-----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, FdaWnEJU5rNNav6aGr/T3bJJjcFz89cIBRqickbSbQfsQhDl0ol0x/UyEn6SwjFr vkfCYZxeMuuPDrXYNt5ipA== 0000944695-97-000021.txt : 19970815 0000944695-97-000021.hdr.sgml : 19970815 ACCESSION NUMBER: 0000944695-97-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 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: 97663714 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 10-Q FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from: to ____________ Commission file number: 1-13754 ALLMERICA FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 04-3263626 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 440 Lincoln Street, Worcester, Massachusetts 01653 (Address of principal executive offices) (Zip Code) (508) 855-1000 (Registrant's telephone number, including area code) _________________________________________________________________ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date: 50,287,305 shares of common stock outstanding, as of August 1, 1997. 41 Total Number of Pages Included in This Document Exhibit Index is on page 36 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Income 3 Consolidated Statements of Shareholders' Equity 4 Consolidated Balance Sheets 5 Consolidated Statements of Cash Flows 6 Notes to Interim Consolidated Financial Statements 7 - 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 - 32 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 33 Item 6. Exhibits and Reports on Form 8-K 34 SIGNATURES 35 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) 1997 1996 1997 1996 REVENUES Premiums $ 578.8 $ 553.7 $1,141.1 $1,101.3 Universal life and investment product policy fees 57.1 48.5 113.4 95.0 Net investment income 170.6 166.8 334.0 327.9 Net realized investment (losses) gains (2.0) 2.3 42.0 53.9 Other income 28.0 27.9 56.9 52.9 --------- --------- --------- --------- Total revenues 832.5 799.2 1,687.4 1,631.0 --------- --------- --------- --------- BENEFITS, LOSSES AND EXPENSES Policy benefits, claims, losses and loss adjustment expenses 508.7 487.1 1,001.0 982.7 Policy acquisition expenses 116.8 116.1 236.6 235.7 Loss from cession of disability income business 0.0 0.0 53.9 0.0 Other operating expenses 130.8 127.1 265.7 247.5 --------- --------- --------- --------- Total benefits, losses and expenses 756.3 730.3 1,557.2 1,465.9 --------- --------- --------- --------- Income before federal income taxes 76.2 68.9 130.2 165.1 --------- --------- --------- --------- Federal income tax expense (benefit) Current 26.4 25.7 32.4 44.3 Deferred (7.1) (13.1) (3.4) (7.5) --------- --------- --------- --------- Total federal income tax expense 19.3 12.6 29.0 36.8 --------- --------- --------- --------- Income before minority interest 56.9 56.3 101.2 128.3 Minority interest: Distributions on Company- obligated mandatorily redeemable preferred securities of subsidiary trust (4.0) 0.0 (6.4) 0.0 Equity in earnings (15.2) (13.7) (41.2) (38.4) --------- --------- --------- --------- (19.2) (13.7) (47.6) (38.4) --------- --------- --------- --------- Net income $ 37.7 $ 42.6 $ 53.6 $ 89.9 ========= ========= ========= ========= PER SHARE DATA Net income $ 0.75 $ 0.85 $ 1.07 $ 1.79 ========= ========= ========= ========= Dividends declared to shareholders $ 0.05 $ 0.05 $ 0.10 $ 0.10 ========= ========= ========= ========= Weighted average shares outstanding 50.3 50.1 50.3 50.1 ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. Page 3 ALLMERICA FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited) Six Months Ended June 30, (In millions) 1997 1996 COMMON STOCK Balance at beginning and end of period $ 0.5 $ 0.5 --------- --------- ADDITIONAL PAID-IN CAPITAL Balance at beginning of period 1,382.5 1,382.5 Issuance of common stock 3.1 0.0 Issuance costs of Company-obligated mandatorily redeemable preferred securities of subsidiary trust (3.7) 0.0 --------- --------- Balance at end of period 1,381.9 1,382.5 --------- --------- RETAINED EARNINGS Balance at beginning of period 210.1 38.2 Net income 53.6 89.9 Dividends to shareholders (5.1) (5.0) --------- --------- Balance at end of period 258.6 123.1 --------- --------- NET UNREALIZED APPRECIATION ON INVESTMENTS Balance at beginning of period 131.6 153.0 Net appreciation (depreciation) on available-for-sale securities 24.8 (193.9) (Provision) benefit for deferred federal income taxes (8.7) 67.9 Minority interest (6.2) 30.4 --------- --------- Balance at end of period 141.5 57.4 --------- --------- Total shareholders' equity $1,782.5 $1,563.5 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. Page 4 ALLMERICA FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS
(Unaudited) June 30, December 31, (In millions, except per share data) 1997 1996 ASSETS Investments: Fixed maturities-at fair value (amortized cost of $7,213.9 and $7,305.5) $ 7,397.8 $ 7,487.8 Equity securities-at fair value (cost of $266.4 and $328.2) 441.3 473.6 Mortgage loans 597.4 650.1 Real estate 90.5 120.7 Policy loans 137.9 132.4 Other long-term investments 143.5 128.8 ---------- ---------- Total investments 8,808.4 8,993.4 ---------- ---------- Cash and cash equivalents 527.0 178.5 Accrued investment income 149.1 149.0 Deferred policy acquisition costs 847.5 822.7 Reinsurance receivable on paid and unpaid losses, benefits and unearned premiums 855.3 875.6 Deferred federal income taxes 84.8 93.2 Premiums, accounts and notes receivable, net 533.4 533.0 Other assets 317.8 307.5 Closed Block assets 803.9 811.8 Separate account assets 8,036.3 6,233.0 ---------- ---------- Total assets $20,963.5 $18,997.7 ========== ========== LIABILITIES Policy liabilities and accruals: Future policy benefits $ 2,605.7 $ 2,613.7 Outstanding claims, losses and loss adjustment expenses 2,873.5 2,944.1 Unearned premiums 839.8 822.5 Contractholder deposit funds and other policy liabilities 1,877.0 2,060.4 ---------- ---------- Total policy liabilities and accruals 8,196.0 8,440.7 ---------- ---------- Expenses and taxes payable 631.8 622.3 Reinsurance premiums payable 34.0 31.4 Short-term debt 34.4 38.4 Deferred federal income taxes 37.2 34.7 Long-term debt 202.2 202.2 Closed Block liabilities 883.9 892.1 Separate account liabilities 8,030.8 6,227.2 ---------- ---------- Total liabilities 18,050.3 16,489.0 ---------- ---------- Minority interest: Company-obligated mandatorily redeemable preferred securities of subsidiary trust 300.0 0.0 Common stock 830.7 784.0 ---------- ---------- Total minority interest 1,130.7 784.0 ---------- ---------- Commitments and contingencies SHAREHOLDERS' EQUITY Preferred stock, $0.01 par value, 20.0 million shares authorized, none issued 0.0 0.0 Common stock, $0.01 par value, 300.0 million shares authorized, 50.3 million and 50.1 million shares issued and outstanding, respectively 0.5 0.5 Additional paid-in capital 1,381.9 1,382.5 Unrealized appreciation on investments, net 141.5 131.6 Retained earnings 258.6 210.1 ---------- ---------- Total shareholders' equity 1,782.5 1,724.7 ---------- ---------- Total liabilities and shareholders' equity $20,963.5 $18,997.7 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. Page 5 ALLMERICA FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Six Months Ended June 30, (In millions) 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 53.6 $ 89.9 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Minority interest 47.6 38.4 Net realized gains (43.0) (54.3) Net amortization and depreciation 13.7 25.1 Deferred federal income taxes (3.5) (7.5) Change in deferred acquisition costs (25.3) (33.7) Change in premiums and notes receivable, net of reinsurance payable 2.9 2.7 Change in accrued investment income 0.1 (1.7) Change in policy liabilities and accruals, net (71.1) (50.4) Change in reinsurance receivable 20.3 28.1 Change in expenses and taxes payable 7.8 (13.4) Separate account activity, net 0.3 (6.1) Other, net (28.4) 13.5 --------- --------- Net cash (used in) provided by operating activities (25.0) 30.6 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from disposals and maturities of available-for-sale fixed maturities 1,491.8 2,205.2 Proceeds from disposals of equity securities 121.0 212.4 Proceeds from disposals of other investments 42.9 34.0 Proceeds from mortgages matured or collected 107.9 74.2 Purchase of available-for-sale fixed maturities (1,413.2) (2,661.7) Purchase of equity securities (22.0) (50.5) Purchase of other investments (70.6) (27.5) Capital expenditures (2.8) (4.9) Other investing activities, net 0.6 4.3 --------- --------- Net cash provided by (used in) investing activities 255.6 (214.5) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Deposits and interest credited to contractholder deposit funds 125.4 181.8 Withdrawals from contractholder deposit funds (302.1) (587.2) Change in short-term debt (4.0) 470.5 Net proceeds from issuance of Company-obligated mandatorily redeemable preferred securities of subsidiary trust 296.3 0.0 Proceeds from issuance of common stock 2.4 0.0 Dividends paid to shareholders (6.0) (7.0) Subsidiary treasury stock purchased, at cost 0.0 (41.8) --------- --------- Net cash provided by financing activities 112.0 16.3 --------- --------- Net change in cash and cash equivalents 342.6 (167.6) Net change in cash held in the Closed Block 5.9 6.3 Cash and cash equivalents, beginning of period 178.5 289.5 --------- --------- Cash and cash equivalents, end of period $ 527.0 $ 128.2 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. Page 6 ALLMERICA FINANCIAL CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The accompanying unaudited consolidated financial statements of Allmerica Financial Corporation ("AFC" or the "Company") have been prepared in accordance with generally accepted accounting principles for stock life insurance companies for interim financial information and with the requirements of Form 10-Q. The interim consolidated financial statements of AFC include the accounts of AFC, First Allmerica Financial Life Insurance Company ("FAFLIC"), its wholly-owned life insurance subsidiary, Allmerica Financial Life Insurance and Annuity Company ("AFLIAC"), non-insurance subsidiaries (principally brokerage and investment advisory subsidiaries), and Allmerica Property & Casualty Companies, Inc. ("Allmerica P&C", a 59.5%-owned non-insurance holding company). The Closed Block assets and liabilities at June 30, 1997 and December 31, 1996 are presented in the consolidated financial statements as single line items. Results of operations for the Closed Block for the six month and three month periods ended June 30, 1997 and June 30, 1996 are included in other income in the consolidated financial statements. All significant intercompany accounts and transactions have been eliminated. Minority interest relates to the Company's investment in Allmerica P&C and its subsidiary, The Hanover Insurance Company ("Hanover"). Hanover's 82.5%-owned subsidiary is Citizens Corporation, the holding company for Citizens Insurance Company of America ("Citizens"). Minority interest also includes an amount related to the minority interest in Citizens Corporation. The accompanying interim consolidated financial statements reflect, in the opinion of the Company's management, all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the financial position and results of operations. Certain reclassifications have been made to the 1996 consolidated statements of income in order to conform to the 1997 presentation. The results of operations for the six months ended and quarter ended June 30, 1997 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Company's 1996 Annual Report to Shareholders, as filed on Form 10-K with the Securities and Exchange Commission. 2. Significant Transactions In June 1997, the Company entered into a credit agreement with The Chase Manhattan Bank ("Chase") providing for a $225 million revolving line of credit that expires on December 15, 1997. Borrowings under the line of credit will be unsecured and will bear interest at a rate per annum equal to, at the Company's option, Chase's base rate or the eurodollar rate plus an applicable margin. The credit agreement requires the Company to comply with certain financial ratios. As of June 30, 1997, the Company had not closed under, or borrowed against, the line of credit provided by this credit agreement. In late July 1997, a lawsuit was instituted in Louisiana against AFC and certain of its subsidiaries by individual plaintiffs alleging fraud, unfair or deceptive acts, breach of contract, misrepresentation and related claims in the sale of life insurance policies. The plaintiffs seek to be certified as a class. The Company intends to defend the lawsuit vigorously. In July 1997, Hanover reached an agreement with Travelers Property Casualty to facilitate Travelers' writing of certain Hanover Insurance policies, as they expire, in Alabama, California, Kansas, Mississippi, Missouri, and Texas. In these six states, Hanover has approximately 250 agents generating approximately $90 million in premium annually. Hanover intends to cease writing personal and commercial policies in these states except for employer and association-sponsored group property and casualty business, surety bonds and specialty program commercial policies. The plan is conditioned upon the appropriate regulatory approval in each state. On July 16, 1997, AFC announced the closing of the merger (the "Merger") of Allmerica P&C and a wholly-owned subsidiary of AFC. Through the transaction, AFC acquired the approximately 24.2 million shares of Allmerica P&C that it did not already own for approximately $426 million in cash and 9.7 million shares of AFC common stock. On July 15, 1997, the Certificate of Incorporation of Allmerica P&C was amended and restated to authorize a Class B Common Stock of Allmerica P&C, $5.00 par value. Immediately prior to the consummation of the Merger, each share of Allmerica P&C Common Stock owned by AFC and its subsidiaries was exchanged for one share of Class B Common Stock. In June 1997, the Company entered into a binding letter of intent for the 100% coinsurance of its disability income line of business. The consummation of the transaction is subject to the receipt of regulatory approvals. The proposed transaction resulted in the recognition of a $53.9 million pre-tax loss in the first quarter of 1997. Page 7 On February 3, 1997, AFC Capital Trust (the "Trust"), a wholly-owned subsidiary business trust of AFC, issued $300.0 million Series A Capital Securities ("Capital Securities"), which pay cumulative dividends at a rate of 8.207% semiannually commencing August 15, 1997. The Trust exists for the sole purpose of issuing the Capital Securities and investing the proceeds thereof in an equivalent amount of 8.207% Junior Subordinated Deferrable Interest Debentures due 2027 of AFC (the "Subordinated Debentures"). Through certain guarantees, the Subordinated Debentures and the terms of related agreements, AFC has irrevocably and unconditionally guaranteed the obligations of the Trust under the Capital Securities. Net proceeds from the offering of approximately $296.3 million will fund a portion of the acquisition of the 24.2 million publicly held shares of Allmerica P&C pursuant to the Merger on July 16, 1997. On August 7, 1997, AFC and the Trust closed an exchange offer to exchange the Series A Capital Securities to a like amount of Series B Capital Securities and related guarantees which are registered under the Securities Act of 1933 as required under the terms of the initial transaction. 3. Federal Income Taxes Federal income tax expense for the periods ended June 30, 1997 and 1996, has been computed using estimated effective tax rates for the AFC and Allmerica P&C tax-paying groups. These rates are revised, if necessary, at the end of each successive interim period to reflect the current estimates of the annual effective tax rates. 4. Closed Block Included in other income in the Consolidated Statements of Income in the second quarter and first six months of 1997 and 1996 is a net pre-tax contribution from the Closed Block of $0.5 million and $6.0 million, and $2.6 million and $6.0 million, respectively. Summarized financial information of the Closed Block is as follows:
(Unaudited) June 30, December 31, (In millions) 1997 1996 ASSETS Fixed maturities-at fair value (amortized cost of $410.0 and $397.2) $ 411.7 $ 403.9 Mortgage loans 102.2 114.5 Policy loans 225.7 230.2 Cash and cash equivalents 18.2 24.1 Accrued investment income 14.2 14.3 Deferred policy acquisition costs 19.4 21.1 Other assets 12.5 3.7 --------- --------- Total assets $ 803.9 $ 811.8 ========= ========= LIABILITIES Policy liabilities and accruals $ 876.9 $ 883.4 Other liabilities 7.0 8.7 --------- --------- Total liabilities $ 883.9 $ 892.1 ========= ========= (Unaudited) (Unaudited) Quarter Ended Six Months Ended June 30, June 30, (In millions) 1997 1996 1997 1996 REVENUES Premiums $ 9.7 $ 10.9 $ 39.0 $ 40.5 Net investment income 13.2 13.0 26.7 26.1 Net realized investment gains (losses) 0.1 (0.2) 1.0 0.4 --------- --------- --------- --------- Total revenues 23.0 23.7 66.7 67.0 --------- --------- --------- --------- BENEFITS AND EXPENSES Policy benefits 21.8 20.4 59.1 59.1 Policy acquisition expenses 0.5 0.7 1.4 1.6 Other operating expenses 0.2 0.0 0.2 0.3 --------- --------- --------- --------- Total benefits and expenses 22.5 21.1 60.7 61.0 --------- --------- --------- --------- Contribution from the Closed Block $ 0.5 $ 2.6 $ 6.0 $ 6.0 ========= ========= ========= =========
Many expenses related to Closed Block operations are charged to operations outside the Closed Block; accordingly, the contribution from the Closed Block does not represent the actual profitability of the Closed Block operations. Operating costs and expenses outside of the Closed Block are, therefore, disproportionate to the business outside the Closed Block. Page 8 5. Segment Information The Company offers financial products and services in two major areas: Risk Management and Retirement and Asset Management. Within these broad areas, the Company conducts business principally in five operating segments. The Risk Management group includes two segments: Regional Property and Casualty and Corporate Risk Management Services. The Regional Property and Casualty segment includes property and casualty insurance products, such as automobile insurance, homeowners insurance, commercial multiple-peril insurance, and workers' compensation insurance. These products are offered by Allmerica P&C through its operating subsidiaries, Hanover and Citizens. Substantially all of the Regional Property and Casualty segment's earnings are generated in Michigan and the Northeast (Connecticut, Massachusetts, New York, New Jersey, New Hampshire, Rhode Island, Vermont and Maine). The Corporate Risk Management Services segment includes group life and health insurance products and services which assist employers in administering employee benefit programs and in managing the related risks. The Retirement and Asset Management group includes three segments: Retail Financial Services, Institutional Services and Allmerica Asset Management. The Retail Financial Services segment includes variable annuities, variable universal life, and traditional insurance products distributed via retail channels to individuals across the country. The Institutional Services segment primarily includes group retirement products such as 401(k) plans, tax-sheltered annuities and GIC contracts which are distributed to institutions across the country via worksite marketing and other arrangements. Allmerica Asset Management is a Registered Investment Advisor which provides investment advisory services, primarily to affiliates, and to other institutions, such as insurance companies and pension plans. In addition to the five operating segments, the Company also has a Corporate segment, which consists primarily of the proceeds from the issuance of Company-obligated mandatorily redeemable preferred securities, Senior Debentures and a portion of the net proceeds from the Company's initial public offering. Summarized below is financial information with respect to business segments for the periods indicated.
(Unaudited) (Unaudited) Quarter Ended Six Months Ended June 30, June 30, (In millions) 1997 1996 1997 1996 Revenues: Risk Management Regional Property and Casualty $ 553.2 $ 531.2 $1,129.8 $1,097.9 Corporate Risk Management Services 100.2 89.6 194.1 176.4 --------- --------- --------- --------- Subtotal 653.4 620.8 1,323.9 1,274.3 --------- --------- --------- --------- Retirement and Asset Management Retail Financial Services 116.5 113.4 233.6 220.5 Institutional Services 58.6 65.3 122.6 137.1 Allmerica Asset Management 2.0 3.5 4.3 4.5 --------- --------- --------- --------- Subtotal 177.1 182.2 360.5 362.1 --------- --------- --------- --------- Corporate 4.5 0.8 8.3 1.3 Eliminations (2.5) (4.6) (5.3) (6.7) --------- --------- --------- --------- Total $ 832.5 $ 799.2 $1,687.4 $1,631.0 ========= ========= ========= ========= Income (loss) from continuing operations before income taxes: Risk Management Regional Property and Casualty $ 38.1 $ 37.1 $ 109.8 $ 104.6 Corporate Risk Management Services 4.2 3.4 6.2 7.5 --------- --------- --------- --------- Subtotal 42.3 40.5 116.0 112.1 --------- --------- --------- --------- Retirement and Asset Management Retail Financial Services 21.3 20.2 (12.0) 35.1 Institutional Services 12.6 12.2 27.3 25.6 Allmerica Asset Management 0.5 0.2 0.6 0.5 --------- --------- --------- --------- Subtotal 34.4 32.6 15.9 61.2 --------- --------- --------- --------- Corporate (0.5) (4.2) (1.7) (8.2) --------- --------- --------- --------- Total $ 76.2 $ 68.9 $ 130.2 $ 165.1 ========= ========= ========= =========
Page 9
(Unaudited) June 30, December 31, (In millions) 1997 1996 Identifiable assets: Risk Management Regional Property and Casualty $ 5,719.9 $ 5,703.9 Corporate Risk Management Services 529.6 506.0 ---------- ---------- Subtotal 6,249.5 6,209.9 ---------- ---------- Retirement and Asset Management Retail Financial Services 10,400.8 8,873.5 Institutional Services 3,979.9 3,879.0 Allmerica Asset Management 3.4 2.4 ---------- ---------- Subtotal 14,384.1 12,754.9 ---------- ---------- Corporate 329.9 32.9 ---------- ---------- Total $20,963.5 $18,997.7 ========== ==========
6. Earnings Per Share Earnings per share are based the monthly weighted average number of common shares and common share equivalents. The weighted average number of shares of common stock and equivalents was 50.3 million and 50.1 million for the second quarters ended as well as the six month periods ended June 30, 1997 and 1996, respectively. Recently the FASB issued Statement of Financial Accounting Standards No. 128, Earnings Per Share, which supersedes APB Opinion No. 15, Earnings Per Share. This standard replaces the primary EPS requirements with a basic EPS computation and requires a dual presentation of basic and diluted EPS for those companies with complex capital structures. The Company intends to adopt the standards of Statement No. 128 for financial statements issued after December 15, 1997. The impact of this statement is expected to be immaterial on the Company's EPS calculation. Page 10 PART I ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis of the interim consolidated results of operations and financial condition of the Company should be read in conjunction with the interim Consolidated Financial Statements and related footnotes included elsewhere herein. INTRODUCTION The results of operations for Allmerica Financial Corporation and subsidiaries ("AFC" or "the Company") include the accounts of AFC, First Allmerica Financial Life Insurance Company ("FAFLIC") its wholly-owned life insurance subsidiary, Allmerica Financial Life Insurance and Annuity Company("AFLIAC"), Allmerica Property & Casualty Companies, Inc. ("Allmerica P&C", a 59.5%-owned non-insurance holding company), The Hanover Insurance Company ("Hanover", a wholly-owned subsidiary of Allmerica P&C), Citizens Corporation ("Citizens", an 82.5%-owned subsidiary of Hanover), Citizens Insurance Company of America (a wholly-owned subsidiary of Citizens) and certain other insurance and non-insurance subsidiaries. CLOSED BLOCK On completion of its demutualization, FAFLIC established a Closed Block for the payment of future benefits, policyholders' dividends and certain expenses and taxes relating to certain classes of policies. FAFLIC allocated to the Closed Block an amount of assets expected to produce cash flows which, together with anticipated revenues from the Closed Block business, are reasonably expected to be sufficient to support the Closed Block business. The Closed Block includes only those revenues, benefit payments, dividends and premium taxes considered in funding the Closed Block and excludes many costs and expenses associated with operating the Closed Block and administering the policies included therein. Since many expenses related to the Closed Block were excluded from the calculation of the Closed Block contribution, the contribution from the Closed Block does not represent the actual profitability of the Closed Block. As a result of such exclusion, operating costs and expenses outside the Closed Block are disproportionate to the business outside the Closed Block. The contribution from the Closed Block is included in `Other income' in the interim Consolidated Financial Statements. The pre-tax contribution from the Closed Block was $0.5 million and $6.0 million for the quarter ended and six months ended June 30, 1997, respectively and $2.6 million and $6.0 million for the quarter ended and six months ended June 30, 1996, respectively. Page 11 FAFLIC's conversion to a stock life insurance company, which was completed October 16, 1995, and the establishment of the Closed Block have affected the presentation of the Company's interim Consolidated Financial Statements. For comparability with prior periods, the following table presents the results of operations of the Closed Block combined with the results of operations outside the Closed Block for all period presented. Management's discussion and analysis addresses the results of operations as combined unless otherwise noted.
(Unaudited) (Unaudited) Quarter Ended Six Months Ended June 30, June 30, (In millions) 1997 1996 1997 1996 REVENUES Premiums $588.5 $564.6 $1,180.1 $1,141.8 Universal life and investment product policy fees 57.1 48.5 113.4 95.0 Net investment income 183.8 179.8 360.7 354.0 Net realized investment (losses) gains (1.9) 2.1 43.0 54.3 Other income 27.5 25.3 50.9 46.9 ------- ------- -------- ------- Total revenues 855.0 820.3 1,748.1 1,692.0 ------- ------- -------- ------- BENEFITS, LOSSES AND EXPENSES Policy benefits, claims, losses and loss adjustment expenses 530.5 507.5 1,060.1 1,041.8 Policy acquisition expenses 117.3 116.8 238.0 237.3 Loss from cession of disability income business 0.0 0.0 53.9 0.0 Other operating expenses 131.0 127.1 265.9 247.8 ------- ------- -------- ------- Total benefits, losses and expenses 778.8 751.4 1,617.9 1,526.9 ------- ------- -------- ------- Income before federal income taxes 76.2 68.9 130.2 165.1 ------- ------- -------- ------- Federal income tax expense (benefit) Current 26.4 25.7 32.4 44.3 Deferred (7.1) (13.1) (3.4) (7.5) ------- ------- -------- ------- Total federal income tax expense 19.3 12.6 29.0 36.8 ------- ------- -------- ------- Income before minority interest 56.9 56.3 101.2 128.3 Minority interest: Distributions on Company- obligated mandatorily redeemable preferred securities of subsidiary trust (4.0) 0.0 (6.4) 0.0 Equity in earnings (15.2) (13.7) (41.2) (38.4) ------- -------- -------- ------- (19.2) (13.7) (47.6) (38.4) ------- -------- -------- ------- Net income $37.7 $42.6 $53.6 $89.9 ======= ======== ======== =======
Page 12 Results of Operations Consolidated Overview Quarter Ended June 30, 1997 Compared to Quarter Ended June 30, 1996 The Company's consolidated net income for the second quarter decreased $4.9 million, or 11.5%, to $37.7 million, compared to the same period in 1996. Net income includes certain items which management believes are not indicative of overall operating trends. The following table reflects consolidated net income adjusted for these items, all net of taxes and minority interest as applicable.
(Unaudited) Quarter Ended June 30, (In millions) 1997 1996 Net income $ 37.7 $ 42.6 Adjustments: Net realized investment losses (gains) 1.0 (1.5) Contingency payment from sale of mutual fund processing business 0.0 (2.1) Restructuring costs 1.0 0.0 Differential earnings tax adjustment 0.0 (5.9) ------- ------- Adjusted net income $ 39.7 $ 33.1 ======= =======
The Company's adjusted net income increased $6.6 million, or 19.9%, to $39.7 million in the second quarter of 1997. This increase is primarily attributable to pre-tax increases of $4.0 million in the Regional Property and Casualty segment, $3.6 million in the Retail Financial Services segment, and $2.5 million in the Institutional Services segment. The increase in the Regional Property and Casualty segment resulted primarily from increased net investment income, while the increase in the Retail Financial Services segment was primarily due to growth in variable products' fee income. Additionally, the Institutional Services segment increased $2.5 million due to increased net GIC margins and growth in telemarketing income. These increases were partially offset by a decrease in the Corporate segment's adjusted net income principally resulting from accrued distributions on the Company-obligated mandatorily redeemable preferred securities of a subsidiary trust ("Capital Securities") issued February 3, 1997. Premium revenue increased $23.9 million, or 4.2%, to $588.5 million in the second quarter of 1997. Premiums in the Regional Property and Casualty segment increased $16.2 million, or 3.4%, to $485.9 million primarily due to accounting effects of restructuring a reinsurance contract in the personal automobile line and increased policies in force in the personal automobile and homeowners' lines at Hanover. Additionally, Citizens' personal lines' premiums increased due to expansion in Ohio and Indiana and an increase in personal automobile and homeowners' rates. Premiums in the Corporate Risk Management Services segment increased $9.2 million, or 12.3%, to $84.3 million due to increases in reinsurance, fully insured group dental, and stop loss product lines totaling $12.3 million, partially offset by decreases in the fully insured group medical and risk sharing product lines. Universal life and investment product policy fees increased $8.6 million, or 17.7%, to $57.1 million during the second quarter of 1997. This increase is primarily attributable to an $8.2 million increase in fees generated by the Retail Financial Services segment due to additional deposits and appreciation on variable products' account balances. Net investment income increased $4.0 million, or 2.2%, to $183.8 million during the second quarter of 1997. This increase resulted from increases in the Regional Property and Casualty and Corporate segments, partially offset by a decrease in the Institutional segment. Net investment income in the Regional Property and Casualty segment increased $9.3 million, or 16.5%, to $65.6 million due to an increase in average invested assets, a portfolio shift to higher yielding debt securities, and increased partnership income. Net investment income in the Corporate segment increased $3.8 million due to the temporary investment of proceeds from the issuance of Capital Securities in the first quarter of 1997. The $7.0 million decrease in the Institutional Services segment resulted primarily from a reduction in invested assets due to declining Guaranteed Investment Contracts ("GICs") deposits related to a downgrading to A+ (Good) in March of 1995. Page 13 Net realized gains on investments decreased $4.0 million, or 190.5%, to net realized losses of $1.9 million in the second quarter of 1997, primarily due to 1997 losses of $1.9 million on the sale of fixed maturity investments in the Regional Property and Casualty segment versus 1996 gains of $2.1 million on the sale of real estate properties. Policy benefits, claims, losses and loss adjustment expenses increased $23.0 million, or 4.5% to $530.5 million during the second quarter of 1997. This increase is primarily attributable to a $22.2 million, or 6.5% increase in losses and loss adjustment expenses ("LAE") in the Company's Regional Property and Casualty segment as a result of increased claims frequency and severity in the personal and commercial automobile lines at Hanover and the personal automobile line at Citizens, as well as a decrease in favorable development on prior year reserves at Hanover. Additionally, an increase of $6.7 million, or 12.5% in the Corporate Risk Management Services segment is primarily related to increased premiums and the 1997 assumption of a block of affinity group business. These increases were partially offset by decreased policy benefits of $7.4 million, or 18.3% in the Institutional Services segment primarily attributable to the continuing decline of GICs during 1997. Other operating expenses increased $3.9 million, or 3.1%, to $131.0 million in the second quarter of 1997 compared to the same period in 1996 primarily due to increased expenses in the Corporate Risk Management Services segment. Other operating expenses in Corporate Risk Management Services increased $3.0 million, or 9.4%, to $35.0 million in the second quarter of 1997 as a result of increased premium taxes and commissions related to growth in premiums and administrative services only ("ASO") fees. Federal income tax expense increased $6.7 million in the second quarter of 1997, while the effective tax rate increased from 18.3% to 25.4% in the same period. For the life insurance subsidiaries, a rate increase from 19.6% to 37.9% resulted primarily from the absence of a differential earnings adjustment in 1997 compared to a $5.9 million differential earnings benefit in 1996. The effective tax rates for the Regional Property and Casualty subsidiaries were 12.9% and 17.3% during the second quarter of 1997 and 1996, respectively. This rate decrease reflects an increase in the proportion of tax-exempt interest on bonds to pre-tax income anticipated for the full year. Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996 The Company's consolidated net income for the six months ended June 30, 1997 decreased $36.3 million, or 40.4%, to $53.6 million, compared to the same period in 1996. Net income includes certain items which management believes are not indicative of overall operating trends. The following table reflects consolidated net income adjusted for these items, all net of taxes and minority interest as applicable.
(Unaudited) Six Months Ended June 30, (In millions) 1997 1996 Net income $ 53.6 $ 89.9 Adjustments: Net realized investment gains (16.7) (22.3) Contingency payment from sale of mutual fund processing business 0.0 (3.1) Restructuring costs 1.0 0.0 Loss from cession of disability income business 35.0 0.0 Differential earnings tax adjustment 0.0 (5.9) ------- ------- Adjusted net income $ 72.9 $ 58.6 ======= =======
The increase in adjusted net income of $14.3 million, or 24.4%, to $72.9 million is primarily attributable to pre-tax increases of $12.6 million and $11.4 million in the Regional Property and Casualty segment and the Retail Financial Services segment, respectively. The increase in the Regional Property and Casualty segment resulted principally from increased net investment income due to an increase in average invested assets, a portfolio shift to higher yielding debt securities, and additional partnership income. The Retail Financial Services segment increased due to growth in variable products' fee income. Additionally, the Institutional Services segment increased $3.8 million primarily from increased net GIC margins and growth in telemarketing income. These increases were partially offset by a decline in the Corporate segment's adjusted net income primarily resulting from accrued distributions on the Capital Securities issued February 3, 1997. Page 14 Premium revenue increased $38.3 million, or 3.4%, to $1,180.1 million during the first six months of 1997. Property and casualty premiums earned increased $26.2 million, or 2.8%, to $961.0 million due to accounting effects of restructuring a reinsurance contract in the personal automobile line and increased policies in force in the personal automobile and homeowners' lines at Hanover. Additionally, growth in Citizens' personal lines premiums is attributable to increases of $6.6 million in Ohio and Indiana resulting from expansion in these states, to a non-recurring $3.0 million decrease in premiums ceded to the Michigan Catastrophic Claims association ("MCCA") in the first quarter of 1997, and to increases in personal automobile and homeowners' rates. Premiums in the Corporate Risk Management Services segment also increased $14.1 million, or 9.5%, to $163.0 million due to increases of $18.5 million in reinsurance, fully insured group dental, and stop loss product lines, partially offset by decreases in fully insured group medical and risk sharing product lines totaling $4.9 million. Universal life and investment product policy fees increased $18.4 million, or 19.4%, to $113.4 million during the first six months of 1997. This was primarily the result of additional deposits and appreciation on variable products' account balances within the Retail Financial Services segment. Net investment income increased $6.7 million, or 1.9%, to $360.7 million during the first six months of 1997. This slight increase primarily reflects increases of $18.3 million and $6.4 million in the Regional Property and Casualty and Corporate segments, respectively, partially offset by an $18.1 decrease in the Institutional segment. Increases in the Regional Property and Casualty segment are the result of an increase in average invested assets, a portfolio shift to higher yielding securities, and increased partnership income. The Corporate segment's growth in investment income was derived from the temporary investment of proceeds from the issuance of Capital Securities in February 1997. The decrease in the Institutional segment resulted primarily from a reduction in invested assets due to declining GIC deposits. Net realized gains on investments decreased $11.3 million, or 20.8%, to $43.0 million for the six months ended June 30, 1997. This decrease is primarily attributable to the Regional Property and Casualty segment, where reduced sales of equity securities decreased net realized gains by $11.6 million. Other income increased $4.0 million, or 8.5%, to $50.9 million in the first six months of 1997. Other income from the Retail Financial Services segment increased $3.4 million, or 25.0%, to $17.0 million due to increased investment management fee income resulting from increased assets under management. Additionally, other income increased $2.5 million, or 14.5%, to $19.7 million in the Corporate Risk Management Services segment due to growth in ASO and contracts fees. Policy benefits, claims, losses and loss adjustment expenses increased $18.3 million, or 1.8% to $1,060.1 million during the first six months of 1997. This increase is primarily attributable to a $22.4 million, or 3.2% increase in losses and LAE in the Company's Regional Property and Casualty segment resulting from a $20.1 million reduction in favorable development on prior year reserves at Hanover, as well as increased claims frequency and severity in the current year in the personal automobile, commercial automobile and commercial multiple peril lines at Hanover and the homeowners line at Citizens. Additionally, a $13.3 million, or 12.6% increase in the Corporate Risk Management Services segment was due to related growth in premiums, increased policy benefits due to the 1997 assumption of a block of affinity group business, and increased group life claims due to unfavorable claims experience. These increases were partially offset by decreased policy benefits of $18.1 million, or 21.2% in the Institutional Services segment primarily resulting from the continuing decline of GICs during 1997. Other operating expenses increased $18.1 million, or 7.3%, to $265.9 million in the first six months of 1997. This increase is primarily attributable to increased expenses of $5.5 million in the Corporate Risk Management Services segment due to increased premium taxes and commissions related to growth in premiums and ASO fees as well as increased expenses of $4.9 million in the Regional Property and Casualty segment related to technology costs. Additionally, other operating expenses increased in the Retail Financial Services and Institutional segments due to product growth in each segment. Federal income tax expense decreased $7.8 million in the first six months of 1997, while the effective tax rates remained consistent at 22.2% and 22.3% for the six months ended June 30, 1997 and 1996, respectively. For the life insurance subsidiaries, the effective tax rate increased from 27.7% in 1996 to 44.8% in 1997. Excluding the effect of an $18.9 million tax benefit related to the agreement to cede the individual disability income business, the 1997 effective tax rate for the FAFLIC/AFLIAC consolidated group was 37.7%. This increase resulted primarily from the absence of a differential earnings adjustment in 1997 compared to a $5.9 million differential earnings benefit in 1996. The effective tax rates for the regional Property and Casualty subsidiaries were 18.0% and 19.2% during the first six months of 1997 and 1996, respectively. Page 15 Segment Results The following is management's discussion and analysis of the Company's results of operations by business segment. The Company offers financial products and services in two major areas: Risk Management and Retirement and Asset Management. Within these broad areas, the Company conducts business principally in five operating segments. These segments are Regional Property and Casualty; Corporate Risk Management Services; Retail Financial Services; Institutional Services; and Allmerica Asset Management. The Regional Property and Casualty segment consists of the Company's 59.5% ownership of Allmerica P&C; however, all property and casualty results presented include 100% of Allmerica P&C's pre-tax results of operations, consistent with the presentation in the Company's consolidated financial statements. The other segments are all owned and operated by FAFLIC and its wholly-owned subsidiaries. In addition to the five operating segments, the Company also has a Corporate segment, which consists primarily of the proceeds from the issuance of Company-obligated mandatorily redeemable preferred securities, Senior debentures and a portion of the net proceeds from the Company's initial public offering. Risk Management Regional Property and Casualty The following table summarizes the results of operations for the Regional Property and Casualty segment.
(Unaudited) (Unaudited) Quarter Ended Six Months Ended June 30, June 30, (In millions) 1997 1996 1997 1996 Revenues Net premiums earned $485.9 $469.7 $961.0 $934.8 Net investment income 65.6 56.3 126.9 108.6 Net realized gains (1.9) 2.0 35.9 47.5 Other income 3.6 3.2 6.0 7.0 ------- ------- ------- ------- Total revenues 553.2 531.2 1,129.8 1,097.9 Losses and LAE (1) 364.4 342.2 712.6 690.2 Policy acquisition and other operating expenses 150.7 151.9 307.4 303.1 ------- ------- -------- ------- Income before taxes $ 38.1 $ 37.1 $ 109.8 $ 104.6 ======= ======= ======== ======= (1) Includes policyholders' dividends of $2.5 million, $1.9 million, $4.1 million and $5.0 million for the quarters ended June 30,1997 and 1996 and the six months ended June 30, 1997 and 1996, respectively.
Quarter Ended June 30, 1997 Compared to Quarter Ended June 30,1996 INCOME BEFORE TAXES Income before taxes increased $1.0 million, or 2.7%, to $38.1 million in the second quarter of 1997. Net realized gains on investments before taxes were $2.0 million during the second quarter of 1996 compared to losses of $1.9 million during the second quarter of 1997. Excluding realized gains and losses and restructuring charges, income before taxes increased $5.7 million, to $40.8 million in the second quarter of 1997. This increase is primarily attributable to a $9.3 million increase in net investment income, to $65.6 million in the second quarter of 1997, partially offset by a $2.8 million increase in the underwriting loss. The growth in net investment income resulted primarily from an increase in average invested assets, a portfolio shift to higher yielding debt securities, including longer duration and non-investment grade securities, and to an increase in partnership income. The decline in underwriting results is primarily attributable to less favorable current year claims experience in the personal and commercial automobile lines at Hanover and the personal automobile and other commercial lines at Citizens, as well as a decrease in favorable development on prior year reserves at Hanover. This decline is partially offset by a decrease in catastrophe losses of $17.0 million and favorable workers' compensation claim activity in both current and prior accident years. Page 16 LINES OF BUSINESS RESULTS Personal Lines of Business The personal lines of business represented 61.6% and 60.7% of total net premiums earned in the second quarter of 1997 and 1996, respectively.
Hanover Citizens Consolidated For the Quarters Ended 1997 1996 1997 1996 1997 1996 June 30 (In millions) Net premiums earned $156.2 $147.7 $143.3 $137.2 $299.5 $284.9 Losses and loss adjustment expenses 121.1 97.3 107.9 103.4 229.0 200.7 Policy acquisition and other underwriting expenses 47.4 50.3 37.7 37.0 85.1 87.3 ------- ------- ------- ------- ------- ------- Underwriting (loss) profit $ (12.3) $ 0.1 $ (2.3) $ (3.2) $ (14.6) $ (3.1) ======= ======= ======= ======= ======= =======
Revenues Personal lines' net premiums earned increased $14.6 million, or 5.1%, to $299.5 million during the second quarter of 1997, compared to $284.9 million in the second quarter of 1996. Hanover's personal lines net premiums earned increased $8.5 million, or 5.8%, to $156.2 million during the second quarter of 1997. This increase is primarily attributable to an increase in the personal automobile line associated with the accounting effects of restructuring a reinsurance contract, increasing net premiums earned by approximately $4.0 million. A 5.6% increase in policies in force in the personal automobile line as well as a 2.6% increase in policies in force in the homeowners' line since June 30, 1996, also contributed to the increase in net premiums earned. These increases were partially offset by the effect of a mandated 6.2% decrease in Massachusetts personal automobile rates on January 1, 1997. In March 1997, the Massachusetts Division of Insurance approved Hanover's plan to offer a safe driver's discount of 10% on automobile insurance premiums. Management believes these rate decreases may unfavorably impact premium growth in Massachusetts. Approximately 37% of Hanover's personal automobile business is currently written in Massachusetts. Citizens' personal lines net premiums earned increased $6.1 million, or 4.4%, to $143.3 million during the second quarter of 1997, compared to $137.2 million during the second quarter of 1996. This increase is primarily attributable to rate increases in personal automobile and homeowners, partially offset by a 0.8% decrease in policies in force in the personal automobile line since June 30, 1996, attributable to continued strong competition in Michigan. Underwriting results The personal lines' underwriting loss increased $11.5 million, to a loss of $14.6 million in the second quarter of 1997. Hanover's underwriting results declined $12.4 million to a loss of $12.3 million, while Citizens' underwriting results improved $0.9 million to a loss of $2.3 million. The decline in Hanover's underwriting results is primarily attributable to an $11.1 million reduction in favorable development on prior year reserves in the personal automobile line and increased claims severity in the personal automobile line. The improvement in Citizens' underwriting results is primarily attributable to an $11.4 million decrease in catastrophe losses over the prior year second quarter, primarily in the homeowners line. This was partially offset by an increase in claim severity in the personal automobile line for the current accident year. Policy acquisition and other underwriting expenses in the personal lines decreased $2.2 million, or 2.5%, to $85.1 million in the second quarter of 1997, reflecting reductions in contingent commissions and employee related expenses, partially offset by increased technology expenses and the effect of growth in net premiums earned. Page 17 Commercial Lines of Business The commercial lines of business represented 38.4% and 39.3% of total net premiums earned in the second quarter of 1997 and 1996, respectively.
Hanover Citizens Consolidated For the Quarters Ended June 30, (In millions) 1997 1996 1997 1996 1997 1996 Net premiums earned $119.6 $110.9 $66.8 $73.9 $186.4 $184.8 Losses and loss adjustment expenses 81.3 80.4 49.4 59.2 130.7 139.6 Policy acquisition and other underwriting expenses 44.8 44.4 17.6 16.8 62.4 61.2 Policyholders' dividends 0.7 0.1 1.8 1.8 2.5 1.9 ------ ------ ------ ------ ------ ------ Underwriting (loss) $(7.2) $(14.0) $(2.0) $(3.9) $(9.2) $(17.9) ====== ====== ====== ====== ====== ======
Revenues Commercial lines' net premiums earned increased $1.6 million, to $186.4 million in the second quarter of 1997. Hanover's commercial lines net premiums earned increased $8.7 million, or 7.8%, to $119.6 million. This increase is primarily attributable to a $3.1 million increase in assumed premiums in Hanover's reinsurance division, as well as a 10.4% and 4.0% increase in policies in force in Hanover's commercial automobile and commercial multiple peril lines, respectively, since June 30, 1996. These increases were significantly offset by average rate decreases of 9.9% since January 1, 1997, in the workers' compensation line. Citizens' commercial lines net premiums earned decreased $7.1 million, or 9.6%, to $66.8 million in the second quarter of 1997. This decrease is primarily attributable to rate decreases in workers' compensation, resulting from continued competitive conditions in Michigan in this line. Rates in the workers' compensation line were decreased 6.4% and 8.7% effective June 1, 1996 and March 1, 1997, respectively. Management believes competitive conditions in Michigan in the workers' compensation line may impact future growth in net premiums earned. Underwriting results The commercial lines' underwriting results improved $8.7 million, or 48.6%, to a loss of $9.2 million in the second quarter of 1997. Hanover's underwriting loss decreased $6.8 million, or 48.6%, to a loss of $7.2 million, and Citizens' underwriting loss decreased $1.9 million, to a loss of $2.0 million in the second quarter of 1997. The improvement in Hanover's commercial lines underwriting results is primarily attributable to an increase in favorable development on prior year reserves in the workers' compensation line, as well as a decrease in catastrophe losses of $3.7 million, partially offset by an increase in current year claim frequency in the commercial automobile line. The improvement in Citizens' commercial lines underwriting results is attributable to a decrease in losses and LAE in the workers' compensation line of $12.2 million, or 45.8%, to $10.3 million primarily as a result of favorable claims activity in both current and prior accident years. Policy acquisition and other underwriting expenses in the commercial lines increased $1.2 million, or 2.0%, to $62.4 million in the second quarter of 1997, reflecting increased technology expenses partially offset by a decrease in contingent commissions at Hanover. Page 18 INVESTMENT RESULTS Net investment income before taxes increased $9.3 million, or 16.5%, to $65.6 million in 1997 compared to $56.3 million in the comparable quarter of 1996. The increase is the result of an increase in average invested assets, the Regional Property and Casualty segment's portfolio shift to higher yielding debt securities, including longer duration and non-investment grade securities, and to increased income from limited partnership investments of $3.8 million. The average pre-tax yield on debt securities was 6.8% and 6.3% for the quarters ended June 30,1997 and 1996, respectively. Average invested assets increased $164.3 million, or 4.3%, to $3,960.4 million at June 30, 1997 compared to $3,796.1 million at June 30, 1996. Net realized losses on investments before taxes were $1.9 million during the second quarter of 1997 compared to gains of $2.0 million during the second quarter of 1996. Six Months Ended June 30,1997 Compared to Six Months Ended June 30,1996 INCOME BEFORE TAXES Income before taxes increased $5.2 million, or 5.0%, to $109.8 million in the six months ended June 30, 1997. Net realized gains were $35.9 million during the six months ended June 30,1997, versus $47.5 million during the comparable period of 1996, reflecting a decrease in the sale of equity securities by Hanover. Excluding realized gains and losses and restructuring charges, income before taxes increased $17.6 million, to $74.4 million in the six months ended June 30,1997. This increase is primarily attributable to an $18.3 million increase in net investment income, to $126.9 million for the six months ended June 30, 1997. The growth in net investment income resulted primarily from an increase in average invested assets, a portfolio shift to higher yielding debt securities, including longer duration and non-investment grade securities, and to an increase in partnership income. LINES OF BUSINESS RESULTS Personal Lines of Business The personal lines of business represented 61.9% and 60.5% of total net premiums earned in the six months ended June 30, 1997 and 1996, respectively.
Hanover Citizens Consolidated For the Six Months Ended June 30, (In millions) 1997 1996 1997 1996 1997 1996 Net premiums earned $307.9 $292.8 $287.0 $272.3 $594.9 $565.1 Losses and loss adjustment expenses 233.9 213.6 221.7 210.0 455.6 423.6 Policy acquisition and other underwriting expenses 98.4 99.3 77.2 74.2 175.6 173.5 ------- ------- ------- ------- ------- ------- Underwriting (loss) $(24.4) $(20.1) $(11.9) $(11.9) $(36.3) $(32.0) ======= ======= ======= ======= ======= =======
Revenues Personal lines' net premiums earned increased $29.8 million, or 5.3%, to $594.9 million during the six months ended June 30, 1997, compared to $565.1 million in the same period of 1996. Hanover's personal lines net premiums earned increased $15.1 million, or 5.2%, to $307.9 million during the six months ended June 30, 1997. This increase was primarily attributable to an increase in the personal automobile line associated with the accounting effects of restructuring a reinsurance contract, increasing both net premiums earned and losses and LAE by approximately $8.0 million. A 5.6% increase in policies in force in the personal automobile line as well as a 2.6% increase in policies in force in the homeowners line, since June 30, 1996, also contributed to the increase in net premiums earned. These increases were partially offset by the effect of a mandated 6.2% decrease in Massachusetts personal automobile rates on January 1, 1997. Page 19 Citizens' personal lines net premiums earned increased $14.7 million, or 5.4%, to $287.0 million in the six months ended June 30, 1997. This increase is primarily attributable to a decrease in premiums ceded to the MCCA and to rate increases in personal automobile and homeowners. The non-recurring decreases in premiums ceded to MCCA was a result of a lower surcharge effective January 1, 1997 for personal automobile policies written. These factors were partially offset by a 0.8% decrease in policies in force in the personal automobile line since June 30,1996, attributable to continued strong competition in Michigan. Underwriting Results The personal lines' underwriting loss for the six months ended June 30, 1997 increased $4.3 million, to a loss of $36.3 million. Hanover's underwriting loss increased $4.3 million, to a loss of $24.4 million. Citizens' underwriting loss was unchanged at $11.9 million for the six months ended June 30, 1997 and 1996. The decline in Hanover's underwriting results is primarily attributable to a $20.1 million reduction in favorable development on prior year reserves in the personal automobile line, and an increase in current year claim severity in the personal automobile line. These increases were partially offset by a decrease in catastrophe losses in the homeowners line of $15.5 million, to $5.0 million during the first six months of 1997. Citizens' underwriting results were unchanged as a result of a decrease in catastrophe losses of $10.2 million over the prior year, primarily in the homeowners line. This was partially offset by an increase in claim severity in the homeowners line for the current accident year, primarily in the first quarter. Policy acquisition and other underwriting expenses in the personal lines increased $2.1 million, or 1.2%, to $175.6 million in the six months ended June 30, 1997, reflecting increased technology expenses and growth in net premiums earned, partially offset by reductions in employee related expenses. Commercial Lines of Business The commercial lines of business represented 38.1% and 39.5% of total net premiums earned in the six months ended June 30, 1997 and 1996, respectively.
Hanover Citizens Consolidated For the Six Months Ended June 30 (In millions) 1997 1996 1997 1996 1997 1996 Net premiums earned $233.1 $226.4 $133.0 $143.3 $366.1 $369.7 Losses and loss adjustment expenses 156.6 154.8 94.1 106.8 250.7 261.6 Policy acquisition and other underwriting expenses 91.3 88.1 35.3 34.7 126.6 122.8 Policyholders' dividends 0.7 1.4 3.4 3.6 4.1 5.0 ------- ------- ------- ------- ------- ------- Underwriting (loss) profit $(15.5) $(17.9) $0.2 $(1.8) $(15.3) $(19.7) ======= ======= ======= ======= ======= =======
Revenues Commercial lines' net premiums earned decreased $3.6 million, or 1.0%, to $366.1 million in the six months ended June 30, 1997. Hanover's commercial lines net premiums earned increased $6.7 million, or 3.0%, to $226.4 million. This increase is primarily attributable to a $4.1 million increase in assumed premiums in Hanover's reinsurance division, as well as a 10.4% and 4.0% increase in policies in force in Hanover's commercial automobile and commercial multiple peril lines, respectively, since June 30, 1996. These increases were partially offset by average rate decreases of 9.9%, since January 1, 1997, in Hanover's workers' compensation line. Citizens' commercial lines net premiums earned decreased $10.3 million, or 7.2%, to $133.0 million in the six months ended June 30, 1997. This decrease is attributable to rate decreases in workers' compensation, resulting from continued competitive conditions in Michigan in this line. Rates in the workers' compensation line were decreased 6.4% and 8.7% effective June 1, 1996 and March 1, 1997, respectively. Page 20 Underwriting Results The commercial lines' underwriting loss decreased $4.4 million, or 22.3% to a loss of $15.3 million for the six months ended June 30, 1997. Hanover's underwriting results improved $2.4 million, or 13.4%, to a loss of $15.5 million and Citizens' underwriting loss decreased $2.0 million, to a profit of $0.2 million in the six months ended June 30, 1997. The improvement in Hanover's underwriting results reflects an increase of $8.8 million in favorable development on prior accident years in the commercial multiple peril line and a decrease in catastrophe losses of $5.6 million in the same line, partially offset by an increase in frequency and severity in the commercial automobile line. The improvement in Citizens' underwriting results is attributable to a decrease of $17.7 million, or 42.1%, to $24.3 million in losses and LAE in the workers' compensation line, primarily as a result of favorable claims activity in both current and prior accident years. Additionally, Citizens experienced less favorable claims experience in the commercial multiple peril line in the first quarter of 1997. Policy acquisition and other underwriting expenses in the commercial lines increased $3.8 million, or 3.1%, to $126.6 million in the six months ended June 30, 1997, primarily attributable to increased technology expenses in 1997. INVESTMENT RESULTS Net investment income before taxes increased $18.3 million, or 16.9%, to $126.9 million during the six months ended June 30, 1997 compared to $108.6 million in the comparable period of 1996. The increase is primarily the result of an increase in average invested assets, a portfolio shift to higher yielding debt securities, including longer duration and non-investment grade securities, and to increased income from limited partnership investments of $3.8 million. The average pre-tax yield on debt securities was 6.8% and 6.2% for the six months ended June 30, 1997 and 1996, respectively. Average invested assets increased $209.6 million, or 5.5%, to $3,990.7 million at June 30, 1997 compared to $3,781.1 million at June 30, 1996. Net realized gains on investments before taxes were $35.9 million and $47.5 million for the six months ended June 30, 1997 and 1996, respectively. The decrease in net realized gains reflects a decrease in the sale of equity securities at Hanover. In both periods, net realized investment gains resulted primarily from the sale of appreciated equity securities, due to the Regional Property and Casualty segment's strategy of shifting to a higher proportion of debt securities. Reserve for Losses and Loss Adjustment Expenses The Regional Property and Casualty segment maintains reserves to provide for its estimated ultimate liability for losses and loss adjustment expenses with respect to reported and unreported claims incurred as of the end of each accounting period. These reserves are estimates, involving actuarial projections at a given point in time, of what management expects the ultimate settlement and administration of claims will cost based on facts and circumstances then known, predictions of future events, estimates of future trends in claim severity and judicial theories of liability and other factors. The inherent uncertainty of estimating insurance reserves is greater for certain types of property and casualty insurance lines, particularly workers' compensation and other liability lines, where a longer period of time may elapse before a definitive determination of ultimate liability may be made, where the technological, judicial and political climates involving these types of claims are changing. Page 21 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) 1997 1996 Reserve for losses and LAE, beginning of period $2,744.1 $2,896.0 Incurred losses and LAE, net of reinsurance recoverable: Provision for insured events of the current year 769.5 740.9 Decrease in provision for insured events of prior years (61.0) (55.7) --------- --------- Total incurred losses and LAE 708.5 685.2 --------- --------- Payments, net of reinsurance recoverable: Losses and LAE attributable to insured events of current year 310.5 298.2 Losses and LAE attributable to insured events of prior years 440.4 386.1 --------- --------- Total payments 750.9 684.3 --------- --------- Change in reinsurance recoverable on unpaid losses (38.0) (31.8) Reserve for losses and LAE, end of period $2,663.7 $2,865.1 ========= =========
As part of an ongoing process, the reserves have been re-estimated for all prior accident years and were decreased by $61.0 million and $55.7 million for the six month periods ended June 30, 1997 and 1996, respectively. The increase in favorable development on prior years' loss reserves of $5.3 million results from a $21.3 million increase in favorable development at Citizens to $35.6 million. The favorable reserve development in both years primarily reflects the initiatives taken by Citizens to manage medical costs in the personal automobile and workers' compensation lines, as well as the impact of the Michigan Supreme Court ruling on workers' compensation indemnity payments, which decreases the maximum amount to be paid for indemnity cases on all existing and future claims. Hanover's favorable development decreased $16.0 million to $25.4 million during the six months ended June 30, 1997. This decrease is primarily attributable to decreased favorable development in the personal automobile line, partially offset by an increase in favorable development in the commercial multiple peril line. The Regional Property and Casualty segment regularly reviews its reserving techniques, its overall reserving position and its reinsurance. Based on (i) review of historical data, legislative enactments, judicial decisions, legal developments in impositions of damages, changes in political attitudes and trends in general economic conditions, (ii) review of per claim information, (iii) historical loss experience of the Company and the industry, (iv) the relatively short-term nature of most policies, and (v)internal estimates of required reserves, management believes that adequate provision has been made for loss reserves. However, establishment of appropriate reserves is an inherently uncertain process and there can be no certainty that current established reserves will prove adequate in light of subsequent actual experience. A significant change to the estimated reserves could have a material impact on the results of operations. Page 22 Corporate Risk Management Services The following table summarizes the results of operations for the Corporate Risk Management Services ("CRMS") segment for the periods indicated.
(Unaudited) (Unaudited) Quarter Ended Six Months Ended June 30, June 30, (In millions) 1997 1996 1997 1996 Premiums and premium equivalents Premiums $ 84.3 $ 75.1 $163.0 $148.9 Premium equivalents 147.4 143.9 298.2 286.5 ------- ------- ------- ------- Total premiums and premium equivalents $231.7 $219.0 $461.2 $435.4 ======= ======= ======= ======= Revenues Premiums $84.3 $75.1 $163.0 $148.9 Net investment income 5.8 5.4 11.3 10.2 Net realized (losses) gains (0.2) 0.2 0.1 0.1 Other income 10.3 8.9 19.7 17.2 ------- -------- ------- ------- Total revenues 100.2 89.6 194.1 176.4 Policy benefits, claims and losses 60.2 53.5 118.8 105.5 Policy acquisition expenses 0.8 0.7 1.7 1.5 Other operating expenses 35.0 32.0 67.4 61.9 ------- -------- ------- ------- Income before taxes $ 4.2 $ 3.4 $ 6.2 $ 7.5 ======= ======== ======= =======
Quarter Ended June 30, 1997 Compared to Quarter Ended June 30, 1996 Income before taxes increased $0.8 million, or 23.5%, to $4.2 million in the second quarter of 1997. This increase was primarily due to growth in the Company's reinsurance, fully insured group dental, stop loss and ASO product lines, as well as an improvement in overall claims experience during the second quarter of 1997. These increases were partially offset by additional policy benefits, premium taxes, and commissions resulting from the growth in premiums and ASO fees. Premiums increased $9.2 million, or 12.3%, to $84.3 million in the second quarter of 1997 primarily due to increases in reinsurance, fully insured group dental, and stop loss product lines totaling $12.3 million. The assumption of a block of affinity group business in the beginning of 1997 resulted in a $7.4 million increase in reinsurance premiums during the quarter. These increases were partially offset by decreases in the fully insured group medical and risk sharing product lines totaling $3.0 million. The decline in risk sharing premiums primarily reflects the Company's emphasis on stop loss coverage and ASO arrangements. Other income increased $1.4 million, or 15.7%, to $10.3 million in the second quarter of 1997 due to growth in ASO and contract fees. Policy benefits, claims and losses increased $6.7 million, or 12.5%, to $60.2 million in the second quarter of 1997. This increase is principally attributable to the increased premiums, partially offset by favorable loss experience overall. The 1997 assumption of a block of affinity group business accounted for $5.1 million of the growth-related increase in policy benefits during the quarter. Other operating expenses increased $3.0 million, or 9.4%, to $35.0 million in the second quarter of 1997 primarily due to increases in premium taxes and commissions resulting from the growth in premiums and ASO fees. Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996 Income before taxes decreased $1.3 million, or 17.3%, to $6.2 million in the first half of 1997 compared to the same period in 1996. During the first quarter of 1996, CRMS released reserves of $1.2 million related to a litigation settlement. Excluding this item, income before taxes decreased $0.1 million, or 1.3%. This decrease was primarily due to adverse claims experience in the group life product line, partially offset by growth of the Company's reinsurance, fully insured group dental, stop loss, and ASO product lines, and to favorable long-term disability claims experience. Page 23 Premiums increased $14.1 million, or 9.5%, to $163.0 million in the first six months of 1997 primarily due to increases in reinsurance, fully insured group dental, and stop loss product lines totaling $18.5 million. The aforementioned assumption of a block of affinity group business resulted in a $9.0 million increase in reinsurance premiums during 1997. These increases were partially offset by decreases in risk sharing and fully insured group medical product lines of $4.9 million. The decline in risk sharing premiums primarily reflects the Company's emphasis on stop loss coverage and ASO arrangements. Net investment income increased $1.1 million, or 10.8%, to $11.3 million in the first half of 1997 due to increased yields on invested assets. This increase primarily reflects the Company's continued shift to higher yielding, longer duration investments. Other income increased $2.5 million, or 14.5%, to $19.7 million in the first six months of 1997 due to growth in ASO and contract fees. Policy benefits, claims and losses increased $13.3 million, or 12.6%, to $118.8 million in the first half of 1997 compared to the same period in 1996. Excluding the aforementioned reserve release, policy benefits, claims and losses increased $12.1 million, or 11.5%. This increase is primarily due to the 1997 assumption of a block of affinity group business which contributed $6.1 million in policy benefits during the year. Additionally, group life claims increased $5.3 million in 1997 due to unfavorable claims experience in the first half of the year combined with unusually favorable claims experience in the first half of 1996. Increased benefits due to growth in the fully insured group dental product line were substantially offset by decreased benefits due to cancellations in the fully insured medical product line and favorable claims experience in the long-term disability income product line. Other operating expenses increased $5.5 million, or 8.9%, to $67.4 million for the six months ended June 30, 1997 primarily due to increases in premium taxes and commissions resulting from the growth in premiums and ASO fees. Retirement and Asset Management Retail Financial Services The following table summarizes the results of operations for the Retail Financial Services segment for the periods indicated.
(Unaudited (Unaudited) Quarter Ended Six Months Ended June 30, June 30, (In millions) 1997 1996 1997 1996 Revenues Premiums $ 18.3 $ 19.7 $ 56.1 $ 58.0 Fees 52.6 44.4 102.3 86.9 Net investment income 61.5 64.0 122.1 123.2 Net realized losses (1.9) (1.1) (3.2) (0.2) Other income 8.5 7.5 17.0 13.6 ------- -------- -------- ------- Total revenues 139.0 134.5 294.3 281.5 Policy benefits, claims and losses 72.8 71.3 161.3 160.6 Policy acquisition expenses 14.3 13.6 30.2 29.0 Loss from cession of disability income business 0.0 0.0 53.9 0.0 Other operating expenses 30.6 29.4 60.9 56.8 -------- -------- -------- ------- Income (loss) before taxes $ 21.3 $ 20.2 $(12.0) $ 35.1 ======= ======== ======== =======
Quarter Ended June 30, 1997 Compared to Quarter Ended June 30, 1996 Income before taxes increased $1.1 million, or 5.4%, to $21.3 million in the second quarter of 1997. This increase is primarily attributable to growth in variable products' fee income, partially offset by decreased net investment income due to a reduction in fixed maturities invested, and less favorable mortality experience in variable universal life and traditional products. Premiums decreased $1.4 million, or 7.1%, to $18.3 million during the second quarter of 1997. This decrease is due to the Company's continued shift in focus from traditional life insurance products to variable life insurance and annuity products. Page 24 Fee revenue increased $8.2 million, or 18.5%, to $52.6 million in the second quarter of 1997 due to additional deposits and appreciation on variable products' account balances. Fees from annuities increased $6.6 million, or 48.2%, to $20.3 million in the second quarter of 1997 compared to the same period in 1996. Fees from variable universal life policies increased $3.0 million, or 29.4%, to $13.2 million in the second quarter of 1997. These increases were partially offset by a continued decline in fees from non- variable universal life of $1.4 million. The Company expects fees on this product to decrease as policies in force and related contract values decline. Net investment income decreased $2.5 million, or 3.9%, to $61.5 million in the second quarter of 1997. This decrease is primarily due to a reduction in average fixed maturities invested, partially offset by increased portfolio yields. The reduction in average fixed maturities invested is primarily due to a reduction in the Company's general account, resulting from a shift in focus from universal life insurance products to variable life insurance and annuity products. Additionally, during 1996, the Company temporarily increased its fixed maturity holdings by utilizing short-term debt to finance additions to the investment portfolio. This strategy has not been utilized in 1997. The increased yields were achieved through a series of modest portfolio shifts, beginning in the second quarter of 1996, to higher yielding debt securities, including longer duration and non-investment grade securities. Related average yields rose from 7.5% in 1996 to 8.1% in 1997. Policy benefits, claims, and losses increased $1.5 million, or 2.1%, to $72.8 million in the second quarter of 1997. Variable universal life and traditional product lines benefits increased $2.9 million due to less favorable mortality experience in the second quarter of 1997. Partially offsetting these increases were decreased benefits of $1.4 million in the individual disability income line due to the Company's decision to discontinue selling this product. Other operating expenses include insurance taxes, licenses, fees, and administrative expenses incurred to support sales and marketing of products sold in this segment. The increase of $1.2 million, or 4.1%, to $30.6 million for the quarter ended June 30, 1997 is primarily due to increases in premium taxes and administrative expenses related to continued growth in the variable product lines. These increases were partially offset by a reduction in interest expense on short-term debt used to finance additions to the investment portfolio in 1996. Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996 Income before taxes decreased $47.1 million, or 134.2%, to a loss before taxes of $12.0 million in the first half of 1997. This decrease is attributable to a $53.9 million loss sustained in the first quarter of 1997 related to an agreement to cede the individual disability income business. Excluding this non-recurring charge, income before taxes increased $6.8 million, or 19.4%, to $41.9 million in the first half of 1997. This increase is primarily due to growth in variable products' fee income, partially offset by losses from sales of real estate and less favorable mortality experience. Premiums decreased $1.9 million, or 3.3%, to $56.1 million during the first six months of 1997. This decrease reflects the Company's continued shift in focus from traditional life insurance products to variable life insurance and annuity products and the decision in the first half of 1996 to discontinue issuing new individual disability income policies. Fee revenue increased $15.4 million, or 17.7%, to $102.3 million in the first half of 1997 due to additional deposits and appreciation in variable products' account balances. Fees from annuities increased $12.4 million, or 48.4%, to $38.0 million in the first half of 1997 compared to the same period in 1996. Fees from variable universal life policies increased $5.1 million, or 25.0%, to $25.5 million in the first half of 1997. These increases were partially offset by a continued decline in fees from non-variable universal life of $2.1 million. The Company expects fees on this product to decrease as policies in force and related contract values decline. Net realized losses increased $3.0 million, from $0.2 million in the first half of 1996, to $3.2 million in the same period of 1997. This change is primarily due to real estate losses of $0.9 million recorded in the first half of 1997 as compared to real estate gains of $1.6 million on the sale of three properties during 1996. Other income increased $3.4 million, or 25.0%, to $17.0 million in 1997. This increase is primarily attributable to increased investment management fee income resulting from increased assets under management. Policy benefits, claims, and losses increased $0.7 million, or 0.4%, to $161.3 million in the first half of 1997. Universal life and variable universal life product lines increased $4.5 million due to unfavorable mortality experience during the first half of 1997. These increases were partially offset by decreased benefits of $2.8 million in the individual disability income line due to the Company's aforementioned decision to discontinue selling this product and decreased benefits of $1.1 million in the individual annuities product due to reduced crediting rates in 1997. Page 25 The increase in other operating expenses of $4.1 million, or 7.2%, to $60.9 million for the six months ended June 30, 1997 is primarily the result of increased premium taxes and administrative expenses related to growth in the variable product lines. Additionally, increases in sub-advisor fees and brokerage commissions resulted from growth in investments under management. These increases were partially offset by a reduction in interest expense on short-term debt used to finance additions to the investment portfolio in 1996. Interest Margins The results of the Retail Financial Services segment depend, in part, on the maintenance of profitable margins between investment results from investment assets supporting universal life and general account annuity products and the interest credited on those products. The following table sets forth interest earned, interest credited and the related interest margin.
(Unaudited) (Unaudited) Quarter Ended Six Months Ended June 30, June 30, (In millions) 1997 1996 1997 1996 Net investment income $37.1 $36.6 $73.2 $73.4 Less: Interest credited 24.6 24.0 49.2 49.0 ------- ------- ------- ------- Interest margins (1) $12.5 $12.6 $24.0 $24.4 ======= ======= ======= ======= (1) Interest margins represent the difference between income earned on investment assets and interest credited to customers' universal life and general account annuity policies.
Interest margins were relatively consistent in 1997 as compared to 1996. 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) 1997 1996 1996 1997 Revenues Fees, premiums, and non-insurance income (1) $9.8 $10.7 $19.8 $18.9 Net investment income GICs 21.4 25.7 43.0 55.2 Other 25.0 27.7 50.0 55.9 Net realized gains 2.4 1.2 9.8 7.1 ----- ----- ----- ----- Total revenues 58.6 65.3 122.6 137.1 Policy benefits, claims and losses Interest credited to GICs 16.5 23.3 34.2 50.7 Other 16.6 17.2 33.2 34.8 Policy acquisition expenses 0.6 0.7 1.3 1.4 Other operating expenses 12.3 11.9 26.6 24.6 ----- ----- ----- ----- Income before taxes $12.6 $12.2 $27.3 $25.6 ===== ===== ===== ===== (1) Fees, premiums, and non-insurance income includes fees from retirement services, institutional 401(K) recordkeeping services, and other miscellaneous non-insurance related fees.
Quarter Ended June 30, 1997 compared to Quarter Ended June 30, 1996 Income before taxes increased $0.4 million, or 3.3%, to $12.6 million in the second quarter of 1997. During the second quarter of 1996, Institutional Services recognized a contingency payment for the sale of the mutual fund processing business of $3.3 million. Excluding this item, income before taxes increased $3.7 million, or 41.6%. This change was primarily attributable to an increase in the net GIC margins of $2.5 million, increased realized gains of $1.2 million, and growth in telemarketing and group variable life products of $0.7 million and $0.4 million, respectively. These increases were partially offset by a $1.7 million reduction in the contribution from defined benefit plans primarily resulting from cancellations and transfers of plan assets to separate accounts. Page 26 Fees, premiums, and non-insurance income decreased $0.9 million, or 8.4%, to $9.8 million in the first quarter of 1997. Excluding the aforementioned contingency payment, fees, premiums, and non-insurance income increased $2.4 million, or 32.4%. This increase was primarily due to growth in the Company's telemarketing services line and group variable life product line of $1.1 million and $0.8 million, respectively. Net investment income related to GICs and interest credited to GIC contractholders have declined as a result of declining GIC deposits due to the downgrading in March 1995 of FAFLIC's S&P Rating to A+ (Good). As a result, sales of traditional GICs have substantially ceased. Management expects GIC deposits and related income to continue to decline. In the second quarter of 1997, the interest margin on GICs increased $2.5 million due to the combination of slightly higher investment yields and lower average crediting rates on the remaining contracts. Other net investment income decreased $2.7 million, or 9.7%, to $25.0 million in the second quarter of 1997. This decrease resulted from a decline in average invested assets due to cancellations of defined benefit plans, as well as transfers of certain plan assets to the separate accounts. Net realized gains increased $1.2 million, or 100%, to $2.4 million in the second quarter of 1997 primarily as a result of sales of real estate during the quarter. Other policy benefits, claims and losses consist principally of benefits provided by the Company's defined contribution and defined benefit plans, including annuity benefits for certain defined benefit plan participants electing that option. Other policy benefits, claims and losses decreased $0.6 million, or 3.5%, to $16.6 million for the second quarter of 1997, primarily due to reductions in interest credited to participants resulting from the aforementioned cancellations, partially offset by less favorable mortality in the defined benefit plan product line and increased policy benefits in the group variable life product line. Other operating expenses increased $0.4 million, or 3.4%, to $12.3 million in the second quarter of 1997. This increase was primarily attributable to growth in telemarketing services. Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996 Income before taxes increased $1.7 million, or 6.6%, to $27.3 million for the six months ended June 30, 1997 compared to the six months ended June 30, 1996. During the first half of 1996, Institutional Services recognized a contingency payment for the sale of the mutual fund processing business of $4.8 million. Excluding this item, income before taxes increased $6.5 million, or 31.3%. This change was primarily attributable to an increase in the net GIC margins of $4.3 million, increased realized gains of $2.7 million, and growth in telemarketing and group variable life product income of $1.1 million and $0.6 million, respectively. These increases were partially offset by a $3.9 million reduction in the contribution from defined benefit plans primarily resulting from cancellations and transfers of plan assets to the separate accounts. Fees, premiums, and non-insurance income increased $0.9 million, or 4.8%, to $19.8 million in the first half of 1997. Excluding the aforementioned contingency payment, fees, premiums, and non-insurance income increased $5.7 million, or 40.4%. This increase was primarily due to growth in the Company's group variable life product line and telemarketing services line of $2.6 million and $2.4 million, respectively. During the first six months of 1997, the interest margin on GICs increased $4.3 million due to the combination of slightly higher investment yields and lower average crediting rates on the remaining contracts. Other net investment income decreased $5.9 million, or 10.6%, to $50.0 million in the first half of 1997. This decrease resulted from a decline in average invested assets due to cancellations of defined benefit plans, as well as transfers of certain plan assets to the separate accounts. Net realized gains increased $2.7 million, or 38.0%, to $9.8 million in the first six months of 1997. This change resulted primarily from increased sales of real estate properties. Other policy benefits, claims and losses for defined benefit plans, defined contribution plans, and the group variable life product declined from $34.8 million in 1996 to $33.2 million in 1997. This was primarily due to reductions in the interest credited to participants resulting from the aforementioned cancellations, partially offset by less favorable mortality in the defined benefit plan product line and increased policy benefits in the group variable life product line. Other operating expenses increased $2.0 million, or 8.1%, to $26.6 million in the first six months of 1997. This increase was primarily attributable to growth in group variable life products and telemarketing services of $1.6 million and $1.3 million, respectively. Page 27 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) 1997 1996 1996 1997 Fees and other income: External $0.3 $0.3 $0.7 $0.5 Internal 1.7 3.2 3.6 4.0 ----- ----- ----- ----- Total revenues 2.0 3.5 4.3 4.5 Other operating expenses 1.5 3.3 3.7 4.0 ----- ----- ----- ----- Income before taxes $0.5 $0.2 $0.6 $0.5 ===== ===== ===== =====
Since 1994, the Company has provided investment advisory and sub-advisory services, primarily to affiliates, through its registered investment advisor, Allmerica Asset Management ("AAM"). In the second quarter of 1996, AAM finalized contracts with two related parties, FAFLIC and AFLIAC, to provide investment advisory services at cost. The internal fees and corresponding operating expenses related to these contracts totaled $0.8 million and $2.3 million for the quarters ended June 30, 1997 and 1996, respectively and $1.9 million and $2.3 million for the six months ended June 30, 1997 and 1996, respectively. Corporate The following table summarizes the results of operations for the Corporate segment for the periods indicated.
(Unaudited) (Unaudited) Quarter Ended Six Months Ended June 30, June 30, (In millions) 1997 1996 1996 1997 Revenues Investment and other income $4.8 $1.0 $7.9 $1.5 Realized (losses) gains (0.3) (0.2) 0.4 (0.2) ----- ----- ----- ----- Total revenues 4.5 0.8 8.3 1.3 Other operating expenses 5.0 5.0 10.0 9.5 ----- ----- ----- ----- Loss before taxes and minority interest (0.5) (4.2) (1.7) (8.2) Minority interest: Distributions on Company- obligated mandatorily redeemable preferred securities of subsidiary trust (6.1) 0.0 (9.9) 0.0 ----- ----- ----- ----- Loss before taxes $(6.6) $(4.2) $(11.6) $(8.2) ===== ===== ===== =====
This segment consists primarily of $329.9 million of cash, investments, and other assets financed by the $296.3 million in net proceeds from the February 3, 1997 issuance of Company-obligated mandatorily redeemable preferred securities of a subsidiary trust, AFC Capital Trust. Investment and other income increased $3.8 million in the second quarter of 1997, and $6.4 million in the first six months of 1997, primarily due to the net proceeds from these securities. These proceeds were invested in the short-term investment portfolio. For all periods presented, other operating expenses principally reflect interest expense on the Company's 7 5/8% Senior Debentures. Additionally, the Series A Capital Securities, issued by AFC Capital Trust, pay cumulative distributions at a rate of 8.207% semiannually commencing August 15, 1997. Minority interest represents the accrual of these distributions from the date of issuance. Page 28 Investment Portfolio The Company had investment assets diversified across several asset classes, as follows:
June 30,1997 (1) December 31, 1996 (1) Carrying % of Total Carrying % of Total Value Carrying Value Value Carrying Value (Dollars in millions) Fixed maturities $7,809.5 77.4% $7,891.7 79.4% Equity securities 441.3 4.4 473.6 4.8 Mortgages 699.6 6.9 764.6 7.7 Policy loans 363.6 3.6 362.6 3.6 Real estate 90.5 0.9 120.7 1.2 Cash and cash equivalents 545.2 5.4 202.6 2.0 Other invested assets 143.5 1.4 128.8 1.3 -------- ----- ------- ----- Total $10,093.2 100.0% $9,944.6 100.0% ======== ===== ======= ===== Includes Closed Block invested assets with a carrying value of $757.8 million and $772.7 million at June 30, 1997 and December 31, 1996, respectively. The Company carries the fixed maturities and equity securities in its investment portfolio at market value.
Total investment assets increased $148.6 million, or 1.5%, to $10.1 billion during the first six months of 1997. This increase is primarily attributable to the net proceeds from the issuance of Capital Securities in the first quarter of 1997, partially offset by a decline in invested assets related to the settlement of GIC contracts. Equity securities decreased $32.3 million, or 6.8%, to $441.3 million, as a result of the Regional Property and Casualty segment's continued shift in portfolio holdings from equity securities to fixed maturity securities. Despite this portfolio shift, fixed maturities decreased $82.2 million, or 1.0%, primarily due to financing of net GIC withdrawals and transfers of general account assets to separate account assets during the year. Mortgages decreased $65.0 million, or 8.5%, to $699.6 million, due to loan repayments during the period. Additionally, real estate decreased $30.2 million, or 25.0%, to $90.5 million during the first six months of 1997 due to sales of investment properties. The Company intends to sell its holdings in this portfolio within the next several years. Cash and cash equivalents increased $342.6 million, or 169.1%, to $545.2 million primarily due to the investment of the net proceeds from the aforementioned Capital Securities issuance. These proceeds were held in short term securities during the first half of 1997. The Company's fixed maturity portfolio is comprised of primarily investment grade corporate securities, tax-exempt issues of state and local governments, U.S. government and agency securities and other issues. Based on ratings by the National Association of Insurance Commissioners, investment grade securities comprised 80.5% and 84.8% of the Company's total fixed maturity portfolio at June 30, 1997 and December 31, 1996, respectively. In 1996 and continuing in the first half of 1997, there was a modest shift to higher yielding debt securities, including longer duration and non-investment grade securities. The average yield on debt securities was 7.6% and 7.1% for the six months ended June 30, 1997 and 1996, respectively. Although management expects that a substantial portion of new funds will be invested in investment grade fixed maturities, the Company may invest a portion of new funds in below investment grade fixed maturities or equity interests. The following table illustrates asset valuation allowances and additions to or deductions from such allowances for the periods indicated.
Other Invested (Dollars in millions) Mortgages Real Estate Assets Total Year Ended December 31, 1996 Beginning balance $33.8 $19.6 $3.7 $57.1 Provision 5.5 0.0 0.0 5.5 Write-offs (19.7) (4.7) (3.7) (28.1) ----- ----- ----- ----- Ending balance $19.6 $14.9 $0.0 $34.5 Valuation allowance as a percentage of carrying value before reserves 2.5% 11.0% 0.0% 3.8% Six months ended June 30, 1997 Provision (benefits) 1.8 1.5 0.0 3.3 Write-offs (1.2) (2.2) 0.0 (3.4) ----- ----- ----- ----- Ending balance $20.2 $14.2 $0.0 $34.4 Valuation allowance as a percentage of carrying value before reserves 2.8% 13.6% 0.0% 4.2% Write-offs reflect asset sales, foreclosures and forgiveness of debt upon restructurings.
Page 29 Income Taxes AFC and its life insurance subsidiaries (including certain noninsurance operations) file a consolidated United States federal income tax return. Entities included within the consolidated group are segregated into either a life insurance or a non-life insurance company subgroup. The consolidation of these subgroups is subject to certain statutory restrictions on the percentage of eligible non-life tax losses that can be applied to offset life company taxable income. Allmerica P&C and its subsidiaries file a separate United States federal income tax return. FAFLIC, as a mutual insurance company until October 1995, was required to adjust its deduction for policyholder dividends by the differential earnings amount under Section 809 of the Internal Revenue Code. This amount was computed, for each tax year, by multiplying the average equity base of the FAFLIC/AFLIAC consolidated group, as determined for tax purposes, by the estimate of an excess of an imputed earnings rate over the average mutual life insurance companies' earnings rate. The differential earnings amount for each tax year was subsequently recomputed when actual earnings rates were published by the IRS. As a stock company, AFC, including its life insurance subsidiaries, is no longer required to reduce its policyholder dividend deduction by the differential earnings amount. The differential earnings adjustment in the second quarter of 1996 related to an adjustment for the 1994 tax year based on the actual average mutual life insurance companies' earnings estimated rate issued by the IRS in 1996. Provision for federal income taxes before minority interest was $19.3 million during the second quarter of 1997 compared to $12.6 million during the same period in 1996. These provisions resulted in consolidated effective federal tax rates of 25.4% and 18.3%, respectively. The effective tax rates for AFLIAC and FAFLIC and its non-insurance subsidiaries were 37.9% and 19.6% during the second quarter of 1997 and 1996, respectively. The effective tax rates for the Regional Property and Casualty subsidiaries were 12.9% and 17.3% during the second quarter of 1997 and 1996, respectively. The increase in the rate for FAFLIC resulted from the absence of a differential earnings adjustment in 1997 compared to a $5.9 million differential earnings benefit in 1996. The decrease in the rate for the Regional Property and Casualty subsidiaries reflects an increase in the proportion of tax-exempt interest on bonds to pre-tax income anticipated for the full year. Provision for federal income taxes before minority interest was $29.0 million during the first six months of 1997 compared to $36.8 million during the same period in 1996. These provisions resulted in consolidated effective federal tax rates of 22.2% and 22.3%, respectively. The effective tax rates for AFLIAC and FAFLIC and its non-insurance subsidiaries were 44.8% and 27.7% during the first six months of 1997 and 1996, respectively. Excluding the effect of an $18.9 million tax benefit related to the agreement to cede the individual disability income business, the 1997 effective tax rate for the FAFLIC/AFLIAC consolidated group was 37.7%. This increase resulted primarily from the absence of a differential earnings adjustment in 1997 compared to a $5.9 million differential earnings benefit in 1996. The effective tax rates for the Regional Property and Casualty subsidiaries were 18.0% and 19.2% during the first six months of 1997 and 1996, respectively. Liquidity and Capital Resources Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of business operations. As a holding company, AFC's primary source of cash is dividends from its insurance subsidiaries. However, dividend payments to AFC by its insurance subsidiaries are subject to limitations imposed by state regulators, such as the requirement that cash dividends be paid out of unreserved and unrestricted earned surplus and restrictions on the payment of "extraordinary" dividends, as defined. Sources of cash for the Company's insurance subsidiaries are from premiums and fees collected, investment income and maturing investments. Primary cash outflows are paid benefits, claims losses and loss adjustment expenses, policy acquisition expenses, other underwriting expenses and investment purchases. Cash outflows related to benefits, claim losses and loss adjustment expenses can be variable because of uncertainties surrounding settlement dates for liabilities for unpaid losses and because of the potential for large losses either individually or in the aggregate. The Company periodically adjusts its investment policy to respond to changes in short-term and long-term cash requirements. Net cash used in operating activities during the first six months of 1997 was $25.0 million, as compared to $30.6 million provided by operating activities during the same period in 1996. This change resulted primarily from increased commissions and other deferrable expenses related to the growth in the annuity and variable universal life product lines of the Retail Financial Services segment and an acceleration of claims payments in the Regional Property and Casualty segment. In addition, 1996 cash provided by operating activities was positively impacted by the receipt of an $11.1 million litigation settlement in the Corporate Risk Management Services segment. Page 30 Net cash provided by investing activities was $255.6 million during the first six months of 1997, as compared to net cash used of $214.5 million in 1996. This increase primarily reflects fewer net purchases of fixed maturities during 1997. In 1996, purchases of fixed maturities were unusually high due to the investment of the remaining net proceeds of the Company's initial public offering of stock and debt. Additionally, proceeds from disposals and maturities were delayed in 1996 by financing new investment purchases with repurchase agreements, thereby decreasing the cash provided by investing activities during that period. Net cash provided by financing activities increased from $16.3 million for the first six months of 1996 to $112.0 million during the same period of 1997. In 1997, cash provided by financing activities was positively impacted by the Company's receipt of proceeds of $296.3 million from the issuance of Company-obligated mandatorily redeemable preferred securities of AFC Capital Trust (the "Trust"). In addition, cash payments on net withdrawals from GICs decreased $228.7 million to $176.7 million in the first six months of 1997. These items were partially offset by reduced proceeds from short-term debt financing of $474.5 million. During 1996, the Company increased its short-term debt in order to finance additions to the investment portfolio and maximize investment earnings. Although the Company expects the trend in negative financing cash flows from GIC withdrawals to continue, the Company does not expect GIC withdrawals to have a material impact on liquidity. Also, in the first six months of 1996, cash from financing activities was affected by the repurchase of 1.8 million shares at a cost of $41.8 million. In June 1997, the Company entered into a credit agreement with The Chase Manhattan Bank ("Chase") providing for a $225 million revolving line of credit that expires on December 15, 1997. Borrowings under the line of credit will be unsecured and will bear interest at a rate per annum equal to, at the Company's option, Chase's base rate or the eurodollar rate plus an applicable margin. The credit agreement requires the Company to comply with certain financial ratios. As of June 30, 1997, the Company had not closed under, or borrowed against, the line of credit provided by this credit agreement. On February 3, 1997, the Trust, a wholly-owned subsidiary business trust of AFC, issued $300 million Series A Capital Securities, which pay cumulative distributions at a rate of 8.207% semiannually commencing August 15, 1997. The Trust exists for the sole purpose of issuing the Capital Securities and investing the proceeds thereof in an equivalent amount of 8.207% Junior Subordinated Deferrable Interest Debentures due 2027 of AFC (the "Subordinated Debentures"). Through certain guarantees, the Subordinated Debentures and the terms of related agreements, AFC has irrevocably and unconditionally guaranteed the obligations of the Trust under the Capital Securities. Net proceeds from the offering of approximately $296.3 million will be used to fund a portion of the July 16, 1997 acquisition of the 24.2 million publicly held shares of Allmerica P&C. On August 7, 1997, AFC and the Trust closed an exchange offer to exchange the Series A Capital Securities to a like amount of Series B Capital Securities and related guarantees which are registered under the Securities Act of 1933 as required under the terms of the initial transaction. AFC has sufficient funds at the holding company or available through dividends from FAFLIC to meet its obligations to pay interest on the Senior Debentures, Subordinated Debentures and dividends, when and if declared by the Board of Directors, on the common stock. Whether the Company will pay dividends in the future depends upon the costs of administering a dividend program as compared to the benefits conferred, and upon the earnings and financial condition of AFC. Based on current trends, the Company expects to continue to generate sufficient positive operating cash to meet all short-term and long-term cash requirements. The Company maintains a high degree of liquidity within the investment portfolio in fixed maturity investments, common stock and short-term investments. FAFLIC and Allmerica P&C have $100.0 million and $40.0 million, respectively, under various committed short-term lines of credit. At June 30, 1997, no amounts were outstanding and $95.0 million and $10.8 million were available for borrowing by FAFLIC and Allmerica P&C, respectively. FAFLIC and Allmerica P&C had $5.0 million and $29.2 million, respectively, of commercial paper borrowings outstanding at June 30, 1997. In addition, FAFLIC and AFLIAC had no repurchase agreements outstanding as of June 30, 1997, as compared to $407.0 million outstanding at June 30, 1996. The repurchase agreements in 1996 were used to delay sales of investments. Recent Developments In late July 1997, a lawsuit was instituted in Louisiana against AFC and certain of its subsidiaries by individual plaintiffs alleging fraud, unfair or deceptive acts, breach of contract, misrepresentation and related claims in the sale of life insurance policies. The plaintiffs seek to be certified as a class. The Company intends to defend the lawsuit vigorously. In July 1997, Hanover reached an agreement with Travelers Property Casualty to facilitate Travelers' writing of certain Hanover Insurance policies, as they expire, in Alabama, California, Kansas, Mississippi, Missouri, and Texas. In these six states, Hanover has approximately 250 agents generating approximately $90 million in premium annually. Hanover intends to cease writing personal and commercial policies in these states except for employer and association-sponsored group property Page 31 and casualty business, surety bonds and specialty program commercial policies. The plan is conditioned upon the appropriate regulatory approval in each state. On July 16, 1997, AFC announced the closing of the merger (the "Merger") of Allmerica P&C and a wholly-owned subsidiary of AFC. Through the transaction, AFC acquired the approximately 24.2 million shares of Allmerica P&C that it did not already own for approximately $426 million in cash and 9.7 million shares of AFC common stock. On July 15, 1997, the Certificate of Incorporation of Allmerica P&C was amended and restated to authorize a Class B Common Stock of Allmerica P&C, $5.00 par value. Immediately prior to the consummation of the Merger, each share of Allmerica P&C Common Stock owned by AFC and its subsidiaries was exchanged for one share of Class B Common Stock. In June 1997, the Company entered into a binding letter of intent for the 100% coinsurance of its disability income line of business. The consummation of the transaction is subject to the receipt of regulatory approvals. The proposed transaction resulted in the recognition of a $53.9 million pre-tax loss in the first quarter of 1997. Forward-Looking Statements The Company wishes to caution readers that the following important factors, among others, in some cases have affected and in the future could affect, the Company's actual results and could cause the Company's actual results for 1997 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. When used in the MD&A discussion, the words "believes," "anticipated," "expects" and similar expressions are intended to identify forward looking statements. See "Important Factors Regarding Forward-Looking Statements" filed as Exhibit 99-2 to the Company's Annual Report on Form 10-K for the period ended December 31, 1996. Factors that may cause actual results to differ materially from those contemplated or projected, forecast, estimated or budgeted in such forward looking statements include among others, the following possibilities: (i) adverse catastrophe experience and severe weather; (ii) adverse loss development for events the Company insured in prior years or adverse trends in mortality and morbidity; (iii) heightened competition, including the intensification of price competition, the entry of new competitors, and the introduction of new products by new and existing competitors; (iv) adverse state and federal legislation or regulation, including decreases in rates, limitations on premium levels, increases in minimum capital and reserve requirements, benefit mandates, limitations on the ability to manage care and utilization, liabilities related to tobacco products, and tax treatment of insurance products; (v) changes in interest rates causing a reduction of investment income or in the market value of interest rate sensitive investments; (vi) failure to obtain new customers, retain existing customers or reductions in policies in force by existing customers; (vii) higher service, administrative, or general expense due to the need for additional advertising, marketing, administrative or management information systems expenditures; (viii) loss or retirement of key executives; (ix) increases in medical costs, including increases in utilization, costs of medical services, pharmaceuticals, durable medical equipment and other covered items; (x) termination of provider contracts or renegotiation at less cost-effective rates or terms of payment; (xi) changes in the Company's liquidity due to changes in asset and liability matching; (xii) restrictions on insurance underwriting, based on genetic testing and other criteria; (xiii) adverse changes in the ratings obtained from independent rating agencies, such as Moody's, Standard and Poors, A.M. Best, and Duff & Phelps; (xiv) lower appreciation on and decline in value of managed investments, resulting in reduced variable products, assets and related fees; and (xv) possible claims relating to sales practices for insurance products. Page 32 PART II - OTHER INFORMATION ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS This registrant's annual shareholders' meeting was held on May 20, 1997. All three directors nominated for reelection by the Board of Directors were named in proxies for the meeting, which proxies were solicited pursuant to Regulation 14A of the Securities and Exchange Act of 1934. The following individuals were elected to serve a three year term, with the exception of Mr. Barrett, who was elected to serve a one year term:
VOTES FOR WITHHELD David A. Barrett 35,192,825 428,448 Gail L. Harrison 35,193,570 427,703 Robert G. Stachler 35,187,688 433,585
The other directors whose terms were continued after the Annual Meeting are Mr. Michael P. Angelini, Mr. Robert P. Henderson, Mr. Terrence Murray, Mr. Robert J. Murray, Mr. John F. O'Brien, Mr. John L. Sprague, Mr. Herbert M. Varnum, and Mr. Richard M. Wall. Shareholders ratified the appointment of Price Waterhouse LLP as the Independent Public Accountants of the Company for 1997: for 35,339,092; against 93,689; abstain 188,492. Shareholders approved an amendment to the Long-Term Stock Incentive Plan to increase the number of shares of common stock that may be issued under such plan: for 21,695,672; against 9,105,011; abstain 689,888; non-vote 4,130,702. Page 33 PART II - OTHER INFORMATION ITEM 6 - EXHIBITS AND REPORTS ON FORM 8K (a) Exhibits EX - 10.21 Amended and Restated Form of Non- Solicitation Agreement executed by substantially all of the executive officers of AFC EX - 10.22 Credit Agreement dated as of June 17, 1997 between the Registrant and The Chase Manhattan Bank * EX - 11 Statement regarding computation of per share earnings EX - 27 Financial Data Schedule * Incorporated by reference to Exhibit 21 of Amendment No. 11 to Schedule 13D filed by the Registrant relating to the shares of Allmerica Property & Casualty Companies, Inc. common stock on June 19, 1997. (b) Reports on Form 8K On April 15, 1997, a report on Form 8-K was filed reporting under item 5, Other Events, the announcement of the entering into a letter of intent to cede its individual disability insurance business under a 100% coinsurance arrangement with Metropolitan Life Insurance Company. On June 16, 1997, a report on Form 8-K was filed reporting under item 5, Other Events, the announcement that its merger with Allmerica Property & Casualty Companies, Inc. ("Allmerica P&C") was expected to close on or about July 16, 1997. On July 9, 1997, a report on Form 8-K was filed reporting under item 5, Other Events, information relating to the merger with Allmerica P&C. On July 11, 1997, a report on Form 8-K was filed reporting under item 5, Other Events, the announcement that an estimated $10 million in pre-tax catastrophe losses impacted the third quarter results of Citizens Corporation, a subsidiary of Allmerica Financial Corporation. On July 16, 1997, a report on Form 8-K was filed reporting under item 5, Other Events, the announcement of the closing of the merger (the "Merger") of Allmerica P&C and a wholly-owned subsidiary of AFC. Through the transaction, AFC acquired the approximately 24.2 million shares of Allmerica P&C that is did not already own for approximately $426 million in cash and 9.7 million shares of AFC common stock. Page 34 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Allmerica Financial Corporation Registrant Dated August 13, 1997 /s/ John F. O'Brien John F. O'Brien President and Chief Executive Officer Dated August 13, 1997 /s/ Edward J. Parry III Edward J. Parry III Vice President, Chief Financial Officer, and Treasurer Page 35 EXHIBIT INDEX
Exhibit Number Exhibit Page 10.21 Amended and Restated Form of Non- Solicitation Agreement executed by substantially all of the executive officers of AFC 37 11 Statement regarding computation of per share earnings 41 27 Financial Data Schedule 0
Page 36 EX-10.21 2 Exhibit 10.21 ALLMERICA FINANCIAL CORPORATION AMENDED AND RESTATED FORM OF NON-SOLICITATION AGREEMENT This Agreement is made this 4th day of April, 1997, between ALLMERICA FINANCIAL CORPORATION, a Delaware corporation (hereinafter referred to collectively with its subsidiaries, as the "Company"), and _______________ (the "Employee"). WHEREAS, Employee acknowledges that the Company could be significantly harmed if the Employee solicits the Company's employees, agents, brokers, or clients, or discloses any proprietary or confidential business information of the Company. NOW, THEREFORE, in consideration of the continued employment of the Employee by the Company and the Employee being selected to be a participant in the Company's Employment Continuity Plan and the receipt by the Employee of restricted stock pursuant to the terms of a certain Restricted Stock Agreement dated April 4, 1997, the Employee and the Company agree as follows: 1. Non-Solicitation. During the period that the Employee is employed by the Company and for a period of two (2) years after the termination or expiration thereof, the Employee will not directly or indirectly: (a)recruit, solicit or induce, attempt to induce, or assist or encourage a third party to solicit or recruit any employee(s), agent(s) or broker(s) of the Company to terminate their employment with, or otherwise cease their relationship with the Company; or (b)solicit, divert or take away, attempt to divert or to take away, or assist or encourage a third party to solicit or divert the business or patronage of any of the policyholders, clients, customers or accounts of the Company which were contacted, solicited or served while the Employee was employed by the Company. In addition, the restrictions set forth in this Section 1.(b) shall apply to prospective clients, customers or accounts of the Company which were contacted or solicited by the Employee or which the Employee has specific knowledge that such prospective clients, customers, accounts were solicited by the Company while the Employee was employed by the Company. Any prospective client, customer or account, which does not, within a one year period from the date of initial contact become a client, customer or account of the Company, shall no longer be considered a prospective client, customer or account of the Company, unless a new contact or solicitation is instituted by the Employee or by the Company with the Employee's knowledge. 2. Unenforceability. (a) If any restriction set forth in Section 1 is found by any court of competent jurisdiction to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it shall be interpreted to extend only over the maximum period of time, range of activities or geographic area as to which it may be enforceable. (b) The restrictions contained in Section 1 are necessary for the protection of the business and goodwill of the Company and are considered by the Employee to be reasonable for such purpose. The Employee agrees that any breach of Section 1 will cause the Company substantial and irrevocable damage and therefore, in the event of any such breach, in addition to such other remedies which may be available, the Company shall have the right to seek specific performance and injunctive relief. Page 37 3. Proprietary Information and Developments. 3.1 Proprietary Information. (a) Employee agrees that all information and know-how, whether or not in writing, of a private, secret or confidential nature concerning the Company's products, servicers, customers or business or financial affairs (collectively, "Proprietary Information") is and shall be the exclusive property of the Company. By way of illustration, but not limitation, Proprietary Information may include products, processes, methods, techniques, projects, plans, research data, financial data, personnel data, computer programs, and policyholders, client, agent, broker and supplier lists. Employee will not disclose any Proprietary Information to others outside the Company or use the same for any unauthorized purposes without written approval by a vice president of the Company, either during or after his/her employment, unless and until such Proprietary Information has become public knowledge without fault by the Employee. (b) Employee agrees that all files, letters, memoranda, reports, records, data or other written, photographic, or other tangible material containing Proprietary Information, whether created by the Employee or others, which shall come into his/her custody or possession, shall be and are the exclusive property of the Company to be used by the Employee only in the performance of his/her duties for the Company. (c) Employee agrees that his/her obligation not to disclose or use information, know-how and records of the types set forth in paragraphs (a) and (b) above, also extends to such types of information, know-how, records and tangible property of clients of the Company or suppliers to the Company or other third parties who may have disclosed or entrusted the same to the Company or to the Employee in the course of the Company's business. 3.2 Developments. (a) Employee agrees that all inventions, improvements, discoveries, methods, developments, software, and works of authorship, whether patentable or not, which are created, made, conceived or reduced to practice by the Employee or under his/her direction or jointly with others during his/her employment by the Company, whether or not during normal working hours or on the premises of the Company (all of which are collectively referred to in this Agreement as "Developments") shall be the sole property of the Company. (b) Employee agrees to assign and does hereby assign to the Company (or any person or entity designated by the Company) all his/her right, title and interest in and to all Developments and all related patents, patent applications, copyrights and copyright applications. However, this Section 3(b) shall not apply to Developments which do not relate to the present or planned business of the Company and which are made and conceived by the Employee not during normal working hours, not on the Company's premises and not using the Company's tools, devices, equipment or Proprietary Information. (c) Employee agrees to cooperate fully with the Company, both during and after his/her employment with the Company, with respect to the procurement, maintenance and enforcement of copyrights and patents (both in the United States and foreign countries) relating to Developments. Employee shall sign all papers, including, without limitation, copyright applications, patent applications, declarations, oaths, formal assignments, assignment of priority rights, and powers of attorney, which the Company may deem are reasonably necessary or desirable in order to protect its rights and interests in any Development. 4. Other Agreements. Employee hereby represents that he/she is not bound by the terms of any agreement with any previous employer or other party to refrain from using or disclosing any trade secret or confidential or proprietary information in the course of his/her employment with the Company or to refrain from competing, directly or indirectly, with the business of such previous employer or any other party. Employee further represents that his/her performance of all the terms of this Agreement and as an employee of the Company does not and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by him/her in confidence or in trust prior to his/her employment with the Company. Page 38 5. Notices. All notices required or permitted under this Agreement shall be in writing and shall be deemed effective upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail, postage prepaid, addressed to the other party at the address shown below, or at such other address or addresses as either party shall designate to the other in accordance with this Section. The Company: Allmerica Financial Corporation 440 Lincoln Street Worcester, MA 01653 Attention: Law Department The Employee: Home Address as reflected on Company records. 6. Pronouns. Whenever the context may require, any pronouns used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular forms of nouns and pronouns shall include the plural, and vice versa. 7. Entire Agreement. This Agreement constitutes the entire agreement between the parties and supersedes all prior agreements and understandings, whether written or oral, relating to the subject this of this Agreement. 8. Amendment. This Agreement may be amended or modified only by a written instrument executed by both the Company and the Employee. 9. Employment Continuity Plan. The Employee's selection to be a participant in the Company's Employment Continuity Plan (the "Plan") does not mean that the Employee cannot be removed as a Participant in the Plan. Participation in the Plan is in accordance with the Plan's provisions and as determined by the Committee (as defined in the Plan). Removal as a Participant in the Plan does not affect your obligations under this Agreement. 10. Governing Law. This Agreement shall be construed, interpreted and enforced in accordance with the laws of the Commonwealth of Massachusetts. 11. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of both parties and their respective successors and assigns, including any corporation with which or into which the Company may be merged or which may succeed to its assets or business, provided, however, that the obligations of the Employee are personal and shall not be assigned by him. 12. Miscellaneous. 12.1 No delay or omission by the Company in exercising any right under this Agreement shall operate as a waiver of that or any other right. A waiver or consent given by the Company on any one occasion shall be effective only in that instance and shall not be construed as a bar or waiver of any right on any other occasion. 12.2 The captions of the sections of this Agreement are for convenience of reference only and in no way define, limit or affect the scope or substance of any section of this Agreement. 12.3 In case any provision of this Agreement shall be invalid, illegal or otherwise unenforceable, the validity, legality and enforceability of the remaining provisions shall in no way be affected or impaired thereby. Page 39 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year set forth above. ALLMERICA FINANCIAL CORPORATION By: Bruce C. Anderson Vice President EMPLOYEE Printed Name: Page 40 EX-11 3 Exhibit 11 ALLMERICA FINANCIAL CORPORATION STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS For the Periods Ended June 30, 1997 and 1996 (In millions, except per share data) (Unaudited)
Quarter Ended Six Months Ended June 30, June 30, 1997 1996 1996 1997 Primary: Average shares outstanding 50.2 50.1 50.2 50.1 Net effect of dilutive stock options based on the treasury stock method using average market price 0.1 0.0 0.1 0.0 ----- ----- ----- ----- TOTALS 50.3 50.1 50.3 50.1 ===== ===== ===== ===== Net income $37.7 $42.6 $53.6 $89.9 ===== ===== ===== ===== Per share amount $0.75 $0.85 $1.07 $1.79 Fully diluted: Average shares outstanding 50.2 50.1 50.2 50.1 Net effect of dilutive stock options based on the treasury stock method using the higher of period end or average market price 0.1 0.0 0.1 0.0 ----- ----- ----- ----- TOTALS 50.3 50.1 50.3 50.1 Net income $37.7 $42.6 $53.6 $89.9 ===== ===== ===== ===== Per share amount $0.75 $0.85 $1.07 $1.79
Page 41 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, 1997 and for the period then ended, and is qualified in its entirety by reference to such financial statements. 1,000,000 6-mos DEC-31-1997 JUN-30-1997 7398 0 0 441 597 91 8808 527 855 848 20964 2874 840 1877 2606 237 0 0 1 1782 20964 1141 334 42 57 1001 237 320 130 29 101 0 0 0 54 1.07 1.07 2744 770 (61) 311 440 2664 (38)
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