10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(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, 2005

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 incorporation or organization)	(I.R.S. Employee Identification No.)

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  ¨

Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange

Act).    Yes   x    No  ¨

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  ¨    No  ¨

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date: 53,459,597 shares of common stock outstanding, as of August 1, 2005.

TABLE OF CONTE NTS

PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
	Consolidated Statements of Income	3
	Consolidated Balance Sheets	4
	Consolidated Statements of Shareholders’ Equity	5
	Consolidated Statements of Comprehensive Income	6
	Consolidated Statements of Cash Flows	7
	Notes to Interim Consolidated Financial Statements	8-20
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21-55
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	56
Item 4.	Controls and Procedures	56
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	57
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 4.	Submission of Matters to a Vote of Security Holders	58
Item 5.	Other Information	58
Item 6.	Exhibits	58
SIGNATURES		59

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

ALLMERICA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

	(Unaudited) Quarter Ended June 30,						(Unaudited) Six Months Ended June 30,
(In millions, except per share data)	2005			2004			2005			2004
REVENUES
Premiums	$	555.3		$	572.3		$	1,124.6		$	1,148.8
Fees and other income		82.8			95.6			169.9			198.0
Net investment income		98.6			106.2			199.7			210.9
Net realized investment gains		4.0			7.0			24.2			22.7
Total revenues		740.7			781.1			1,518.4			1,580.4
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss adjustment expenses		402.3			456.0			851.3			915.5
Policy acquisition expenses		140.9			148.8			292.5			299.7
Losses from retirement of funding agreements and trust instruments supported by funding obligations		—			—			—			3.2
(Gains) losses on derivative instruments		(0.2	)		0.3			0.2			1.3
Restructuring costs		0.2			2.2			0.9			5.5
Other operating expenses		119.4			135.9			234.4			271.4
Total benefits, losses and expenses		662.6			743.2			1,379.3			1,496.6
Income before federal income taxes		78.1			37.9			139.1			83.8
Federal income tax expense (benefit):
Current		(5.2	)		5.6			(4.5	)		(20.5	)
Deferred		11.3			(0.1	)		25.1			2.6
Total federal income tax expense (benefit)		6.1			5.5			20.6			(17.9	)
Income before cumulative effect of change in accounting principle		72.0			32.4			118.5			101.7
Cumulative effect of change in accounting principle (less income tax benefit of $30.8 for the six months ended June 30, 2004)		—			—			—			57.2
Net income	$	72.0		$	32.4		$	118.5		$	44.5
PER SHARE DATA
Basic
Income before cumulative effect of change in accounting principle	$	1.35		$	0.61		$	2.22		$	1.92
Cumulative effect of change in accounting principle (less income tax benefit of $0.58 for the six months ended June 30, 2004)		—			—			—			(1.08	)
Net income	$	1.35		$	0.61		$	2.22		$	0.84
Weighted average shares outstanding		53.4			53.2			53.4			53.1
Diluted
Income before cumulative effect of change in accounting principle	$	1.34		$	0.60		$	2.20		$	1.89
Cumulative effect of change in accounting principle (less income tax benefit of $0.57 for the six months ended June 30, 2004)		—			—			—			(1.06	)
Net income	$	1.34		$	0.60		$	2.20		$	0.83
Weighted average shares outstanding		53.9			53.7			53.8			53.7

The accompanying notes are an integral part of these consolidated financial statements.

3

ALLMERICA FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(In millions, except per share data)	(Unaudited) June 30, 2005			December 31, 2004
ASSETS
Investments:
Fixed maturities-at fair value (amortized cost of $7,026.0 and $7,553.4)	$	7,254.3		$	7,822.2
Equity securities-at fair value (cost of $13.1 and $13.7)		17.3			17.0
Mortgage loans		108.6			114.8
Policy loans		251.9			256.4
Other long-term investments		46.3			55.3
Total investments		7,678.4			8,265.7
Cash and cash equivalents		413.5			486.5
Accrued investment income		109.2			118.2
Premiums, accounts and notes receivable, net		511.2			485.4
Reinsurance receivable on paid and unpaid losses, benefits and unearned premiums		1,955.2			2,026.4
Deferred policy acquisition costs		844.4			905.5
Deferred federal income taxes		374.7			415.1
Goodwill		128.2			128.2
Other assets		387.2			433.2
Separate account assets		9,444.6			10,455.0
Total assets	$	21,846.6		$	23,719.2
LIABILITIES
Policy liabilities and accruals:
Future policy benefits	$	3,347.6		$	3,462.3
Outstanding claims, losses and loss adjustment expenses		3,158.1			3,179.0
Unearned premiums		1,038.3			1,029.8
Contractholder deposit funds and other policy liabilities		360.3			379.5
Total policy liabilities and accruals		7,904.3			8,050.6
Expenses and taxes payable		1,049.7			1,152.8
Reinsurance premiums payable		85.6			86.5
Trust instruments supported by funding obligations		363.1			1,126.0
Long-term debt		508.8			508.8
Separate account liabilities		9,444.6			10,455.0
Total liabilities		19,356.1			21,379.7
Commitments and contingencies (Note 12)
SHAREHOLDERS’ EQUITY
Preferred stock, $0.01 par value, 20.0 million shares authorized, none issued		—			—
Common stock, $0.01 par value, 300.0 million shares authorized, 60.5 million and 60.4 million shares issued		0.6			0.6
Additional paid-in capital		1,783.5			1,782.1
Accumulated other comprehensive income		31.6			3.0
Retained earnings		1,056.0			943.4
Treasury stock at cost (7.0 million and 7.2 million shares)		(381.2	)		(389.6	)
Total shareholders’ equity		2,490.5			2,339.5
Total liabilities and shareholders’ equity	$	21,846.6		$	23,719.2

The accompanying notes are an integral part of these consolidated financial statements.

4

ALLMERICA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	(Unaudited) Six Months Ended June 30,
(In millions)	2005			2004
PREFERRED STOCK
Balance at beginning and end of period	$	—		$	—
COMMON STOCK
Balance at beginning and end of period		0.6			0.6
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period		1,782.1			1,775.6
Unearned compensation related to restricted stock and other		1.4			6.5
Balance at end of period		1,783.5			1,782.1
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS AND DERIVATIVE INSTRUMENTS:
Balance at beginning of period		87.1			89.4
Appreciation (depreciation) during the period:
Net appreciation (depreciation) on available-for-sale securities and derivative instruments		44.0			(97.4	)
(Provision) benefit for deferred federal income taxes		(15.4	)		34.1
		28.6			(63.3	)
Balance at end of period		115.7			26.1
MINIMUM PENSION LIABILITY:
Balance at beginning and end of period		(84.1	)		(73.3	)
Total accumulated other comprehensive income (loss)		31.6			(47.2	)
RETAINED EARNINGS
Balance at beginning of period		943.4			833.1
Net income		118.5			44.5
Treasury stock issued for less than cost		(5.9	)		(12.5	)
Balance at end of period		1,056.0			865.1
TREASURY STOCK
Balance at beginning of period		(389.6	)		(405.2	)
Net shares reissued at cost under employee stock-based compensation plans		8.4			11.8
Balance at end of period		(381.2	)		(393.4	)
Total shareholders’ equity	$	2,490.5		$	2,207.2

The accompanying notes are an integral part of these consolidated financial statements.

5

ALLMERICA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	(Unaudited) Quarter Ended June 30,						(Unaudited) Six Months Ended June 30,
(In millions)	2005			2004			2005			2004
Net income	$	72.0		$	32.4		$	118.5		$	44.5
Other comprehensive income (loss):
Available-for-sale securities:
Net appreciation (depreciation) during the period		82.9			(215.9	)		(30.3	)		(142.6	)
(Provision) benefit for deferred federal income taxes		(29.0	)		75.5			10.6			49.9
Total available-for-sale securities		53.9			(140.4	)		(19.7	)		(92.7	)
Derivative instruments:
Net appreciation during the period		59.0			39.9			74.3			45.2
Provision for deferred federal income taxes		(20.6	)		(13.9	)		(26.0	)		(15.8	)
Total derivative instruments		38.4			26.0			48.3			29.4
Other comprehensive income (loss)		92.3			(114.4	)		28.6			(63.3	)
Comprehensive income (loss)	$	164.3		$	(82.0	)	$	147.1		$	(18.8	)

The accompanying notes are an integral part of these consolidated financial statements.

6

ALLMERICA FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

	(Unaudited) Six Months Ended June 30,
(In millions)	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	118.5		$	44.5
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
(Gains) losses on futures contracts		(3.1	)		11.3
Net realized investment gains		(24.2	)		(22.7	)
Net amortization and depreciation		17.0			19.0
Interest credited to contractholder deposit funds and trust instruments supported by funding obligations		14.4			24.4
Deferred federal income taxes		25.1			2.6
Change in deferred acquisition costs		66.8			75.8
Change in premiums and notes receivable, net of reinsurance premiums payable		(34.3	)		(53.6	)
Change in accrued investment income		9.0			7.6
Change in policy liabilities and accruals, net		(143.6	)		(155.7	)
Change in reinsurance receivable		71.2			89.6
Change in expenses and taxes payable		(55.2	)		(92.0	)
Other, net		(6.2	)		10.1
Net cash provided by (used in) operating activities		55.4			(39.1	)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities of available-for-sale fixed maturities		1,296.9			915.8
Proceeds from disposals of equity securities		0.8			12.2
Proceeds from disposals of other investments		18.1			28.1
Proceeds from mortgages matured or collected		6.8			18.8
Proceeds from collections of installment finance and notes receivable		159.0			160.0
Purchase of available-for-sale fixed maturities		(767.8	)		(893.7	)
Purchase of equity securities		—			(2.6	)
Purchase of other investments		—			(4.7	)
Capital expenditures		(3.4	)		(2.2	)
Net receipts related to margin deposits on derivative instruments		5.0			9.0
Disbursements to fund installment finance and notes receivable		(151.3	)		(146.5	)
Other investing activities, net		(3.4	)		—
Net cash provided by investing activities		560.7			94.2
CASH FLOWS FROM FINANCING ACTIVITIES
Withdrawals from contractholder deposit funds		(0.9	)		(188.6	)
Withdrawals from trust instruments supported by funding obligations		(646.0	)		(34.1	)
Exercise of options		2.4			3.3
Change in collateral related to securities lending program		(44.6	)		(31.3	)
Net cash used in financing activities		(689.1	)		(250.7	)
Net change in cash and cash equivalents		(73.0	)		(195.6	)
Cash and cash equivalents, beginning of period		486.5			778.1
Cash and cash equivalents, end of period	$	413.5		$	582.5

The accompanying notes are an integral part of these consolidated financial statements.

7

ALLMERICA FINANCIAL CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation and Principles of Consolidation

The accompanying unaudited consolidated financial statements of Allmerica Financial Corporation (“AFC” or the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the requirements of Form 10-Q.

The interim consolidated financial statements of AFC include the accounts of The Hanover Insurance Company (“Hanover”) and Citizens Insurance Company of America (“Citizens”), AFC’s principal property and casualty companies; Allmerica Financial Life Insurance and Annuity Company (“AFLIAC”) and First Allmerica Financial Life Insurance Company (“FAFLIC”), AFC’s principal life insurance and annuity companies; and certain other insurance and non-insurance subsidiaries. These legal entities conduct their operations through several business segments discussed in Note 9. All significant intercompany accounts and transactions have been eliminated.

The accompanying interim consolidated financial statements reflect, in the opinion of the Company’s management, all adjustments necessary for a fair presentation of the financial position and results of operations. The results of operations for the six months ended June 30, 2005 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 2004 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Certain prior period amounts have been reclassified to conform to the current year presentation.

2. New Accounting Pronouncements

In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3 (“Statement No. 154”). Statement No. 154 replaces Accounting Principles Board Opinion No. 20, Accounting Changes (“APB Opinion No. 20”), and Statement of Financial Accounting Standards No. 3, Reporting Accounting Changes in Interim Financial Statements. This statement establishes, unless impracticable, retrospective application as the required method for all voluntary changes in accounting principle in the absence of specific transition provisions for the newly adopted accounting principle. Statement No. 154 requires companies to retrospectively apply the effect of the change to all prior periods practicable, and the financial statements for all periods presented shall be adjusted to reflect the change. Similarly, an error in the financial statements of a prior period that is discovered subsequent to their issuance shall be reported as a prior-period adjustment, and the financial statements for each period presented shall be adjusted to reflect the correction. This statement also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and the necessary disclosures once that determination has been made. Additionally, changes in methods of depreciation, amortization or depletion of long-lived, non-financial assets must be accounted for as a change in accounting estimate. The statement also requires certain disclosures in the period in which a change in accounting principle or correction of an error is made. Statement No. 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“Statement No. 123(R)”). This statement requires companies to measure and recognize the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value. Statement No. 123(R) replaces Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“Statement No. 123”), and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB Opinion No. 25”). The provisions of this statement are effective for interim and annual periods beginning after June 15, 2005. In April 2005, the Securities and Exchange Commission adopted a rule amending the compliance dates of Statement No. 123(R). The rule allows companies to implement the standard at the beginning of their next fiscal year, rather than their next reporting period, that begins after June 15, 2005. The Company is evaluating the effects of Statement No. 123(R) and expects to begin expensing stock options in 2006.

8

In July 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts (“SOP 03-1”). SOP 03-1 is applicable to all insurance enterprises as defined by Statement of Financial Accounting Standards No. 60, Accounting and Reporting by Insurance Enterprises. This statement provides guidance regarding accounting and disclosures of separate account assets and liabilities and an insurance company’s interest in such separate accounts. It further provides for the accounting and disclosures related to contractholder transfers to separate accounts from a company’s general account and the determination of the balance that accrues to the benefit of the contractholder. In addition, SOP 03-1 provides guidance for determining any additional liabilities for guaranteed minimum death benefits (“GMDB”) or other insurance benefit features, potential benefits available only on annuitization and liabilities related to sales inducements, such as immediate bonus payments, persistency bonuses, and enhanced crediting rates or “bonus interest” rates, as well as the required disclosures related to these items. This statement was effective for fiscal years beginning after December 15, 2003. The determination of the GMDB reserve under SOP 03-1 is complex and requires various assumptions, including, among other items, estimates of future market returns and expected contract persistency. Upon adoption of this statement in the first quarter of 2004, the Company recorded a $57.2 million charge, net of taxes. This charge was reported as a cumulative effect of a change in accounting principle in the Consolidated Statements of Income. See also Note 3, Adoption of Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts.

3. Adoption of Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts

Effective January 1, 2004, the Company adopted SOP 03-1 (see Note 2 – New Accounting Pronouncements). Upon adoption, the Company recorded a cumulative effect of change in accounting principle of $57.2 million, after-tax.

The following illustrates the components of that charge (in millions):

Increase in guaranteed minimum death benefit liability	$	80.6
Establishment of guaranteed minimum income benefit liability		4.1
Change in deferred acquisition costs		3.3
		88.0
Provision for federal income taxes		(30.8	)
Cumulative effect of change in accounting principle	$	57.2

Guaranteed Minimum Death Benefits

The Company issued variable annuity contracts with a GMDB feature. The GMDB feature provides annuity contractholders with a guarantee that the benefit received at death will be no less than a prescribed minimum amount. This amount is based on either the net deposits paid into the contract, the net deposits accumulated at a specified rate, the highest historical account value on a contract anniversary, or more typically, the greatest of these values. If the GMDB is higher than the current account value at the time of death, the Company incurs a cost equal to the difference.

The following summarizes the liability for GMDB contracts reflected in the general account (unaudited):

(In millions)
Balance at December 31, 2004	$	74.6
Provision for GMDB:
GMDB expense incurred		22.3
Volatility (1)		8.0
		30.3
Claims, net of reinsurance:
Claims from policyholders		(32.6	)
Claims ceded to reinsurers		31.8
		(0.8	)
GMDB reinsurance premium		(30.6	)
Balance at June 30, 2005	$	73.5

(1) Volatility reflects the difference between actual and expected investment performance, persistency, age distribution, mortality and other factors that are assumptions within the GMDB reserving model.

9

The following information relates to the reserving methodology and assumptions for GMDB, which the Company is utilizing in response to SOP 03-1. These assumptions are consistent with those utilized in the Company’s calculation of its deferred acquisition cost (“DAC”) asset.

• The projection model used 1,000 stochastically generated market return scenarios.

• The mean investment performance assumptions, prior to the consideration of mortality and expense fees, vary from approximately 5-10% depending on the underlying fund type. The long-term, aggregate, weighted average investment performance rate assumption is 8.06%, net of investment fees.

• The volatility assumption was 17% for equity funds; 4% for bond funds; and 1% for money market funds.

• The mortality assumption was 75% of the 1994 GMDB table.

• The full surrender rate assumption varies from 1-35% depending on contract type and policy duration. The aggregate projected full surrender rate for 2005 and 2006 is approximately 12%. (Full surrender rates do not include partial withdrawals or deaths). The partial withdrawal rate assumption was 3.25%.

• The discount rate was 6.6%.

The table below presents the account value, net amount at risk and average attained age of underlying contractholders for guarantees in the event of death as of June 30, 2005 and December 31, 2004. The net amount at risk is the death benefit coverage in force or the amount that the Company would have to pay if all contractholders had died as of the specified date, and represents the excess of the guaranteed benefit over the fair value of the underlying investments.

(In millions, except for contractholder information)	(Unaudited) June 30, 2005		December 31, 2004
Net deposits paid
Account value	$	1,130	$	1,228
Net amount at risk	$	55	$	57
Average attained age of contractholders		66		66
Ratchet (highest historical account value at specified anniversary dates)
Account value	$	1,774	$	2,024
Net amount at risk	$	180	$	185
Average attained age of contractholders		64		64
Roll-up (net deposits accumulated at a specified rate)
Account value	$	97	$	104
Net amount at risk	$	22	$	20
Average attained age of contractholders		76		76
Higher of ratchet or roll-up
Account value	$	6,393	$	7,049
Net amount at risk	$	1,715	$	1,676
Average attained age of contractholders		71		71
Total of guaranteed benefits categorized above
Account value	$	9,394	$	10,405
Net amount at risk	$	1,972	$	1,938
Average attained age of contractholders (weighted by account value)		69		69
Number of contractholders		174,974		188,897

Guaranteed Minimum Income Benefit

Additionally, the Company issued variable annuity contracts with a guaranteed minimum income benefit (“GMIB”) feature. The GMIB liability recorded at December 31, 2004 was $5.6 million. As of June 30, 2005, the balance increased to $6.4 million with no benefits being paid out. The GMIB liability is determined by estimating the expected value of the annuitization benefits in excess of the projected account balance at the date of annuitization and recognizing the excess ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised.

10

Sales Inducements

The Company’s variable annuity product offerings included contracts that offered enhanced crediting rates or bonus payments. These enhanced rates are considered sales inducements under SOP 03-1. As such, the balance of sales inducement assets were required to be reclassified from DAC to other assets upon adoption of SOP 03-1, and amortization of these sales inducements over the life of the contract is required to be reflected as a policy benefit. Amortization of these contracts is required to be computed using the same methodology and assumptions used in amortizing DAC.

The balance of deferred sales inducements was $66.2 million and $72.9 million as of June 30, 2005 and December 31, 2004, respectively.

Separate Accounts with Credited Interest Guarantees

The Company issued variable annuity and life contracts through its separate accounts for which net investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contractholder. The Company also issued variable annuity and life contracts through separate accounts where the Company contractually guarantees to the contractholder the total deposits made to the contract less any partial withdrawals plus a minimum return.

Prior to the adoption of SOP 03-1, the Company had recorded certain market value adjusted (“MVA”) fixed annuity products as separate account assets and separate account liabilities in the Consolidated Balance Sheets. Changes in the fair value of MVA assets were reflected in other comprehensive income in the Consolidated Balance Sheets. In addition, the Company reflected policy fees, interest spreads, realized gains and losses on investments and changes in the liability for minimum guarantees in net income. Notwithstanding the market value adjustment feature of this product, all of the investment performance of the separate account assets related to this product does not accrue to the contractholder, and it therefore, does not meet the conditions for separate account reporting under SOP 03-1.

Upon adoption of SOP 03-1, assets related to the MVA product, primarily fixed maturities, which are carried at fair value, were reclassified to the general account as available-for-sale securities. Reserves related to contract account values included in separate account liabilities were also reclassified to the Company’s general account. Changes in the fair value of these assets continue to be reflected in other comprehensive income in the Consolidated Balance Sheets. Additionally, amounts assessed against the contractholders for mortality, administrative, and other services continue to be included in universal life and investment product policy fees and changes in liabilities for minimum guarantees continue to be included in policy benefits, claims, losses and loss adjustment expenses in the Consolidated Statements of Income. Components of the interest spreads related to this product continue to be recorded in net investment income and policy benefits, claims losses and loss adjustment expenses in the Consolidated Statements of Income. Realized investment gains and losses are recognized as incurred, consistent with prior years.

The following table summarizes the Company’s variable annuities with guaranteed minimum returns for the periods indicated.

	(Unaudited) June 30, 2005			December 31, 2004
Account value (in millions)	$	82.3		$	90.3
Range of guaranteed minimum return rates		3.0-6.5	%		3.0-6.5	%

The aggregate fair value of assets supporting these contracts are as follows:

(In millions)	(Unaudited) June 30, 2005		December 31, 2004
Asset Type
Fixed maturities	$	80.3	$	104.7
Cash and cash equivalents		7.0		4.5
Total	$	87.3	$	109.2

11

4. Significant Transactions

In the fourth quarter of 2003, the Company ceased operations of its Life Companies segment retail broker/dealer operations (see Note 9 for a description of the Company’s operating segments). These operations had distributed third-party investment and insurance products through VeraVest Investments, Inc. All levels of employees within the broker/dealer operations, from staff to senior management, were affected by the decision. The Company recognized a pre-tax charge of $11.5 million for asset impairments in connection with this action. Additionally, the Company recognized a cumulative pre-tax restructuring charge of $26.1 million, in accordance with Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Approximately $14.8 million of this charge related to one-time termination benefits associated with the elimination of 552 positions, and $11.3 million related to contract termination fees and other costs. Of the total restructuring charge, $0.6 million and $2.9 million were recorded during the first six months of 2005 and 2004, respectively. Of the 552 positions eliminated, all employees were either terminated or transferred to other positions within the Company. As of June 30, 2005, the Company has made payments of approximately $24.0 million related to this restructuring plan, of which $14.5 million related to one-time termination benefits and $9.5 million related to contract termination fees and other costs. The liability balance at June 30, 2005 was $2.1 million. The Company currently anticipates an additional $1 million to $2 million of expenses will be recognized during the remainder of 2005 and in 2006 related to this restructuring.

In the first six months of 2004, the Company retired $76.6 million of long-term funding agreement obligations at discounts. This retirement resulted in a pre-tax loss of $3.2 million which is reported as losses from retirement of funding agreements and trust instruments supported by funding obligations in the Consolidated Statements of Income. Certain amounts related to the termination of derivative instruments used to hedge the retired funding agreements were reported in separate line items in the Consolidated Statements of Income.

5. Federal Income Taxes

Federal income tax expense for the six months ended June 30, 2005 and 2004 has been computed using estimated effective tax rates. These rates are revised, if necessary, at the end of each successive interim period to reflect the current estimates of the annual effective tax rates. The 2005 effective tax rate reflects a $12.9 million benefit representing a reduction in federal income tax reserves for prior years, resulting from ongoing Internal Revenue Service audits. The Company realized a higher proportion of deductions taken for equity dividends received by its separate accounts than had been previously anticipated. The 2004 effective tax rate reflected a $30.3 million benefit resulting from the settlement of disputed items in the company’s federal tax returns filed for 1979 to 1991. The largest of the disputed items related to deductions taken for increased death benefits pertaining to certain life insurance contracts. Under this settlement, the Company received a refund of amounts paid for these years, as well as various tax credits that have been applied to offset federal tax liabilities in other years.

The Company holds a significant variable interest in a limited partnership. In 1997, the Company invested in the McDonald Corporate Tax Credit Fund - 1996 Limited Partnership, which was organized to invest in low income housing projects which qualify for tax credits under the Internal Revenue Code. The Company’s investment in this limited partnership, which represents approximately 36% of the partnership, is not a controlling interest; it entitles the Company to tax credits to be applied against its federal income tax liability in addition to tax losses to offset taxable income. The Company’s maximum exposure to loss on this investment is limited to its carrying value, which is $5.3 million at June 30, 2005.

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6. Pension and Other Postretirement Benefit Plans

Prior to 2005, AFC provided retirement benefits to substantially all of its employees under defined benefit pension plans based on a cash balance formula. In addition, certain transition group employees who had met specified age and service requirements as of December 31, 1994, were eligible for a grandfathered benefit based on service and compensation. As of January 1, 2005, the defined benefit pension plans were frozen; therefore, no further cash balance allocations will be credited for plan years beginning on or after January 1, 2005. Additionally, the grandfathered benefits were frozen at January 1, 2005 levels with an annual transition pension adjustment. Additional unfunded pension plans and postretirement plans provide certain benefits to a portion of full-time employees, former agents, retirees and their dependents.

The components of net periodic pension cost for pension and other postretirement benefit plans are as follows:

	(Unaudited) Quarter Ended June 30,
(In millions)	2005			2004			2005			2004
	Pension Benefits						Postretirement Benefits
Service cost – benefits earned during the period	$	—		$	2.5		$	0.1		$	0.4
Interest cost		7.7			7.8			0.8			1.1
Expected return on plan assets		(6.5	)		(6.7	)		—			—
Recognized net actuarial loss		4.2			5.6			0.1			0.1
Amortization of transition asset		(0.3	)		(0.4	)		—			—
Amortization of prior service cost		0.1			(0.4	)		(1.3	)		(0.8	)
Net periodic benefit cost (benefit)	$	5.2		$	8.4		$	(0.3	)	$	0.8

	Six Months Ended June 30,
	2005			2004			2005			2004
	Pension Benefits						Postretirement Benefits
Service cost – benefits earned during the period	$	—		$	5.0		$	0.2		$	0.7
Interest cost		15.4			15.6			1.6			2.2
Expected return on plan assets		(13.0	)		(13.5	)		—			—
Recognized net actuarial loss		8.7			11.2			0.2			0.2
Amortization of transition asset		(0.6	)		(0.7	)		—			—
Amortization of prior service cost		0.3			(0.8	)		(2.7	)		(1.5	)
Net periodic benefit cost (benefit)	$	10.8		$	16.8		$	(0.7	)	$	1.6

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7. Closed Block

Summarized financial information of the Closed Block is as follows for the periods indicated:

(In millions)	(Unaudited) June 30, 2005			December 31, 2004
ASSETS
Fixed maturities-at fair value (amortized cost of $510.6 and $505.3)	$	538.2		$	535.1
Mortgage loans		30.7			31.4
Policy loans		139.1			144.4
Cash and cash equivalents		4.2			20.1
Accrued investment income		11.9			11.4
Deferred policy acquisition costs		3.9			4.4
Deferred federal income taxes		7.6			8.0
Other assets		1.4			2.6
Total assets	$	737.0		$	757.4
LIABILITIES
Policy liabilities and accruals	$	720.1		$	726.1
Policyholder dividends		54.1			64.9
Other liabilities		2.2			10.6
Total liabilities	$	776.4		$	801.6
Excess of Closed Block liabilities over assets designated to the Closed Block	$	39.4		$	44.2
Amounts included in accumulated other comprehensive income:
Net unrealized investment losses, net of deferred federal income tax benefits of $5.5 million and $5.9 million		(10.2	)		(11.0	)
Maximum future earnings to be recognized from Closed Block assets and liabilities	$	29.2		$	33.2

	(Unaudited) Quarter Ended June 30,				(Unaudited) Six Months Ended June 30,
(In millions)	2005		2004		2005		2004
REVENUES
Premiums	$	5.5	$	5.9	$	24.5	$	25.9
Net investment income		10.3		10.8		20.6		21.7
Net realized investment gains		0.6		—		1.4		0.1
Total revenues		16.4		16.7		46.5		47.7
BENEFITS AND EXPENSES
Policy benefits		14.2		14.8		41.8		40.7
Policy acquisition expenses		0.2		0.4		0.5		0.8
Other operating expenses (benefits)		0.2		0.1		—		(0.1	)
Total benefits and expenses		14.6		15.3		42.3		41.4
Contribution from the Closed Block	$	1.8	$	1.4	$	4.2	$	6.3

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.

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8. Other Comprehensive Income

The following table provides a reconciliation of gross unrealized gains (losses) to the net balance shown in the Statements of Comprehensive Income.

	(Unaudited) Quarter Ended June 30,						(Unaudited) Six Months Ended June 30,
(In millions)	2005			2004			2005			2004
Unrealized appreciation (depreciation) on available-for-sale securities:
Unrealized holding gains (losses) arising during period, net of income tax (expense) benefit of $(30.2) million and $72.8 million for the quarter ended June 30, 2005 and 2004 and $3.1 million and $41.7 million for the six months ended June 30, 2005 and 2004	$	56.0		$	(135.4	)	$	(5.9	)	$	(77.5	)
Less: reclassification adjustment for gains included in net income, net of income tax expense of $1.2 million and $2.7 million for the quarter ended June 30, 2005 and 2004 and $7.5 million and $8.2 million for the six months ended June 30, 2005 and 2004		2.1			5.0			13.8			15.2
Total available-for-sale securities		53.9			(140.4	)		(19.7	)		(92.7	)
Unrealized appreciation on derivative instruments:
Unrealized holding (losses) gains arising during period, net of income tax benefit (expense) of $3.2 million and $1.4 million for the quarter ended June 30, 2005 and 2004 and $15.1 million and $(6.5) million for the six months ended June 30, 2005 and 2004		(5.8	)		(2.5	)		(28.1	)		12.0
Less: reclassification adjustment for losses included in net income, net of income tax benefit of $23.8 million and $15.3 million for the quarter ended June 30, 2005 and 2004 and $41.1 million and $9.3 million for the six months ended June 30, 2005 and 2004		(44.2	)		(28.5	)		(76.4	)		(17.4	)
Total derivative instruments		38.4			26.0			48.3			29.4
Other comprehensive income (loss)	$	92.3		$	(114.4	)	$	28.6		$	(63.3	)

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9. Segment Information

The Company’s business includes financial products and services in two major areas: Property and Casualty and Life Companies. Within these broad areas, the Company conducts business principally in four operating segments. These segments are Personal Lines, Commercial Lines, Other Property and Casualty, and Life Companies. In accordance with Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information, the separate financial information of each segment is presented consistent with the way results are regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance. A summary of the Company’s reportable segments is included below.

The Property and Casualty group manages its operations principally through three segments: Personal Lines, Commercial Lines and Other Property and Casualty. Personal Lines include such property and casualty coverages as personal automobile, homeowners and other personal policies, while Commercial Lines include such property and casualty coverages as workers’ compensation, commercial automobile, commercial multiple peril and other commercial policies. In addition, the Other Property and Casualty segment consists of: voluntary pools in which the Company has not actively participated since 1995; AMGRO, Inc. (“AMGRO”), the Company’s premium financing business; Opus Investment Management Inc. (“Opus”), which markets investment management services to institutions, pension funds and other organizations; and earnings on holding company assets.

The Life Companies segment manages a block of existing variable annuity, variable universal life and traditional life insurance products, guaranteed investment contracts (“GIC”) business, certain group retirement products and the discontinued group life and health business, including group life and health voluntary pools.

The Company reports interest expense related to its corporate debt separately from the earnings of its operating segments. Corporate debt consists of the Company’s junior subordinated debentures and its senior debentures.

Management evaluates the results of the aforementioned segments based on a pre-tax basis. Segment income excludes certain items, which are included in net income, such as federal income taxes and net realized investment gains and losses, including certain gains or losses on derivative instruments, because fluctuations in these gains and losses are determined by interest rates, financial markets and the timing of sales. Also, segment income excludes net gains and losses on disposals of businesses, discontinued operations, restructuring costs, extraordinary items, the cumulative effect of accounting changes and certain other items. While these items may be significant components in understanding and assessing the Company’s financial performance, management believes that the presentation of segment income enhances understanding of the Company’s results of operations by highlighting net income attributable to the normal operations of the business. However, segment income should not be construed as a substitute for net income determined in accordance with generally accepted accounting principles.

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Summarized below is financial information with respect to business segments.

	(Unaudited) Quarter Ended June 30,						(Unaudited) Six Months Ended June 30,
(In millions)	2005			2004			2005			2004
Segment revenues:
Property and Casualty:
Personal Lines	$	382.2		$	412.6		$	771.5		$	820.3
Commercial Lines		224.1			209.7			441.7			412.5
Other Property and Casualty		7.1			7.3			14.1			14.1
Total Property and Casualty		613.4			629.6			1,227.3			1,246.9
Life Companies		126.1			146.4			271.8			314.4
Intersegment revenues		(2.2	)		(2.6	)		(4.5	)		(5.2	)
Total segment revenues		737.3			773.4			1,494.6			1,556.1
Adjustments to segment revenues:
Net realized investment gains		4.0			7.0			24.2			22.7
Other (loss) income		(0.6	)		0.7			(0.4	)		1.6
Total revenues	$	740.7		$	781.1		$	1,518.4		$	1,580.4
Segment income before federal income taxes and cumulative effect of change in accounting principle:
Property and Casualty:
Personal Lines:
GAAP underwriting profit (loss)	$	29.8		$	8.9		$	41.6		$	(6.8	)
Net investment income		25.2			24.8			50.1			48.3
Other		2.4			2.1			4.9			5.1
Personal Lines segment income		57.4			35.8			96.6			46.6
Commercial Lines:
GAAP underwriting profit (loss)		5.1			(12.6	)		(0.1	)		(11.3	)
Net investment income		24.9			24.9			49.5			48.6
Other		1.0			0.3			2.1			1.8
Commercial Lines segment income		31.0			12.6			51.5			39.1
Other Property and Casualty:
GAAP underwriting loss		(0.1	)		(1.1	)		(0.6	)		(1.9	)
Net investment income		1.3			0.6			2.6			1.1
Other		0.5			1.2			1.8			2.8
Other Property and Casualty segment income		1.7			0.7			3.8			2.0
Total Property and Casualty		90.1			49.1			151.9			87.7
Life Companies		(5.3	)		(6.3	)		(12.7	)		3.5
Interest on corporate debt		(9.9	)		(9.9	)		(19.9	)		(19.9	)
Segment income before federal income taxes		74.9			32.9			119.3			71.3
Adjustments to segment income:
Net realized investment gains, net of deferred acquisition cost amortization		3.7			6.9			21.2			20.9
(Losses) gains on derivative instruments		(0.3	)		0.3			(0.5	)		0.3
Losses from retirement of funding agreements and trust instruments supported by funding obligations		—			—			—			(3.2	)
Restructuring costs		(0.2	)		(2.2	)		(0.9	)		(5.5	)
Income before federal income taxes and cumulative effect of change in accounting principle	$	78.1		$	37.9		$	139.1		$	83.8

17

	Identifiable Assets						Deferred Acquisition Costs
(In millions)	(Unaudited) June 30, 2005			December 31, 2004			(Unaudited) June 30, 2005		December 31, 2004
Property and Casualty (1)	$	6,459.9		$	6,459.4		$	209.0	$	211.4
Life Companies (2)		15,387.3			17,335.4			635.4		694.1
Intersegment eliminations (3)		(0.6	)		(75.6	)		—		—
Total	$	21,846.6		$	23,719.2		$	844.4	$	905.5

(1) The Company reviews assets based on the total Property and Casualty Group and does not allocate between the Personal Lines, Commercial Lines and Other Property and Casualty segments.

(2) Includes assets related to the Company’s discontinued operations.

(3) The 2004 balance reflects a $75.0 million dividend from AFLIAC to the holding company, which was paid during the first quarter of 2005.

Discontinued Operations

During 1999, the Company exited its group life and health insurance business, consisting of its Employee Benefit Services (“EBS”) business, its Affinity Group Underwriters (“AGU”) business and its accident and health assumed reinsurance pool business (“reinsurance pool business”). Prior to 1999, these businesses comprised substantially all of the former Corporate Risk Management Services segment. Accordingly, the operating results of the discontinued segment have been reported in accordance with Accounting Principles Board Opinion No. 30, Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (“APB Opinion No. 30”). In 1999, the Company recorded a $30.5 million loss, net of taxes, on the disposal of this segment, consisting of after-tax losses from the run-off of the group life and health business of approximately $46.9 million, partially offset by net proceeds from the sale of the EBS business of approximately $16.4 million. Subsequent to the measurement date of June 30, 1999, approximately $19.6 million of the aforementioned $46.9 million loss has been generated from the operations of the discontinued business and net proceeds of $12.5 million were received from the sale of the EBS business.

As permitted by APB Opinion No. 30, the Consolidated Balance Sheets have not been segregated between continuing and discontinued operations. At June 30, 2005 and December 31, 2004, the discontinued segment had assets of approximately $250.1 million and $275.0 million, respectively, consisting primarily of invested assets and reinsurance recoverables, and liabilities of approximately $320.2 million and $344.9 million, respectively, consisting primarily of policy liabilities.

10. Earnings Per Share

The following table provides share information used in the calculation of the Company’s basic and diluted earnings per share.

	(Unaudited) Quarter Ended June 30,				(Unaudited) Six Months Ended June 30,
(In millions, except per share data)	2005		2004		2005		2004
Basic shares used in the calculation of earnings per share		53.4		53.2		53.4		53.1
Dilutive effect of securities:
Employee stock options		0.4		0.5		0.4		0.5
Non-vested stock grants		0.1		—		—		0.1
Diluted shares used in the calculation of earnings per share		53.9		53.7		53.8		53.7
Per share effect of dilutive securities on income before cumulative effect of change in accounting principle	$	0.01	$	0.01	$	0.02	$	0.03
Per share effect of dilutive securities on net income	$	0.01	$	0.01	$	0.02	$	0.01

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11. Stock-Based Compensation Plans

The Company applies the provisions of APB Opinion No. 25 in accounting for its stock-based compensation plans. Therefore, compensation cost is not generally required to be recognized in the financial statements for the Company’s stock options issued to employees. However, costs associated with the issuance of stock options to certain agents who did not qualify as employees were recognized in 2004. Effective January 1, 2006, the Company expects to adopt Statement No. 123(R) as discussed in Note 2 – New Accounting Pronouncements and the cost of stock options issued to employees would be recognized in the financial statements.

The following table illustrates the effect on net income and net income per share if the Company had applied the fair value recognition provisions of Statement No. 123, to stock-based compensation.

	(Unaudited) Quarter Ended June 30,						(Unaudited) Six Months Ended June 30,
(In millions, except per share data)	2005			2004			2005			2004
Net income, as reported	$	72.0		$	32.4		$	118.5		$	44.5
Stock-based compensation expense included in reported net income, net of taxes		0.2			0.1			0.3			0.3
Total stock-based compensation expense determined under fair value based method for all awards, net of taxes		(2.1	)		(2.8	)		(3.9	)		(4.8	)
Net income, after effect of Statement No. 123	$	70.1		$	29.7		$	114.9		$	40.0
Earnings per share:
Basic - as reported	$	1.35		$	0.61		$	2.22		$	0.84
Basic - after effect of Statement No. 123	$	1.31		$	0.56		$	2.15		$	0.75
Diluted - as reported	$	1.34		$	0.60		$	2.20		$	0.83
Diluted - after effect of Statement No. 123	$	1.30		$	0.55		$	2.13		$	0.75

12. Commitments and Contingencies

Regulatory and Industry Developments

Unfavorable economic conditions may contribute to an increase in the number of insurance companies that are under regulatory supervision. This may result in an increase in mandatory assessments by state guaranty funds, or voluntary payments by solvent insurance companies to cover losses to policyholders of insolvent or rehabilitated companies. Mandatory assessments, which are subject to statutory limits, can be partially recovered through a reduction in future premium taxes in some states. The Company is not able to reasonably estimate the potential impact of any such future assessments or voluntary payments.

Litigation

On July 24, 2002, an action captioned American National Bank and Trust Company of Chicago, as Trustee f/b/o Emerald Investments Limited Partnership, and Emerald Investments Limited Partnership v. Allmerica Financial Life Insurance and Annuity Company was commenced in the United States District Court for the Northern District of Illinois, Eastern Division. In 1999, plaintiffs purchased two variable annuity contracts with initial premiums aggregating $5 million. Plaintiffs, who AFLIAC subsequently identified as engaging in frequent transfers of significant sums between sub-accounts that in the Company’s opinion constituted “market timing”, were subject to restrictions upon such trading that AFLIAC imposed in December 2001. Plaintiffs allege that such restrictions constituted a breach of the terms of the annuity contracts. In December 2003, the court granted partial summary judgment to the plaintiffs, holding that at least certain restrictions imposed on their trading activities violated the terms of the annuity contracts. The Company filed a motion for reconsideration and clarification of the court’s partial summary judgment opinion, which was denied on April 8, 2004.

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On May 19, 2004, plaintiffs filed a Brief Statement of Damages in which, without quantifying their damage claim, they outlined a claim for (i) amounts totaling $150,000 for surrender charges imposed on the partial surrender by plaintiffs of the annuity contracts, (ii) loss of trading profits they expected over the remaining term of each annuity contract, and (iii) lost trading profits resulting from AFLIAC’s alleged refusal to process five specific transfers in 2002 because of trading restrictions imposed on market timers. With respect to the lost profits, plaintiffs claim that pursuant to their trading strategy of transferring money from money market accounts to international equity accounts and back again to money market accounts, they have been able to consistently obtain relatively risk free returns of between 35% and 40% annually. Plaintiffs claim that they would have been able to continue to maintain such returns on the account values of their annuity contracts over the remaining terms of the annuity contracts (which are based in part on the lives of the named annuitants). The aggregate account value of plaintiffs’ annuities was approximately $12.8 million in December 2001.

The Company intends to vigorously defend this matter, and regards plaintiffs’ claims for lost trading profits as being speculative and, in any case, subject to an obligation to mitigate damages. Further, in the Company’s view, these purported lost profits would not have been earned because of various actions taken by the Company, the investment management industry and regulators, to defer or eliminate market timing, including the implementation of “fair value” pricing.

The monetary damages sought by plaintiffs, if awarded, could have a material adverse effect on the Company’s financial position. However, in the Company’s judgment, the outcome is not expected to be material to the Company’s financial position, although it could have a material effect on the results of operations for a particular quarter or annual period. A trial date for the damage phase of the litigation has not been set.

The Company has been named a defendant in various other legal proceedings arising in the normal course of business and is involved, from time to time, in investigations and proceedings by governmental and self-regulatory agencies, which currently include investigations relating to “market timing” in sub-accounts of variable annuity and life products, “revenue sharing” and other matters, and regulatory inquiries into compensation arrangements with brokers and agents. A number of companies have announced settlements of enforcement actions related to such matters with various regulatory agencies, including the Securities and Exchange Commission (the “SEC”), which have included a range of monetary penalties and restitution. While no such action has been initiated against the Company, the SEC may take some action at the conclusion of the on-going investigation related to “market timing”, “revenue sharing” and other matters, including the marketing support and administrative services arrangements entered into by VeraVest Investments, Inc. in connection with the distribution of life insurance and annuity products issued by unaffiliated insurance companies. The potential outcome of any such action, or other legal proceedings in which the Company has been named a defendant, and the Company’s ultimate liability, if any, from such action or legal proceedings, is difficult to predict at this time. In the Company’s opinion, based on the advice of legal counsel, the ultimate resolutions of such proceedings will not have a material effect on the Company’s consolidated financial position, although they could have a material effect on the results of operations for a particular quarter or annual period. In this respect and based on ongoing discussions with the SEC to resolve this portion of its investigation, the Company recorded a $4.0 million provision to establish a reserve related to anticipated reimbursements to certain mutual funds related to “market timing” in certain sub-accounts of our Life Companies’ variable life insurance and annuity products. This reserve is an estimate which relates only to such reimbursements. The ultimate cost to the Company of any such matters, including potential fines or penalties, could significantly exceed the reserve amount.

Residual Markets

The Company is required to participate in residual markets in various states. The results of the residual markets are not subject to the predictability associated with the Company’s own managed business, and are significant to the workers’ compensation line of business and both the personal and commercial automobile lines of business.

20

PART I

ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE OF CONTENTS

Introduction	22
Executive Overview	22
Description of Operating Segments	22-23
Results of Operations	23-26
Segment Income	24-25
Other Items	25-26
Segment Results	27-43
Property and Casualty	27-36
Life Companies	36-43
Investment Portfolio	43-45
Derivative Instruments	45
Income Taxes	45-46
Critical Accounting Estimates	46-48
Statutory Capital of Insurance Subsidiaries	48-49
Liquidity and Capital Resources	49-50
Off-Balance Sheet Arrangements	50
Contingencies	50-51
Rating Agency Actions	51
Risks and Forward-Looking Statements	51-53
Glossary of Selected Insurance Terms	54-55

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Introduction

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to assist readers in understanding the interim consolidated results of operations and financial condition of Allmerica Financial Corporation and subsidiaries (“AFC”) and should be read in conjunction with the interim Consolidated Financial Statements and related footnotes included elsewhere in this Quarterly Report and the Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our 2004 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Our results of operations include the accounts of The Hanover Insurance Company (“Hanover”) and Citizens Insurance Company of America (“Citizens”), our principal property and casualty companies. Our results of operations also include the accounts of Allmerica Financial Life Insurance and Annuity Company (“AFLIAC”) and First Allmerica Financial Life Insurance Company (“FAFLIC”), our principal life insurance and annuity companies; and other insurance and non-insurance subsidiaries.

Executive Overview

In 2005, we continued to execute our strategies for improving the profitability of our personal lines business and for retaining our profitability in, and growing, our commercial lines business.

In our personal lines business, we are making investments that are intended to maintain profitability, build our distinctive position in the market and prepare Citizens and Hanover for profitable growth in 2006. We are focused on expanding our distribution capabilities by writing more business with our best agents and developing new relationships with the best agents in states where we conduct business. We are also focused on enhancing our service capabilities. At the same time, we are making significant investments to strengthen our product offerings, including the introduction in the second quarter of 2005 of a new multi-variate auto product, “Connections Auto,” in a few, selected states. The product will be introduced in other states throughout the remainder of 2005 and into 2006.

During 2005, we are continuing to invest in our commercial lines business, beginning with building and maintaining our relationships with the best agents in each of our territories. We are further developing our product portfolio and specialty lines expertise in our commercial lines business as we target the first-tier middle market, which represents clients whose premiums are between $25,000 and $100,000. We are expanding our businessowner’s policy to accommodate larger risks, and are enhancing our inland marine, bond and umbrella programs, which on average are expected to offer higher margins over time and enable us to deliver a complete response to our agents and policyholders in our target market.

During the first six months of 2005, our segment earnings increased compared to the prior year, driven by our property and casualty business, partially offset by unfavorable results in our Life Companies. Our property and casualty earnings increased primarily due to lower losses in both our Personal Lines and Commercial Lines segments. This was the result of improved current accident year performance, an increase in favorable development and lower catastrophe losses. Segment earnings in our life insurance business were unfavorably affected by a $4.0 million provision established in response to an ongoing informal SEC investigation related to market timing and the continued runoff of our variable life, annuity and guaranteed investment contract (“GIC”) business. We incurred higher deferred policy acquisition costs, as well as increased guaranteed minimum death benefit (“GMDB”) expenses incurred under SOP 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts (“SOP 03-1”). These were partially offset by gains related to our GMDB hedging program.

Description of Operating Segments

Our business includes financial products and services in two major areas: Property and Casualty and Life Companies. Within these broad areas, we conduct business principally in four operating segments. These segments are Personal Lines, Commercial Lines, Other Property and Casualty, and Life Companies. We present the separate financial information of each segment consistent with the manner in which our chief operating decision maker evaluates results in deciding how to allocate resources and in assessing performance.

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The Property and Casualty group manages its operations principally through three segments: Personal Lines, Commercial Lines and Other Property and Casualty. Personal Lines includes such property and casualty coverages as personal automobile, homeowners and other personal policies, while Commercial Lines includes such property and casualty coverages as workers’ compensation, commercial automobile, commercial multiple peril and other commercial policies. In addition, the Other Property and Casualty segment consists of: voluntary pools business in which we have not actively participated since 1995; Amgro, Inc. (“AMGRO”), our premium financing business; Opus Investment Management, Inc. (“Opus”), which markets investment management services to institutions, pension funds and other organizations; and earnings on holding company assets.

Our Life Companies segment manages a block of existing variable annuity, variable universal life and traditional life insurance products, our GIC business, certain group retirement products, and our discontinued group life and health business, including group life and health voluntary pools (the former Corporate Risk Management Services segment).

We report interest expense related to our corporate debt separately from the earnings of our operating segments. Corporate debt consists of our junior subordinated debentures and our senior debentures.

Results of Operations

Our consolidated net income includes the results of our four operating segments (segment income) and our interest expense on corporate debt, which we evaluate on a pre-tax basis. In addition, segment income excludes certain items which we believe are not indicative of our core operations. The income of our segments excludes items such as federal income taxes and net realized investment gains and losses, including net gains or losses on certain derivative instruments, because fluctuations in these gains and losses are determined by interest rates, financial markets and the timing of sales. Also, segment income excludes net gains and losses on disposals of businesses, discontinued operations, restructuring costs, extraordinary items, the cumulative effect of accounting changes and certain other items. Although the items excluded from segment income may be significant components in understanding and assessing our financial performance, we believe segment income enhances an investor’s understanding of our results of operations by highlighting net income attributable to the normal operations of the business. However, segment income should not be construed as a substitute for net income determined in accordance with generally accepted accounting principles (“GAAP”).

Our consolidated net income for the second quarter of 2005 increased $39.6 million to net income of $72.0 million, compared to $32.4 million for the same period in 2004. The increase is primarily due to higher segment income, net of taxes, in our property and casualty business, partially offset by a decrease in segment results, net of taxes, related to our life insurance business. Also contributing to the increase was a benefit of $12.9 million relating to a reduction in federal income tax reserves resulting from ongoing Internal Revenue Service audits.

Consolidated net income for the first six months of 2005 increased $74.0 million, to net income of $118.5 million, compared to $44.5 million for the same period in 2004. Net income in 2004 included two significant items. First, we implemented SOP 03-1 which resulted in an after-tax charge of $57.2 million. Additionally, we recognized a $30.3 million favorable federal income tax settlement. Excluding the effect of these items, net income increased by $47.1 million primarily due to higher segment income, net of taxes, in our property and casualty business, partially offset by a decrease in segment results, net of taxes, related to our life insurance business. Also contributing to the increase was the aforementioned $12.9 million benefit resulting from the reduction in our federal income tax reserves in 2005.

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The following table reflects segment income and a reconciliation of total segment income to consolidated net income.

	Quarter Ended June 30,						Six Months Ended June 30,
(In millions)	2005			2004			2005			2004
Segment income before federal income taxes:
Property and Casualty
Personal Lines	$	57.4		$	35.8		$	96.6		$	46.6
Commercial Lines		31.0			12.6			51.5			39.1
Other Property and Casualty		1.7			0.7			3.8			2.0
Total Property and Casualty		90.1			49.1			151.9			87.7
Life Companies		(5.3	)		(6.3	)		(12.7	)		3.5
Interest expense on corporate debt		(9.9	)		(9.9	)		(19.9	)		(19.9	)
Total segment income before federal income taxes		74.9			32.9			119.3			71.3
Federal income tax expense on segment income		(17.3	)		(3.8	)		(27.5	)		(9.0	)
Change in prior year tax reserves		12.9			—			12.9			—
Federal income tax settlement		—			0.2			—			30.3
Net realized investment gains, net of taxes and amortization		1.9			4.4			14.7			14.6
Net (losses) gains on derivative instruments, net of taxes		(0.2	)		0.2			(0.3	)		0.2
Losses from retirement of funding agreements and trust instruments supported by funding obligations, net of taxes		—			—			—			(2.1	)
Restructuring costs, net of taxes		(0.2	)		(1.5	)		(0.6	)		(3.6	)
Income before cumulative effect of change in accounting principle		72.0			32.4			118.5			101.7
Cumulative effect of change in accounting principle, net of taxes		—			—			—			(57.2	)
Net income	$	72.0		$	32.4		$	118.5		$	44.5

Segment Income

Quarter Ended June 30, 2005 Compared to Quarter Ended June 30, 2004

Our segment income before federal income taxes increased $42.0 million to $74.9 million in the second quarter of 2005. This increase was attributable to an increase in the Property and Casualty group’s segment income of $41.0 million, and a decreased loss of $1.0 million in the Life Companies segment income.

The Property and Casualty group’s segment income increased $41.0 million, or 83.5%, to $90.1 million, in the second quarter of 2005, compared to $49.1 million in the second quarter of 2004. The increase in segment income is primarily attributable to an estimated $15 million of improved current accident year underwriting results due to a decrease in the frequency of non-catastrophe claims and net premium rate increases, primarily in our Personal Lines segment. Also contributing to the increase in segment income was a $12.5 million increase in favorable development on prior years’ loss and loss adjustment expense (“LAE”) reserves. Additionally, catastrophe losses decreased $8.1 million, and underwriting expenses, excluding volume related expenses which include primarily base commissions and premium taxes, decreased $5.0 million primarily from lower contingent commissions and the timing of technology costs.

Life Companies’ segment loss was $5.3 million in the second quarter of 2005 compared to a loss of $6.3 million in the second quarter of 2004. The decrease in loss is primarily due to a $2.8 million favorable combined effect of decreased GMDB reserve expenses under SOP 03-1 and derivative losses associated with the GMDB hedging program, both net of deferred acquisition costs (“DAC”). Also, there was a $2.5 million decrease in DAC amortization primarily caused by market performance and lower annuity redemptions. These items were partially offset by a $4.0 million provision established in response to an ongoing informal SEC investigation related to market timing (see Contingencies), and to a lesser extent, the continued runoff of our variable life and annuity business, resulting in lower fees, partially offset by lower DAC amortization.

Our federal tax expense on segment income was $17.3 million for the second quarter of 2005, compared to $3.8 million for the same period in 2004. This increase is primarily due to an increase in underwriting income.

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Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004

Our segment income before federal income taxes increased $48.0 million, or 67.3%, to $119.3 million in the first six months of 2005, compared to $71.3 million in the first six months of 2004. This increase was primarily attributable to a $64.2 million increase in the Property and Casualty group’s segment income, partially offset by a decrease in Life Companies segment results of $16.2 million.

The Property and Casualty group’s segment income increased $64.2 million, or 73.2%, to $151.9 million, for the six months ended June 30, 2005, compared to $87.7 million in the same period in 2004. The increase in segment income is primarily attributable to an estimated $29 million of improved current accident year underwriting results due to a decrease in the frequency of non-catastrophe claims primarily in our Personal Lines segment and net premium rate increases across all principal product lines. Also contributing to the increase in segment income were lower catastrophe losses of $16.9 million, and a $10.9 million increase in favorable development on prior years’ loss and LAE reserves. Additionally, underwriting expenses, excluding volume related expenses which include primarily base commissions and premium taxes, decreased $5.1 million primarily from lower contingent commissions.

Life Companies’ segment loss was $12.7 million in the six months ended June 30, 2005 compared to income of $3.5 million in the same period of 2004. The decrease was primarily the result of the aforementioned $4.0 million provision related to market timing and the continued runoff of our variable life and annuity business which reduced profits by $3.9 million as a result of lower fees, partially offset by lower DAC amortization and lower expenses. Additionally, interest margins on GICs decreased $2.8 million primarily from lower average assets. Also, net investment income decreased $2.7 million primarily resulting from lower income from partnership investments. Finally, the combined effect of increased GMDB reserve expenses required under SOP 03-1, and derivatives losses associated with the GMDB hedging program, both net of DAC, increased net expenses by $1.2 million in the first six months of 2005. See also “Guaranteed Minimum Death Benefits” below.

Our federal income tax expense on segment income was $27.5 million for the first six months of 2005 compared to $9.0 million for the same period of 2004. The increase in tax expense is primarily the result of an increase in underwriting income and lower tax-exempt interest in the current year.

Other Items

During the first six months of 2005, we recorded a benefit of $12.9 million due to a reduction in our federal income tax reserves resulting from ongoing Internal Revenue Service audits (see Income Taxes).

In the first six months of 2004, we recorded income of $30.3 million relating to a federal income tax settlement for prior years (see Income Taxes).

Net realized gains on investments, after taxes, were $1.9 million and $4.4 million in the second quarter of 2005 and 2004, respectively. Net realized gains on investments, after taxes, for the first six months of 2005 and 2004 were $14.7 and $14.6 million, respectively, primarily due to gains recognized from the sale of fixed maturities.

In the first six months of 2004, we retired $76.6 million of long-term funding agreement obligations, resulting in a loss of $2.1 million, net of taxes.

In 2002, we began restructuring efforts in our Life Companies segment after terminating new sales of our proprietary life insurance and annuity products. In the fourth quarter of 2003, we ceased our retail operations related to our broker/dealer in our Life Companies segment. In the second quarter of 2005 and 2004, we recognized $0.2 million and $1.5 million, respectively, net of taxes, and in the first six months of 2005 and 2004, we recognized $0.6 million and $3.6 million, respectively, net of taxes, related to these actions.

During the first quarter of 2004, we adopted SOP 03-1, which resulted in a charge of $57.2 million, net of taxes. The charge results from new requirements for recognizing guaranteed minimum death benefit and guaranteed minimum income reserves based on various assumptions, including estimates of future market returns and expected contract persistency.

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Net income includes the following items (net of taxes) by segment:

	Quarter Ended June 30, 2005
	Property and Casualty
	Personal Lines		Commercial Lines		Other Property and Casualty (2)		Life Companies			Total
Change in prior years tax reserves	$	—	$	—	$	10.6	$	2.3		$	12.9
Net realized investment gains (1)		0.1		0.1		0.5		1.2			1.9
Net losses on derivative instruments		—		—		—		(0.2	)		(0.2	)
Restructuring costs		—		—		—		(0.2	)		(0.2	)

	Quarter Ended June 30, 2004
	Property and Casualty
	Personal Lines		Commercial Lines		Other Property and Casualty (2)		Life Companies			Total
Federal income tax settlement	$	—	$	—	$	—	$	0.2		$	0.2
Net realized investment gains (1)		1.9		1.9		0.6		—			4.4
Net gains on derivative instruments		—		—		—		0.2			0.2
Restructuring costs		—		—		—		(1.5	)		(1.5	)

	Six Months Ended June 30, 2005
	Property and Casualty
	Personal Lines			Commercial Lines			Other Property and Casualty (2)		Life Companies			Total
Change in prior years tax reserves	$	—		$	—		$	10.6	$	2.3		$	12.9
Net realized investment (losses) gains (1)		(0.4	)		(0.4	)		0.5		15.0			14.7
Net losses on derivative instruments		—			—			—		(0.3	)		(0.3	)
Restructuring costs		—			—			—		(0.6	)		(0.6	)

	Six Months Ended June 30, 2004
	Property and Casualty
	Personal Lines		Commercial Lines		Other Property and Casualty (2)		Life Companies			Total
Federal income tax settlement	$	—	$	—	$	—	$	30.3		$	30.3
Net realized investment gains (1)		3.8		3.9		2.8		4.1			14.6
Net gains on derivative instruments		—		—		—		0.2			0.2
Loss from retirement of funding agreements and trust instruments supported by funding obligations		—		—		—		(2.1	)		(2.1	)
Restructuring costs		—		—		—		(3.6	)		(3.6	)
Cumulative effect of change in accounting principle		—		—		—		(57.2	)		(57.2	)

(1) We manage investment assets for our property and casualty business based on the requirements of the entire property and casualty group. We allocate the investment income, expenses and realized gains (losses) to our Personal Lines, Commercial Lines and Other Property and Casualty segments based on actuarial information related to the underlying business.

(2) Includes holding company results and corporate eliminations.

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Segment Results

The following is a discussion and analysis of our results of operations by business segment. The segment results are presented before taxes and other items which we believe are not indicative of core operations, including realized gains and losses.

Property and Casualty

The following table summarizes the results of operations for the Property and Casualty group:

	Quarter Ended June 30,				Six Months Ended June 30,
(In millions)	2005		2004		2005		2004
Segment revenues
Net premiums written	$	557.5	$	580.1	$	1,105.9	$	1,141.4
Net premiums earned	$	549.8	$	566.2	$	1,100.0	$	1,122.5
Net investment income		51.4		50.3		102.2		98.0
Other income		12.2		13.1		25.1		26.4
Total segment revenues		613.4		629.6		1,227.3		1,246.9
Losses and operating expenses
Losses and loss adjustment expenses		343.7		390.2		715.2		784.2
Policy acquisition expenses		113.5		117.5		227.6		234.6
Other operating expenses		66.1		72.8		132.6		140.4
Total losses and operating expenses		523.3		580.5		1,075.4		1,159.2
Segment income	$	90.1	$	49.1	$	151.9	$	87.7

Quarter Ended June 30, 2005 Compared to Quarter Ended June 30, 2004

The Property and Casualty group’s segment income increased $41.0 million, or 83.5%, to $90.1 million, in the second quarter of 2005, compared to $49.1 million in the second quarter of 2004. The increase in segment income is primarily attributable to an estimated $15 million of improved current accident year underwriting results due to a decrease in the frequency of non-catastrophe claims and net premium rate increases, primarily in our Personal Lines segment. Also contributing to the increase in segment income was a $12.5 million increase in favorable development on prior years’ loss and LAE reserves, to $15.9 million in the second quarter of 2005, from $3.4 million in the same period of 2004. Additionally, catastrophe losses decreased $8.1 million, to $7.0 million in the second quarter of 2005 from $15.1 million in the second quarter of 2004. Also, underwriting expenses, excluding volume related expenses which include primarily base commissions and premium taxes, decreased $5.0 million primarily from lower contingent commissions and the timing of technology costs.

Underwriting Results

We report underwriting results using generally accepted accounting principles (“GAAP”). We manage investment assets for our property and casualty business based on the requirements of the entire Property and Casualty group. We allocate net investment income to our Personal Lines, Commercial Lines and Other Property and Casualty segments based on actuarial information related to the underlying business.

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The following table summarizes GAAP net premiums written and GAAP loss and combined ratios for the Personal Lines and Commercial Lines segments. These items are not meaningful for our Other Property and Casualty segment.

	Quarter Ended June 30,
	2005			2004
(In millions, except ratios)	GAAP Net Premiums Written		GAAP Loss Ratio (1)	GAAP Net Premiums Written		GAAP Loss Ratio (1)
Personal Lines:
Personal automobile	$	231.3	59.0	$	261.8	62.5
Homeowners		105.3	42.9		111.6	47.2
Other personal		11.1	21.0		11.9	38.5
Total Personal Lines		347.7	53.3		385.3	57.7
Commercial Lines:
Workers’ compensation		28.7	79.1		32.0	84.1
Commercial automobile		52.4	49.9		49.1	50.9
Commercial multiple peril		89.7	41.6		87.3	41.8
Other commercial		38.8	38.2		26.2	75.5
Total Commercial Lines		209.6	49.3		194.6	55.9
Total	$	557.3	51.9	$	579.9	57.3
GAAP combined ratio (2):
Personal lines		91.5			97.6
Commercial lines		97.4			107.0
Other Property and Casualty		N/M			N/M
Total		93.7			100.8

(1) GAAP loss ratio is a common industry measurement of the results of property and casualty insurance underwriting. This ratio reflects incurred claims compared to premiums earned. Our GAAP loss ratios exclude catastrophe losses.

(2) GAAP combined ratio is a common industry measurement of the results of property and casualty insurance underwriting. This ratio is the sum of incurred claims, claim expenses, and underwriting expenses incurred to premiums earned. Federal income taxes, net investment income and other non-underwriting expenses are not reflected in the GAAP combined ratio. Our GAAP combined ratios include catastrophe losses, which represented 1.2%, 1.3% and 1.3% of our Personal Lines, Commercial Lines and Total GAAP combined ratios, respectively, for the quarter ended June 30, 2005 and 3.1%, 1.8% and 2.7% or our Personal Lines, Commercial Lines and Total GAAP combined ratios, respectively, for the quarter ended June 30, 2004.

The following table summarizes GAAP underwriting results for the Personal Lines, Commercial Lines and Other Property and Casualty segments and reconciles it to GAAP segment income.

	Quarter Ended June 30, 2005												Quarter Ended June 30, 2004
	Personal Lines			Commercial Lines			Other Property and Casualty			Total			Personal Lines			Commercial Lines			Other Property and Casualty			Total
GAAP underwriting profit (loss), excluding prior year reserve development and catastrophes	$	24.6		$	0.9		$	0.4		$	25.9		$	11.5		$	(4.4	)	$	(0.2	)	$	6.9
Prior year reserve development favorable (unfavorable)		9.6			6.8			(0.5	)		15.9			9.3			(5.0	)		(0.9	)		3.4
Pretax catastrophe losses		(4.4	)		(2.6	)		—			(7.0	)		(11.9	)		(3.2	)		—			(15.1	)
GAAP underwriting profit (loss)		29.8			5.1			(0.1	)		34.8			8.9			(12.6	)		(1.1	)		(4.8	)
Net investment income		25.2			24.9			1.3			51.4			24.8			24.9			0.6			50.3
Other income		3.7			2.9			5.6			12.2			3.6			3.0			6.5			13.1
Other operating expenses		(1.3	)		(1.9	)		(5.1	)		(8.3	)		(1.5	)		(2.7	)		(5.3	)		(9.5	)
Segment income	$	57.4		$	31.0		$	1.7		$	90.1		$	35.8		$	12.6		$	0.7		$	49.1

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Personal Lines

Personal Lines’ net premiums written decreased $37.6 million, or 9.8%, to $347.7 million for the second quarter of 2005. This was primarily the result of a decrease of $30.5 million, or 11.7% in the personal automobile line, in addition to a decrease of $6.3 million, or 5.6%, in the homeowners line. The decreases in the personal automobile and homeowners lines resulted primarily from 11.7% and 8.7% decreases in policies in force since June 30, 2004, respectively. Approximately one-half of the decline in policies in force in both lines was the result of our strategies to enhance margins by reducing policies in certain less profitable portions of our business. We are reducing exposures in Massachusetts, where the regulatory structure is challenging and where we conduct a significant amount of business. We are also exiting certain sponsored market accounts (employer and affinity groups) that were unprofitable and not well aligned with our current strategy. However, policies in force also declined in many other markets, most significantly in Michigan where policies in force decreased 7.0% since June 30, 2004. We attribute this decline partly to the introduction of an insurance score-based product toward the end of 2003 that enhanced our ability to segment risks, to certain service issues, which management has addressed, and to rate increases on specific classes of business.

There can be no assurance that we will not experience further declines in our policies in force.

Personal Lines’ segment income increased $21.6 million to $57.4 million for the second quarter of 2005. This improvement in segment income is primarily attributable to an estimated $13 million of improved current accident year underwriting results. The improved underwriting results are primarily attributable to a decrease in the frequency of non-catastrophe claims in both the personal automobile and homeowners lines, as well as the favorable effect of net premium rate increases. We believe our improved non-catastrophe claims frequency is consistent with recent industry trends; we do not know whether these trends are sustainable. Also contributing to the increase in segment income, catastrophe losses decreased $7.5 million, to $4.4 million for the second quarter of 2005, compared to $11.9 million for the same period in 2004. In addition to these favorable items, Personal Lines’ segment income benefited from a $2.9 million decrease in underwriting expenses, excluding volume related expenses which include primarily base commissions and premium taxes, primarily due to lower contingent commissions for the second quarter of 2005.

Our ability to increase net premiums written and to maintain or improve underwriting results is expected to be affected by increased price competition.

Commercial Lines

Commercial Lines’ net premiums written increased $15.0 million, or 7.7% to $209.6 million for the second quarter of 2005, primarily attributable to an increase in business volume and an overall 2.5% increase in premiums on renewed policies attributable principally to policy level exposure increases in the period. Approximately two-thirds of the increase in business volume was driven by growth in our other commercial lines business, including umbrella, inland marine, and fidelity and surety bonds.

Commercial Lines’ segment income increased $18.4 million to $31.0 million in the second quarter of 2005. The increase in segment income is primarily attributable to an $11.8 million increase in favorable development on prior years’ loss and LAE reserves, to $6.8 million of favorable development in the second quarter of 2005, from $5.0 million of adverse development in the same period of 2004. Segment income was also positively impacted by a decrease in underwriting expenses, excluding volume related expenses which include primarily base commissions and premium taxes, of $2.1 million in the second quarter of 2005, primarily due to the timing of technology costs and a decrease in contingent commissions. Also contributing to the increase in segment income, current accident year underwriting results improved an estimated $2 million, primarily attributable to overall growth in the business.

Our ability to increase net premiums written and to maintain or improve underwriting results is expected to be affected by increased price competition.

Other Property and Casualty

Segment income of the Other Property and Casualty segment increased $1.0 million, to $1.7 million in the second quarter of 2005, from $0.7 million for the same period in 2004, primarily due to an increase in net investment income.

The remaining portion of business remained relatively consistent with the same period in the prior year.

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Investment Results

Net investment income increased $1.1 million or 2.2% to $51.4 million for the quarter ended June 30, 2005. The increase in net investment income reflects an increase in average invested assets, partially offset by a reduction in average pre-tax yields on fixed maturities. Average pre-tax yields on fixed maturities decreased to 5.6% for the second quarter of 2005, compared to 5.7% for the second quarter of 2004. The decline in average pre-tax yields is due to the lower prevailing fixed maturity investment rates. We expect that the lower prevailing fixed maturity investment rates reflected in the current interest rate environment will continue to negatively affect our average investment yield.

Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004

The Property and Casualty group’s segment income increased $64.2 million, or 73.2%, to $151.9 million, for the six months ended June 30, 2005, compared to $87.7 million in the same period in 2004. The increase in segment income is primarily attributable to an estimated $29 million of improved current accident year underwriting results due a decrease in the frequency of non-catastrophe claims primarily in our Personal Lines segment and net premium rate increases across all principal product lines. Also contributing to the increase in segment income was a decrease in catastrophe losses of $16.9 million, to $19.3 million in the first six months of 2005 from $36.2 million in the first six months of 2004. Additionally, segment income increased $10.9 million due to an increase in favorable development on prior years’ loss and LAE reserves, to $29.6 million for the six months ended June 30, 2005, from $18.7 million in the same period of 2004. Also, underwriting expenses, excluding volume related expenses which include primarily base commissions and premium taxes, decreased $5.1 million primarily from lower contingent commissions.

Underwriting Results

The following table summarizes GAAP net premiums written and GAAP loss and combined ratios for the Personal Lines and Commercial Lines segments. These items are not meaningful for our Other Property and Casualty segment.

	Six Months Ended June 30,
	2005			2004
(In millions, except ratios)	GAAP Net Premiums Written		GAAP Loss Ratio (1)	GAAP Net Premiums Written		GAAP Loss Ratio (1)
Personal Lines:
Personal automobile	$	477.8	62.7	$	538.5	66.0
Homeowners		186.3	42.6		192.1	47.6
Other personal		19.4	29.1		20.7	54.2
Total Personal Lines		683.5	56.0		751.3	60.8
Commercial Lines:
Workers’ compensation		68.8	84.4		68.6	76.6
Commercial automobile		102.6	51.2		97.9	49.4
Commercial multiple peril		178.7	43.1		172.9	41.8
Other commercial		72.1	33.0		50.5	53.3
Total Commercial Lines		422.2	50.5		389.9	51.3
Total	$	1,105.7	54.1	$	1,141.2	58.0
GAAP combined ratio (2):
Personal lines		94.2			100.9
Commercial lines		100.0			103.2
Other Property and Casualty		N/M			N/M
Total		96.3			101.8

(1) GAAP loss ratio is a common industry measurement of the results of property and casualty insurance underwriting. This ratio reflects incurred claims compared to premiums earned. Our GAAP loss ratios exclude catastrophe losses.

(2) GAAP combined ratio is a common industry measurement of the results of property and casualty insurance underwriting. This ratio is the sum of incurred claims, claim expenses, and underwriting expenses incurred to premiums earned. Federal income taxes, net investment income and other non-underwriting expenses are not reflected in the GAAP combined ratio. Our GAAP combined ratios include catastrophe losses, which represented 1.6%, 2.1% and 1.8% of our Personal Lines, Commercial Lines and Total GAAP combined ratios, respectively, for the six months ended June 30, 2005 and 3.5%, 2.7% and 3.2% for our Personal Lines, Commercial Lines and Total GAAP combined ratios, respectively, for the six months ended June 30, 2004.

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The following table summarizes GAAP underwriting results for the Personal Lines, Commercial Lines and Other Property and Casualty segments and reconciles them to GAAP segment income.

	Six Months Ended June 30, 2005												Six Months Ended June 30, 2004
	Personal Lines			Commercial Lines			Other Property and Casualty			Total			Personal Lines			Commercial Lines			Other Property and Casualty			Total
GAAP underwriting profit (loss), excluding prior year reserve development and catastrophes	$	33.7		$	(3.7	)	$	0.6		$	30.6		$	10.7		$	(13.1	)	$	(0.1	)	$	(2.5	)
Prior year reserve development favorable (unfavorable)		19.1			11.7			(1.2	)		29.6			9.0			11.5			(1.8	)		18.7
Pretax catastrophe losses		(11.2	)		(8.1	)		—			(19.3	)		(26.5	)		(9.7	)		—			(36.2	)
GAAP underwriting profit (loss)		41.6			(0.1	)		(0.6	)		40.9			(6.8	)		(11.3	)		(1.9	)		(20.0	)
Net investment income		50.1			49.5			2.6			102.2			48.3			48.6			1.1			98.0
Fee income		7.6			6.2			11.3			25.1			7.6			6.3			12.5			26.4
Other operating expenses		(2.7	)		(4.1	)		(9.5	)		(16.3	)		(2.5	)		(4.5	)		(9.7	)		(16.7	)
Segment income	$	96.6		$	51.5		$	3.8		$	151.9		$	46.6		$	39.1		$	2.0		$	87.7

Personal Lines

Personal Lines’ net premiums written decreased $67.8 million, or 9.0%, to $683.5 million for the six months ended June 30, 2005. This was primarily the result of a decrease of $60.7 million, or 11.3% in the personal automobile line, in addition to a decrease of $5.8 million, or 3.0% in the homeowners line. The decreases in the personal automobile and homeowners lines resulted primarily from 11.7% and 8.7% decreases in policies in force since June 30, 2004, respectively. Partially offsetting these decreases, were rate increases of 2.0% and 0.4% in the homeowners and personal automobile lines, respectively. Approximately one-half of the decline in policies in force in both lines was the result of our strategies to enhance margins by reducing policies in certain less profitable portions of our business. We are reducing exposures in Massachusetts, where the regulatory structure is challenging and where we conduct a significant amount of business. We are also exiting certain sponsored market accounts (employer and affinity groups) that were unprofitable and not well aligned with our current strategy. However, policies in force also declined in many other markets, most significantly in Michigan where policies in force decreased 7.0% since June 30, 2004. We attribute this decline partly to the introduction of an insurance score-based product toward the end of 2003 that enhanced our ability to segment risks, certain service issues, which management has addressed, and rate increases on specific classes of business.

Personal Lines’ segment income increased $50.0 million, to $96.6 million for the six months ended June 30, 2005, compared to $46.6 million for the same period in 2004. The increase in segment income is primarily attributable to an estimated $20 million of improved current accident year underwriting results due to a decrease in the frequency of non-catastrophe claims, primarily in the personal automobile line, as well as the favorable effect of net premium rate increases. We believe our improved non-catastrophe claims frequency is consistent with recent industry trends; we do not know whether these trends are sustainable. Also contributing to the increase in segment income, catastrophe losses decreased $15.3 million, to $11.2 million for the six months ended June 30, 2005, compared to $26.5 million for the same period in 2004. Additionally, there was a $10.1 million increase in favorable development on prior years’ loss and LAE reserves, to $19.1 million for the six months ended June 30, 2005, from $9.0 million for the same period in 2004. Also, underwriting expenses, excluding volume related expenses which include primarily base commissions and premium taxes, decreased $4.5 million, primarily from lower contingent commissions.

Commercial Lines

Commercial Lines’ net premiums written increased $32.3 million, or 8.3% to $422.2 million for the six months ended June 30, 2005, primarily attributable to an increase in business volume and an overall 3.0% increase in premiums on renewed policies attributable principally to policy level exposure increases in the period. Approximately one-half of the increase in business volume was driven by growth in our other commercial lines business, including umbrella, inland marine, and fidelity and surety bonds.

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Commercial Lines’ segment income increased $12.4 million to $51.5 million for the six months ended June 30, 2005, compared to $39.1 million for the same period in 2004. The increase in segment income is primarily attributable to an estimated $8 million in improved current accident year underwriting results during the first six months of 2005, mainly due to the favorable effect of net premium rate increases and overall growth in the business. Segment income was also positively impacted by an estimated $1 million decrease in underwriting expenses, excluding volume related expenses which include primarily base commissions and premium taxes, primarily due to lower contingent commissions. In addition, catastrophe losses decreased $1.6 million, to $8.1 million in the first six months of 2005, compared to $9.7 million for the same period in 2004.

Other Property and Casualty

Segment income of the Other Property and Casualty segment increased $1.8 million, to $3.8 million in the six months ended June 30, 2005, from $2.0 million for the same period in 2004, primarily due to an increase in net investment income.

The remaining portion of business remained relatively consistent with the same period in the prior year.

Investment Results

Net investment income increased $4.2 million, or 4.3%, to $102.2 million for the six months ended June 30, 2005. The increase in net investment income reflects an increase in average invested assets, partially offset by a reduction in average pre-tax yields on fixed maturities. Average pre-tax yields on fixed maturities decreased to 5.6% for the first six months of 2005 compared to 5.7% for the first six months of 2004 due to the lower prevailing fixed maturity investment rates.

Reserve for Losses and Loss Adjustment Expenses

Overview of Loss Reserve Estimation Process

We maintain reserves for our property and casualty products to provide for our 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 we expect the ultimate settlement and administration of claims will cost based on facts and circumstances then known, estimates of future trends in claim severity and frequency, judicial theories of liability and policy coverage, and other factors.

We determine the amount of loss and loss adjustment expense reserves (the “loss reserves”) based on an estimation process that is very complex and uses information obtained from both company specific and industry data, as well as general economic information. The estimation process is judgmental, and requires us to continuously monitor and evaluate the life cycle of claims on type-of-business and nature-of-claim bases. Using data obtained from this monitoring and assumptions about emerging trends, we develop information about the size of ultimate claims based on historical experience and other available market information. The most significant assumptions used in the estimation process, which vary by line of business, include determining the trend in loss costs, the expected consistency in the frequency and severity of claims incurred but not yet reported to prior year claims, changes in the timing of the reporting of losses from the loss date to the notification date, and expected costs to settle unpaid claims. This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. There are no precise methods, however, for subsequently evaluating the impact of any specific factor on the adequacy of reserves, because the eventual development of reserves is affected by many factors, as noted above.

Because the amounts of the loss reserves are sensitive to our assumptions, we do not completely rely on only one estimate to determine our loss reserves. We develop several estimates using generally accepted actuarial projection methodologies that result in various loss reserve outcomes. Multiple estimation methods are available for the analysis of ultimate loss reserves. Each estimation method has its own set of assumption variables and its own advantages and disadvantages, with no single estimation method being better than the others in all situations and no one set of assumption variables being meaningful for all product line components. The relative strengths and weaknesses of the particular estimation methods when applied to a particular group of claims can also change over time. Therefore, the actual choice of estimation methods can change with each evaluation. The estimation methods chosen are those that are believed to produce the most reliable indication at that particular evaluation date for the loss reserves being evaluated.

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In most cases, multiple estimation methods will be valid for the particular facts and circumstances of the loss reserves being evaluated. This will result in a range of reasonable estimates for any particular loss reserve. The exact boundary points of these ranges are more qualitative than quantitative in nature, since no clear line of demarcation exists to determine when the set of underlying assumptions for an estimation method changes from being reasonable to unreasonable. As a result, we do not believe that the endpoints of these ranges are or would be comparable across companies. In addition, potential interactions among the different estimation assumptions for different product lines make the aggregation of individual ranges a highly judgmental and inexact process. For these reasons, we adopt an estimate that considers all of the actuarial projection methodologies plus other factors not captured by these methodologies and do not consider it appropriate to report a range of estimations.

Regarding voluntary and involuntary pools, managers of each pool provide us with loss estimates. We adopt an estimate that considers this information and other facts. We exercise judgment based upon our knowledge of the business, review of the outcome of actuarial studies, historical experience and other factors to record an estimate which reflects our expected ultimate loss and loss adjustment expenses.

When trends emerge that we believe affect the future settlement of claims, we adjust our reserves accordingly.

Management’s Review of Judgments and Key Assumptions

There is greater inherent uncertainty in estimating insurance reserves 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 and losses may be made. In addition, the technological, judicial, regulatory and political climates involving these types of claims change regularly. We maintain a practice of significantly limiting the issuance of long-tailed other liability policies, including directors and officers (“D&O”) liability, errors and omissions (“E&O”) liability and medical malpractice liability. The industry has experienced recent adverse loss trends in these lines of business.

We regularly update our reserve estimates as new information becomes available and further events occur which may impact the resolution of unsettled claims. Reserve adjustments are reflected in the Consolidated Statements of Income as adjustments to losses and LAE. Often, these adjustments are recognized in periods subsequent to the period in which the underlying loss event occurred. These types of subsequent adjustments are disclosed and discussed separately as “prior year reserve development”. Such development can be either favorable or unfavorable to our financial results. An increase or decrease in reserve estimates would result in a corresponding decrease or increase in financial results. For example, a reserve change of $22 million would have a 1 percentage point impact on the loss and LAE ratio, based on 2004 full year earned premiums. Each 1 percentage point change in the loss and LAE ratio would have a $22 million impact on segment income.

Inflation generally increases the cost of losses covered by insurance contracts. The effect of inflation varies by product. Our property and casualty insurance premiums are established before the amount of losses and LAE and the extent to which inflation may affect such expenses are known. Consequently, we attempt, in establishing rates and reserves, to anticipate the potential impact of inflation in the projection of ultimate costs. We have experienced increasing medical costs associated with personal automobile personal injury protection claims, particularly in Michigan, as well as in our workers’ compensation line in most states. This increase is reflected in our reserve estimates, but continued increases could contribute to increased losses and LAE in the future.

We regularly review our reserving techniques, our overall reserving position and our reinsurance. Based on (i) our review of historical data, legislative enactments, judicial decisions, legal developments in impositions of damages and policy coverage, political attitudes and trends in general economic conditions, (ii) our review of per claim information, (iii) our historical loss experience and that of the industry, (iv) the relatively short-term nature of most policies written by us and (v) our internal estimates of required reserves, we believe 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 our results of operations and financial position.

Loss Reserves by Line of Business

We perform actuarial reviews on certain detailed line of business coverages. These individual estimates are summarized into six broader lines of business: personal automobile, homeowners, workers’ compensation, commercial automobile, commercial multiple peril, and other lines.

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The table below provides a reconciliation of the beginning and ending reserve for unpaid losses and LAE as follows:

	Six Months Ended June 30,
(In millions)	2005			2004
Reserve for losses and LAE, beginning of period	$	3,068.6		$	3,018.9
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of current year		744.4			802.5
Decrease in provision for insured events of prior years		(29.6	)		(18.7	)
Total incurred losses and LAE		714.8			783.8
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current year		295.9			329.1
Losses and LAE attributable to insured events of prior years		382.5			416.0
Total payments		678.4			745.1
Change in reinsurance recoverable on unpaid losses		(38.8	)		(38.8	)
Reserve for losses and LAE, end of period	$	3,046.2		$	3,018.8

The table below summarizes the reserve for losses and LAE by line of business.

(In millions)	June 30, 2005		December 31, 2004
Personal Automobile	$	1,177.2	$	1,183.9
Homeowners and Other		177.4		218.3
Total Personal		1,354.6		1,402.2
Worker’s Compensation		666.3		640.6
Commercial Automobile		246.6		254.2
Commercial Multiple Peril		550.8		572.1
Other Commercial		227.9		199.5
Total Commercial		1,691.6		1,666.4
Total reserve for losses and LAE	$	3,046.2	$	3,068.6

Prior Year Development by Line of Business

When trends emerge that we believe affect the future settlement of claims, we adjust our reserves accordingly. Reserve adjustments are reflected in the Consolidated Statements of Income as adjustments to losses and LAE. Often, we recognize these adjustments in periods subsequent to the period in which the underlying loss event occurred. These types of subsequent adjustments are disclosed and discussed separately as “prior year reserve development”. Such development can be either favorable or unfavorable to our financial results.

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The table below summarizes the change in the provision for insured events of prior years by line of business.

	Six Months Ended June 30,
(In millions)	2005			2004
Increase (decrease) in loss provision for insured events of prior years:
Personal Automobile	$	(13.3	)	$	(5.8	)
Homeowners and other		(4.5	)		(2.0	)
Total Personal		(17.8	)		(7.8	)
Worker’s Compensation		4.5			3.9
Commercial Automobile		(0.4	)		(4.7	)
Commercial Multiple Peril		(7.8	)		(9.3	)
Other Commercial		(1.8	)		8.6
Total Commercial		(5.5	)		(1.5	)
Voluntary Pools		1.2			1.8
Decrease in loss provision for insured events of prior years		(22.1	)		(7.5	)
Decrease in LAE provision for insured events of prior years		(7.5	)		(11.2	)
Decrease in total loss and LAE provision for insured events of prior years	$	(29.6	)	$	(18.7	)

Estimated loss reserves for claims occurring in prior years developed favorably by $22.1 million and $7.5 million during the first six months of 2005 and 2004, respectively. The favorable loss reserve development during the first six months of 2005 is primarily the result of a decrease in personal lines claim frequency and claim severity in the 2004 accident year. In addition, the commercial multiple peril line and other commercial lines experienced lower claim severity in the most recent accident years. Partially offsetting these items was adverse development in the workers’ compensation line during the first six months of 2005, which is primarily the result of increased medical costs and long term attendant care.

The favorable loss reserve development during the first six months of 2004 is primarily the result of a decrease in personal and commercial automobile and commercial multiple peril claim severity. Partially offsetting these items was adverse development in the other commercial line during the first six months of 2004, which is primarily the result of case reserve strengthening.

During the first six months of 2005 and 2004, estimated LAE reserves for claims occurring in prior years developed favorably by $7.5 million and $11.2 million, respectively. The favorable development in 2005 is primarily attributable to the aforementioned improvement in ultimate loss activity on prior accident years which results in the decrease of ultimate loss adjustment expenses. Development in both periods was also favorably affected by claims process improvement initiatives taken by us during the 1997 to 2001 calendar-year period. Since 1997, we have lowered claim settlement costs through increased utilization of in-house attorneys and consolidation of claim offices. As actual experience begins to establish trends inherent within the improved claim settlement process, the actuarial reserving process recognizes these trends, resulting in favorable development. Since we believe that the impact of these actions has been previously recognized, we expect less favorable LAE prior year reserve development from these process improvements. This fact is reflected in the decline in favorable LAE prior year reserve development for the six months ended June 30, 2005 versus the same period in 2004.

Asbestos and Environmental Reserves

Although we do not specifically underwrite policies that include asbestos, environmental damage and toxic tort liability, we may be required to defend such claims. Ending loss and LAE reserves for all direct business written by our property and casualty companies related to asbestos, environmental damage and toxic tort liability, included in the reserve for losses and LAE, were $25.3 million and $24.7 million at June 30, 2005 and December 31, 2004, respectively, net of reinsurance of $16.1 million and $16.3 million at June 30, 2005 and December 31, 2004, respectively. The outstanding reserves for direct business asbestos and environmental damage have remained relatively consistent for the last three years. As a result of our historical direct underwriting mix of commercial lines policies toward smaller and middle market risks, past asbestos, environmental damage and toxic tort liability loss experience has remained minimal in relation to our total loss and LAE incurred experience.

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In addition, and not included in the numbers above, we have established loss and LAE reserves for assumed reinsurance and pool business with asbestos, environmental damage and toxic tort liability of $48.0 million and $48.2 million at June 30, 2005 and December 31, 2004, respectively. These reserves relate to pools in which we have terminated our participation; however, we continue to be subject to claims related to years in which we were a participant. A significant part of our pool reserves relates to our participation in the Excess and Casualty Reinsurance Association (“ECRA”) voluntary pool from 1950 to 1982. In 1982, the pool was dissolved and since that time, the business has been in runoff. Our percentage of the total pool liabilities varied from 1.15% to 6.00% during these years. Our participation in this pool has resulted in average paid losses of $2.0 million annually over the past ten years. Because of the inherent uncertainty regarding the types of claims in these pools, we cannot provide assurance that our reserves will be sufficient. Additionally, we have been advised by the ECRA pool that an independent actuarial review will be forthcoming.

We estimate our ultimate liability for asbestos, whether resulting from direct business or assumed reinsurance and pool business, environmental and toxic tort liability claims based upon currently known facts, reasonable assumptions where the facts are not known, current law and methodologies currently available. Although these outstanding claims are not significant, their existence gives rise to uncertainty and are discussed because of the possibility that they may become significant. We believe that, notwithstanding the evolution of case law expanding liability in asbestos and environmental claims, recorded reserves related to these claims are adequate. In addition, we are not aware of any litigation or pending claims that are expected to result in additional material liabilities in excess of recorded reserves. Nevertheless, the asbestos, environmental and toxic tort liability reserves could be revised in the near term if the estimates used in determining the liability are revised, including, as a result of new actuarial reviews of the ECRA pools or otherwise, and any such revisions could have a material adverse effect on our results of operations for a particular quarter or annual period or on our financial position.

Life Companies

The following table summarizes the results of operations for the Life Companies segment for the periods indicated:

	Quarter Ended June 30,						Six Months Ended June 30,
(In millions)	2005			2004			2005			2004
Segment revenues
Premiums	$	5.5		$	6.1		$	24.6		$	26.3
Fees:
Fees from surrenders		8.3			12.3			17.5			26.1
Other proprietary product fees		52.9			59.0			107.9			121.3
Net investment income		47.1			55.9			97.4			112.8
Other income		12.3			13.1			24.4			27.9
Total segment revenue		126.1			146.4			271.8			314.4
Policy benefits, claims and losses		58.0			65.8			134.7			131.2
Policy acquisition expenses		27.8			31.1			63.3			63.4
Other operating expenses		45.6			55.8			86.5			116.3
Segment (loss) income	$	(5.3	)	$	(6.3	)	$	(12.7	)	$	3.5

Quarter Ended June 30, 2005 Compared to Quarter Ended June 30, 2004

Life Companies’ segment loss was $5.3 million in the second quarter of 2005 compared to loss of $6.3 million in the second quarter of 2004. While certain transactions may impact several income statement line items, the following items contributed to the overall change in segment income. First, the combined effect of decreased GMDB reserve expenses under SOP 03-1 and derivative losses associated with the GMDB hedging program, both net of DAC, was favorable by $2.8 million in the second quarter of 2005 compared to the same period in 2004. Also, there was a $2.5 million decrease in DAC amortization primarily caused by market performance and lower annuity redemptions in the second quarter of 2005 compared to the second quarter of 2004. These items were partially offset by a $4.0 million provision established in response to an ongoing informal SEC investigation related to market timing (see Contingencies) and to a lesser extent the continued runoff of our variable life and annuity business, resulting in lower fees, partially offset by lower DAC amortization.

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Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004

Life Companies’ segment income decreased $16.2 million, to a $12.7 million loss in the first six months of 2005. This decrease was primarily the result of the aforementioned $4.0 million provision related to market timing and the continued runoff of our variable life and annuity business which reduced profits by $3.9 million as a result of lower fees, partially offset by lower DAC amortization and lower expenses. Additionally, interest margins on GICs decreased $2.8 million, primarily from lower average assets. Also, net investment income decreased $2.7 million primarily resulting from lower income from partnership investments. Finally, the combined effect of increased GMDB reserve expenses under SOP 03-1 and derivative losses associated with the GMDB hedging program, both net of DAC, was unfavorable by $1.2 million in first six months of 2005 compared to the same period in 2004.

Net Investment Income

Net investment income declined $8.8 million, to $47.1 million for the second quarter of 2005 and $15.4 million, to $97.4 million for the six months ended June 30, 2005. The decline in net investment income reflects a decrease in average general account assets, principally resulting from maturities of long-term funding agreements and a decrease in pre-tax yields on fixed maturity securities. Average pre-tax yields on fixed maturities decreased to 5.7% for the first six months of 2005 compared to 5.9% for the first six months of 2004. The decline in average pre-tax yields is due to sales and maturities of higher yielding fixed maturity securities to fund the maturities of long-term funding agreements. We expect that the lower prevailing fixed maturity investment rates reflected in the current interest rate environment will continue to negatively affect our average investment yield.

Net investment income is expected to continue to decline in the second half of 2005 primarily due to the maturity of long-term funding agreements during the first six months of 2005 of $576.0 million and additional maturities of $30.0 million in the third quarter of 2005, along with the reduction of other general account assets as a result of surrenders and redemptions. The reductions in income from long-term funding agreement balances is expected to be offset by a corresponding reduction in interest credited to the holders of such long-term funding agreements.

Deferred Acquisition Costs and Sales Inducements

DAC for variable life products and variable annuities consists of commissions, underwriting costs and other costs that are amortized in proportion to the estimated total gross profits from such products. We estimate that these costs will be earned over the expected life of the insurance contracts to which such costs relate. To estimate the profitability of our insurance contracts, we establish and apply assumptions relating to, among other matters, appreciation of account assets, contract persistency and contract costs (such as those relating to any GMDB feature and fees payable to distributors). We regularly evaluate these assumptions to determine whether recent experience or anticipated trends merit adjustments to such assumptions. For additional information regarding our accounting policy and estimates related to DAC, see “Critical Accounting Estimates.”

The Company’s variable annuity products include contracts that offered enhanced credit rates or bonus payments. These enhanced rates are considered sales inducements under SOP 03-1. Amortization of these sales inducements over the life of the contract is reflected as a policy benefit and is computed using the same methodology and assumptions used in amortizing DAC.

Amortization of sales inducements and policy acquisition expenses decreased $4.0 million, to $30.7 million, in the second quarter of 2005. DAC and sales inducement amortization primarily decreased from the impact of the runoff of the core business, as well as higher equity market returns, which resulted in a decrease to DAC amortization. These decreases were partially offset by the increased DAC amortization related to GMDB hedging program, discussed below.

In the first six months of 2005, amortization of sales inducements and policy acquisition expenses decreased $4.1 million, to $70.3 million. DAC and sales inducement amortization decreased from the impact of the runoff of the core business, partially offset by the GMDB hedging program, discussed below and lower equity market returns, which resulted in an increase to DAC amortization.

Other Operating Expenses

In the second quarter of 2005, other operating expenses decreased $10.2 million, to $45.6 million. The decrease primarily reflects lower interest expense related to trust instruments supported by funding obligations of $8.8 million. In addition, the decrease reflects a $3.8 million pre-tax difference in results from the derivative contracts in connection with the GMDB hedging program, resulting in a $2.1 million loss for the quarter ended June 30, 2005 compared to a $5.9 million loss for the quarter ended June 30, 2004. These decreases in expenses were partially offset by the aforementioned $4.0 million charge related to market timing.

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Included in other operating expenses of $45.6 million is the $4.0 million charge related to market timing, as well as $3.8 million of GIC interest expense related to trust instruments supported by funding obligations and the $2.1 million GMDB hedging program loss discussed above. Of the remaining $35.7 million of other operating expenses, we estimate that approximately 35% vary directly with policy count and we expect to manage these expenses down over time as the policy count decreases. The balance of these expenses are relatively fixed and primarily associated with technology, finance, human resources and legal activities that do not decline proportionally with policy count. These expenses also include allocations of corporate overhead.

In the first six months of 2005, other operating expenses decreased $29.8 million, to $86.5 million. The decrease reflects a $15.0 million pre-tax difference in results from the derivative contracts in connection with the GMDB hedging program, resulting in a $3.7 million gain for the six months ended June 30, 2005 compared to $11.3 million loss for the six months ended June 30, 2004. The decrease also reflects lower interest expense associated with our trust instruments supported by funding obligations of $11.9 million. Additionally, lower commissions and insurance operation expenses, partially offset by the aforementioned charge related to market timing also contributed to the decrease in expenses.

GIC Derivative Instruments

We use derivative instruments to hedge our GIC portfolio (see Derivative Instruments). For floating rate GIC liabilities that are matched with fixed rate securities, we manage the interest rate risk by hedging with interest rate swap contracts designed to pay fixed and receive floating interest. In addition, some funding agreements are denominated in foreign currencies. To mitigate the effect of changes in currency exchange rates, we hedge this risk by entering into foreign exchange swap and futures contracts, as well as compound foreign currency/interest rate swap contracts to hedge our net foreign currency exposure. These hedges resulted in a $2.1 million reduction in net investment income during the second quarter of 2005, as compared to a $5.4 million reduction in net investment income during the second quarter of 2004. Additionally, the hedges resulted in a $7.2 million reduction in net investment income during the first six months of 2005, as compared to a $10.9 million reduction in net investment income during the first six months of 2004. These reductions were offset by similar reductions in GIC interest credited during the quarters, and the six months ended June 30, 2005 and 2004. Although we do not expect our hedges to become ineffective, in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivatives and Hedging Activities, there can be no assurance that we will not experience losses from ineffective hedges in the future.

Guaranteed Minimum Death Benefits

The GMDB feature provides annuity contract holders with a guarantee that the benefit received at death will be no less than a prescribed minimum amount. This minimum amount is based on the net deposits paid into the contract, the net deposits accumulated at a specified rate (most commonly 5% annually), the highest historical account value on a contract anniversary, or more typically the greatest of these values. If the GMDB is higher than the current account value at the time of death, we incur a cost equal to the difference. As of June 30, 2005, the difference between the GMDB and the current account value (the “net amount at risk”) for all existing contracts was approximately $2.0 billion, compared to approximately $1.9 billion at December 31, 2004. The increase from December 31, 2004 was primarily the result of a decrease in equity market values during the six months ended June 30, 2005. For each one percent increase or decrease in the S&P 500 Index from June 30, 2005 levels, the net amount at risk is estimated to decrease or increase, respectively, by approximately $50 million to $70 million. Other factors, such as interest rates, the relative performance of our funds and persistency of existing accounts, may also affect the net amount at risk.

On January 1, 2004, we adopted Statement of Position 03-1. SOP 03-1 provides guidance for, among other items, determining liabilities for GMDB costs. The determination of the GMDB reserve under SOP 03-1 is complex and requires various assumptions including, among other items, mortality, estimates of future market returns and expected contract persistency. On January 1, 2004, we recorded an $88.0 million pre-tax charge to earnings, reflected in the cumulative effect of a change in accounting principle in the Consolidated Statements of Income. This reflects adjustments to both our GMDB reserve and our DAC asset, as well as additional reserves required for our product features. The reserve calculation required under SOP 03-1 resulted in an increase of GMDB expenses of $2.5 million and $8.0 million for the second quarter and six months ended June 30, 2005, respectively. Subsequent changes in the reserve will continue to be included in segment income. Future changes in market levels, persistency of existing accounts, including the effect on the age distribution, specific fund performance, interest rates, mortality and other factors, may result in material changes to GMDB costs and related expenses.

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On December 3, 2003, we implemented a hedging program for our in-force variable annuity policies with GMDB features. The program’s primary purpose is to provide us with an economic hedge against increased GMDB claims which could arise from declines in the equity market below levels at December 3, 2003. Also, the program is expected to reduce the volatility in statutory capital and risk-based capital levels from the effects of future equity market movements and allows us to retain most of the benefits of reduced GMDB costs in a rising equity market. The hedge program does not provide protection from the GMDB cost associated with the net amount at risk of $2.7 billion in existence on December 3, 2003. Over time, the actual amount of the unhedged economic cost will vary depending on equity market levels, redemption rates, and certain GMDB product features, such as roll-up (net deposits accumulated at a specified rate) or ratchet (highest historical account value on a contract anniversary). (See also, Note 3, Adoption of Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts for further information).

As the block of annuity contractholders ages, our mortality costs, as a percentage of the net amount at risk, will increase due to premium increases related to the GMDB mortality reinsurance program. The mortality reinsurance program, which extends until 2012, provides protection against adverse mortality experience but not against the increasing age of annuitants. The hedge program also does not protect against the reduction in proprietary product fees and cash flow which would result from the reduction in net account balances following a decline in the equity market.

We also expect that the hedge program will partially offset the volatility associated with the GMDB reserve caused by equity market changes. If the equity market declines, we believe that gains on the hedge derivatives will partially offset any increases in the GMDB reserve required under SOP 03-1. Alternately, if the equity market rises, we expect a decrease in the GMDB reserve to be partially offset by losses from the hedge derivatives. There can be no assurance that the hedge program will be effective in offsetting the costs of GMDB and related expenses.

The program utilizes a dynamic hedging approach involving exchange traded futures contracts. Under the program, hedge contracts are expected to generate cash to fund increases in the GMDB claims resulting from declines in the equity market. As part of the program, investment returns of a majority of the funds underlying our variable annuity products were correlated with widely followed indices which have exchange traded futures contracts. There can be no assurance that the returns of the underlying funds will be perfectly correlated to the returns of the indices. Also, certain market risks such as those relating to interest rates have not been hedged; such interest rate risk is predominantly in separate accounts which have underlying bond funds, which represent approximately 13% of separate account assets as of June 30, 2005. As interest rates rise, account values decrease, and the net amount at risk and associated reinsurance premium increase. Consequently, we would expect an increase in unhedged GMDB cost.

In connection with our GMDB hedging program, we incurred $2.1 million in pre-tax losses and $3.7 million in pre-tax gains on the derivative contracts in the second quarter and first six months of 2005, respectively. The second quarter losses were increased by higher GMDB expenses of $2.5 million and partially offset by decreased DAC amortization of $0.2 million. The gains in the first six months of 2005 were more than offset by increased GMDB expense and DAC amortization of $8.0 million and $2.1 million respectively. In the second quarter of 2004, the pre-tax losses on derivative contracts were $5.9 million which were increased by higher expenses of $3.4 million and partially offset by lower DAC amortization of $2.1 million. We incurred $11.3 million in pre-tax losses on derivative contracts in the first six months of 2004 which were partially offset by the combined effect of lower GMDB expenses of $2.3 million and decreased DAC amortization of $3.8 million.

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The following table provides a reconciliation of our beginning and ending reserve for GMDB utilizing generally accepted accounting principles. These reserves differ from the statutory GMDB reserves disclosed in the section “Statutory Capital of Insurance Subsidiaries”, which are calculated using prescribed statutory accounting principles.

	Quarter Ended						Six Months Ended			Quarter Ended			Six Months Ended
(In millions)	June 30, 2005			March 31, 2005			June 30, 2005			June 30, 2004			June 30, 2004
Reserve for GMDB, beginning of period	$	75.8		$	74.6		$	74.6		$	97.2		$	26.2
Adoption of SOP 03-1		—			—						—			80.6
Provision for GMDB:
GMDB expense incurred		11.0			11.3			22.3			12.3			24.9
Volatility (1)		2.5			5.5			8.0			3.4			(2.3	)
		13.5			16.8			30.3			15.7			22.6
Claims, net of reinsurance (2):
Claims from policyholders		(16.6	)		(16.0	)		(32.6	)		(18.4	)		(38.0	)
Claims ceded to reinsurers (3)		16.2			15.6			31.8			16.5			35.3
		(0.4	)		(0.4	)		(0.8	)		(1.9	)		(2.7	)
GMDB reinsurance premiums paid (2)		(15.4	)		(15.2	)		(30.6	)		(16.2	)		(31.9	)
Reserve for GMDB, end of period	$	73.5		$	75.8		$	73.5		$	94.8		$	94.8

(1) Volatility reflects the difference between actual and expected investment performance, persistency, age distribution, mortality and other factors that are assumptions within the GMDB reserving model.

(2) We maintain a GMDB mortality reinsurance program covering the incidence of mortality on variable annuity policies. We pay the reinsurers monthly premiums based on variable annuity net amount at risk in exchange for reimbursement of the net amount at risk portion of qualified cash claims. These premiums are significantly lower on products sold through our former agency channel due to the lower average age of the business. We retain the market risk associated with the net amount at risk on the variable annuity business (see GMDB hedge program discussion included in Guaranteed Minimum Death Benefit section).

(3) Claims ceded to reinsurers exclude those contracts with a date of death prior to December 1, 2002 and certain other claims.

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Annuity Account Values and Redemptions

The following tables summarize annuity account values and redemption activity for the Life Companies segment according to the three distribution channels we used prior to discontinuing sales of proprietary products in the fourth quarter of 2002. Redemptions include both full policy and partial policy surrenders, withdrawals and death benefits (to the extent equal to account value).

	Quarter Ended June 30, 2005						Quarter Ended March 31, 2005						Quarter Ended June 30, 2004
			Redemptions (2)						Redemptions (2)						Redemptions (2)
(In millions)	Account Values (1)		Amount		Rates		Account Values (1)		Amount		Rates		Account Values (1)		Amount		Rates
Agency	$	3,288.3	$	200.3	25	%	$	3,591.5	$	238.3	28	%	$	4,188.4	$	304.9	31	%
Select		2,477.5		94.0	15			2,644.9		112.8	18			2,781.2		96.3	14
Partners		3,981.0		156.5	16			4,224.1		175.4	17			4,374.7		154.7	15
Total	$	9,746.8	$	450.8	19	%	$	10,460.5	$	526.5	21	%	$	11,344.3	$	555.9	20	%

	Six Months Ended June 30, 2005						Six Months Ended June 30, 2004
			Redemptions (2)						Redemptions (2)
(In millions)	Account Values (3)		Amount		Rates		Account Values (3)		Amount		Rates
Agency	$	3,591.5	$	438.6	26	%	$	4,364.3	$	639.8	31	%
Select		2,644.9		206.8	16			2,852.3		221.4	16
Partners		4,224.1		331.9	17			4,526.0		328.8	15
Total	$	10,460.5	$	977.3	20	%	$	11,742.6	$	1,190.0	21	%

(1) Account values at June 30 reflect market values as of April 1 of the year indicated; account values at March 31 reflect market values as of January 1 of the year indicated.

(2) Redemptions reflect activity for the period indicated.

(3) Account values at June 30 reflect market values as of January 1 of the year indicated.

The following table reflects the average age of our inforce business as of the periods indicated:

	June 30, 2005	December 31, 2004	December 31, 2003
Agency	62	62	61
Select	71	71	70
Partners	74	74	73
Total	69	69	68

Redemption levels in the second quarter of 2005 were lower than both the first quarter of 2005 and the second quarter of 2004, and redemptions in the first six months of 2005 were lower than those in the first six months of 2004, particularly in our former Agency channel. The higher level of redemptions in the second quarter and first six months of 2004 was a result of our cessation of retail sales operations through VeraVest and the termination of the contracts of the registered representatives who constituted our former Agency channel. However, our mix of product surrenders continues to be unfavorable in the current quarter because a higher proportion of the total surrenders came from our former agency distribution channel. This channel has a lower average age of annuitant than the other channels. Therefore, should the higher relative surrender rates in this channel continue, our mortality costs as a percentage of overall net amount at risk will increase. Notwithstanding the recent redemption patterns, we believe that our current overall DAC assumptions include reasonable redemption levels. However, we cannot provide assurance that ultimately redemptions will not differ from our assumptions. Such differences could materially, adversely affect DAC amortization in future periods, as well as GMDB costs and reserves, and segment income excluding certain non-cash items.

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Life Companies Segment Income Excluding Certain Non-Cash Items

In addition to our review of segment income, we also utilize an alternative non-GAAP method of viewing our Life Companies business. We adjust the segment income for the Life Companies for various non-cash items. We believe this measure allows for the review of the performance of this business based on the current cash operations. In addition, this measure provides us with information regarding cash flows of this business that we can use in assessing the funding requirements to support these operations and any excess cash the business may be generating. However, this measure does not reflect statutory earnings or increases in statutory surplus or amounts available to dividend from the life insurance companies, which in any case, are subject to regulatory approval. This measure is also subject to fluctuations resulting from gains or losses in our GMDB hedging program.

We adjust segment income for DAC and amortization of sales inducements because the cash payments related to the acquisition of the remaining business were made in prior years. Since we are no longer selling the products that generated these deferred costs, we do not expect significant future cash payments associated with DAC and sales inducements. Additionally, we adjust segment income for the change in our GMDB reserve because this change represents the difference between the cash GMDB payments and the related expense reflected in segment income. The items excluded from segment income, including DAC and sales inducement amortization, the change in our GMDB reserve, depreciation and amortization of certain assets may be significant in understanding and assessing our financial performance. Segment income excluding certain non-cash items, should not be construed as a substitute for segment income or net income determined in accordance with GAAP.

Although this measure excludes DAC and sales inducement amortization and changes in the GMDB reserves, it is sensitive to movements in the equity market. The primary drivers of this sensitivity are gains or losses on the GMDB hedging program derivatives, changes in the net amount at risk and the associated reinsurance premiums, and the fee income generated by separate account balances. This measure is also sensitive to surrender and withdrawal rates (which increase fees at the time of surrender if policies are within the surrender charge period, but result in lower ongoing proprietary product fees) and changes in surrender patterns, which may impact fees and GMDB costs. A sustained declining or flat equity market would result in declining fees as a result of the equity market and surrenders, while the aging annuitant base would result in higher GMDB costs. In certain equity market scenarios, such results could cause this measure to become negative and cause statutory losses which would reduce statutory capital.

The following tables provide a reconciliation of segment loss before taxes to segment income excluding certain non-cash items.

	Quarter Ended
(In millions)	June 30, 2005			March 31, 2005			June 30, 2004
Segment loss	$	(5.3	)	$	(7.4	)	$	(6.3	)
Deferred acquisition cost operating amortization and amortization of sales inducements, net		30.4			39.2			33.6
Property, plant and equipment, net		1.5			1.3			0.9
Statement of Position 98-1 amortization, net		0.7			0.9			1.1
Change in guaranteed minimum death and income benefit reserves		(1.9	)		1.6			(2.4	)
Total segment income excluding certain non-cash items	$	25.4		$	35.6		$	26.9

	Six Months Ended June 30,
	2005			2004
Segment (loss) income	$	(12.7	)	$	3.5
Deferred acquisition cost operating amortization and amortization of sales inducements, net		69.6			71.6
Property, plant and equipment depreciation, net		2.8			1.8
Statement of Position 98-1 amortization, net		1.6			2.3
Change in guaranteed minimum death and income benefit reserves		(0.3	)		(12.0	)
Total segment income excluding certain non-cash items	$	61.0		$	67.2

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Segment income excluding certain non-cash items decreased $10.2 million, to $25.4 million in the second quarter of 2005, compared to $35.6 million in the first quarter of 2005. The decrease is primarily due to increased losses of $7.9 million on GMDB hedging program derivatives and the aforementioned $4.0 million charge related to market timing, partially offset by increased GIC results of $2.7 million. Segment income excluding certain non-cash items decreased $1.5 million, to $25.4 in the second quarter of 2005, compared to $26.9 million in the second quarter of 2004 due to lower asset based and surrender fees and the charge related to market timing. These decreases were partially offset by lower policy benefits, increased gains on GMDB hedging program derivatives and lower expenses. For similar reasons, segment income excluding certain non-cash items decreased $6.2 million to $61.0 million in the first six months of 2005, compared to $67.2 million in the first six months of 2004.

Investment Portfolio

We held general account investment assets diversified across several asset classes, as follows:

	June 30, 2005				December 31, 2004
(In millions, except percentage data)	Carrying Value		% of Total Carrying Value		Carrying Value		% of Total Carrying Value
Fixed maturities (1)	$	7,254.3	89.7	%	$	7,822.2	89.4	%
Equity securities (1)		17.3	0.2	%		17.0	0.2	%
Mortgages		108.6	1.3	%		114.8	1.3	%
Policy loans (1)		251.9	3.1	%		256.4	2.9	%
Cash and cash equivalents (1)		413.5	5.1	%		486.5	5.6	%
Other long-term investments		46.3	0.6	%		55.3	0.6	%
Total	$	8,091.9	100.0	%	$	8,752.2	100.0	%

(1) We carry these investments at fair value.

Total investment assets decreased $660.3 million, or 7.5%, to $8.1 billion during the first six months of 2005, as a result of decreases in fixed maturities of $567.9 million and cash and cash equivalents of $73.0 million. Fixed maturities decreased primarily due to the maturity of long-term funding agreements in our Life Companies segment and market value depreciation. Cash and cash equivalents decreased primarily as a result of a decrease in collateral held related to our securities lending program, as well as the maturity of long-term funding agreements in our Life Companies segment.

Our fixed maturity portfolio is comprised primarily of 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 (“NAIC”), investment grade securities comprised 93.5% at June 30, 2005 and 94.2% at December 31, 2004 of our total fixed maturity portfolio.

The following table provides information about the credit quality of our fixed maturities:

(In millions)		June 30, 2005				December 31, 2004
NAIC Designation	Rating Agency Equivalent Designation	Amortized Cost		Carrying Value		Amortized Cost		Carrying Value
1	Aaa/Aa/A	$	4,715.4	$	4,850.9	$	4,976.3	$	5,113.8
2	Baa		1,859.7		1,929.1		2,167.5		2,257.6
3	Ba		241.2		245.7		220.1		233.7
4	B		140.4		141.4		132.8		142.6
5	Caa and lower		58.4		71.1		44.8		56.3
6	In or near default		10.9		16.1		11.9		18.2
Total fixed maturities		$	7,026.0	$	7,254.3	$	7,553.4	$	7,822.2

Although we expect to invest new funds primarily in cash, cash equivalents and investment grade fixed maturities, we may invest a portion of new funds in below investment grade fixed maturities or equity securities. The average yield on fixed maturities was 5.6% for June 30, 2005 and 5.8% for June 30, 2004. This decline reflects lower prevailing fixed maturity investment rates and an increased emphasis on higher credit quality, shorter duration fixed maturity investments. We expect that the lower prevailing fixed maturity investment rates reflected in the current interest rate environment will continue to negatively affect our average investment yield.

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At June 30, 2005, $133.7 million of our fixed maturities were invested in traditional private placement securities, as compared to $157.7 million at December 31, 2004. Fair values of traditional private placement securities are determined by internally developed pricing models, including the use of discounted cash flow analyses.

We recognized $4.6 million of realized losses on other-than-temporary impairments of fixed maturities for the first six months of 2005, as compared to $2.3 million for the first six months of 2004, principally resulting from our exposure to below investment grade securities. Other-than-temporary impairments of fixed maturities for the first six months of 2005 included $1.7 million related to the finance sector; $1.6 million related to the airline/transportation sector; $1.0 million related to industrial sector; and $0.3 million related to securitized investments. For the first six months of 2004, all of the other-than-temporary impairments of fixed maturities were related to the airline/transportation sector. We recognized $0.2 million of realized losses on other-than-temporary impairments of equity securities for the first six months of 2005, as compared to $0.1 million for the first six months of 2004.

In our determination of other-than-temporary impairments, we consider several factors and circumstances, including the issuer’s overall financial condition; the issuer’s credit and financial strength ratings; the issuer’s financial performance, including earnings trends, dividend payments, and asset quality; a weakening of the general market conditions in the industry or geographic region in which the issuer operates; a prolonged period in which the fair value of an issuer’s securities remains below our cost; and with respect to fixed maturity investments, any factors that might raise doubt about the issuer’s ability to pay all amounts due according to the contractual terms. We apply these factors to all securities. Other-than-temporary impairments are recorded as a realized loss, which serves to reduce net income and earnings per share. Temporary declines in market value are recorded as unrealized losses, which do not affect net income and earnings per share but reduce other comprehensive income. We cannot provide assurance that the other-than-temporary impairments will, in fact, be adequate to cover future losses or that we will not have substantial additional impairments in the future.

The following table provides information about our fixed maturities and equity securities that have been continuously in an unrealized loss position:

	June 30, 2005				December 31, 2004
(In millions)	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
Investment grade fixed maturities:
0-6 months	$	2.8	$	357.9	$	4.2	$	652.7
7-12 months		3.1		317.4		6.1		332.0
Greater than 12 months		12.3		523.7		15.5		425.4
Total investment grade fixed maturities		18.2		1,199.0		25.8		1,410.1
Below investment grade fixed maturities:
0-6 months		6.4		148.0		0.4		36.9
7-12 months		0.4		12.0		1.9		20.3
Greater than 12 months		0.6		5.8		—		1.0
Total below investment grade fixed maturities		7.4		165.8		2.3		58.2
Equity securities		—		—		0.1		0.7
Total fixed maturities and equity securities	$	25.6	$	1,364.8	$	28.2	$	1,469.0

We had $25.6 million of gross unrealized losses on fixed maturities and equity securities at June 30, 2005, as compared to $28.2 million at December 31, 2004. Approximately $3.8 million of the gross unrealized losses at June 30, 2005 relate to investment grade fixed maturity obligations of the U.S. Treasury, U.S. government and agency securities, states and political subdivisions, compared to $5.5 million at December 31, 2004. At both June 30, 2005 and December 31, 2004, substantially all below investment grade securities with an unrealized loss had been rated by the NAIC, Standard & Poor’s or Moody’s.

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We view the gross unrealized losses of fixed maturities and equity securities as being temporary as it is our assessment that these securities will recover in the near-term. Furthermore, as of June 30, 2005, we had the intent and ability to retain such investments for a period of time sufficient to allow for this anticipated recovery in fair value. The risks inherent in our assessment methodology include the risk that, subsequent to the balance sheet date, market factors may differ from our expectations; we may decide to subsequently sell a security for unforeseen business needs; or changes in the credit assessment or equity characteristics from our original assessment may lead us to determine that a sale at the current value would maximize recovery on such investments. To the extent that there are such adverse changes, the unrealized loss would then be realized and we would record a charge to earnings. Although unrealized losses are not reflected in the results of financial operations until they are realized or deemed “other than temporary”, the fair value of the underlying investment, which does reflect the unrealized loss, is reflected in our Consolidated Balance Sheets and our Consolidated Statements of Comprehensive Income.

The following table sets forth gross unrealized losses for fixed maturities by maturity period, and for equity securities at June 30, 2005 and December 31, 2004. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties, or we may have the right to put or sell the obligations back to the issuers. Mortgage backed securities are included in the category representing their ultimate maturity.

(In millions)	June 30, 2005		December 31, 2004
Due in one year or less	$	0.4	$	1.0
Due after one year through five years		5.3		3.4
Due after five years through ten years		12.3		10.9
Due after ten years		7.6		12.8
Total fixed maturities		25.6		28.1
Equity securities		—		0.1
Total fixed maturities and equity securities	$	25.6	$	28.2

We had fixed maturity securities with a carrying value of $12.9 million on non-accrual status at June 30, 2005, as compared to $29.8 million at December 31, 2004. The effect of non-accruals, compared with amounts that would have been recognized in accordance with the original terms of the fixed maturities, was a reduction in net investment income of $1.7 million for the six months ended June 30, 2005, as compared to a reduction of $3.4 million for the six months ended June 30, 2004. We expect that defaults in the fixed maturities portfolio may continue to negatively affect investment income.

Derivative Instruments

We maintain an overall risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by foreign currency, equity market and interest rate volatility. As such, we enter into foreign currency swap and futures contracts, as well as compound foreign currency/interest rate swap contracts, to hedge foreign currency and interest rate exposure on specific funding agreement liabilities. We also entered into various types of interest rate swap contracts to hedge exposure to interest rate fluctuations on floating rate funding agreement liabilities that were matched with fixed rate securities. Also, in the first quarter of 2005, we sold futures to hedge the embedded gains in certain bonds identified to be liquidated to settle the maturity of a particular long-term funding agreement.

On December 3, 2003, we implemented an economic hedging program involving exchange traded futures contracts to hedge against increased GMDB claims that could arise from declines in the equity market below levels at December 3, 2003 (See Life Companies – Guaranteed Minimum Death Benefits). The program is expected to reduce the volatility in statutory capital and risk-based capital levels from the effects of future equity market movements and allows us to retain most of the benefits of reduced GMDB costs in a rising equity market. During the second quarter of 2005, we recognized $2.1 million in losses, reflected in Life Companies segment income, as compared to $5.9 million of losses in the second quarter of 2004. For the six months ended June 30, 2005, we recognized $3.7 million of gains, also reflected in Life Companies segment income, as compared to $11.3 million losses for the six months ended June 30, 2004. The GMDB hedges do not qualify for hedge accounting under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities.

Income Taxes

We file a consolidated United States federal income tax return that includes AFC and its domestic subsidiaries (including non-insurance operations). 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 statutory restrictions on the percentage of eligible non-life tax losses that can be applied to offset life company taxable income.

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Quarter Ended June 30, 2005 Compared to Quarter Ended June 30, 2004

The provision for federal income taxes before the cumulative effect of a change in accounting principle was an expense of $6.1 million during the second quarter of 2005 compared to $5.5 million during the same period in 2004. These provisions resulted in consolidated effective federal tax rates of 7.8% and 14.5% for the quarters ended June 30, 2005 and 2004, respectively. The current year effective rate reflects a $12.9 million benefit representing a reduction in federal income tax reserves for prior years, resulting from ongoing Internal Revenue Service audits. We realized a higher proportion of tax deductions taken for equity dividends received by our separate accounts than we had previously anticipated. Absent the aforementioned $12.9 million benefit, the effective tax rate in the current quarter is 24.4%. The increase in the current year is primarily due to higher underwriting income.

Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004

The provision for federal income taxes before the cumulative effect of a change in accounting principle was $20.6 million during the first six months of 2005 compared to a benefit of $17.9 million during the same period in 2004. These provisions resulted in consolidated effective federal tax rates of 14.8% and (21.4%) for the six months ended June 30, 2005 and 2004, respectively. The 2005 effective tax rate reflects the aforementioned $12.9 million benefit. The 2004 effective tax rate reflects a $30.3 million benefit resulting from the settlement of disputed items in our federal tax returns filed for 1979 to 1991. The largest of the disputed items relates to deductions taken for increased death benefits pertaining to certain life insurance contracts existing in 1982 and 1983. Under this settlement, we received a refund of amounts paid for these years, as well as various tax credits that have been applied to offset federal tax liabilities in other years.

Absent the aforementioned benefits, the effective tax rates in 2005 and 2004 are 24.1% and 14.8%, respectively. The increase in the current year is primarily due to the increase in underwriting income and a reduced level of tax-exempt interest in the current year.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations are based upon the consolidated financial statements. These statements have been prepared in accordance with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following critical accounting estimates are those which we believe affect the more significant judgments and estimates used in the preparation of our financial statements. Additional information about our other significant accounting policies and estimates may be found in Note 1, “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2004.

Property & Casualty Insurance Loss Reserves

We determine the amount of loss and loss adjustment expense reserves (the “loss reserves”), as discussed in “Segment Results – Property and Casualty, Overview of Loss Reserve Estimation Process” based on an estimation process that is very complex and uses information obtained from both company specific and industry data, as well as general economic information. The estimation process is judgmental, and requires us to continuously monitor and evaluate the life cycle of claims on type-of-business and nature-of-claim bases. Using data obtained from this monitoring and assumptions about emerging trends, we develop information about the size of ultimate claims based on historical experience and other available market information. The most significant assumptions used in the estimation process, which vary by line of business, include determining the trend in loss costs, the expected consistency in the frequency and severity of claims incurred but not yet reported to prior year claims, changes in the timing of the reporting of losses from the loss date to the notification date, and expected costs to settle unpaid claims. This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. There are no precise methods, however, for subsequently evaluating the impact of any specific factor on the adequacy of reserves, because the eventual development of reserves is affected by many factors, as noted above.

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Because the amounts of the loss reserves are sensitive to our assumptions, we do not completely rely on only one estimate to determine our loss reserves. We develop several estimates using generally accepted actuarial projection methodologies that result in various loss reserve outcomes. Multiple estimation methods are available for the analysis of ultimate loss reserves. Each estimation method has its own set of assumption variables and its own advantages and disadvantages, with no single estimation method being better than the others in all situations and no one set of assumption variables being meaningful for all product line components. The relative strengths and weaknesses of the particular estimation methods when applied to a particular group of claims can also change over time. Therefore, the actual choice of estimation methods can change with each evaluation. The estimation methods chosen are those that are believed to produce the most reliable indication at that particular evaluation date for the loss reserves being evaluated.

In most cases, multiple estimation methods will be valid for the particular facts and circumstances of the loss reserves being evaluated. This will result in a range of reasonable estimates for any particular loss reserve. The exact boundary points of these ranges are more qualitative than quantitative in nature, since no clear line of demarcation exists to determine when the set of underlying assumptions for an estimation method changes from being reasonable to unreasonable. As a result, we do not believe that the endpoints of these ranges are comparable across companies. In addition, potential interactions among the different estimation assumptions for different product lines make the aggregation of individual ranges a highly judgmental and inexact process. For these reasons, we adopt an estimate that considers all of the actuarial projection methodologies plus other factors not captured by these methodologies and do not consider it appropriate to report a range of estimates.

Regarding voluntary and involuntary pools, managers of each pool provide us with loss estimates. We adopt an estimate that considers this information and other facts. We exercise judgment based upon our knowledge of the property and casualty business, review of the outcome of actuarial studies, historical experience and other factors to record an estimate which reflects our expected ultimate loss and loss adjustment expenses.

When trends emerge that we believe affect the future settlement of claims, we would adjust our reserves accordingly (see Segment Results – Property and Casualty, Management’s Review of Judgments and Key Assumptions for further explanation of factors affecting our reserve estimates, our review process and our process for determining changes to our reserve estimates). Reserve adjustments are reflected in the Consolidated Statements of Income as adjustments to losses and loss adjustment expenses. Often, these adjustments are recognized in periods subsequent to the period in which the underlying loss event occurred. These types of subsequent adjustments are disclosed and discussed separately as “prior year reserve development”. Such development can be either favorable or unfavorable to our financial results. An increase or decrease in reserve estimates would result in a corresponding decrease or increase in financial results. For example, a reserve change of $22 million would have a one percentage point impact on the loss and LAE ratio, based on 2004 full year earned premiums. Each one percentage point change in the loss and LAE ratio would have a $22 million impact on segment income.

Property & Casualty Reinsurance Recoverables

We share a significant amount of insurance risk of the primary underlying contracts with various insurance entities through the use of reinsurance contracts. As a result, when we experience loss events that are subject to the reinsurance contract, reinsurance recoveries are recorded. The amount of the reinsurance recoverable can vary based on the size of the individual loss or the aggregate amount of all losses in a particular line, book of business or an aggregate amount associated with a particular accident year. The valuation of losses recoverable depends on whether the underlying loss is a reported loss, or an incurred but not reported loss. For reported losses, we value reinsurance recoverables at the time the underlying loss is recognized, in accordance with contract terms. For incurred but not reported losses, we estimate the amount of reinsurance recoverable based on the terms of the reinsurance contracts and historical reinsurance recovery information and apply that information to the gross loss reserve estimates. The most significant assumption we use is the average size of the individual losses for those claims that have occurred but have not yet been recorded by us. The reinsurance recoverable is based on what we believe are reasonable estimates and is disclosed separately on the financial statements. However, the ultimate amount of the reinsurance recoverable is not known until all losses are settled.

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Variable Products’ Deferred Policy Acquisition Costs and Deferred Sales Inducements

DAC consists of commissions, underwriting costs and other costs, which vary with, and are primarily related to, the production of insurance deposits. Our variable annuity product offerings included contracts that offered enhanced crediting rates or bonus payments, also referred to as sales inducements. Prior to the adoption of SOP 03-1 in 2004, sales inducements were included with our deferred policy acquisition costs. Acquisition costs and sales inducements related to our variable products (variable universal life and variable annuities) are recorded on the balance sheet and amortized through the income statement in proportion to total estimated gross profits over the expected life of the contracts. Our estimated gross profits are based on assumptions including mortality, contract persistency, asset growth rates, expenses associated with policy maintenance and contract costs (such as those relating to any GMDB feature and fees payable to distributors). The principal source of earnings for these policies is from asset-based fees, which can vary in relation to changes in the equity market.

At each balance sheet date, we evaluate the historical and expected future gross profits. Any adjustment in estimated profit requires that the amortization rate be revised retroactively to the date of policy/annuity issuance. The cumulative difference related to prior periods is recognized as a component of the current periods’ amortization, along with amortization associated with the actual gross profits of the period. Lower actual gross profits would typically result in less amortization expense. The converse would also be true. However, if lower gross profits were to continue into the future, a partial permanent impairment of the existing DAC asset may occur.

Decreased persistency and equity market value declines are factors which would lower our estimated gross profits. Decreased persistency not only lowers net fees due to lower average invested assets, it also will increase the cost of the GMDB feature of variable annuity contracts, further reducing profitability. This results in future revenues being insufficient to offset GMDB claims in the near term.

We review the DAC and deferred sales inducement asset quarterly to determine if it is recoverable from future income. If the assets are determined to be unrecoverable, such costs are expensed at the time of determination. The amount of DAC considered recoverable would be reduced in the near-term if the estimate of ultimate or future gross profits is reduced. We would revise the amount of DAC amortization if any of the estimates discussed above were revised. In addition, the disposition of a line of business can result in the permanent impairment of the related DAC and deferred sales inducement asset.

Other-Than-Temporary Impairments

We employ a systematic methodology to evaluate declines in fair values below amortized cost for all investments. The methodology utilizes a quantitative and qualitative process ensuring that available evidence concerning the declines in fair value below amortized cost is evaluated in a disciplined manner. In determining whether a decline in fair value below amortized cost is other-than-temporary, we evaluate the length of time and the extent to which the fair value has been less than amortized cost; the financial condition and near-term prospects of the issuer; the issuer’s credit and financial strength ratings; the issuer’s financial performance, including earnings trends, dividend payments, and asset quality; any specific events which may influence the operations of the issuer; general market conditions; the financial condition and prospects of the issuer’s market and industry; and, our ability and intent to hold the investment. We apply judgment in assessing whether the aforementioned factors have caused an other-than-temporary decline in value. When an other-than-temporary decline in value is deemed to have occurred, we reduce the cost basis of the investment to fair value. This reduction is permanent and is recognized as a realized investment loss (see Investment Portfolio for further discussions regarding other-than-temporary impairments and securities in an unrealized loss position).

Statutory Capital of Insurance Subsidiaries

The NAIC prescribes an annual calculation regarding risk based capital (“RBC”). RBC is a method of measuring the minimum amount of capital appropriate for an insurance company to support its overall business operations in consideration of its size and risk profile. The RBC ratio for regulatory purposes is calculated as total adjusted capital divided by required risk based capital. Total adjusted capital for life insurance companies is defined as capital and surplus, plus asset valuation reserve, plus 50% of dividends apportioned for payment. Total adjusted capital for property and casualty companies is capital and surplus. The Company Action Level is the first level at which regulatory involvement is specified based upon the level of capital. Regulators may take action for reasons other than triggering various RBC action levels.

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RBC ratios for regulatory purposes, as described above, are expressed as a percentage of the capital required to be above the Authorized Control Level (the “Regulatory Scale”); however, in the insurance industry RBC ratios are widely expressed as a percentage of the Company Action Level (without regard to the application of the negative trend test). Set forth below are statutory GMDB reserves, Total Adjusted Capital and RBC ratios for our life insurance subsidiaries and for Hanover, as applicable, as of June 30, 2005, expressed both on the Industry Scale (Total Adjusted Capital divided by the Company Action Level) and Regulatory Scale (Total Adjusted Capital divided by Authorized Control Level):

	Statutory GMDB Reserves (3)
(In millions, except ratios)	Gross of Reinsurance	Net of Reinsurance	Total Adjusted Capital	Company Action Level	Authorized Control Level	RBC Ratio Industry Scale		RBC Ratio Regulatory Scale
AFLIAC (1)	102.8	77.8	631.2	109.8	54.9	575	%	1150	%
FAFLIC	2.6	2.1	234.4	52.3	26.1	448	%	898	%
Hanover (2)	—	—	1,179.5	440.6	220.3	268	%	535	%

(1) AFLIAC’s Total Adjusted Capital includes $234.4 million related to its subsidiary, FAFLIC.

(2) Hanover’s Total Adjusted Capital includes $656.5 million related to its subsidiary, Citizens.

(3) AFLIAC statutory GMDB reserve balances exclude those reserves held by its subsidiary, FAFLIC.

The total adjusted statutory capital position of our life companies continued to improve during the first six months of 2005, increasing from $581.9 million at December 31, 2004 to $631.2 million at June 30, 2005. The increase in adjusted capital is primarily due to a current tax benefit of $42.7 million resulting from the utilization of our net operating loss carryforwards and other tax attributes.

The improvement of our life companies’ RBC ratios reflect lower required risk based capital primarily as a result of lower deposit fund reserves and group annuity contracts.

The NAIC recently adopted the C-3 Phase II RBC instructions for year-end 2005 Life Insurance RBC. We have not yet determined the impact of this adoption on our projected RBC ratios, however, we believe that the new regulation will likely result in a material negative change to our Life Companies RBC ratios.

Liquidity and Capital Resources

Net cash provided by operating activities was $55.4 million during the first six months of 2005, as compared to net cash used of $39.1 million during the same period in 2004. The $94.5 million increase in cash provided by operating activities was primarily due to lower net loss and LAE payments in the property and casualty business and lower net payments from the general account as a result of fewer annuity contract surrenders in our Life Companies segment. Also, in 2004, cash provided by operations included a non-recurring federal income tax settlement for $30.3 million.

Net cash provided by investing activities was $560.7 million during the first six months of 2005, compared to $94.2 million for the same period of 2004. During 2005, cash was primarily provided by net sales of fixed maturity securities, resulting from the maturity of certain long-term funding agreements in our Life Companies segment. During 2004, cash was primarily provided by net sales of fixed maturities and other investment assets, resulting from funding agreement withdrawals and general account annuity redemptions in the Life Companies segment. In 2005 and 2004, these were partially offset by purchases of fixed maturities, resulting from improved segment income in our property and casualty business.

Net cash used in financing activities was $689.1 million during the first six months of 2005, compared to $250.7 million for the same period of 2004. The increase in cash used in 2005 is primarily due to the maturity of certain long-term funding agreements in our Life Companies segment.

At June 30, 2005, AFC, as a holding company, had $125.5 million of cash and fixed maturities. We believe our holding company assets are sufficient to meet our obligations through the remainder of 2005, which consist primarily of interest on the senior debentures and junior subordinated debentures. In addition, we have recently indicated our intention to reinstitute our annual common stock dividend in the fourth quarter of this year in an amount comparable to the 25 cents that we previously paid. We believe that our holding company assets are sufficient to provide for any shareholder dividends, if and when declared by the Board of Directors. Additionally, we expect that it will be necessary for the holding company to pay certain federal income tax liabilities during 2005. However, we currently do not expect that it will be necessary to dividend funds from our insurance subsidiaries in order to fund 2005 holding company obligations.

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We expect to continue to generate sufficient positive operating cash to meet all short-term and long-term cash requirements including the funding of our qualified defined benefit pension plan. The combination of the current interest rate environment reflecting lower yielding fixed maturities and volatile stock market returns have caused many U.S. pension plans, including ours, to become underfunded. As a result, without any additional pension funding relief currently being considered by Congress, we would expect to make significant cash contributions to our qualified defined benefit pension plan in future years. Based upon current law, we are required to contribute approximately $1 million in the third quarter of 2005 and an additional $52.1 million in 2006. As the single employer of AFC, the funding of these plans is the responsibility of FAFLIC.

Our insurance subsidiaries, including FAFLIC, maintain a high degree of liquidity within their respective investment portfolios in fixed maturity investments, common stock and short-term investments. In addition, we had no commercial paper borrowings as of June 30, 2005 and we do not anticipate utilizing commercial paper in 2005. Debt ratings downgrades in prior years continue to preclude or adversely affect the cost and availability of credit lines, commercial paper, and other additional debt and equity financing.

Off-Balance Sheet Arrangements

We currently do not have any material off-balance sheet arrangements that are reasonably likely to have an effect on our financial position, revenues, expenses, results of operations, liquidity, capital expenditures, or capital resources.

Contingencies

On July 24, 2002, an action captioned American National Bank and Trust Company of Chicago, as Trustee f/b/o Emerald Investments Limited Partnership, and Emerald Investments Limited Partnership v. Allmerica Financial Life Insurance and Annuity Company was commenced in the United States District Court for the Northern District of Illinois, Eastern Division. In 1999, plaintiffs purchased two variable annuity contracts with initial premiums aggregating $5 million. Plaintiffs, who AFLIAC subsequently identified as engaging in frequent transfers of significant sums between sub-accounts that in our opinion constituted “market timing”, were subject to restrictions upon such trading that AFLIAC imposed in December 2001. Plaintiffs allege that such restrictions constituted a breach of the terms of the annuity contracts. In December 2003, the court granted partial summary judgment to the plaintiffs, holding that at least certain restrictions imposed on their trading activities violated the terms of the annuity contracts. We filed a motion for reconsideration and clarification of the court’s partial summary judgment opinion, which was denied on April 8, 2004.

On May 19, 2004, plaintiffs filed a Brief Statement of Damages in which, without quantifying their damage claim, they outlined a claim for (i) amounts totaling $150,000 for surrender charges imposed on the partial surrender by plaintiffs of the annuity contracts, (ii) loss of trading profits they expected over the remaining term of each annuity contract, and (iii) lost trading profits resulting from AFLIAC’s alleged refusal to process five specific transfers in 2002 because of trading restrictions imposed on market timers. With respect to the lost profits, plaintiffs claim that pursuant to their trading strategy of transferring money from money market accounts to international equity accounts and back again to money market accounts, they have been able to consistently obtain relatively risk free returns of between 35% and 40% annually. Plaintiffs claim that they would have been able to continue to maintain such returns on the account values of their annuity contracts over the remaining terms of the annuity contracts (which are based in part on the lives of the named annuitants). The aggregate account value of plaintiffs’ annuities was approximately $12.8 million in December 2001.

We intend to vigorously defend this matter, and regard plaintiffs’ claims for lost trading profits as being speculative and, in any case, subject to an obligation to mitigate damages. Further, in our view, these purported lost profits would not have been earned because of various actions taken by us, the investment management industry and regulators, to defer or eliminate market timing, including the implementation of “fair value” pricing.

The monetary damages sought by plaintiffs, if awarded, could have a material adverse effect on our financial position. However, in our judgment, the outcome is not expected to be material to our financial position, although it could have a material effect on the results of operations for a particular quarter or annual period. A trial date for the damage phase of the litigation has not been set.

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We have been named a defendant in various other legal proceedings arising in the normal course of business and are involved, from time to time, in investigations and proceedings by governmental and self-regulatory agencies, which currently include investigations relating to “market timing” in sub-accounts of variable annuity and life products, “revenue sharing” and other matters, and regulatory inquiries into compensation arrangements with brokers and agents. A number of companies have announced settlements of enforcement actions related to such matters with various regulatory agencies, including the Securities and Exchange Commission (the “SEC”), which have included a range of monetary penalties and restitution. While no such action has been initiated against us, the SEC may take some action at the conclusion of the on-going investigation related to “market timing”, “revenue sharing” and other matters, including the marketing support and administrative services arrangements entered into by VeraVest Investments, Inc. in connection with the distribution of life insurance and annuity products issued by unaffiliated insurance companies. The potential outcome of any such action, or other legal proceedings in which we have been named a defendant, and our ultimate liability, if any, from such action or legal proceedings, is difficult to predict at this time. In our opinion, based on the advice of legal counsel, the ultimate resolutions of such proceedings will not have a material effect on our financial position, although they could have a material effect on the results of operations for a particular quarter or annual period. In this respect and based on ongoing discussions with the SEC to resolve this portion of its investigation, we recorded a $4.0 million provision to establish a reserve related to anticipated reimbursements to certain mutual funds related to “market timing” in certain sub-accounts of our Life Companies’ variable life insurance and annuity products. This reserve is an estimate which relates only to such reimbursements. The ultimate cost to us of any such matters, including potential fines or penalties, could significantly exceed the reserve amount.

Rating Agency Actions

Insurance companies are rated by rating agencies to provide both industry participants and insurance consumers information on specific insurance companies. Higher ratings generally indicate the rating agencies’ opinion regarding financial stability and a stronger ability to pay claims.

We believe that strong ratings are important factors in marketing our products to our agents and customers, since rating information is broadly disseminated and generally used throughout the industry. Insurance company financial strength ratings are assigned to an insurer based upon factors deemed by the rating agencies to be relevant to policyholders and are not directed toward protection of investors. Such ratings are neither a rating of securities nor a recommendation to buy, hold or sell any security.

In May 2005, A.M. Best Co. upgraded the debt ratings on our senior debt to “bbb-” from “bb+”, and on our Capital Securities to “bb” from “bb-”. Our short-term debt rating of “AMB-3” has been withdrawn, since we no longer have a commercial paper program. In addition, A.M. Best re-affirmed the financial strength ratings of A- (excellent) of our property and casualty subsidiaries, and B+ (Very Good) of our life insurance companies. All ratings from A.M. Best were assigned a “stable” outlook.

In June 2005, Standard & Poor’s revised its outlook on our senior debt to positive from stable and re-affirmed its rating of BB (marginal) and its outlook on our Capital Securities to positive from stable and re-affirmed its rating of B (weak). In addition, Standard & Poor’s revised its outlook for our life insurance companies’ financial strength ratings to positive from stable and re-affirmed its rating of BB (marginal). Standard & Poor’s also re-affirmed the financial strength ratings of BBB+ (good) of our property and casualty subsidiaries.

Risks and Forward-Looking Statements

We wish to caution readers that the following important factors, among others, in some cases have affected and in the future could affect our actual results and could cause our actual results for 2005 and beyond to differ materially from historical results and from those expressed in any of our forward-looking statements. When used in Management’s Discussion and Analysis, the words “believes”, “anticipates”, “expects” and similar expressions are intended to identify forward looking statements. See “Important Factors Regarding Forward-Looking Statements” filed as Exhibit 99-2 to our Annual Report on Form 10-K for the period ended December 31, 2004.

The following important factors, among others, in some cases have affected and in the future could affect our actual results, and cause actual results to differ materially from historical or projected results. While any of these factors could affect our business as a whole, we have grouped certain factors by the business segment to which we believe they are most likely to apply.

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Risks Relating to Our Property and Casualty Insurance Business

We generate a significant portion of our total revenues and earnings through our property and casualty insurance subsidiaries. The results of companies in the property and casualty insurance industry historically have been subject to significant fluctuations and uncertainties. Our profitability could be affected significantly by (i) adverse catastrophe experience, severe weather or other unanticipated significant losses; (ii) adverse loss development or loss adjustment expense for events we have insured in either the current or in prior years, including risks indirectly insured through discontinued pools which are included in the Other Property and Casualty segment; (iii) an inability to retain profitable policies in force and attract profitable policies in our Personal Lines and Commercial Lines segments; (iv) increases in costs, particularly those occurring after the time our products are priced and including construction, automobile, and medical and rehabilitation costs; (v) restrictions on insurance underwriting; (vi) industry-wide change resulting from current investigations and inquiries relating to compensation arrangements with insurance brokers and agents; and (vii) disruptions caused by the introduction of new personal lines products, such as our new multi-variate auto product, and related technology changes and new personal and commercial lines operating models.

In particular, future operating results as compared to prior years and forward-looking information regarding personal lines and commercial lines segment information on written and earned premiums, policies in force, underwriting results and segment income currently are expected to be adversely affected by competitive and regulatory pressures affecting rates. In addition, underwriting results and segment income could be adversely affected by changes in the current favorable frequency and loss trends generally being experienced industry-wide. Results in personal lines may also be adversely affected by pricing decreases and market disruptions which could be caused by the Michigan Commissioner of Insurance’s proposed ban on the use of credit scores, by unfavorable loss trends that may result in New Jersey due to that state’s recent supreme court ruling relating to the no-fault tort threshold and by disruptions caused by judicial and potential legislative intervention related to new rules adopted by the Massachusetts Commissioner of Insurance to reform the distribution of losses from the Massachusetts personal automobile residual market. Additionally, our personal lines production and earnings may be unfavorably affected by the introduction of our new multi-variate auto product should we experience adverse selection because of our pricing, operational difficulties or implementation impediments with independent agents.

Risks Relating to Our Life Companies

Our businesses may be affected by (i) lower appreciation or decline in value of our managed investments or the investment markets in general, resulting in reduced variable product assets and related variable product management fees, lapses and increased surrenders, increased DAC amortization, as well as increased cost of guaranteed minimum death benefits; (ii) adverse trends in mortality and morbidity; (iii) possible claims relating to sales practices for insurance and investment products; (iv) earlier than expected withdrawals and changes in redemption patterns from our general account annuities and other insurance products, particularly with respect to younger-aged annuities sold in the former Agency channel; (v) losses due to foreign currency fluctuations; (vi) the extent to which the performance of the various hedging instruments utilized in our GMDB hedging program do not correlate with the investment performance and underlying annuity sub-accounts; (vii) the continued availability of equity index futures; and (viii) adverse actions related to legal and regulatory actions described under “Contingencies”.

We have provided forward looking information relating to the impact of equity market values on certain financial metrics, including among other things, GMDB expenses and DAC amortization and net amount at risk. This information is an estimation only and is based upon matters in effect on June 30, 2005. Actual amounts of these certain financial metrics would vary based upon numerous other factors, including but not limited to, variable product account values, allocation between separate and general accounts, mortality experience, surrender and withdrawal rates and patterns, investment experience and performance of equity and financial markets throughout the period, as well as from period to period.

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Risks Relating to Our Business Generally

Other market fluctuations and general economic, market and political conditions also may negatively affect our business and profitability. These conditions include (i) heightened competition, including the intensification of price competition, the entry of new competitors and the introduction of new products by new and existing competitors, or as the result of consolidation within the financial services industry and the entry of additional financial institutions into the insurance industry; (ii) adverse state and federal legislation or regulation, including decreases in rates, the inability to obtain further rate increases, limitations on premium levels, increases in minimum capital and reserve requirements, benefit mandates, limitations on the ability to manage care and utilization, requirements to write certain classes of business, limitations on the use of credit scoring, such as the recent proposal to ban the use of credit scores with respect to personal lines in Michigan, recent and future changes affecting the tax treatment of insurance and annuity products, restrictions on the use of certain compensation arrangements with agents and brokers, as well as continued compliance with state and federal regulations; (iii) changes in interest rates causing a reduction of investment income or in the market value of interest rate sensitive investments; (iv) failure to obtain new customers, retain existing customers or reductions in policies in force by existing customers; (v) higher service, administrative or general expense due to the need for additional advertising, marketing, administrative or management information systems expenditures; (vi) the inability to attract, or the loss or retirement of key executives or other key employees, particularly in the Life Companies segment; (vii) changes in our liquidity due to changes in asset and liability matching, including the effect of defaults of debt securities; (viii) adverse changes in the ratings obtained from independent rating agencies, such as Moody’s, Standard and Poor’s and A.M. Best; (ix) failure of a reinsurer of our policies to pay its liabilities under reinsurance or coinsurance contracts or adverse effects on the cost and availability of reinsurance; (x) changes in the mix of assets comprising our investment portfolios and changes in general market conditions that may cause the market value of our investment portfolio to fluctuate; (xi) losses resulting from our participation in certain reinsurance pools, including pools in which we no longer participate but may have unquantified potential liabilities relating to asbestos and other matters; (xii) defaults or impairments of debt securities held by us; (xiii) higher employee benefit costs due to changes in market values of plan assets, interest rates and employee compensation levels; (xiv) the effects of our restructuring actions, including any resulting from the cessation of retail sales through VeraVest or from our review of operational matters related to our business, including a review of our markets, products, organization, financial capabilities, agency management, regulatory environment, ancillary businesses and service processes; and (xv) interruptions in our ability to conduct business as a result of terrorist actions, catastrophes or other significant events affecting infrastructure, and delays in recovery of our operating capabilities.

In addition, except where required or permitted by applicable accounting principles, components of our Consolidated Balance Sheets are not marked to market or otherwise intended to reflect our estimates of the fair market or disposition value of such assets or liabilities or the related businesses. The recorded value of certain assets, such as deferred acquisition costs, deferred federal income taxes and goodwill, and certain liabilities such as guaranteed minimum death benefit reserves, reflect the application of our assumptions to generally accepted accounting principles. Accordingly, in the event of a disposition of all or a portion of any such assets, liabilities or related businesses, the value obtainable in such a transaction may differ materially from the value reflected in our consolidated financial statements, which would in turn have a material impact on Shareholders’ Equity and book value per share. Management continually evaluates strategic options for the Life Companies, including the possible disposition of all or a portion of such business. In the event of such a disposition, it is management’s expectation that the realizable value would be substantially and materially lower than the value reflected in Shareholders’ Equity in our Consolidated Balance Sheets. Additionally, such transactions may also result in the reallocation of corporate overhead costs to other segments.

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Glossary of Selected Insurance Terms

Annuity contracts – An annuity contract is an arrangement whereby an annuitant is guaranteed to receive a series of stipulated amounts commencing either immediately or at some future date. Annuity contracts can be issued to individuals or to groups.

Antiselection – The tendency of people who suspect or know they are more likely than average to experience loss to apply for or retain an insurance or annuity contract to a greater extent than are people who lack such knowledge of probable loss.

Benefit payments – Payments made to an insured or their beneficiary in accordance with the terms of an insurance policy.

Casualty insurance – Insurance that is primarily concerned with the losses caused by injuries to third persons and their property (other than the policyholder) and the related legal liability of the insured for such losses.

Catastrophe – A single event that causes our property and casualty companies both a significant number of claims (175 or more) and $500,000 or more in insured property damage losses.

Cede; cedent; ceding company – When a party reinsures its liability with another, it “cedes” business and is referred to as the “cedent” or “ceding company”.

Closed Block – Consists of certain individual life insurance participating policies, individual deferred annuity contracts and supplementary contracts not involving life contingencies which were in force as of FAFLIC’s demutualization in 1995. The purpose of this block of business is to protect the policy dividend expectations of such FAFLIC dividend paying policies and contracts. The Closed Block will be in effect until none of the Closed Block policies are in force, unless an earlier date is agreed to by the Massachusetts Commissioner of Insurance.

Combined ratio, GAAP – This ratio is the GAAP equivalent of the statutory ratio that is widely used as a benchmark for determining an insurer’s underwriting performance. A ratio below 100% generally indicates profitable underwriting prior to the consideration of investment income. A combined ratio over 100% generally indicates unprofitable underwriting prior to the consideration of investment income. The combined ratio is the sum of the loss ratio, the loss adjustment expense ratio, and the underwriting expense ratio.

Dividends received deduction – A corporation is entitled to a special tax deduction from gross income for dividends received from a domestic corporation that is subject to income tax.

Earned premium – The portion of a premium that is recognized as income, or earned, based on the expired portion of the policy period, that is, the period for which loss coverage has actually been provided. For example, after six months, $50 of a $100 annual premium is considered earned premium. The remaining $50 of annual premium is unearned premium. Net earned premium is earned premium net of reinsurance.

Excess of loss reinsurance – Reinsurance that indemnifies the insured against all or a specific portion of losses under reinsured policies in excess of a specified dollar amount or “retention”.

Exposure – A measure of the rating units or premium basis of a risk; for example, an exposure of a number of automobiles.

Frequency – The number of claims occurring during a given coverage period.

Guaranteed Minimum Death Benefit (GMDB) – A contract feature which provides annuity contractholders with a guarantee that the benefit received at death will be no less than a prescribed minimum amount. This minimum amount is based on either the net deposits paid into the contract, the net deposits accumulated at a specified rate, the highest historical account value on a contract anniversary, or more typically, the greatest of these values.

Loss adjustment expenses (LAE) – Expenses incurred in the adjusting, recording, and settlement of claims. These expenses include both internal company expenses and outside services. Examples of LAE include claims adjustment services, adjuster salaries and fringe benefits, legal fees and court costs, investigation fees and claims processing fees.

Loss adjustment expense ratio, GAAP – The ratio of loss adjustment expenses to earned premiums for a given period.

Loss costs – An amount of money paid for a property and casualty claim.

Loss ratio, GAAP – The ratio of losses to premiums earned for a given period.

Loss reserves – Liabilities established by insurers to reflect the estimated cost of claims payments and the related expenses that the insurer will ultimately be required to pay in respect of insurance it has written. Reserves are established for losses and for LAE.

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Net premium rate increase – A measure of the estimated earnings impact of increasing premium rates charged to property and casualty policyholders. This measure includes the estimated increase in revenue associated with higher prices (premiums), including those caused by price inflation and changes in exposure, partially offset by higher volume driven expenses and inflation of loss costs. Volume driven expenses include policy acquisition costs such as commissions paid to property and casualty agents which are typically based on a percentage of premium dollars.

Peril – A cause of loss.

Property insurance – Insurance that provides coverage for tangible property in the event of loss, damage or loss of use.

Rate – The pricing factor upon which the policyholder’s premium is based.

Rate increase (commercial lines) – Represents the average change in premium on renewal policies caused by the estimated net effect of base rate changes, discretionary pricing, inflation or changes in policy level exposure.

Rate increase (personal lines) – The estimated cumulative premium effect of approved rate actions during the prior policy period applied to a policy’s renewal premium.

Registered representative – Salesperson of a broker/dealer. Salespeople are registered with the Centralized Registration Depository, a system operated by the National Association of Securities Dealers, that maintains registration information regarding broker/dealers and their registered personnel.

Reinsurance – An arrangement in which an insurance company, the reinsurer, agrees to indemnify another insurance or reinsurance company, the ceding company, against all or a portion of the insurance or reinsurance risks underwritten by the ceding company under one or more policies. Reinsurance can provide a ceding company with several benefits, including a reduction in net liability on risks and catastrophe protection from large or multiple losses. Reinsurance does not legally discharge the primary insurer from its liability with respect to its obligations to the insured.

Reversion-to-the-mean – Actuarial approach to develop estimates of future returns, which assumes that the market will return to an average gross long-term return estimate, developed with reference to historical long-term equity market performance and subject to assessment of the reasonableness of resulting estimates of future return assumptions. For purposes of making this reasonableness assessment, we have set limitations as to maximum and minimum future rates of return assumptions, as well as the duration of use of these maximum or minimum rates of return.

Separate accounts – An investment account that is maintained separately from an insurer’s general investment portfolio and that allows the insurer to manage the funds placed in variable life insurance policies and variable annuity policies. Policyholders direct the investment of policy funds among the different types of separate accounts available from the insurer.

Severity – A monetary increase in the loss costs associated with the same or similar type of event or coverage.

Statutory accounting principles – Recording transactions and preparing financial statements in accordance with the rules and procedures prescribed or permitted by insurance regulatory authorities including the National Association of Insurance Commissioners (“NAIC”), which in general reflect a liquidating, rather than going concern, concept of accounting.

Surrender or withdrawal – Surrenders of life insurance policies and annuity contracts for their entire net cash surrender values and withdrawals of a portion of such values.

Underwriting – The process of selecting risks for insurance and determining in what amounts and on what terms the insurance company will accept risks.

Underwriting expenses – Expenses incurred in connection with the acquisition, pricing, and administration of a policy.

Underwriting expense ratio, GAAP – This ratio reflects underwriting expenses to earned premiums.

Unearned premiums – The portion of a premium representing the unexpired amount of the contract term as of a certain date.

Variable annuity – An annuity which includes a provision for benefit payments to vary according to the investment experience of the separate account in which the amounts paid to provide for this annuity are allocated.

Written premium – The premium assessed for the entire coverage period of a property and casualty policy without regard to how much of the premium has been earned. See also earned premium. Net written premium is written premium net of reinsurance.

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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risks, and the ways we manage them, are summarized in management’s discussion and analysis of financial condition and results of operations as of December 31, 2004, included in our Annual Report on Form 10-K for the year ended December 31, 2004. There have been no material changes in the first six months of 2005 to these risks or our management of them.

ITEM 4 – CONTROLS AND PROCEDURES

Disclosure Controls and Procedures Evaluation

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act).

Limitations on the Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Based on our controls evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this quarterly report, subject to the limitations noted above, our disclosure controls and procedures were effective to provide reasonable assurance that material information was made known timely to our management, including our Chief Executive Officer and Chief Financial Officer.

Internal Controls Over Financial Reporting

There have not been any significant changes in our internal controls over financial reporting that occurred during our fiscal quarter ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

On July 24, 2002, an action captioned American National Bank and Trust Company of Chicago, as Trustee f/b/o Emerald Investments Limited Partnership, and Emerald Investments Limited Partnership v. Allmerica Financial Life Insurance and Annuity Company was commenced in the United States District Court for the Northern District of Illinois, Eastern Division. In 1999, plaintiffs purchased two variable annuity contracts with initial premiums aggregating $5 million. Plaintiffs, who AFLIAC subsequently identified as engaging in frequent transfers of significant sums between sub-accounts that in our opinion constituted “market timing”, were subject to restrictions upon such trading that AFLIAC imposed in December 2001. Plaintiffs allege that such restrictions constituted a breach of the terms of the annuity contracts. In December 2003, the court granted partial summary judgment to the plaintiffs, holding that at least certain restrictions imposed on their trading activities violated the terms of the annuity contracts. We filed a motion for reconsideration and clarification of the court’s partial summary judgment opinion, which was denied on April 8, 2004.

On May 19, 2004, plaintiffs filed a Brief Statement of Damages in which, without quantifying their damage claim, they outlined a claim for (i) amounts totaling $150,000 for surrender charges imposed on the partial surrender by plaintiffs of the annuity contracts, (ii) loss of trading profits they expected over the remaining term of each annuity contract, and (iii) lost trading profits resulting from AFLIAC’s alleged refusal to process five specific transfers in 2002 because of trading restrictions imposed on market timers. With respect to the lost profits, plaintiffs claim that pursuant to their trading strategy of transferring money from money market accounts to international equity accounts and back again to money market accounts, they have been able to consistently obtain relatively risk free returns of between 35% and 40% annually. Plaintiffs claim that they would have been able to continue to maintain such returns on the account values of their annuity contracts over the remaining terms of the annuity contracts (which are based in part on the lives of the named annuitants). The aggregate account value of plaintiffs’ annuities was approximately $12.8 million in December 2001.

We intend to vigorously defend this matter, and regard plaintiffs’ claims for lost trading profits as being speculative and, in any case, subject to an obligation to mitigate damages. Further, in our view, these purported lost profits would not have been earned because of various actions taken by us, the investment management industry and regulators, to defer or eliminate market timing, including the implementation of “fair value” pricing.

The monetary damages sought by plaintiffs, if awarded, could have a material adverse effect on our financial position. However, in our judgment, the outcome is not expected to be material to our financial position, although it could have a material effect on the results of operations for a particular quarter or annual period. A trial date for the damage phase of the litigation has not been set.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c) Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs
April 1 – 30, 2005	—	$	—	—	—
May 1 – 31, 2005	—		—	—	—
June 1 – 30, 2005	—		—	—	—
Total	—	$	—	—	—

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ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our annual shareholders’ meeting was held on May 17, 2005. The following is a brief description of each matter voted upon at the meeting and the votes cast.

Election of Directors:

Three directors nominated for election by the Board of Directors were named in proxies for the meeting, which proxies were solicited pursuant to Regulation 14A of the Securities Exchange Act of 1934.

	VOTES FOR	WITHHELD
Wendall J. Knox	43,508,556	1,664,974
Robert J. Murray	43,483,014	1,690,516
Nancy L. Leaming *	44,393,865	779,665

The other directors whose terms continued after the Annual Meeting are Michael P. Angelini, Frederick H. Eppinger, Gail L. Harrison, Edward J. Parry, III, Joseph R. Ramrath and Herbert M. Varnum.

Ratification of Independent Public Accountants:

Shareholders ratified the appointment of PricewaterhouseCoopers LLP as our independent public accountants for 2005.

For	43,753,847
Against	1,268,851
Abstain	150,832

* On June 17, 2005, Allmerica Financial Corporation’s Board of Directors accepted the resignation of Nancy L. Leaming, effective immediately. Ms. Leaming submitted her resignation in connection with a significant change in her principal job responsibilities.

ITEM 5 – OTHER INFORMATION

On August 3, 2005, the Company entered into non-solicitation agreements with Frederick H. Eppinger and Marita Zuraitis, which agreements were a pre-condition to their participation in the Company’s Amended Employment Continuity Plan (the “Plan”). The Plan is described in the Company’s Proxy Statement dated April 11, 2005 (the “Proxy Statement”) and a copy of the Plan is attached as Exhibit 10.69 hereto. The non-solicitation agreements are substantially in the form previously filed and identified as Exhibit 10.21 in the Company’s Form 10-K for the year ended December 31, 2004. As a result, Mr. Eppinger and Ms. Zuraitis are eligible for certain benefits under the Plan in the event of a Change in Control (as defined in the Plan) based upon a Multiplier (as defined in the Plan) of three (3). As noted in the Proxy Statement, named executive officers and certain other officers of the Company participate in the Plan. Mr. Eppinger’s participation in the Plan is in lieu of the change in control provisions in his offer letter from the Company.

ITEM 6 – EXHIBITS

EX – 10.69	Amended Allmerica Financial Corporation Employment Continuity Plan
EX – 31.1	Certification of the Chief Executive Officer, pursuant to 15 U.S.C. 78m, 78o(d), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
EX – 31.2	Certification of the Chief Financial Officer, pursuant to 15 U.S.C. 78m, 78o(d), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
EX – 32.1	Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
EX – 32.2	Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

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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 3, 2005	/s/ Frederick H. Eppinger, Jr.
		Frederick H. Eppinger, Jr.
		President, Chief Executive Officer and Director
Dated	August 3, 2005	/s/ Edward J. Parry, III
		Edward J. Parry, III
		Chief Financial Officer, Executive Vice President, Principal Accounting Officer and Director

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EX-10.69

Exhibit 10.69

THE ALLMERICA FINANCIAL CORPORATION

EMPLOYMENT CONTINUITY PLAN

THE ALLMERICA FINANCIAL CORPORATION

EMPLOYMENT CONTINUITY PLAN

ARTICLE 1

Purpose

1.1 The purpose of the Plan is

(a) to keep top management employees focused on the interests of the Company’s shareholders and to secure their continued services in addition to their undivided dedication and objectivity in the event of any threat or occurrence of, or negotiation or other action that could lead to the possibility of, a Change in Control; and

(b) to ensure that Participants do not (i) solicit or assist in the solicitation of employees, agents and/or policyholders of the Company or any affiliate for a specified period, or (ii) disclose any confidential or proprietary information of the Company or any affiliate prior to or after a Change in Control.

ARTICLE 2

Definitions

The following capitalized terms used in the Plan have the respective meanings set forth in this Article:

2.1 Anticipatory Change in Control: (i) Any “person” including a “group” (as such terms are used in Sections 13(d) and 14(d)(2) of the 1934 Act, but excluding the Company, its affiliates, any employee benefit plan of the Company or any affiliate, and an underwriter temporarily holding securities pursuant to an offering of such securities) commences a tender offer for securities, which if consummated, would result in such person owning 20% or more of the combined voting power of the Company’s then outstanding securities, (ii) the Company enters into an agreement the consummation of which would constitute a Change in Control, (iii) the submission of a nominee or nominees for the position of director of the Company by a shareholder or group of shareholders in a proxy solicitation or otherwise which, in its judgment, the Board or the Committee determines might or is intended to result in a Change in Control of the Company, (iv) any “person” including a “group” (as such terms are used in Sections 13(d) and 14(d)(2) of the 1934 Act, but excluding the Company, its affiliates, any employee benefit plan of the Company or any affiliate, and an underwriter temporarily holding securities pursuant to an offering of such securities) (1) becomes the beneficial owner, directly or indirectly, of capital stock of the Company in an amount which requires the filing of Schedule 13D or its equivalent form pursuant to the rules and regulations under the 1934 Act; and (2) such Schedule 13D or its equivalent filing indicates that the purpose of such capital stock

acquisition is part of a plan or proposal that the Board or Committee determines could lead to a Change in Control; or (v) any other event occurs which is deemed to be an Anticipatory Change in Control by the Board or the Committee.

2.2 Board: The Board of Directors of Allmerica Financial Corporation or any successor entity thereto.

2.3 Cause: (i) The continued willful failure of a Participant to perform substantially his or her duties with the Company or any affiliate (other than any such failure resulting from the Participant’s incapacity due to disability within the meaning of the Company’s short term disability plan as in effect at the time such determination is made) after ten (10) days prior written notice from the Board; (ii) the Participant’s conviction of, or plea of guilty or nolo contendere to, a misdemeanor involving theft or embezzlement, or a felony ; (iii) the willful engaging by the Participant in illegal conduct or gross misconduct which is demonstrably and materially injurious to the Company or any affiliate; or (iv) the breach by the Participant of any nondisclosure or nonsolicitation agreement with the Company or any affiliate, including but not limited to the agreements provided under sections 5.2 and 6.5 hereof.

2.4 Change in Control: (i) The members of the Board at the beginning of any consecutive twenty-four (24) calendar month period (the “Incumbent Directors”) cease at any time during such period for any reason other than due to death, Disability or Retirement (in the event of a member’s death, Disability or Retirement, such member shall be deemed to continue as an Incumbent Director until such member’s seat on the Board is filled) to constitute at least a majority of the members of the Board, provided that any director whose election or nomination for election by the Company’s stockholders was approved by a vote of at least a majority of such Incumbent Directors shall be treated as an Incumbent Director; (ii) any “person” including a “group” (as such terms are used in Sections 13(d) and 14(d)(2) of the 1934 Act, but excluding the Company, its affiliates, any employee benefit plan of the Company or any affiliate, and an underwriter temporarily holding securities pursuant to an offering of such securities) is or becomes the “beneficial owner” (as defined in Rule 13(d)(3) under the 1934 Act), directly or indirectly, of securities of the Company representing 35% or more of the combined voting power of the Company’s then outstanding securities, except this provision shall not be applicable if the Company, in connection with raising capital (including through the issuance of debt or other securities which are convertible into securities with voting power), voluntarily agrees to issue to a “person” or a “group” (as defined above) in such a transaction, securities aggregating (when combined with securities owned by such person or group immediately prior to such transaction) 35% or more, but less than a majority, of the combined voting power of the Company’s then outstanding securities (but this exception shall not apply to any subsequent transfer, except to the extent agreed to by the Company, in writing, at the time such securities are issued); (iii) the consummation of a merger, consolidation, share exchange or similar form of corporate transaction involving the Company or any affiliate that requires the approval of the Company’s stockholders (excluding a corporate transaction involving solely the Company and its affiliates) (a “Business Combination”), unless the stockholders immediately prior to such Business Combination own more than 50% of the total voting power of the successor corporation resulting from such Business Combination or a majority of the board of directors of the successor corporation were Incumbent Directors immediately prior to

such Business Combination; (iv) the stockholders of the Company approve a sale of all or substantially all of the Company’s assets and such sale is consummated; or (v) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company. Notwithstanding the foregoing, if any payment or benefit payable hereunder upon or following a Change in Control would be required to comply with the limitations of Section 409A(a)(2)(A)(v) of the Code and the guidance thereunder to avoid an additional tax under Section 409A of the Code, such payment or benefit shall be made only if such Change in Control constitutes a change in ownership or control of the Company, or a change in ownership of the Company’s assets, described in IRS Notice 2005-1 or any successor guidance.

2.5 Code: The Internal Revenue Code of 1986, as amended from time to time.

2.6 Committee: The Compensation Committee of the Board or such other committee or persons designated by the Board.

2.7 Company: Allmerica Financial Corporation or any successor entity thereto, including without limitation, the transferee of all or substantially all of the stock or assets of the Company.

2.8 Coverage Period: The three-year period commencing on the date of termination of employment with the Company and its affiliates for Category 1 Participants; the two-year period commencing on the date of termination of employment with the Company and its affiliates for Category 2 Participants; and the one-year period commencing on the date of termination of employment with the Company and its affiliates for Category 3 Participants.

2.9 Disability: With respect to members of the Board, the inability to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment which can be expected to result in death or which can be expected to last for a continuous period of not less than twelve (12) months.

2.10 Effective Date: The date on which the Plan becomes effective as set forth in section 3.1 hereof.

2.11 Excess Plan: Any nonqualified plan which provides supplementary retirement benefits for participants with compensation in excess of the section 401(a)(17) and section 415 limits of the Code, as from time to time amended.

2.12 Good Reason: Upon or subsequent to a Change in Control, without the Participant’s express written consent, (i) any change in the duties or responsibilities of the Participant that are inconsistent in any material and adverse respect with the Participant’s duties or responsibilities immediately prior to the Change in Control; provided, that the mere fact that the Company is no longer a public company or has become a subsidiary after the Change in Control shall not in and of itself constitute Good Reason hereunder, (ii) a reduction in the Participant’s rate of annual base salary as in effect immediately prior to such Change in Control, or a failure to provide an annual target bonus opportunity (including any adverse change in the formula for such annual bonus target but excluding the conversion of any cash bonus arrangement into an equity incentive arrangement of

commensurate value) substantially similar to that which was in effect immediately prior to such Change in Control; (iii) a failure to provide benefits which are substantially similar in the aggregate to the benefits under any employee benefit plan, compensation plan, welfare benefit plan or material fringe benefit plan in which the Participant is participating immediately prior to the Change in Control (excluding any across-the-board reduction in benefits effected with respect to all executive employees of the Company after the Change in Control); (iv) any requirement that the Participant relocate to an office more than 35 miles from the facility where the Participant is located immediately prior to the Change in Control; or (v) the failure of the Company to cause any successor entity to the Company to assume all obligations under the Plan as set forth in section 8.3 hereof.

2.13 Multiplier: Three (3) for Category 1 Participants; two (2) for Category 2 Participants; and one (1) for Category 3 Participants.

2.14 1934 Act: The Securities Exchange Act of 1934, as amended from time to time.

2.15 Participant: Any individual specified on Appendix A attached hereto in accordance with Article 4 hereof, and who has entered into a non-solicitation agreement in form and substance satisfactory to the Company.

2.16 Plan: The Allmerica Financial Corporation Employment Continuity Plan, as from time to time amended.

2.17 Protection Period: The period beginning with a Change in Control and ending on the second anniversary thereof.

2.18 Retirement: With respect to employees, separation from service with the Company and its affiliates in accordance with a retirement plan maintained by the Company (as in existence immediately prior to the Change in Control) or in accordance with any retirement arrangement established with respect to the Participant with the Participant’s consent; with respect to members of the Board, retirement pursuant to a retirement policy then in effect for members of the Board.

2.19 Retirement Savings Plan: The Allmerica Financial Retirement Savings Plan, as from time to time amended.

2.20 Stock Incentive Plans: Allmerica Financial Corporation Amended Long-Term Stock Incentive Plan and any successor(s) to such plans or other stock option or stock incentive plans approved by the Board.

ARTICLE 3

Plan Term

3.1 Effective Date: The Plan shall be effective as of December 17, 1996.

3.2 Expiration: Subject to the provisions of sections 3.4 and 3.5 hereof, the Plan shall terminate on the date on which the notice requirement of section 3.6 hereof has been satisfied.

3.3 [Reserved].

3.4 Anticipatory Change in Control: In the event the Plan would otherwise terminate pursuant to section 3.2 hereof during any fifteen (15) month period commencing three (3) months prior to an Anticipatory Change in Control, the Plan shall terminate on the first anniversary of such Anticipatory Change in Control; provided, however, in the event of a Change in Control during the one-year period commencing upon such Anticipatory Change in Control, the Plan shall terminate on the last day of the Protection Period.

3.5 Change in Control: In the event the Plan would otherwise terminate pursuant to section 3.2 hereof during the Protection Period commencing upon a Change in Control, the Plan shall terminate on the last day of the Protection Period.

3.6 Notice: The notice requirement of this section shall be satisfied upon the expiration of a thirty-day written notice to all Participants from the Committee of its desire to terminate the Plan.

ARTICLE 4

Eligibility

4.1 General: A Participant shall be eligible to receive benefits and payments hereunder. Participants shall be designated as “Category 1” or “Category 2” or “Category 3” on Appendix A and shall receive benefits and payments hereunder in accordance with such designation.

4.2 Addition or Move: The Committee in its sole discretion may add the names of additional employees of the Company or any affiliate to Appendix A or move the name of a Participant from Category 3 or Category 2 to Category 1 or from Category 3 to Category 2 (any such move is referred to herein as an “Upward Redesignation”) at any time, or subject to the provisions of section 4.3 hereof, move the name of a Participant from Category 1 to Category 2 or Category 3 or from Category 2 to Category 3 (a “Downward Redesignation”). Each such employee shall be eligible to receive benefits and payments hereunder in accordance with the employee’s designation on Appendix A.

4.3 Removal or Downward Redesignation: Except as provided in sections 4.5 and 4.6 hereof, the Committee in its sole discretion may remove the name of any individual specified on Appendix A or cause a Downward Redesignation, in each case effective upon the expiration of the thirty day notice requirement of section 4.7. However, a Participant who voluntarily terminates his/her employment with the Company and/or one of its affiliates shall be removed from Appendix A as of the date that his/her employment is terminated and in the case of a Participant involuntarily terminated by the Company and/or its affiliates at any time prior to a period commencing three (3) months prior to the occurrence of an Anticipatory Change of Control, removal of such Participant’s name from Appendix A shall occur upon the effective date of such involuntary termination. An individual removed from Appendix A shall cease to be eligible to receive benefits and payments hereunder and all rights thereto shall be without further force or effect upon

removal from Appendix A. An individual whose Downward Redesignation is effective shall be eligible to receive benefits and payments hereunder in accordance with such individual’s revised designation on Appendix A. Notwithstanding any provision in the Plan to the contrary, the Committee may remove the name of any individual specified on Appendix A or cause a Downward Redesignation at any time with such individual’s written consent.

4.4 [Reserved].

4.5 Anticipatory Change in Control: In the event of an Anticipatory Change in Control, any name to be removed from Appendix A or the subject of a Downward Redesignation pursuant to the first sentence of section 4.3 hereof, which removal or redesignation would otherwise be effective during the fifteen (15) month period commencing three (3) months prior to such Anticipatory Change in Control, shall not be so removed or redesignated until the first anniversary of such Anticipatory Change in Control; provided, however, in the event of a Change in Control during the one-year period commencing upon such Anticipatory Change in Control, such name shall be removed from Appendix A or such redesignation shall be effective on the first day following the end of the Protection Period. Notwithstanding the foregoing, a Participant may be removed from Appendix A during the three (3) month period prior to an Anticipatory Change in Control or thereafter if such removal is due to (a) a termination for Cause, (b) the Participant voluntarily terminates his employment, (c) the individual was involuntarily terminated by the Company and the individual received severance payments in connection therewith and provided a general release of claims to the Company, or (d) the individual was involuntarily terminated by the Company effective prior to a Change in Control and the termination was unrelated to an Anticipatory Change in Control or a Change in Control.

4.6 Change in Control: In the event of a Change in Control, any name to be removed from Appendix A or the subject of a Downward Redesignation pursuant to the first sentence of section 4.3 hereof, which removal or redesignation would otherwise be effective on or after the date of a Change in Control, shall not be so removed or redesignated, as the case may be, until the first day following the end of the Protection Period.

4.7 Notice: The notice requirement of this section shall be satisfied upon the expiration of thirty (30) days after written notice has been received by the Participant from the Committee of its desire to remove such individual’s name from the list of Participants on Appendix A or to cause a Downward Redesignation as the case may be. No notice under this Plan is required if a Participant voluntarily terminates his employment with the Company and/or one of its affiliates, or if a Participant is involuntarily terminated by the Company and/or its affiliates.

ARTICLE 5

Change in Control Payments

5.1 General: In the event of a Change in Control, the Company shall pay to each Participant within ten (10) days following such Change in Control, a lump-sum cash amount equal to the sum of

(a) the fair market value (determined in accordance with the applicable Stock Incentive Plans as of the date of the Change in Control) of shares of common stock awarded to the Participant under the Stock Incentive Plans which are outstanding, but not vested, immediately after the Change in Control (unless otherwise specifically provided in writing under the terms of the plan, agreement or award pursuant to which such shares were issued); and

(b) the excess of

(i) the fair market value (determined in accordance with the applicable Stock Incentive Plans as of the date of the Change in Control) of the shares of common stock designated to a stock option (or stock appreciation right) granted to the Participant under the Stock Incentive Plans and with respect to which, such stock option (or stock appreciation right) is outstanding but not exercisable immediately after the Change in Control, over

(ii) the exercise price (or base price) for such shares.

5.2 Release: Notwithstanding the foregoing, no amount shall be payable under section 5.1 hereof unless the Participant executes a Waiver and Release in form and substance approved by the Company, which shall be substantially in the form provided in Appendix B attached hereto or as otherwise amended by the Company in accordance with section 8.5 hereof, and such agreement becomes effective waiving and extinguishing any further rights or benefits under the Stock Incentive Plans with respect to shares of common stock, stock options or stock appreciation rights “cashed out” pursuant to Section 5.1 above.

ARTICLE 6

Protected Termination Benefits and Payments

6.1 General: Except as provided in section 6.2(b) hereof, in the event of a Change in Control, the Company shall pay the benefits and payments specified in sections 6.3 and 6.4 hereof if,

(a) the Company or any affiliate terminates a Participant’s employment with the Company and its affiliates without Cause during the Protection Period,

(b) the Participant terminates employment with the Company and its affiliates with Good Reason during the Protection Period, or

(c) with respect to a Category 1 Participant only, such Category 1 Participant terminates employment with the Company and its affiliates for any reason at any time during the thirteenth calendar month commencing after the Change in Control.

6.2 Retirement, Death or Disability:

(a) For purposes of section 6.1(b) hereof, any termination of employment by reason of Retirement without Good Reason shall be deemed to be a termination of employment by the Participant without Good Reason.

(b) Notwithstanding the foregoing, no benefits or payments shall be payable to a Participant under this Article in the event the Participant’s employment is terminated by reason of death or such Participant becomes eligible for disability benefits under the Company’s long-term disability plan.

6.3 Lump-Sum Benefits: In the event of a termination of employment specified in section 6.1 hereof, the Company shall pay to each Participant within thirty (30) days following such termination, a lump-sum cash amount equal to the sum of

(a) the Multiplier times the sum of

(i) the greater of (A) the Participant’s annual base salary in effect on the date of termination of employment or (B) the Participant’s annual base salary in effect immediately prior to the date of the Change in Control; and

(ii) the target bonus for the Participant under the Short Term Incentive Plan as in effect immediately prior to the Change in Control (if the Short Term Incentive Plan does not have a target bonus for the year in which the Change of Control occurred, the most recent target bonus shall be used);

(b) an amount equal to the target bonus under the Short Term Incentive Plan for the plan year in which the Participant’s employment is terminated, times a fraction (not more than one (1)) the numerator of which shall be the number of days the Participant is employed by the Company or any affiliate during the plan year in which the Participant’s employment is terminated and the denominator of which shall be 365;

(c) if not paid prior to the termination of employment, the Participant’s Short Term Incentive Award for the year prior to the year in which the Participant’s employment is terminated; and

(d) the Multiplier times the amount which would be credited to the Participant’s account balance(s) under the Retirement Savings Plan and the Excess Plan, in the plan year in which the Participant’s employment is terminated, assuming the account balance increase reflecting the employer matching contribution is determined by using the same match rate as the Participant had elected for the most recent plan year under the Retirement Savings Plan and disregarding for purposes of the employer non-elective contribution the requirement that the Participant be employed on the last day of the calendar year and further assuming the Participant’s eligible compensation (as defined in the respective plans) to be the greater of (A) the Participant’s eligible annualized rate of compensation for the plan year in which the Participant’s employment is terminated or (B) the Participant’s eligible compensation for the plan year immediately preceding the year in which the Change in Control occurred; and

(e) to the extent any payment hereunder shall be required to be delayed until six months following separation from service to comply with the “specified employee” rules of Section 409A of the Code, it shall be so delayed (but not more than is required to comply with such rules).

6.4 Other Benefits: In the event of a termination of employment specified in section 6.1 hereof, the Company shall

(a) continue for the Coverage Period to cover the Participant under those employee benefit plans (including but not limited to life and disability insurance coverage but excluding dental and health plan coverage which is otherwise provided for in sections 6.4(d) and 6.4(e) hereof) which were applicable to the Participant immediately prior to the Change in Control at the same benefit levels then in effect (or shall provide their approximate equivalent);

(b) provide outplacement services to the Participant through the Company’s preferred service provider(s) which are substantially equivalent to outplacement services provided by the Company to executive officers of a similar level on the date immediately prior to the Change in Control, or, at the Participant’s election, the Participant may obtain outplacement services from an outplacement provider of his or her choice, provided that the expense to the Company shall not exceed the amount that would have otherwise been paid to the Company’s preferred service provider. The provider of choice will be directly reimbursed by the Company.

(c) [Reserved].

(d) with respect to any Participant who is entitled to post-retirement medical benefits under the post-retirement medical plan or arrangement in effect immediately prior to the Change in Control or who would be entitled to such benefits if such Participant were older or had more years of service than such Participant actually has on the date of the Participant’s termination of employment by a number of years equal to the Multiplier and such Participant were credited with a number of additional years of service and age, in each case equal to the Multiplier,

(i) during the Coverage Period, provide coverage for the Participant and the applicable dependents under the group health plan maintained by the Company or any affiliate at substantially the same level of coverage in effect immediately prior to the Change in Control or coverage in effect at the date of termination provided such coverage provides a substantially equivalent level of coverage as the coverage in effect immediately prior to the Change in Control, and

(ii) upon expiration of such Coverage Period, provide the Participant and applicable dependents with coverage under the post-retirement medical plan or arrangement at a level substantially similar to the level in effect immediately prior to termination of employment, subject to retiree contributions at a rate no greater than that in effect immediately prior to termination of employment or (as the same may be adjusted from time to time) for all similarly situated retirees with comparable age, health background and coverage (or shall provide their equivalent);

(e) provide dental and health plan coverage for the Coverage Period for the Participant and the applicable dependents under the group dental and health plans maintained by the Company or any affiliate for employees of a level similar to that of such Participant immediately prior to such Change in Control;

(f) discontinue one or more of the benefits provided under Sections 6.4(a) and 6.4(e) if a Participant obtains employment with another company pursuant to which group health benefits are available; and

6.5 Release: Notwithstanding the foregoing, no amounts shall be payable under sections 6.3 and 6.4 hereof unless the Participant executes a Waiver and General Release, in form and substance approved by the Company, which shall be substantially in the form provided in Appendix C attached hereto or as otherwise amended by the Company in accordance with section 8.5 hereof, and such agreement becomes effective.

6.6 Interim Period:

(a) In the event the Company or any affiliate terminates a Participant’s employment with the Company and its affiliates without Cause during the period commencing three (3) months prior to an Anticipatory Change in Control and ending upon a Change in Control (the “Interim Period”), and a Change of Control occurs within the one-year period after the date of the Anticipatory Change of Control, such Participant shall become entitled to the benefits he or she otherwise would have received if such termination had occurred on the date of the Change in Control (based on his or her annual salary and target bonus immediately prior to the date of actual termination) and he or she was terminated without Cause on the date of the Change in Control; provided however,

(i) any benefits payable shall be reduced by any severance or similar payments or benefits otherwise paid or payable by the Company or its affiliates in connection with such termination;

(ii) such Participant shall be subject to the same obligations and responsibilities as any other Participant receiving similar benefits hereunder (including, without limitation, the requirement to provide waivers and releases under Sections 5.2 and 6.5); and

(iii) no benefits shall be payable as a result of the application of this Section 6.6 if (1) the removal of such Participant’s name from Appendix A had become effective, (2) a Change in Control does not occur, (3) the Participant previously provided a general release of claims to the Company in connection with his or her prior termination, (4) the Participant otherwise agrees or agreed in writing to waive the right to such payments or benefits, or (5) the termination was unrelated to an Anticipatory Change in Control or a Change in Control.

(b) If during the Interim Period,

(i) any change is made to a Participant’s duties or responsibilities, or any reduction is made to the Participant’s salary or annual target opportunity, or any reduction is made with respect to other benefit, compensation, welfare benefit or other material fringe benefit plan (excluding with respect to any such plan any across-the-board reductions in benefits effected with respect to all executive employees of the Company), or

(ii) the Participant is required to relocate to an office more than 35 miles from the facility where the Participant is located immediately prior thereto,

then for purposes of determining whether Good Reason exists, or determining benefits payable pursuant to this Plan, such Participant’s duties and responsibilities, salary and annual target opportunity, or other benefit compensation, welfare benefit or other material fringe benefit plan, or location, as applicable, shall be applied as of the date of the commencement of the Interim Period.

ARTICLE 7

Taxation of Benefits and Payments

7.1 Withholding Taxes: The Company may withhold from the Participant’s benefits and payments payable hereunder the amount which it determines is necessary to satisfy its obligation to withhold federal, state and local income taxes or other taxes or amounts required to be withheld.

7.2 Gross-Up Payment: In the event it shall be determined that any benefit or payment payable hereunder to a Participant would be subject to the excise tax imposed by section 4999 of the Code, the Company shall pay to the Participant (or to the Internal Revenue Service on behalf of the Participant) in any taxable year for which the excise tax is payable an additional payment (a “Gross-Up Payment”) in an amount such that after payment by the Participant of all taxes (including but not limited to federal, state and local income taxes, excise taxes, and FICA taxes including hospital insurance taxes) imposed on the Gross-Up Payment, the Participant retains (or has had paid to the Internal Revenue Service on his or her behalf) an amount of the Gross-Up Payment equal to the sum of

(a) the excise tax imposed by section 4999 of the Code, and

(b) the product of (i) any income tax deductions of the Participant disallowed because of the inclusion of the Gross-Up Payment in the Participant’s adjusted gross income, times (ii) the highest applicable marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made.

For purposes of determining the amount of the Gross-Up Payment, the Participant shall be deemed to (a) pay federal, state and local income taxes (for the residence where the Participant most recently filed a return for such taxes) at the highest marginal rate of taxation for the calendar year in which the Gross-Up Payment is to be made and (b) have otherwise allowable deductions for federal income tax purposes at least equal to the Gross-Up Payment.

To the extent any gross-up payment would be considered “deferred compensation” for purposes of Section 409A of the Code, the manner and time of payment, and the provisions of this Section 7.2, shall be adjusted to the extent necessary (but only to the extent necessary) to comply with the requirements of Section 409A with respect to such payment so that the payment does not give rise to the interest or additional tax amounts described at Section 409A(a)(1)(B) or Section 409A(b)(4) of the Code (the “Section 409A penalties”); and further provided, that if, notwithstanding the immediately preceding proviso, the gross-up payment cannot be made to conform to the requirements of Section 409A of the Code, the amount of the gross-up payment shall be determined without regard to any gross-up for the Section 409A penalties.

7.3 [Reserved]

7.4 Determination of Excise Tax: All determinations of gross-up payments that are required to be made under section 7.2 hereof shall be made by PricewaterhouseCoopers LLP or such other public accounting firm as may be retained by the Company prior to the Change of Control. The determination by such accounting firm shall be final and conclusive, absent manifest error.

7.5 Claim by Internal Revenue Service: As soon as practicable, a Participant shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would result in the imposition of the excise tax under section 4999 of the Code. If the Company notifies the Participant in writing that it desires to contest such claim, the Participant shall cooperate in all reasonable ways with the Company in such contest and the Company shall be entitled to participate in all proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Participant harmless, on an after-tax basis, for any excise tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Participant to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Participant agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Participant to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Participant on an interest-free basis, and shall indemnify and hold the Participant harmless, on an after-tax basis, from any excise tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided, further, that if the Participant is required to extend the statute of limitations to enable the Company to contest such claim, the Participant may limit this extension solely to such contested amount. The Company’s control of the contest shall be limited to issues with respect to the imposition of the excise tax under section 4999 of the Code and the Participant shall be entitled to settle or

contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

ARTICLE 8

Miscellaneous

8.1 No Mitigation: No benefit or payment payable hereunder shall be subject to offset including, but not limited to, amounts in respect of any claims which the Company may have against the Participant, provided, however, the amount payable hereunder to any Participant shall be reduced by any amounts payable to such Participant from the Company or any affiliate pursuant to any other severance plan or policy (including any employment agreement).

8.2 Legal Fees: The Company shall reimburse all costs and expenses, including attorneys’ fees, of the Participant in connection with any legal proceedings relating to the Plan, any plan listed on Appendix D, or any successor plans; provided, however, the Company shall not reimburse such costs and expenses for the Participant if (a) prior to the initiation of any proceedings by the Participant, such Participant fails to specify in writing all claims relating to the Plan, any plan listed on Appendix D, or any successor plans and to provide the Committee with thirty (30) days to address such claims, or (b) the judge or other individual presiding over the proceedings affirmatively finds that (i) the Participant did not initiate such proceedings in good faith, or (ii) the Participant violated the terms of the Waiver and Release required under section 5.2 hereof or the Waiver and General Release required under section 6.5 hereof.

8.3 Successors: If the Company shall be merged into or consolidated with another entity, the provisions of this Plan shall be binding upon and inure to the benefit of the entity surviving such merger or resulting from such consolidation. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company to expressly assume and agree to perform the duties set forth hereunder in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place (including but not limited to section 8.7 hereof).

8.4 Indemnification. In addition to such other rights of indemnification as they may have as members of the Board or the Committee, the members of the Board and the Committee shall be indemnified by the Company against all costs and expenses reasonably incurred by them in connection with any action, suit or proceeding to which they or any of them may be party by reason of any action taken or failure to act under or in connection with the Plan and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except a judgment based upon a finding that such member was not acting in good faith on the reasonable belief that he or she was acting in the best interests of the Company; provided that upon the institution of any such action, suit or proceeding, a Committee or Board member shall, in writing, give the Company notice thereof and an opportunity, at its own expense, to handle and defend the same before such Committee or Board member undertakes to handle and defend it on such member’s own behalf.

8.5 Amendments: The Board or the Committee may at any time, or from time to time, amend the Plan in whole or in part or amend it in such respects as the Board or the Committee may deem appropriate; provided, however, that no amendment to the Plan (including the waiver and release agreements provided in sections 5.2 and 6.5 hereof) shall, without the affected Participant’s written consent, impose any obligations on the Participant or impair any rights or obligations hereunder except as provided in section 4.3 hereof.

8.6 Plan Expenses: Any expenses of administering the Plan shall be borne by the Company.

8.7 Survival: Notwithstanding any provision in the Plan to the contrary, the obligations hereunder to the Participants which arise due to an Anticipatory Change in Control or a Change in Control shall survive any termination of the Plan and shall be binding upon the Company.

8.8 Notice: All notices and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given when actually delivered, or five (5) days after deposit in the United States mail, certified and return receipt requested, for delivery to

(a) the Committee at Allmerica Financial, 440 Lincoln Street, Worcester, MA 01653; or

(b) the Participant at the last known address specified in the Company’s records.

Any notice required to come from the Committee shall be deemed to be satisfied by a notice from an authorized officer of the Company following approval by the Committee of the action described in such notice.

8.9 Governing Law: The validity, construction and effect to the Plan and any actions taken under or relating to the Plan shall be determined in accordance with the laws of the State of Delaware.

APPENDIX A

APPENDIX B

Waiver and Release

In exchange for the benefits and payments offered to me by Allmerica Financial Corporation as set forth in section 5.1 of The Allmerica Financial Corporation Employment Continuity Plan (the “Plan”), I hereby release Allmerica Financial Corporation and all of its past and/or present divisions, affiliates, subsidiaries, officers, directors, stockholders, trustees, employees, agents, representatives, administrators, attorneys, insurers, fiduciaries, successors and assigns, in their individual and/or representative capacities (the “Company”) from any and all causes of action, suits, agreements, promises, damages, disputes, controversies, contentions, differences, judgments, claims and demands of any kind whatsoever which I or my heirs, executors, administrators, successors and assigns ever had, now have or may have against the Company, whether known or unknown to me, under the Allmerica Financial Corporation Long-Term Stock Incentive Plan and any successor(s) to such plans, but only with respect to shares of common stock, stock options or stock appreciation rights “cashed out” pursuant to Section 5.1 of the Plan (“Stock Rights”).

I represent that I have not filed, and will not hereafter file, any claim against the Company relating to such Stock Rights.

I understand and agree that if

(i) I commence, continue, join in, or in any other manner attempt to assert any claim released herein against the Company, or otherwise violate the terms of this Waiver and Release;

(ii) without prior written consent from the Company, I disclose to any other person or entity any non-public information concerning the Company’s financial data, strategic business plans, product development (or other proprietary product data), customer lists, marketing plans and other proprietary information, except for specific items which have become publicly available information other than through a breach by me of my fiduciary duties to the Company or which cannot reasonably be expected to adversely affect the business of the Company, unless required to do so by a court of competent jurisdiction or other governmental authority with purported or apparent jurisdiction;

(iii) I, directly or indirectly, hire, recruit, solicit or induce, attempt to hire, recruit, solicit or induce, or assist or encourage a third party to hire, recruit, solicit or induce, any person who was employed by the Company (including any of its affiliates, as determined at the time of such termination) at the time of my termination of employment, to terminate his or her employment with the Company (or any of such affiliates) during [for Category 1 and Category 2 Participants, “the two year period” and for Category 3 Participants, “the one year period”] commencing on the date of my termination of employment, or, during such [one][two] year period, I otherwise recommend for employment or interfere in any way with the Company’s relationship with any such employee; or

(iv) I violate the terms of any non-solicitation agreement between myself and the Company, including, without limitation, the agreement referred to in the definition of “Participant”,

which agreement I hereby reaffirm as of the date hereof and represent and warrant is fully enforceable and I waive any claim that such agreement is not enforceable in any respect;

the Company shall have the right to the return of the benefits and payments paid to me by the Company under section 5.1 of the Plan (together with interest thereon at the rate of six (6) percent per annum from the date of receipt by me to the date of payment by me). Notwithstanding the foregoing, in no event shall this Waiver and Release be construed to waive or release any rights I may have to be indemnified under the Company’s Charter, By-Laws, other agreements or documents or statutory provisions providing such indemnification.

I understand and agree that I shall notify the Company in writing, as soon as practicable, of any claim by the Internal Revenue Service that, if successful, would result in the imposition of the excise tax under section 4999 of the Code. I further understand and agree that if the Company notifies me in writing that it desires to contest such claim, I shall cooperate in all reasonable ways with the Company in accordance with the provisions of section 7.5 of the Plan.

IN WITNESS WHEREOF, the Company has caused this Waiver and Release to be executed by a duly authorized officer of the Company and I have executed this Waiver and Release as of the date set forth below.

Name of Participant

Signature

Date

Allmerica Financial Corporation

By:

Title

Date

APPENDIX C

Waiver and General Release

In exchange for the benefits and payments offered to me by Allmerica Financial Corporation as set forth in The Allmerica Financial Corporation Employment Continuity Plan (the “Plan”), I hereby release Allmerica Financial Corporation and all of its past and/or present divisions, affiliates, subsidiaries, officers, directors, stockholders, trustees, employees, agents, representatives, administrators, attorneys, insurers, fiduciaries, successors and assigns, in their individual and/or representative capacities (the “Company”) from any and all causes of action, suits, agreements, promises, damages, disputes, controversies, contentions, differences, judgments, claims and demands of any kind whatsoever which I or my heirs, executors, administrators, successors and assigns ever had, now have or may have against the Company, whether known or unknown to me, by reason of my employment and/or cessation of employment with the Company or otherwise involving facts relating to such employment which occurred on or prior to the date that I have signed this Release, including without limitation all claims under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, the Reconstruction Era Civil Rights Act, the Civil Rights Act of 1991, the Fair Labor Standards Act, the Employee Retirement Income Security Act, the Americans with Disabilities Act, the Family and Medical Leave Act of 1993, and any and all other federal, state and local laws, statutes, rules and regulations pertaining to employment, as well as any and all claims under state contract or tort law.

I represent that I have not filed, and will not hereafter file, any claim against the Company relating to my employment and/or cessation of employment with the Company, or otherwise specified above involving facts which occurred on or prior to the date that I have signed this Waiver and General Release.

I understand and agree that if

(i) I commence, continue, join in, or in any other manner attempt to assert any claim released herein against the Company, or otherwise violate the terms of this Waiver and General Release,

(ii) without prior written consent from the Company, I disclose to any other person or entity any non-public information concerning the Company’s financial data, strategic business plans, product development (or other proprietary product data), customer lists, marketing plans and other proprietary information, except for specific items which have become publicly available information other than through a breach by me of my fiduciary duties to the Company or which cannot reasonably be expected to adversely affect the business of the Company, unless required to do so by a court of competent jurisdiction or other governmental authority with purported or apparent jurisdiction;

(iii) I, directly or indirectly, hire, recruit, solicit or induce, attempt to hire, recruit, solicit or induce, or assist or encourage a third party to hire, recruit, solicit or induce, any person who was employed by the Company (including any of its affiliates, as determined at the time of such termination) at the time of my termination of employment, to terminate his or her employment with the Company (or any of such affiliates) during [for Category 1 and

Category 2 Participants, “the two year period” and for Category 3 Participants, “the one year period”] commencing on the date of my termination of employment, or, during such [one][two] year period, I otherwise recommend for employment or interfere in any way with the Company’s relationship with any such employee; or

(iv) I violate the terms of any non-solicitation agreement between myself and the Company, including, without limitation, the agreement referred to in the definition of “Participant”, which agreement I hereby reaffirm as of the date hereof and represent and warrant is fully enforceable and I waive any claim that such agreement is not enforceable in any respect;

the Company shall have the right to the return of the benefits and payments paid to me by the Company under the Plan (together with interest thereon at the rate of six (6) percent per annum from the date of receipt by me to the date of payment by me).

Notwithstanding the foregoing, in no event shall this Waiver and Release be construed to waive or release any rights I may have to be indemnified under the Company’s Charter, By-Laws, other agreements or documents or statutory provisions providing such indemnification.

I also agree to respond to questions and/or inquiries and provide other information concerning matters that were within the ambit of my responsibilities during my employment with the Company. It is anticipated that most matters will be addressed through phone calls and/or e-mails.

I understand and agree that I shall notify the Company in writing, as soon as practicable, of any claim by the Internal Revenue Service that, if successful, would result in the imposition of the excise tax under section 4999 of the Code. I further understand and agree that if the Company notifies me in writing that it desires to contest such claim, I shall cooperate in all reasonable ways with the Company in accordance with the provisions of section 7.5 of the Plan.

I have read this Waiver and General Release carefully, have been given at least 21 days to consider all of its terms, have been advised to consult with an attorney and any other advisors of my choice, and fully understand that by signing below I am, to the extent provided herein, giving up any right which I may have to sue or bring any other claims against the Company. I have not been forced or pressured in any manner whatsoever to sign this Waiver and General Release, and I agree to all of its terms voluntarily.

I understand that I have seven days from the date I have signed this Waiver and General Release below to revoke this Waiver and General Release, that this Waiver and General Release will not become effective until the 8th day following the date that I have signed this Waiver and General Release, and that the Company will have no obligation to pay me the benefits and payments under the Plan as agreed unless this Waiver and General Release becomes effective.

I further understand that this Waiver and General Release is the complete and exclusive statement of its terms and any waiver prior to the date of my signature below with respect to the Plan shall be without further force or effect on the effective date of this Waiver and General Release.

IN WITNESS WHEREOF, the Company has caused this Waiver and General Release to be executed by a duly authorized officer of the Company and I have executed this Waiver and General Release as of the date set forth below.

Name of Participant

Signature

Date

Allmerica Financial Corporation

By:

Title

Date

APPENDIX D

First Allmerica Financial Life Insurance Company Non-Qualified Executive Deferred Compensation Plan

Allmerica Financial Non-Qualified Savings Retirement Plan

First Allmerica Financial Life Insurance Company Excess Benefit Retirement Plan

First Allmerica Financial Life Insurance Company individual deferred compensation agreements

EX-31.1

Exhibit 31.1

Certification as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Frederick H. Eppinger, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Allmerica Financial Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 3, 2005

/s/ Frederick H. Eppinger, Jr.

Frederick H. Eppinger, Jr.

President Chief Executive Officer and Director

EX-31.2

Exhibit 31.2

Certification as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Edward J. Parry, III certify that:

1. I have reviewed this quarterly report on Form 10-Q of Allmerica Financial Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 3, 2005

/s/ Edward J. Parry, III

Edward J. Parry, III

Chief Financial Officer,

Executive Vice President,

Principal Accounting Officer and Director

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as President, Chief Executive Officer and Director of Allmerica Financial Corporation (the “Company”), does hereby certify that to the undersigned’s knowledge:

1) the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2005 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) the information contained in the Company’s Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Frederick H. Eppinger, Jr.

Frederick H. Eppinger, Jr.

President, Chief Executive Officer and Director

Dated: August 3, 2005

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, as Chief Financial Officer, Executive Vice President, Principal Accounting Officer and Director of Allmerica Financial Corporation (the “Company”), does hereby certify that to the undersigned’s knowledge:

1) the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2005 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2) the information contained in the Company’s Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Edward J. Parry, III

Edward J. Parry, III

Chief Financial Officer, Executive Vice President,

Principal Accounting Officer and Director

Dated: August 3, 2005