $7.6 million in interest expense on the Company's 7 5/8% Senior Debentures issued in October 1995. Investment Portfolio The Company had investment assets diversified across several asset classes, as follows:
June 30, December 31, 1996 1995 Carrying % of Total Carrying % of Total (Dollars in millions) Value Carrying Value Value Carrying Value Fixed maturities $ 8,402.7 81.3% $ 8,197.3 78.1% Equity securities 399.3 3.9 517.2 4.9 Mortgages 796.3 7.7 856.5 8.2 Policy loans 365.0 3.5 365.7 3.5 Real estate 157.5 1.5 179.6 1.7 Cash and cash equivalents 139.5 1.3 307.1 2.9 Other invested assets 78.2 0.8 71.9 0.7 ----------------- ------------------ Total $10,338.5 100.0% $10,495.3 100.0% ================= ================== Includes Closed Block invested assets with a carrying value of $770.8 million and $775.1 million at June 30, 1996 and December 31, 1995, respectively. The Company carries the fixed maturities and equity securities in its investment portfolio at market value.
Total investment assets decreased $156.8 million, or 1.5%, to $10.3 billion during the first six months of 1996. This decrease is primarily attributable to a decline in invested assets related to GIC contracts, and to market value depreciation in the fixed maturities portfolio, partially offset by increased investments financed with short-term debt. Equity securities decreased $117.9 million, or 22.8%, to $399.3 million, as a result of the Regional Property and Casualty segment's shift in portfolio holdings from equity securities to tax-exempt fixed maturity securities. This portfolio shift and a $470.5 million increase in short-term debt contributed to an increase in fixed maturities of $205.4 million, or 2.5%, in spite of market value depreciation of $232.9 million. Additionally, mortgage loans decreased $60.2 million, or 7.0%, to $796.3 million caused primarily by loan repayments. The real estate portfolio decreased $22.1 million, or 12.3%, to $157.5 million during the first six months of 1996 due to sales of these properties. Cash and cash equivalents decreased $167.6 million, or 54.6%, to $139.5 million. 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. Investment grade securities comprised 85.8% and 88.7% of the Company's total fixed maturity portfolio at June 30, 1996 and December 31, 1995, respectively. Although management expects that a substantial portion of new funds will be invested in investment grade fixed maturities, the Company may invest a portion of new funds in below investment grade fixed maturities or equity interests, which management anticipates will not become a significant portion of its total investment portfolio. The following table illustrates asset valuation allowances and additions to or deductions from such allowances for the periods indicated.
Other Real Invested (Dollars in millions) Mortgages Estate Assets Total Year Ended December 31, 1995 Beginning balance $ 47.2 $ 22.9 $ 3.7 $ 73.8 Provision (benefits) 1.5 (0.6) 0.0 0.9 Write-offs (14.9) (2.7) 0.0 (17.6) --------- --------- --------- --------- Ending balance $ 33.8 $ 19.6 $ 3.7 $ 57.1 Valuation allowance as a percentage of carrying value before reserves 3.8% 9.8% 4.9% 4.9% Six months ended June 30, 1996 Provision (benefits) 0.6 0.0 0.0 0.6 Write-offs (2.4) (1.1) 0.0 (3.5) --------- --------- --------- -------- Ending balance $ 32.0 $ 18.5 $ 3.7 $ 54.2 Valuation allowance as a percentage of carrying value before reserves 3.9% 10.5% 4.5% 5.0% Write-offs reflect asset sales, foreclosures and forgiveness of debt upon restructurings.
The decrease in write-offs of mortgages during 1996 as compared to 1995 reflects a decrease in foreclosures, debt restructuring agreements and discounted payoffs, as well as the improved real estate market. Income Taxes AFC and its life insurance subsidiaries (including certain noninsurance operations) file a consolidated United States federal income tax return. Entities included within the consolidated group are segregated into either a life insurance or a nonlife insurance company subgroup. The consolidation of these subgroups is subject to certain statutory restrictions on the percentage of eligible nonlife tax losses that can be applied to offset life company taxable income. Allmerica P&C and its subsidiaries file a separate United States federal income tax return. For the six months ended June 30, 1995, FAFLIC, as a mutual insurance company until October 1995, was required to adjust its deduction for policyholder dividends by the differential earnings amount under Section 809 of the Internal Revenue Code. This amount was computed, for each tax year, by multiplying the average equity base of the FAFLIC/AFLIAC consolidated group, as determined for tax purposes, by the estimate of an excess of an imputed earnings rate over the average mutual life insurance companies' earnings rate. The differential earnings amount for each tax year was subsequently recomputed when actual earnings rates were published by the IRS. As a stock company, AFC, including its life insurance subsidiaries, is no longer required to reduce its policyholder dividend deduction by the differential earnings amount. The differential earnings amount in the current period related to an adjustment for the 1994 tax year based on the actual average mutual life insurance companies' earnings estimated rate issued by the IRS in 1996. Provision for federal income taxes before minority interest was $12.6 million during the second quarter of 1996 compared to $18.3 million during the same period in 1995. These provisions resulted in consolidated effective federal tax rates of 18.3% and 26.9%, respectively. The effective tax rates for AFLIAC and FAFLIC and its non-insurance subsidiaries were 19.6% and 47.7% during the second quarter of 1996 and 1995, respectively. The effective tax rates for the Regional Property and Casualty subsidiaries were 17.3% and 19.8% during the first six months of 1996 and 1995, respectively. The reduction in the rate for FAFLIC resulted primarily from a differential earnings charge of $0.5 million during the second quarter of 1995 compared to a differential earnings benefit of $5.9 million for the same period in 1996. The slight decrease in the rate for the Regional Property and Casualty subsidiaries reflects a higher underwriting loss and a greater proportion of pre-tax income from tax-exempt bonds in 1996 than in the second quarter of 1995. Provision for federal income taxes before minority interest was $36.8 million during the first six months of 1996 compared to $42.4 million during the same period in 1995. These provisions resulted in consolidated effective federal tax rates of 22.3% and 28.8%, respectively. The effective tax rates for AFLIAC and FAFLIC and its non-insurance subsidiaries were 27.7% and 44.3% during the first six months of 1996 and 1995, respectively. The effective tax rates for the Regional Property and Casualty subsidiaries were 19.2% and 20.1% during the first six months of 1996 and 1995, respectively. The reduction in the rate for FAFLIC resulted primarily from a differential earnings benefit of $5.9 million in the first six months of 1996 compared to a differential earnings charge of $1.3 million in the first half of 1995. The slight decrease in the rate for the Regional Property and Casualty subsidiaries reflects a higher underwriting loss and a greater proportion of pre-tax income from tax-exempt bonds in 1996 than in the first half of 1995. Liquidity and Capital Resources Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of business operations. As a holding company, AFC's primary source of cash is dividends from its insurance subsidiaries. However, dividend payments to AFC by its insurance subsidiaries are subject to limitations imposed by state regulators, such as the requirement that cash dividends be paid out of unreserved and unrestricted earned surplus and restrictions on the payment of "extraordinary" dividends, as defined. Sources of cash for the Company's insurance subsidiaries are from premiums collected, investment income and maturing investments. Primary cash outflows are paid benefits, claims losses and loss adjustment expenses, policy acquisition expenses, other underwriting expenses and investment purchases. Cash outflows related to benefits, claim losses and loss adjustment expenses can be variable because of uncertainties surrounding settlement dates for liabilities for unpaid losses and because of the potential for large losses either individually or in the aggregate. Accordingly, the Company's strategy is to monitor available cash and short-term investment balances in relation to projected cash needs by matching maturities of investments with expected payments of current and long-term liabilities. The Company periodically adjusts its investment policy to respond to changes in short-term and long-term cash requirements. Net cash provided by operating activities was $30.6 million and $101.0 million for the first six months of 1996 and 1995, respectively. This decrease is primarily attributable to the increase in underwriting losses in the Regional Property and Casualty lines of business during the first six months of 1996 which resulted in an increase in claims payments. Net cash used for investing activities was $214.5 million and $49.6 million during the first six months of 1996 and 1995, respectively. Cash used for investing activities has increased primarily due to net purchases of fixed maturities, which were financed with the increase of $470.5 million in short-term debt. This was partially offset by a decline in investable cash generated by operations. Net cash provided by financing activities was $16.3 million during the six months ended June 30, 1996 compared to $271.9 used during the comparable prior year period. This change is due to increases in short-term debt partially offset by the continued negative financing cash flows from GIC withdrawals. During 1996, the Company increased its short-term debt in order to finance additions to the investment portfolio and maximize investment earnings. These inflows were partially offset by cash payments on withdrawals from GICs that exceeded cash received from deposits on these contracts by $405.4 million and $250.8 million in the first six months of 1996 and 1995, respectively. Although the Company expects this trend in negative financing cash flows from GIC withdrawals to continue, particularly in 1996, the Company does not expect GIC withdrawals to have a material impact on liquidity due to the Company's asset and liability matching. Due to the restrictive withdrawal provisions on the Company's GICs, payments under these contracts are scheduled and predictable, which allows the Company to maintain a close correlation between asset and liability cash flows. Therefore, cash provided by deposits is substantially offset by cash used for purchases of investments to match the liabilities; and cash used for withdrawals is substantially offset with cash provided by net investment income and by sales or maturities of investments that support the maturing GIC contracts. In addition, cash used to purchase subsidiary common stock increased $30.8 million, to $41.8 million during the first six months of 1996. On October 16, 1995, FAFLIC converted from a policyholder owned to stockholder owned insurance company and AFC became the holding company for FAFLIC. AFC also raised net proceeds of $248.0 million from the sale of Common Stock and issued $200.0 million principal amount 7 5/8% Senior Debentures due 2025 with net proceeds to the Company of $197.2 million. The Company will also pay approximately $15.3 million per year in interest payments on the Senior Debentures. AFC has sufficient funds at the holding company or available through dividends from FAFLIC to meet its obligations to pay interest on the Senior Debentures and dividends, when and if declared by the Board of Directors, on the common stock. Whether the Company will pay dividends in the future depends upon the costs of administering a dividend program as compared to the benefits conferred, and upon the earnings and financial condition of AFC. Based on current trends, the Company expects to continue to generate sufficient positive operating cash to meet all short-term and long-term cash requirements. The Company maintains a high degree of liquidity within the investment portfolio in fixed maturity investments, common stock and short-term investments. FAFLIC and Allmerica P&C have $150.0 million and $80.0 million available, respectively, under various committed short-term lines of credit, with no amounts outstanding at June 30, 1996. FAFLIC and Allmerica P&C had $71.5 million and $22.6 million, respectively, of commercial paper borrowings outstanding at June 30, 1996. In addition, FAFLIC and AFLIAC had $235.6 million and $171.4 million, respectively, of repurchase agreements outstanding at June 30, 1996. This debt was used to finance the purchase of investments in the second quarter of 1996. The Company, at its option, could liquidate these investments at any time and repay the debt. AFC and FAFLIC are prohibited from entering into any merger, consolidation or other business combination with any entity, and from issuing any shares of capital stock, or securities convertible into capital stock, until October 17, 1996, without the prior approval of the Commonwealth of Massachusetts Insurance Commissioner. PART II - OTHER INFORMATION ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The registrant's annual shareholders' meeting was held on May 21, 1996, all three persons nominated for directors by management were named in proxies for the meeting which were solicited pursuant to Regulation 14A of the Securities and Exchange Act of 1934. The following individuals were elected to serve a three year term: VOTES FOR WITHHELD Robert J. Murray 33,126,232 275,017 John. L Sprague 33,170,935 230,314 Richard M. Wall 33,167,045 234,204 The other directors whose terms were continued after the Annual Meeting are Mr. Michael P. Angelini, Mr. David A. Barrett, Ms. Gail L. Harrison, Nr. Terrence Murray, Mr. John O'Brien, Mr. Robert G. Stachler, and Mr. Herbert M. Varnum. Shareholders ratified the appointment of Price Waterhouse LLP as the Independent Public Accountants of the Company for 1996: for 33,085,604; against 110,386; abstain 205,259. Shareholders voted for the approval of the Long-Term Stock Incentive Plan: for 30,972,076; against 1,684,180; abstain 744,993. Shareholders voted for the approval of the Non-Employee Director Stock Ownership Plan: for 30,777,024; against 1,807,543; abstain 816,682. PART II - OTHER INFORMATION ITEM 6 - EXHIBITS AND REPORTS ON FORM 8K (a) Exhibits EX-10.20 Allmerica Financial Corporation Long- Term Stock Incentive Plan EX-10.21 Allmerica Financial Corporation 1996 Non-Employee Director Stock Ownership Plan EX-27 Financial data schedule (b) Reports on Form 8K None. 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 7, 1996 /s/ John. F. O'Brien John F. O'Brien President and Chief Executive Officer Dated August 7, 1996 /s/ Eric A. Simonsen Eric A. Simonsen Vice President, Chief Financial Officer and Principal Accounting Officer EX-10 2 Exhibit 10.20 ALLMERICA FINANCIAL CORPORATION LONG-TERM STOCK INCENTIVE PLAN Section 1. Purpose. The Allmerica Financial Long-Term Stock Incentive Plan (the "Plan") has been adopted to encourage and create significant ownership of the Company's Common Stock among executive officers, other key employees and certain insurance agents and brokers of the Company and its Subsidiaries and Affiliates. The Plan may be adopted by any Subsidiary of the Company, including, but not limited to, First Allmerica Financial Life Insurance Company, The Hanover Insurance Company and Citizens Insurance Company of America. Any Subsidiary adopting the Plan agrees to adhere to the terms and conditions of the Plan as set forth below. Additional purposes of the Plan include: (a) To provide a meaningful incentive to Participants for making substantial contributions to the Company's long- term business growth; (b) To enhance the Company's and its Subsidiaries' ability to attract and retain executive officers, other key employees and certain insurance agents and brokers who will make such contributions; and (c) To closely align the interests of these executive officers and other key employees with those of Company stockholders by providing opportunities for them to obtain significant longer term rewards through stock ownership. Section 2. Definitions. (a) "Affiliate" means any entity, other than a Subsidiary, that is directly or indirectly controlled by the Company or in which the Company has a significant equity interest as determined by the Committee. (b) "Award" means any Stock Option, Stock Appreciation Right or Stock Award granted under the Plan. (c) "Board" means the Company's Board of Directors. (d) "Cause" shall mean (i) the willful failure by the Participant to perform substantially the Participant's duties as an employee of the Company (other than due to physical or mental illness), (ii) the Participant's engaging in serious misconduct that is injurious to the Company, any Subsidiary or any Affiliate, (iii) the Participant's having been convicted of, or entered a plea of nolo contendere to, a crime that constitutes a felony, (iv) the breach by the Participant of any written or unwritten covenant or agreement not to compete with the Company, any Subsidiary or any Affiliate or (v) the breach by the Participant of his or her duty of loyalty to the Company, any Subsidiary or any Affiliate. (e) "Change in Control" means the occurrence of any of the following events: (I) the members of the Board at the beginning of any consecutive twenty-four calendar month period (the "Incumbent Directors") cease for any reason other than due to death or retirement to constitute at least a majority of the members of the Board, provided that any director whose election or nomination for election by the Company's stockholders was approved by a vote of a least a majority of the members of the Board at the beginning of such twenty-four calendar month period shall be treated as an Incumbent Director; (ii) any "person" including a "group" (as such terms are used in Section 13(d) and 14(d)(2) of the 1934 Act, but excluding the Company, any of its Subsidiaries, any employee benefit plan of the Company or any of its Subsidiaries) is or becomes the "beneficial owner" (as defined in Rule 13(d)(3) under the 1934 Act), directly or indirectly, of securities of the Company representing 35% or more of the combined voting power of the Company's then outstanding securities; or (iii) the stockholders of the Company shall approve a definitive agreement (1) for the merger or other business combination of the Company with or into another corporation, a majority of the directors of which were not directors of the Company immediately prior to the merger or other business combination and in which the stockholders of the Company immediately prior to the effective date of such merger or other business combination own less than 50% of the voting power in such corporation or (2) for the sale or other disposition of all or substantially all of the assets of the Company. (f) "Change in Control Price" means the highest price per Share offered in conjunction with any transaction resulting in a Change in Control (as determined in good faith by the Committee if any part of the offered price is payable other than in cash) or, in the case of a Change in Control occurring solely by reason of a change in the composition of the Board, the highest Fair Market Value of the Stock on any of the 30 trading days immediately preceding the date on which a Change in Control occurs. (g) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (h) "Committee" means a committee of not less than two non-employee members of the Board, appointed by the Board to administer the Plan. The Committee shall be comprised of members who qualify to administer this Plan as contemplated by Rule 16b-3 under the 1934 Act (or any successor rule thereto). (I) "Common Stock" means the common stock, par value $.01 per share, of the Company. (j) "Company" means Allmerica Financial Corporation, a corporation established under the laws of the State of Delaware. (k) "Disability" shall mean long-term disability as defined under the terms of the Company's or any Subsidiaries' applicable long term disability plans or policies. (l) "Early Retirement" with respect to a Participant shall mean retirement under any qualified pension plan maintained by the Company or any of its Subsidiaries or Affiliates at or after the earliest age at which a Participant may retire and receive an immediate, but actuarially reduced, retirement benefit under such plan. If a Participant is not a participant in such a plan, "Early Retirement" shall mean retirement at or after age 55 with at least 15 years of service with the Company or a Subsidiary. (m) "Fair Market Value" means, with respect to Common Stock, the fair market value of a Share as determined by the Committee in good faith in such manner as shall be established by the Committee from time to time; provided that at any time that the Common Stock is traded on an established securities market, Fair Market Value means the last reported sale price at which the Common Stock is traded on such date or, if no Common Stock is traded on such date, the most recent date on which Common Stock was traded, as reflected on such public market. Under no circumstances shall the Fair Market Value be less than the par value of the Common Stock. (n) "Incentive Stock Option" or "ISO" means a Stock Option to purchase Shares awarded to a Participant which is intended to meet the requirements of Section 422 of the Code or any successor provision. (o) "Non-Qualified Stock Option" or "NQSO" means a Stock Option to purchase Shares of Common Stock awarded to a Participant which is not intended to meet the requirements of Section 422 of the Code or any successor provision. (p) "1934 Act" means the Securities Exchange Act of 1934, as amended from time to time. (q) "Normal Retirement" with respect to a Participant shall mean retirement under any qualified pension plan maintained by the Company or any of its Subsidiaries or Affiliates at or after the earliest age at which a Participant may retire and receive a retirement benefit under such plan without an actuarial reduction for early commencement of benefits. If a Participant is not a participant in such a plan, "Normal Retirement" shall mean retirement at or after age 65 with no minimum service requirement. (r) "Participant" means a person selected by the Committee (or its delegate as provided under Section 4) to receive an Award under the Plan. (s) "Reporting Person" means an individual who is subject to Section 16 of the 1934 Act by virtue of his or her relationship with the Company. (t) "Senior Management" means the executive officers (within the meaning of Rule 3b-7 under the 1934 Act) of the Company from time to time, whether such persons are officers of the Company or of a Subsidiary. (u) "Shares" means shares of the Common Stock of the Company. (v) "Stock Appreciation Right" or "SAR" means an Award in the form of a right to receive a payment equal to the excess of Fair Market Value as of the date of exercise over the base value of the SAR. (w) "Stock Award" means an Award to a Participant comprised of Common Stock or valued by reference to Common Stock granted under Section 7 of the Plan. (x) "Stock Option" means an Award in the form of the right to purchase a specified number of Shares at a specified price during a specified period. (y) "Subsidiary" shall mean any entity of which the Company possesses directly or indirectly fifty percent (50%) or more of the total combined voting power of all classes of stock of such entity. Section 3. Effective Date. Subject to the approval of the stockholders of the Company, the Plan shall be effective as of May 22, 1996. Senior Management, however, shall not be eligible to participate until the later of the date the Board adopts the Plan with respect to Senior Management or October 17, 1996. No Awards may be made under the Plan after ten years from the effective date or earlier termination of the Plan by the Board. Section 4. Administration. The Plan shall be administered by the Committee. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the operation of the Plan as it shall from time to time consider advisable. The Committee shall also have full discretion to interpret the provisions of the Plan. Any decision or action taken or to be taken by the Committee, arising out of or in connection with the construction, administration, interpretation and effect of the Plan and of its rules and regulations, shall, to the maximum extent permitted by applicable law, be within its absolute discretion (except as otherwise specifically provided herein) and shall be conclusive and binding upon all Participants and any person claiming under or through any Participant. To the extent permitted by applicable law and the provisions of the Plan, the Committee may delegate to one or more employee members of the Board the power to make Awards to Participants who are not Reporting Persons. Section 5. Eligibility. Any executive officer or other key employee (including, without limitation, insurance agents, brokers and independent agents) of the Company, any Subsidiary or any Affiliates shall be eligible to receive an Award under the Plan, provided that such participation would not jeopardize (I) the Plan's compliance with Rule 16b-3 under the 1934 Act or any successor rule, and (ii) the Company's ability to register shares underlying the Plan on Registration Statements on Form S-8 pursuant to the Securities Act of 1933, as amended, or any successor form. Directors who are not employees shall not be eligible to be granted Awards under the Plan. Section 6. Stock Available for Awards. (a) Common Shares Available. The maximum number of Shares available for Awards under the Plan with respect to each fiscal year the Plan is in effect will be 1.25% of the total Shares of outstanding Common Stock of the Company as of the start of each such fiscal year plus any Shares available for Awards under the Plan in prior fiscal years but not used. Shares of Common Stock underlying any Awards which are forfeited, canceled, reacquired by the Company, satisfied without the issuance of Common Stock or otherwise terminated (other than by exercise) shall be added back to the Shares of Common Stock available for issuance under the Plan. (b) Share Usage Limits. For the period that the Plan is in effect, the aggregate number of Shares that may be issued on exercise of Stock Options and as Stock Awards shall not exceed 2,350,000 Shares. Additionally, the aggregate number of Shares that may be covered by Awards for any one Participant over the period that the Plan is in effect shall not exceed 500,000 Shares. (c) Adjustments. In the event of any stock dividend, stock split, combination or exchange of Shares, merger, consolidation, spin-off or other distribution (other than normal cash dividends) of Company assets to stockholders, or any other change affecting Shares, such proportionate adjustments, if any, as the Committee in its discretion may deem appropriate to reflect such change shall be made with respect to (i) the aggregate number of Shares that may be issued under the Plan; (ii) the number of Shares covered by each outstanding Award made under the Plan; and (iii) the option, base or purchase price per Share for any outstanding Stock Options, Stock Appreciation Rights and other Awards granted under the Plan, provided that any such actions are consistently and equitably applicable to all affected Participants. In addition, any Shares issued by the Company through the assumption or substitution of outstanding grants or grant commitments from an acquired entity shall not reduce the Shares available for issuance under the Plan. Section 7. Awards. (a) General. The Committee (or its delegate, as permitted under Section 4), shall determine the type or types of Award(s) (as set forth below) to be made to each Participant and shall approve the terms and conditions of all such Awards in accordance with Sections 4 and 8 of the Plan. Awards may be granted singularly, in combination, or in tandem such that the settlement of one Award automatically reduces or cancels the other. Awards may also be made in replacement of, as alternatives to, or as form of payment for grants or rights under any other employee compensation plan or arrangement of the Company, including the plans of any acquired entity. (b) Stock Option. A Stock Option shall confer on a Participant the right to purchase a specified number of Shares from the Company subject to the terms and conditions of the Stock Option grant. Stock Options may be in the form of ISOs or NQSOs. The terms and conditions of ISOs shall be subject to and comply with Section 422 of the Code, or any successor provision, and any regulations thereunder. Anything in the Plan notwithstanding, no term of the Plan relating to ISOs shall be interpreted, amended or altered, nor shall any discretion or authority granted to the Committee under the Plan be so exercised, so as to disqualify the Plan or, without the consent of the optionee, any ISO granted under the Plan, under Section 422 of the Code. The Committee shall establish the option price at the time each Stock Option is awarded, provided that such price shall not be less than 100% of the Fair Market Value of the Common Stock on the date the Stock Option is granted. If a Participant owns or is deemed to own (by reason of the attribution rules applicable under Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any subsidiary or parent corporation and an ISO is awarded to such Participant, the option price shall not be less than 110% of the Fair Market Value at the time such ISO is awarded. The aggregate Fair Market Value at time of grant of the Shares covered by ISOs exercisable by any one optionee in any calendar year shall not exceed $100,000 (or such other limit as may be required by the Code). Each Stock Option shall be exercisable at such times and subject to such terms and conditions as the Committee may specify at or after the time of grant; provided, however, that if the Committee does not establish a different exercise schedule at or after the date of grant of a Stock Option, such Stock Option shall become exercisable in five approximately equal annual installments on each of the first, second, third, fourth and fifth anniversaries of the date the Stock Option is granted. A Stock Option shall not be exercisable after the expiration of ten years from the date of grant. The recipient of a Stock Option shall pay the exercise price for the Shares in cash or pursuant to such other arrangements as are satisfactory to the Committee, including, without limitation, using Shares valued at Fair Market Value on the date of exercise. The Committee may also permit Participants to have the option price delivered to the Company by a broker pursuant to an arrangement whereby the Company, upon irrevocable instructions from a Participant, delivers the exercised Shares to the broker. A Stock Option may include forfeitability contingencies based on continued employment with the Company or a Subsidiary. In addition, a violation of a continued employment provision may entitle the Company or a Subsidiary to repurchase the Shares obtained through the Stock Option at the original exercise price, without interest. Unless the Committee shall otherwise permit a Stock Option to remain exercisable for such greater or lesser period (but not beyond its otherwise stated term) as the Committee shall specify at or after the grant of such Stock Option, a Stock Option shall be exercisable following the termination of a Participant's employment with the Company and each Subsidiary and Affiliate only to the extent provided in this paragraph. If a Participant's employment terminates due to the Participant's death, Disability, Normal Retirement or Early Retirement with the consent of the Committee, the Participant (or, in the event of the Participant's death or Disability during employment or during the period during which a Stock Option is exercisable under this sentence, the Participant's beneficiary or legal representative) may exercise any Option held by the Participant at the time of such termination, regardless of whether then exercisable, for up to three years (or such greater or lesser period as the Committee shall determine at or after grant) following the date of such termination, but in no event after the date the Stock Option otherwise expires. If a Participant's employment is terminated for Cause or, if following the Participant's termination of employment, the Committee determines that the Participant's employment could have been terminated for Cause, all Stock Options held by the Participant shall immediately terminate, regardless of whether then exercisable and any Stock Option exercised by the Participant in anticipation of his/her For Cause termination shall be rescinded and the stock returned to the Company and/or its Subsidiary and the exercise price returned to the Participant. Any option exercised 60 days before notice of termination and all options exercised after notice of termination shall be considered to be exercised in anticipation of termination. (c) Stock Appreciation Rights (SARs). An SAR grant shall confer on a Participant the right to receive in Shares, cash or a combination, up to the positive difference, if any, between the Fair Market Value of a designated number of Shares when the SARs are exercised and the base price of the SAR contained in the terms and conditions of the Award. The Committee shall have the authority to grant an SAR in tandem with a Stock Option, in addition to a Stock Option, or freestanding and unrelated to a Stock Option. An SAR granted in tandem or in addition to a Stock Option may be granted either at the same time as the Stock Option or at a later time. An SAR shall not be exercisable after the expiration of ten years from the date of grant. Shares issued in settlement of the exercise of SARs shall be valued at their Fair Market Value on the date of exercise. The Committee shall establish the base price of the SAR at the time the SARs are awarded; provided that the base price of an SAR granted in combination with, in tandem with, or in replacement for a Stock Option shall have a base price determined in the same manner as, and subject to the same conditions as applied with respect to, such Stock Option under Section 7(b). The Committee shall determine the time or times at which or the event or events (including, without limitation, a Change in Control) upon which an SAR may be exercised in whole or in part; provided, however, that unless otherwise specified by the Committee at or after grant, an SAR granted in tandem with a Stock Option shall be exercisable at the same time or times as the related Stock Option is exercisable. (d) Stock Awards. A Stock Award shall confer on a Participant the right to acquire a specified number of Shares for a purchase price (which may be zero) or the right to receive a cash equivalent payment or a combination of both subject to the terms and conditions of the Award, which may include forfeitability contingencies based on continued employment with the Company or a Subsidiary or on meeting performance criteria or both, and the Committee may also grant Stock Awards that are not subject to any restrictions. A Stock Award may be in the form of Shares or share units. In no event shall more than 25% of the total amount of Shares available under the Plan be granted as Stock Awards. Such 25% limit shall be subject to the replenishment provision in Section 6(a). If the vesting of a Stock Award is conditioned in whole or in part upon the attainment of specified performance goals or targets (or if the vesting of a Stock Award that will vest upon the passage of time and the Participant's continued employment is accelerated upon the attainment of such goals or targets), such goals and targets shall be determined by the Committee and set forth in the specific Award agreements. Such performance goals or targets may be related to the performance of (i) the Company; (ii) a Subsidiary or an Affiliate, (iii) a division or unit of the Company, any Subsidiary or any Affiliate, (iv) the Participant or (v) any combination of the foregoing, over a performance period or periods established by the Committee. Except to the extent otherwise expressly provided herein, the Committee may, at any time and from time to time, change the performance objectives applicable with respect to any Stock Award to reflect such factors, including, without limitation, changes in a Participant's duties or responsibilities or changes in business objectives (e.g., from corporate to Subsidiary or business unit performance or vice versa), as the Committee shall deem necessary or appropriate. In making any such adjustment, the Committee shall adjust the number of Shares subject to any such Stock Award or take other appropriate actions to prevent any enlargement or diminution of the Participant's rights related to service rendered and performance attained prior to the effective date of such adjustment. Unless the Committee otherwise determines at or after grant, the rights of a Participant with respect to a Stock Award outstanding at the time of the Participant's termination of employment with the Company and each Subsidiary and Affiliate shall be determined pursuant to this paragraph. In the event that a Participant's employment terminates due to the Participant's (i) death, (ii) disability, (iii) retirement; or, (iv) early retirement with the consent of the Committee, a pro-rated portion of any unvested Shares subject to a Stock Award shall become vested based on the number of days the Participant actually worked since the date the Stock Award was granted (or in the case of any award which becomes vested in installments, since the date, if any, on which the last installment of such Stock Award became vested); provided that, in the case of an award with respect to which the restrictions will lapse, if at all, based on the attainment of performance goals or targets, such vesting shall be deferred until the end of the applicable performance period and be based on that number of Shares of such Stock Award, if any, that would have been earned based on the attainment or partial attainment of such performance goals or targets. Any portion of any Stock Award that has not vested at the date of a Participant's termination of employment (or which does not become vested until after such date under the preceding sentence) shall be forfeited as of such termination date (or, if applicable, such deferred vesting date). Section 8. General Provisions Applicable to Awards. (a) Transferability and Exercisability. Unless the Committee shall permit (on such terms and conditions as it shall establish) an Award to be transferred to a member of the Participant's immediate family, a Guardian, or to a trust or similar vehicle for the benefit of such immediate family members ("Permitted Transferees"), any Award under this Plan will be non-transferable and accordingly shall not be assignable, alienable, saleable or otherwise transferable by the Participant other than by will or the laws of descent and distribution; provided, however, that in no event shall the Committee permit any Award to be transferable if the effect thereof would be to cause any other nontransferable Award to fail to qualify for the exemptive relief available under Rule 16b-3 promulgated under the 1934 Act. During the Participant's lifetime, only the Participant (or the Participant's Permitted Transferees, if any) shall be able to exercise any Stock Option or SAR awarded to the Participant. If so permitted by the Committee, a Participant may designate a beneficiary or beneficiaries to exercise the Participant's rights and receive any distribution under this Plan upon the Participant's death. (b) General Restriction. Each Award shall be subject to the requirement that, if at any time the Committee shall determine, in its sole discretion, that the listing, registration, exemption or qualification of any Award under the Plan upon any securities exchange or under any state or federal law, or the consent or approval of any government regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such Award or the grant or settlement thereof, such Award may not be exercised or settled in whole or in part unless such listing, registration, qualification, exemption, consent or approval has been effected or obtained free of any conditions not acceptable to the Committee. (c) Tax Withholding. The Company or any Subsidiary which adopts the Plan shall have the right to deduct from any settlement of an Award, including the delivery or vesting of Shares, made under the Plan, a sufficient amount to cover withholding of any federal, state or local taxes required by law or to take such other actions as may be necessary to satisfy any such withholding obligations. The Committee may require or permit Shares to be used to satisfy required tax withholding and such Shares shall be valued at their Fair Market Value on the date the tax withholding is effective. (d) Documentation of Grants. Awards made under the Plan shall be evidenced by written agreements or such other appropriate documentation as the Committee shall prescribe. Any written agreement or other such documentation shall be delivered to the Participant and shall incorporate the terms of the Plan by reference and specify the terms and conditions thereof and any rules applicable thereto. The Committee need not require the execution of any instrument or acknowledgment of notice of an Award under the Plan, in which case acceptance of such Award by the respective Participant will constitute agreement to the terms of the Award and acceptance of the Award in accordance with the terms of this Agreement (e) Settlement. The Committee shall determine whether Awards are settled in whole or in part in cash, Shares or other Awards. The Committee may require or permit a Participant to defer all or any portion of a payment under the Plan, including the crediting of interest on deferred amounts denominated in cash. (f) Change in Control. Except as provided below, in the event of a Change in Control, each Stock Option (including, for this purpose, any SAR granted in tandem with such Stock Option) and each freestanding SAR (whether or not then exercisable) shall be cancelled in exchange for a payment in cash of an amount equal to the excess of the Change in Control Price (or, in the case of any ISO, the excess of the Fair Market Value on the date of exercise) over the exercise or base price thereof and all Stock Awards shall become nonforfeitable. Notwithstanding the immediately preceding sentence, no cancellation, cash settlement or acceleration of vesting shall occur with respect to any Award or any class of Awards if the Committee reasonably determines in good faith prior to the occurrence of a Change in Control that such Award or Awards shall be honored or assumed, or new rights substituted therefor (such honored, assumed or substituted award hereinafter called an "Alternative Award"), by a Participant's employer (or the parent or a subsidiary of such employer) immediately following the Change in Control, provided that any such Alternative Award must: (i) be based on stock which is traded on an established securities market, or which will be so traded within 60 days of the Change in Control; (ii) provide such Participant (or each Participant in a class of Participants) with rights and entitlements substantially equivalent to or better than the rights, terms and conditions applicable under such Award, including, but not limited to, an identical or better exercise or vesting schedule and identical or better timing and methods of payment; (iii) have substantially equivalent economic value to such Award (determined at the time of the Change in Control); and (iv) have terms and conditions which provide that in the event that the Participant's employment is involuntarily terminated or constructively terminated, any conditions on a Participant's rights under, or any restrictions on transfer or exercisability applicable to, each such Alternative Award shall be waived or shall lapse, as the case may be. For this purpose, a constructive termination shall mean a termination by a Participant following a material reduction in the Participant's compensation, a material reduction in the Participant's responsibilities or the relocation of the Participant's principal place of employment to another location, in each case without the Participant's written consent. Section 9. Miscellaneous. (a) Plan Amendment. The Board or the Committee may amend the Plan as it deems necessary or appropriate to better achieve the purposes of the Plan, except that no amendment without the approval of the Company's stockholders shall be made which would (i) increase the total number of Shares available for issuance under the Plan, (ii) materially increase the benefits accruing to Participants under the Plan, or (iii) materially modify the requirements as to eligibility for participation in the Plan. (b) No Right to Employment. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment. The Company expressly reserves the right at any time to dismiss a Participant free from any liability or claim under the Plan, except as expressly provided by an applicable agreement or other documentation of an Award. (c) No Rights as Shareholder. Only upon issuance of Shares to a Participant (and only in respect to such Shares) shall the Participant obtain the rights of a shareholder, subject, however, to any limitations imposed by the terms of the applicable Award. (d) No Fractional Shares. No fractional shares shall be issued under the Plan, however, the Committee may provide for a cash payment as settlement in lieu of any fractional shares. (e) Other Company Benefit and Compensation Programs. Except as expressly determined by the Committee, settlements of Awards received by Participants under this Plan shall not be deemed as part of a Participant's regular, recurring compensation for purposes of calculating payments or benefits from any Company or Subsidiary benefit or severance program (or severance pay law of any country). The above programs notwithstanding, the Company may adopt other compensation plans or arrangements as it deems appropriate or necessary. (f) Unfunded Plan. The Plan shall be unfunded and shall not create (or be construed to create) a trust or a separate fund(s). Likewise, the Plan shall not establish any fiduciary relationship between the Company, any Subsidiary or Affiliate and any Participant or other person. To the extent any person holds any rights by virtue of an Award granted under the Plan, such rights shall be no greater than the rights of an unsecured general creditor of the Company, any Subsidiary or Affiliate. (g) Successors and Assignees. The Plan shall be binding on all successors and assignees of a Participant, including, without limitation, the estate or beneficiaries of such Participant and the executor, administrator or trustee of such estate, or any receiver or trustee in bankruptcy or representative of the Participant's creditors. (h) Governing Law. The validity, construction and effect to the Plan and any actions taken under or relating to the Plan shall be determined in accordance with the laws of the State of Delaware. EX-10 3 Exhibit 10.21 ALLMERICA FINANCIAL CORPORATION 1996 NON-EMPLOYEE DIRECTOR STOCK OWNERSHIP PLAN Section 1: Purpose The Allmerica Financial Corporation 1996 Non-Employee Director Stock Ownership Plan (the "Plan") has been adopted to promote the long-term growth and financial success of Allmerica Financial Corporation (the "Company") by attracting and retaining non-employee directors of outstanding ability and assisting the Company in promoting a greater identity of interest between the Company's non- employee directors and its stockholders. Section 2: Definitions As used in the Plan, the following terms have the respective meanings as set forth below. Award means any Stock Award granted under the Plan. Board means the Company's Board of Directors. Common Stock means the Common Stock, par value $.01 per share, of the Company. Company means Allmerica Financial Corporation, a corporation established under the laws of the State of Delaware, and any entity that is directly or indirectly controlled by the Company or any entity in which the Company has a significant interest as determined by the Board. 1934 Act means the Securities Exchange Act of 1934 as amended from time to time. Participant means a Non-Employee Director. Shares means of the Common Stock of the Company. Stock Award means an Award to a Participant comprised of Common Stock granted under Section 7 of the Plan. Section 3: Effective Dates Subject to approval by the stockholders of the Company, the Plan shall be in effect as of October 17, 1996. No Awards may be made under the Plan after ten years from the effective date of the Plan or earlier termination of the Plan by the Board. Section 4: Plan Operation The Plan is intended to meet the requirements of Rule 16b-3 or its successors under Section 16 of the 1934 Act and accordingly is intended to be self-governing. To this end the Plan requires no discretionary action by any administrative body with regard to any transaction under the Plan. To the extent, if any, that any questions of interpretation arise, they shall be resolved by the Board. To the extent any provision of the Plan or action by the Board fails to comply with Rule 16b-3, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Board. Section 5: Eligibility Directors eligible to receive Awards under the Plan ("Non-Employee Directors") shall be those members of the Board who are not current employees of the Company or any of its subsidiaries. Section 6: Stock Available for Awards (a) Common Shares Available. The maximum number of Shares available for Awards under the Plan may not exceed 150,000 shares of Common Stock of the Company. (b) Adjustments and Reorganizations. As appropriate, adjustments shall be made to meet the intent of the Plan. Such appropriate adjustments shall be made to the number of shares available under the Plan and which thereafter may be made the subject of Awards under the Plan. Such actions may include, but are not limited to, any stock dividend, stock split, combination or exchange of Shares, merger, consolidation, spin-off, recapitalization or other distributions (other than normal cash dividends) of Company assets to stockholders, or any other change affecting Shares. Appropriate adjustments shall also be made in the calculation of Fair Market Value as necessary to preserve the Participants' rights under the Plan. Section 7: Awards Stock Awards. Commencing with the 1997 annual meeting of shareholders, the Company will issue to each Participant 800 Shares of Common Stock on the first business day following each annual meeting until the Plan is terminated or amended. Such shares will not have any restrictions regarding future service or performance contingencies which must be satisfied before the Participant is allowed to sell or transfer the Shares. Section 8: General Provisions Applicable to Awards (a) Documentation of Grants. Awards made under the Plan shall be evidenced by written agreements or such other appropriate documentation as the Board shall prescribe. The Board need not require the execution of any instrument or acknowledgment of notice of an Award under the Plan, in which case acceptance of such Award by the respective Participant will constitute agreement to the terms of the Award. (b) Plan Amendment. The Board may suspend the Plan or any portion of the Plan. The Board may also amend the Plan if deemed to be in the best interests of the Company and its stockholders; provided, however, that (a) no such amendment may impair any Participant's right regarding any outstanding grants, elections or other right to receive shares under the Plan without his or her consent, and (b) the Plan may not be amended more than once every six months, unless such amendment is permitted by Rule 16b-3(c)(2)(ii)(B) under the 1934 Act. (c) Compliance with Securities Laws. The Company shall not be obligated to deliver any Shares until (1), in the opinion of the Company's counsel, all applicable federal, state and foreign laws and regulations have been complied with, (2) if the Company's Common Stock outstanding is at the time listed on any stock exchange, the Shares to be delivered have been listed or authorized to be listed on such exchange upon official notice of issuance, and (3) all other legal matters in connection with the issuance and delivery of such Shares have been approved by the Company's counsel. If the sale of Shares has not been registered under the Securities Act of 1933, as amended, the Company may require such representations or agreements as counsel for the Company may consider appropriate to avoid violation of such Act and may require that the certificates evidencing such Shares bear an appropriate legend restricting transfer. (d) Governing Law. The validity, construction and effect of the Plan and any such actions taken under or relating to the Plan shall be determined in accordance with the laws of the State of Delaware and applicable federal law. EX-27 4
7 This schedule contains summary financial information extracted from the interim consolidated balance sheet and income statement of Allmerica Financial Corporation as of June 30, 1996 and for the period then ended, and is qualified in its entirety by reference to such financial statements. 1,000,000 6-MOS DEC-31-1996 JUN-30-1996 7958 7908 7958 399 717 158 9440 128 971 792 18506 3051 816 2290 2640 704 0 0 1 1563 18506 1101 328 54 51 985 241 237 165 37 128 0 0 0 90 1.79 1.79 2896 744 (56) 301 386 2865 (32)
-----END PRIVACY-ENHANCED MESSAGE-----